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JOY > SEC Filings for JOY > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for JOY GLOBAL INC

Form 10-Q for JOY GLOBAL INC


6-Jun-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. Dollar amounts are in thousands, except per share data and as otherwise indicated.

Overview Joy Global Inc. is a leading manufacturer and servicer of high-productivity mining equipment for the extraction of coal and other minerals and ores. We manufacture and market original equipment and parts and perform services for both underground and surface mining and certain industrial applications. Our equipment is used in major mining regions throughout the world to mine coal, copper, iron ore, oil sands, gold and other minerals. We operate in two business segments: Underground and Surface. We are a major manufacturer of underground mining machinery for the extraction of coal and other bedded minerals and offer comprehensive service locations near major mining regions worldwide. We are also a major producer of surface mining equipment for the extraction of ores and minerals and we provide extensive operational support for many types of equipment used in surface mining. Our principal manufacturing facilities are located in the United States, including facilities in Pennsylvania, Wisconsin, Texas and Alabama, and internationally, including facilities in China, the United Kingdom, South Africa and Australia. Operating Results
Net sales in the second quarter of fiscal 2014 were $929.7 million, compared to $1.4 billion in the second quarter of fiscal 2013. The 31.7% decrease in net sales in the current year second quarter included a decrease in original equipment sales of $370.7 million, or 57.5%, and a decrease in service sales of $60.1 million, or 8.4%. Original equipment sales decreased in all regions. Service sales decreased in all regions except Eurasia, which increased by $1.4 million. Compared to the prior year second quarter, net sales in the second quarter of fiscal 2014 included a $35.0 million unfavorable effect of foreign currency translation, due primarily to the weakening of the U.S. dollar compared to the Australian dollar and South African rand.
Operating income in the second quarter of fiscal 2014 was $125.7 million, or 13.5% of net sales, compared to $278.6 million, or 20.5% of net sales, in the second quarter of fiscal 2013. The 54.9% decrease in operating income in the current year second quarter was impacted by $144.8 million due to lower sales volumes, $10.4 million due to a less favorable product mix, $17.3 million due to less favorable manufacturing cost absorption and $0.6 million due to higher period costs. These items were partially offset by an increase in other income of $1.8 million and reduced product development, selling and administrative expenses of $18.4 million, which included a $0.9 million decrease in restructuring charges that was partially offset by a $0.4 million increase in acquisition costs. Compared to the prior year second quarter, operating income in the second quarter of fiscal 2014 included a $7.1 million unfavorable effect of foreign currency translation.
Income from continuing operations was $74.0 million, or $0.73 per diluted share, in the second quarter of fiscal 2014, compared to $181.8 million, or $1.69 per diluted share, in the second quarter of fiscal 2013.
Bookings in the second quarter of fiscal 2014 were $1.0 billion, compared to $1.1 billion in the second quarter of fiscal 2013. The 7.2% decrease in bookings in the current year second quarter included a decrease in original equipment bookings of $130.2 million, or 27.1%, and an increase in service orders of $49.0 million, or 7.6%. Original equipment bookings decreased in all regions except South America and Eurasia, which increased by $18.4 million and $7.9 million, respectively. The decrease in original equipment orders is largely due to a longwall system order received in the U.S. in the prior year, partially offset by a current quarter multiple shovel order for a greenfield expansion project in the Canadian oil sands with deliveries in 2016. Stronger rebuild activity contributed to service order increases in all regions except Africa and Australia, which decreased by $1.8 million and $8.8 million, respectively. Compared to the prior year second quarter, bookings in the second quarter of fiscal 2014 included a $1.6 million unfavorable effect of foreign currency translation.
Net sales in the first six months of fiscal 2014 were $1.8 billion, compared to $2.5 billion in the first six months of fiscal 2013. The 29.5% decrease in net sales in the first six months of the current year included a decrease in original equipment sales of $628.2 million, or 53.8%, and a decrease in service sales of $113.1 million, or 8.4%. Original equipment sales decreased in all regions. Service sales decreased in all regions except Eurasia and Africa, which increased by $5.2 million and $9.0 million, respectively. Compared to the first six months of the prior year, net sales in the first six months of fiscal 2014 included a $68.8 million unfavorable effect of foreign currency translation, due primarily to the weakening of the U.S. dollar compared to the Australian dollar and South African rand.
Operating income in the first six months of fiscal 2014 was $211.0 million, or 11.9% of net sales, compared to $499.8 million, or 19.9% of net sales, in the first six months of fiscal 2013. The 57.8% decrease in operating income in the first six months of the current year was impacted by $251.2 million due to lower sales volumes, $17.5 million due to a less favorable product mix, $29.9


