This summary is based on the third quarter fiscal 2007 earnings call conducted by Joy Global Inc. (JOYG) on August 29, 2007.
CFO: Jim Woodward
President and CEO: Mike Sutherlin
Key Investors Issues
- EPS were 66 cents a share compared to $1.53 a share last year.
- Net income fell to $72.9 million from $188.6 million a year ago.
- Revenue climbed to $621.8 million, up 4% from $598.7 million the previous year.
Third Quarter Highlights
Contrary to expectations at the end of the second quarter, the US underground coal market continued to be soft.
The company did not expect to see any increases in OE orders until calendar 2008. It had predicted that aftermarket would benefit from marginal increases in production.
This prediction was based on several factors, including a 4% year-over-year increase in electricity demand at that time, coal stockpiles that had started to decline and prices that appear to be firming, especially in Central App. However, what the company experienced was a slowing in the year-over-year growth in electricity demand, due to mild weather, an increased use of natural gas for generation, and rather than continued decline in coal inventories and firmer prices, increasing stockpiles and weaker prices. These factors resulted in a continuing decline in production as customers continued to trim their production schedules and focus on reducing their cash costs, but it did result in lower than planned aftermarket sales in underground segment.
In addition to a weaker US market, flooding in the United Kingdom and a national labor work stoppage in South Africa unfavorably impacted Joy Mining Machinery underground shipments in the short run by putting behind schedule. All of these factors resulted in a decline of 1% in underground sales and 9% if adjusted for the addition of Stamler in late 2006.
Operating margins in the underground segment declined by 300 basis points at 18.3% of sales versus 21.3% in the prior year quarter.
The decline reflects in part an increase in period costs due to the loss of fixed overhead absorption resulting from the operational issues. The company is moving to reduce costs in the United States and the United Kingdom underground businesses to conform to the weaker US market and the movement of production to new factory in China. These and other cost reduction efforts resulted in a charge of $3.3 million for related severance costs. Also comparing with the previous year, there were $2.6 million of additional costs associated with the Stamler acquisition.
The company continues to invest in the required sales and service infrastructure to support expected future sales in China. Incurring these costs in advance of the sales has the effect of reducing current margins but is a necessary component for success in this strategic market in the future.
The issues faced in surface segment were different. Sales at P&H were up over the prior year quarter by over 11% but they were still below internal expectations. Although the company has invested increased capacity for electric mining shovels and aftermarket components over the last couple of years, the increase has not grown fast enough to satisfy demand. This has placed a lot of pressure on own operations and the supply chain.
Revenue for long lead time electric mining shovels is recognized on a percentage of completion method.
If a shovel does not meet certain manufacturing benchmarks, revenue is not recognized. Thus a delay in the schedule even if the machine ultimately meets all contractual dates, will cause a shift in the quarters where revenue recognition occurs. To address capacity constraints at P&H, continuing strategy is to invest in key components that have high intellectual property content and to outsource non-proprietary components such as large fabrications. In the former category, the company completed an investment of approximately $20 million in Milwaukee this year and announced an investment of $50 million in a second plant in Tianjin, China on the current Joy campus which will be dedicated to P&H proprietary components. The company expects to break ground on this new facility this fall and begin production in the spring of 2008 with full production targeted for 2009.
The new fabrication supplier in China is another example of this effort. The company is expanding capacity and shovel components in this region not just because of lower cost but also because this is the region where these products are ultimately destined. In addition to these moves, the P&H team continues to focus on improving operational efficiencies and manufacturing cycle time.
Despite the operational issues experienced at P&H, their operating margins in this segment increased by 240 basis points to 19.5% from 17.1% in the prior year quarter. Although sales were less than production plans, the higher levels of activity year over year did result in increased absorption of fixed overhead. In addition, sales growth exceeded the growth in SG&A expense resulting in a lower percent of sales compared to the prior period.
While sales in both segments were below expectations, P&H quarterly sales still increased year over year while Joy Mining sales declined.
Bookings in the underground segment increased 18% over the prior year quarter while the surface segment declined 13%. Orders in the underground segment increased for both original equipment and aftermarket with OE bookings driven primarily by orders for powered roof support systems in the United States and Russia. Underground aftermarket orders were strong in China and also reflected the addition of Stamler. The orders for long lead time powered roof support systems from US customers reflects their continued positive outlook for this market despite the short-term weakness.
The overall reduction in order bookings in the surface segment continues to reflect the lumpiness of original equipment orders rather than any reduction in prospects. The requirements for recognizing an order booking include a signed agreement with all terms and conditions finalized or a down payment along with commitment letters. While the company has many orders in various stages of the booking process, it is not until it passes these requirements that it will officially recognize it, thus the lumpiness factor.
