Quarterly bookings up 13 percent year-over-year to $606 million
Revenues increased 17 percent in the quarter to $599 million
Operating income increased over 50 percent with incremental profitability of 44 percent
Share repurchases total $197 million in the quarter
Milwaukee, WI August 31, 2006 Joy Global Inc. (NASDAQ: JOYG), a worldwide leader in high-productivity mining solutions, today reported results for the third quarter of fiscal 2006. Net sales for the quarter increased by 17 percent to $599 million, compared with $513 million in the third quarter of last year. Operating income totaled $110 million in the third quarter, versus $72 million in the corresponding quarter last year. Net income was $189 million, or $1.53 per diluted share in the quarter, compared with $31 million, or $0.25 per diluted share in the third quarter of fiscal 2005. Net income in the quarter included a reversal of certain deferred tax asset valuation allowances that increased net income by $111 million, or $0.90 per diluted share.
Third quarter financial results were very solid, particularly given the capacity constraints that we continue to address, commented John Hanson, chairman, president and CEO of Joy Global Inc. Our strong operating performance in the quarter, including the growth in sales, incremental profitability and earnings per share, reflected the continued vigor we are witnessing in this cycle as well as our successful efforts in meeting the rising demands of our customers. We see no peak in demand for our products and services and, with the exception of short-term softness in the U.S. coal markets, our customers commodity markets continue to exhibit robust conditions.
Bookings in the quarter grew by 13 percent to $606 million, reflecting the strength in most markets. Aftermarket orders again exhibited solid double-digit growth, increasing by 17 percent in total. However, this was a combination of a strong growth rate in the surface markets of P&H Mining with high single-digit growth at Joy Mining, where demand for parts and component repairs in the U.S. slowed in the quarter. Original equipment orders in the quarter were similarly strong at P&H Mining, with shovel orders exceeding current production capacity and total P&H original equipment bookings growing by more than one-third. At Joy Mining, original equipment orders fell slightly in total from the third quarter of last year, with short-term softness in the U.S. coal market resulting in a significant decline in quarterly U.S. original equipment orders. The company believes this softness is primarily due to reduced short-term coal demand caused by mild weather conditions over the past few quarters, and is in contrast to the continued long-term strength of the U.S. coal market.
Total revenues in the third quarter were $599 million, a 17 percent increase over the $513 million reported in the third quarter of 2005. This increase was particularly evident in aftermarket parts and services revenues, which rose by 24 percent from the prior years third quarter. Aftermarket revenue growth was strong in both operations, particularly at Joy Mining with a significant rise in parts and complete machine rebuilds. Aftermarket revenues were 63 percent of total quarterly revenues compared with 59 percent in the third quarter of fiscal 2005. Original equipment revenue growth in the quarter was limited by mining shovel capacity at P&H Mining.
Gross margins rose in the quarter to 32 percent of sales from 28 percent of sales last year. Operating leverage in the quarter was again very strong, with incremental profitability of 44 percent for Joy Global in total. This unusually high operating leverage was due to a combination of factors, including a higher percentage of aftermarket revenues at Joy Mining, favorable product mix in original equipment revenues overall, good recovery of material cost increases and the stringent control of overhead costs. In addition, product development, selling and administrative expenses in the quarter totaled $80 million, and as a percent of sales were a full percentage point lower than in the third quarter of last year. Included in the current quarter expenses were lower bonus accruals under the companys incentive plan, which rewards return on average working capital. Despite two consecutive quarters of outstanding incremental profitability, the company continues to expect operating leverage in future quarters to be in the range of 25 percent to 30 percent.
The combination of reorganization items and other income totaled $3 million in the quarter compared to $2.4 million in the third quarter of last year. Results in the prior years third quarter were also affected by $24 million of charges from the early retirement of the companys bonds, which reduced prior year quarterly EPS by approximately $0.13. The current quarters tax provision included a favorable adjustment to reverse valuation allowances relating to U.S. deferred tax assets. This positive adjustment amounted to $111 million, or $0.90 per diluted share, and represents the income statement effect from the reversal of all remaining U.S. deferred federal-tax related valuation allowances. In addition, the company continues to have valuation allowances relating to deferred income tax assets in Australia. The reversal of those allowances, if determined to be appropriate in future quarters, could result in a further credit to tax provisions of up to $12 million. At this time the company is unable to determine if those reversals will occur in fiscal 2006. These adjustments do not affect the companys current or future utilization of its tax NOLs, which totaled approximately $800 million as of the beginning of fiscal 2006.