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million due to less favorable manufacturing cost absorption and $16.0 million due to higher period costs, which included a $3.8 million gain from the true-up of first year excess purchase accounting changes in fiscal 2013. These items were partially offset by an increase in other income of $3.2 million and reduced product development, selling and administrative expenses of $22.7 million, which included a $0.2 million offset from an increase in restructuring charges and a $0.3 million offset from an increase in acquisition costs. Compared to the first six months of the prior year, operating income in the first six months of fiscal 2014 included a $13.1 million unfavorable effect of foreign currency translation.
Income from continuing operations was $122.8 million, or $1.20 per diluted share, in the first six months of fiscal 2014, compared to $323.9 million, or $3.02 per diluted share, in the first six months of fiscal 2013.
Bookings in the first six months of fiscal 2014 were $1.9 billion, compared to $2.2 billion in the first six months of fiscal 2013. The 11.4% decrease in bookings in the first six months of the current year included a decrease in original equipment bookings of $316.3 million, or 34.5%, and an increase in service orders of $70.9 million, or 5.7%. Original equipment bookings decreased in all regions except South America, which increased by $19.5 million. The decrease in original equipment orders is largely due to a longwall system order received in the U.S. in the prior year, partially offset by current year bookings of the first low seam longwall system and a multiple shovel order for a greenfield expansion project in the Canadian oil sands with deliveries in 2016. Stronger component and rebuild activity contributed to service order increases in North America, South America and Eurasia by $51.4 million, $27.8 million and $20.0 million, respectively, with decreases in all other regions. Compared to the first six months of the prior year, bookings in the first six months of fiscal 2014 included a $63.2 million unfavorable effect of foreign currency translation, due primarily to the weakening of the U.S. dollar compared to the Australian dollar and South African rand. Market Outlook
Economic and commodity indicators presented a mixed picture during the first calendar quarter of 2014. Improving economic activity in the Eurozone was met by sluggish growth in the U.S. that was impacted by unusually severe weather. At the same time, Chinese economic activity continued to slow, but showed signs of stabilizing. Despite the slowdown in China, global growth is trending at the second strongest level in two years. While improving economic conditions should drive increased demand, commodities remain oversupplied with prices in some cases at multi-year lows that continue to delay capital decisions.
Thermal coal market fundamentals in the U.S. strengthened through April as power plant inventories reached their lowest levels since 2006. An extremely cold winter season, along with high natural gas prices, have driven an increase in coal burn in the first calendar quarter. While production is flat year-to-date, the need to replenish depleted inventories should drive production increases during the second half of the year, with much of this increase coming from the Illinois and Powder River Basins.
Seaborne thermal coal markets remain challenged as supply is outpacing demand growth. While demand has remained strong from China, India and Japan, limited supply reductions have driven spot pricing down for seaborne thermal coal and resulted in the annual thermal coal benchmark being down from a year ago. Despite improving economic conditions and the expected increase in seaborne demand in 2014, continuing supply conditions are expected to leave prices range bound.
Chinese coal market conditions remained challenged during the first quarter of 2014 as a depressed pricing environment weighed on many large producers. While China is aiming to cut coal's share of energy use in 2014, coal demand is still expected to grow, however, there appears to be limited upside for pricing improvement as seaborne coal prices continue to pressure domestic China producers.
Facing similar pressures, metallurgical coal markets drifted lower during the first calendar quarter of 2014 with the recent quarterly contract representing the weakest pricing environment since 2009. Despite steel production increasing through April, limited supply rationalization has driven metallurgical coal prices lower. Recently announced supply curtailments appear to indicate that the early stages of supply rationalization may have begun.
Again, notwithstanding the global steel production increase in the first quarter, iron ore prices have also declined over the last two months largely owed to supply increases hitting the market. The slope of the seaborne iron ore cost curve should support prices for the remainder of the year given the expectation for global steel demand to increase in 2014.
After seeing a market deficit in 2013, the global refined copper market is expected to move into surplus for the first time in four years. The expected surpluses are a result of production increases hitting the market after several years of development. However, global copper inventories remain below the March 2013 peak. Copper prices have held steady over the last several months as supply and demand conditions have remained relatively balanced.


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The economics of oil sands remain strong as oil prices have been high since 2010. Sustained prices at these levels continue to stimulate investment in the oil sands region given the average cost of production.
While global economic conditions are improving, commodity supply rationalization has yet to meaningfully materialize. As such, the backdrop of weak commodity prices continues to influence mining capital expenditure decisions. There have been some signs of stabilization, however, the current market landscape remains difficult and continues to present near-term headwinds to the mining industry. Company Outlook
Challenging market conditions continue to impact our business despite incremental positive signs on the horizon. When looking at seaborne coal markets, current prices are pressuring thermal and metallurgical coal producers. The recent decline in iron ore prices has also begun to pressure the upper portion of the global cost curve, which is primarily high-cost producers in China. Copper continues to have the strongest fundamentals of the major commodities we serve, with the vast majority of global producers recognizing positive cash generation.
While U.S. coal market fundamentals have improved, there is generally a lagged effect between that improvement and our bookings, and this appears to be playing out now. Our company-wide service bookings increased for the second consecutive quarter versus the year ago period, however, our Underground North American region was relatively flat from last year.
One area we are seeing growth in is the oil sands market. We received a large order this quarter for several electric mining shovels which will add to our fleet currently working in the Canadian oil sands region. The Canadian oil sands represent the largest unconventional source of oil production over the next 20 years and we remain committed to the region and to providing world-class service to our fleet of equipment operating there.
As we continue to navigate the trough of this cycle, we remain committed to controlling costs and optimizing our global manufacturing footprint. During the quarter, we executed on our planned 2014 restructuring actions and we remain focused on balancing further actions with market conditions. We continue to be diligent in looking for ways to maximize returns for shareholders while executing on our overall growth strategies. One of these strategies is the expansion of our offerings in the underground hard rock mining market. We recently closed on the acquisition of certain assets of Mining Technologies International Inc. This represents an opportunity for us to expand our product portfolio in underground hard rock mining and leverage our global service capabilities in bringing value to our hard rock mining customers and our shareholders.
Overall, we remain focused on delivering innovative solutions through world-class products and direct service to our customers that help make mining safer and lower their total lifecycle costs.

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