Cash balances, net of outstanding debt, decreased by $148 million in the quarter to a level of $24 million. This reduction was primarily due to aggressive stock repurchases during the quarter totaling $197 million, with a total of more than 3.8 million shares being repurchased. The company has acquired $234 million of the $300 million authorized share repurchase program through quarter end, and anticipates continuing to execute open-market purchases of its stock under this authorization from time-to-time, using cash generated from operations or borrowings under its senior revolving facility.
The management of working capital remains a focal point, but is a challenge in all operations. Net non-cash working capital rose by $45 million in the quarter, and has now increased by $171 million to date in fiscal 2006. These increases are partially attributable to normal growth in the business as the cycle continues, and to lower liability balances. Nonetheless, the ability to maintain desired levels of inventory is being hampered by continuing supply chain constraints. As a result, it does not appear that bonus achievement under the companys return on average working capital program will reach prior year levels, despite higher actual performance on this metric in the current year.
The effective tax rate in the third quarter before the deferred tax asset valuation allowance adjustment was 31 percent. The company continues to estimate an overall tax rate for fiscal 2006 in the vicinity of 33 percent, and preliminary indications are that the tax rate for fiscal 2007 will be in the vicinity of 34 percent. Both of these rates exclude any effects of discreet valuation allowance reversals recorded, or yet to be recorded. Cash taxes in the third quarter were $9 million, and the effective cash tax rate for fiscal 2006 to date is 9 percent, in line with company forecasts. Finally, in addition to the deferred tax asset valuation allowance reversal recorded as a credit in income tax expense in the quarter, an additional $68 million of pre-emergence valuation allowance reversals were recorded as additional paid in capital. This contributed to the increase in total shareholders equity of more than $200 million to date in fiscal 2006, despite the significant stock buybacks.
As announced on July 31, the company completed the acquisition of the net assets of the Stamler mining equipment business for approximately $117 million. The effects of this transaction will be recorded in the companys financial statements in the fourth quarter. Revenues from this business are anticipated to be in the range of $140 to $150 million over the next 12 months, and the company expects operating results consistent with current company performance following the integration of Stamlers activities with those of other company operations. While the analysis necessary for the recording of purchase accounting has not been completed, it is estimated that certain purchase accounting charges could reduce operating income by approximately $8 million in total over the first few quarters, and that the amortization of intangibles resulting from the transaction could result in quarterly amortization expense in the range of $1 to $2 million.
Conditions in almost all commodity markets served by the companys customers continue to reflect a positive demand/supply balance and generally strong pricing. Commodity demand continues to increase, either on a measured pace in the case of the U.S. coal market, or more vigorously in the case of copper, iron ore, the oil sands of Canada, seaborne metallurgical and thermal coal or the emerging markets, such as China, India and Russia. Constraints on supply growth exist in the majority of these markets, and the combination of these factors reinforces managements belief that the current cyclical upturn will continue for the foreseeable future.
Conditions in the U.S. coal market, the companys largest single market, have changed over the past couple of quarters. Due to the mild winter and slow start to the summer cooling season, utilities were able to return coal stocks closer to historical levels, spot coal pricing was lowered, and certain production cutbacks were implemented by customers. In addition, in some instances customers have delayed or deferred the placement of new orders for original equipment. However, short-term fluctuations in the U.S. coal markets are not expected to affect the long-term strategic direction of customers, although the company would not be surprised to see this volatility continue in the short-term. The long-term supply and demand situation for coal in the U.S. is favorable, as new coal-fired power plants continue to be announced, the retrofit of existing plants with scrubbers accelerates, and new coal technology projects are undertaken. Taken together, all of these factors should contribute to an extended overall cycle.
Unlike current conditions in U.S. coal, conditions in the worldwide commodity markets for copper, iron ore and coal remain very robust. Prices for these commodities, while volatile, are well in excess of production costs and are driving increased revenues in our business, particularly at P&H Mining. As a result of the strength in these and other markets, P&H could expect to receive orders for new mining shovels in excess of their production capacity in the next few quarters, as happened in the third quarter.
Conditions also remain strong in the long-term growth markets for the company. Coal mining in China continues to benefit from solid overall economic growth, strong infrastructure development and the conversion of coal production previously employing low-productivity mining methods. As a result, both new orders and revenues from China have increased at a double-digit rate for Joy Mining to date in fiscal 2006. As detailed in the companys Analyst Day presentation earlier this summer, significant efforts and initiatives are underway by Joy Mining in China with the target of realizing $500 million in annual revenues in China by 2010. Surface coal mining activity levels in China have also increased recently, with a number of projects having either placed equipment orders so far in 2006, or expected to do so over the next few quarters. The development of the oil sands in Canada continues despite increasing project costs and labor constraints, with new equipment orders being received, or expected, from both existing producers in the area and from new projects being developed. Finally, activity in Russia continues with a number of mining companies discussing the need for new equipment, both surface and underground. Only India continues to lag in addressing their need for mineral extraction, but the company believes India ultimately will be a significant long-term growth opportunity in both surface and underground mining.
All of these long-term growth opportunities translate into a greater need to increase overall capacity. The expansion project for a 40% mining shovel capacity increase in Milwaukee is on schedule for completion by the end of 2006. Current expansion projects in China and Poland will provide increased capacity for both original equipment and aftermarket services. Bolt-on acquisitions, like those of the Stamler assets or the motor rebuild operation in Edmonton, Canada, also provide increased capabilities to the company and will continue to be explored.
Based on strong industry fundamentals in general and the specific capital projects of our customers, we will see a continued long-term growth in demand for our equipment and aftermarket parts and services, commented Mike Sutherlin, who is slated to succeed John Hanson as CEO. Therefore, we continue to expand realizable capacity both internally and with our supplier base. To date, we have done this by de-bottlenecking and other process improvements that have resulted in high returns on investment. The concept of pursuing the highest value-added capacity will be continued with the increased capital spending levels announced at our recent Analyst Day. I believe that service levels rather than backlogs drive our business, and therefore, the objective of our capital expansion program is to reduce original equipment order lead-times to less than a year. This will allow us to better meet the needs of our customers and the expectations of our shareholders.
John Hanson stated, Providing accurate guidance for anticipated results in the upcoming 12 months is challenging. Supply-chain constraints and the timing of our internal capacity expansions are restricting our ability to grow revenues as rapidly as overall customer demand. In addition, we are experiencing some softness in the U.S. coal markets, although we believe this will be a short-term phenomenon. On the plus side, the results of the Stamler acquisition will begin contributing to our revenues in the fourth quarter, and the shovel expansion project at P&H Mining will allow for increased original equipment revenues beginning early in 2007. Therefore, we currently anticipate that revenues in the next 12 months will grow in the range of 16 percent to 29 percent, with Stamler revenues providing approximately 6 percentage points of this growth. This translates into total 12-month revenues in the range of $2.65 to $2.95 billion.
Hanson concluded, Last quarter I forecasted that we could not continue to achieve incremental profitability performance in excess of our 25 to 30 percent target on an ongoing basis. However, the businesses did exceed this target again in the third quarter. Certain purchase accounting related adjustments from the Stamler acquisition will reduce incremental profitability over the next few quarters. Overall, we expect operating profits in the coming twelve months, including all effects of the Stamler transaction, to be in the range of $470 to $550 million, and operating margins to remain in the high teens range achieved to date in fiscal 2006. This level of operating performance should result in earnings per share over the upcoming four quarters ranging from $2.60 to $2.95, before any additional deferred tax asset valuation allowance reversals.
Management will host a quarterly conference call to discuss the companys third quarter results to be held at 11:00 AM EDT on August 31, 2006. Investors and interested parties may participate on the call by dialing 800-649-5127 in the U.S. and 706-679-0637 elsewhere, both with access code #3764273. A rebroadcast of the call will be available until the close of business on September 15, 2006 by dialing 800-642-1687 or 706-645-9291, access code #3764273. Finally, a replay of the webcast will be accessible until September 29, 2006, through the Investor Relations section of our web site (http://www.joyglobal.com/investorrelations/confcalls.jsp).
The forward-looking statements in this press release are based on our current expectations and are made only as of the date of this press release. We undertake no obligation to update forward-looking statements to reflect new information. We cannot assure you the projected results or events will be achieved. Because forward-looking statements involve risks and uncertainties, they are subject to change at any time. Such risks and uncertainties, many of which are beyond our control, include, but are not limited to: the duration of the recovery of coal and copper commodity markets; sustained economic growth and stability in China and our continued access to the Chinese market for mining equipment; the cyclical nature of our original equipment businesses and the high costs of our manufacturing operations that can result in the under-absorption of manufacturing expenses; increased costs and constraints on the supply of major purchased items such as steel, castings, forgings and bearings can adversely affect profits and revenues; the large size and cost of our products that means that the timing of individual orders and shipments can cause fluctuations in our operating results; our significant international operations are subject to many uncertainties, meaning that a reduction in international sales or unfavorable change in foreign exchange rates could affect our financial results; the highly competitive environment that we operate in means that the actions of our competitors can affect our financial performance; regulations affecting the mining industry or electric utilities may adversely impact demand for our products; our growth may be hindered if we are unable to hire or retain qualified employees; unexpected adverse results in litigation or arbitration may reduce our profits; difficulties in integrating business operations we acquire could negatively impact the results of those acquired operations; our reliance on enterprise resource management systems to help us manage and track our business means that the implementation of new systems can adversely affect our deliveries to customers and create inefficiencies in our financial reporting processes; and other risks, uncertainties and cautionary factors set forth in our public filings with the Securities and Exchange Commission.
|Three Months Ended
||Nine Months Ended|
|Costs and expenses:|
|Cost of sales||409,828||367,689||1,173,185||965,811|
|Product development, selling|
|and administrative expenses||80,362||74,206||234,757||217,287|
|Interest income (expense), net||381||(1,617||)||2,887||(9,568||)|
|Loss on early retirement of debt||||(24,205||)||||(29,242||)|
|Income from continuing operations before reorganization items||110,045||46,438||313,449||139,936|
|Income from continuing operations before income taxes||111,940||47,605||320,296||143,426|
|Benefit (provision) for income taxes||76,625||(17,154||)||9,325||(52,423||)|
|Income from continuing operations||188,565||30,451||329,621||91,003|
|Income from discontinued operations||||331||||786|
|Income before cumulative effect of changes in accounting principle||188,565||30,782||329,621||91,789|
|Cumulative effect of changes in accounting principle||||||1,565|||
|Basic earnings per share|
|Cumulative effect of accounting changes||||||0.01|||
|Diluted earnings per share|
|Cumulative effect of accounting changes||||||0.01|||
|Dividends per share||$||0.1125||$||0.075||$||0.3375||$||0.20|
|Weighted average shares outstanding:|
Note - for complete
quarterly information, including footnote disclosures, please refer to the
Company's Form 10-Q filing with the SEC.
|Cash and cash equivalents||$||102,150||$||143,917|
|Accounts receivable, net||417,542||351,501|
|Other current assets||49,101||73,070|
|Total current assets||1,191,873||1,116,683|
|Property, plant and equipment, net||199,250||199,180|
|Intangible assets, net||6,243||6,515|
|Deferred income taxes||375,764||225,138|
|Prepaid benefit cost||73,782||87,308|
|LIABILITIES AND SHAREHOLDERS' EQUITY|
|Short-term notes payable, including current portion|
|of long-term debt||$||693||$||964|
|Trade accounts payable||156,619||160,627|
|Advance payments and progress billings||183,608||187,710|
|Employee compensation and benefits||61,039||91,172|
|Other accrued liabilities||142,913||159,040|
|Total current liabilities||544,872||599,513|
|Other non-current liabilities||379,264||379,686|
|Total liabilities and shareholders' equity||$||1,876,585||$||1,648,528|
Note - for complete
quarterly information, including footnote disclosures, please refer to the
Company's Form 10-Q filing with the SEC.
|Three Months Ended
||Nine Months Ended|
|BREAKDOWN OF SALES REVENUE:|
|Net Sales By Operation:|
|Underground Mining Machinery||$||352,213||$||278,901||$||1,028,796||$||800,489|
|Surface Mining Equipment||246,497||233,973||683,603||558,759|
|Total Sales By Operation||$||598,710||$||512,874||$||1,712,399||$||1,359,248|
|Net Sales By Product Stream:|
|Total Sales By Product Stream||$||598,710||$||512,874||$||1,712,399||$||1,359,248|
|Net Sales By Geography:|
|Rest of World||333,829||285,149||899,971||752,460|
|Total Sales By Geography||$||598,710||$||512,874||$||1,712,399||$||1,359,248|
|OPERATING INCOME BY SEGMENT:|
|Underground Mining Machinery||$||75,173||$||48,818||$||216,907||$||121,469|
|Surface Mining Equipment||42,165||31,486||116,023||81,309|
|Total Operating Income||$||109,664||$||72,260||$||310,562||$||178,746|
|DEPRECIATION AND AMORTIZATION BY SEGMENT:|
|Underground Mining Machinery||$||5,855||$||6,689||$||17,629||$||18,463|
|Surface Mining Equipment||3,824||3,761||11,104||11,427|
|Total Depreciation And Amortization||$||9,697||$||10,482||$||28,785||$||29,985|
|CASH FLOW DATA:|
|Decrease (Increase) in Net Working Capital Items||(51,028||)||(7,994||)||(133,847||)||(59,121||)|
|Property, Plant and Equipment Acquired||8,220||9,952||32,788||27,190|
|Cash Interest Paid||653||4,699||1,549||14,732|
|Cash Taxes Paid||8,669||1,966||27,989||14,522|
|Underground Mining Machinery||$||334,555||$||327,764||$||993,474||$||1,004,358|
|Surface Mining Equipment||271,751||208,190||758,972||633,150|
|Amounts as of|
|Underground Mining Machinery||$||626,004||$||643,662||$||646,242||$||661,326|
|Surface Mining Equipment||468,889||443,635||453,743||393,520|