Joy Global has reported first quarter fiscal year 2010 results. “We delivered solid results that are in line with our expectations and are consistent with our outlook for our markets,” said Mike Sutherlin, President and CEO. “Orders were up from last year, and translated to a positive book to bill. We continue to see strength in the international and emerging markets for all commodities, and the US thermal coal market is correcting faster than expected. I was also pleased that we reduced our trade working capital during the first quarter as we continue to improve the efficiency of our processes. As a result, we are well positioned to take full advantage as the market recovery unfolds.”
The company continues to see a positive outlook for the commodities that its customers mine. The emerging markets in general, and China and India in particular, were the major source of seaborne commodity demand during most of 2009. Although the rate of growth in commodity imports into China began to moderate in the company’s first fiscal quarter of 2010, imports are expected to remain near their current high levels.
Steel and other industrial producers in the industrialised countries made significant reduction in inventories in 2009, and days of supply were reduced to historical averages on lower volumes. During that time, sales out of inventory forced capacity utilisation below 40% for steel making and into the low 60% range for broader industrial production. Inventory levels stabilised in the second half of 2009, and sales that were previously coming out of inventory have been increasingly coming out of production. As a result, capacity utilization in the industrialized countries exceeded 65% for steel making and over 70% for broader industrial production by the end of calendar year 2009. These higher rates of industrial production are creating increased demand for commodities such as copper, iron ore, metallurgical coal and seaborne thermal coal.
In addition, Joy believes that there has been a structural shift in coal supply to China that started in 2009. China’s shortage of coal production and rail bottlenecks created the need to substantially increase imports of thermal and metallurgical coal. China was self-sufficient in metallurgical coal until 2009, when imports surged to over 30 Mt. After becoming a marginal net importer of thermal coal by the second half of 2008, China’s net imports accelerated to over 70 Mt tons in 2009. Coal imports are reaching the heavily populated and highly industrialised southeast sector of China at delivered prices that are competitive with domestic coal. Joy believes that these shifts will be sustained because of preference for higher grade imported product and increasing domestic transportation cost as future Chinese production expands farther north and west.
India’s imports of coal also continue to rise, and imports reached 59 Mt in 2009. Coal India recently revised its current production estimates down, and now projects that imports into India could reach 200 Mt in the next few years.
Although it continues to lag the seaborne traded market, the US thermal coal market has improved significantly in Joy’s most recent quarter. Increasing industrial production and a colder winter have increased power demand, and coal stockpiles that had reached 200 Mt last September are being depleted and approaching 150 Mt. Natural gas prices that have doubled from their lows of last September are causing utilities to switch generator dispatch back to coal. As a result, the Company’s customers now believe that thermal coal stockpiles could reach normal levels in the second half of 2010.
The fundamentals in the commodity markets are improving as increasing demand from the industrialised countries adds to high demand from the emerging markets. Global mine capacity utilisation remains above 90% on average, and expansion projects have been on hold for the past year or more. Customers now believe that limited capacity surplus will become a supply deficit before new capacity can be brought on line. Announced capital expenditures for 18 of the world’s largest mining companies have increased by over 22%, and budgets continue to be revised up.
As a result, the company expects 2010 to be a year of improving order rates. Based on planning meetings with customers regarding machine specifications and delivery schedules, Joy expects that the strongest equipment demand will come from copper, international coal and iron ore, and that orders will come predominately from North and South America, Asia and Africa.
“We are encouraged by the improving fundamentals in the commodity markets, and by our first quarter order rate that confirms customers are beginning to act on these fundamentals,” continued Sutherlin. “In addition, our on-going work with customers supports our increased prospect list and indicates that expansion projects will continue to move to equipment orders during 2010. We expect any upside to orders to be mostly in original equipment, and longer lead times will push their subsequent shipment into 2011 in most cases. As a result, we are maintaining our previous revenue guidance for fiscal 2010 between $2.8 and $3.0 billion. However, we continue to see the positive bottom line impact of programs to improve process efficiencies and efforts to contain costs. We believe these will continue to favorably impact earnings and this allows us to raise the low end of our previous earnings expectations by $0.20. We now expect earnings per fully diluted share for 2010 to be between $2.85 and $3.05. Finally, we continue to expect to approve capital expenditures of $100 million this year as we accelerate our investments early in this up-cycle.”
Net sales for the quarter were $729 million compared to $755 million in the first quarter of last year, a decrease of 3%. Operating income was $118 million, or 16% of net sales, in the current quarter versus $135 million, or 18% of net sales, in the prior year. Net income in the current quarter was $76 million, or $0.73 per fully diluted share, compared to $86 million, or $0.83 per fully diluted share, in the first quarter last year.
Segment results from the prior year have been restated to reflect the integration of Continental Crushing and Conveying into Joy Mining Machinery and P&H Mining Equipment. Full results for crushing and conveying products are now reported with Joy, while the results for sales into the surface market are additionally reported with P&H.
New orders in the first quarter of $808 million were up 22% compared to the new orders last year of $664 million, before net cancellations and adjustments of $126 million. Aftermarket orders were up, before last year’s cancellations and adjustments, but most of the order increase was from original equipment. Surface original equipment orders increased in both North and South America and in both coal and copper in each of those markets. Aftermarket orders for the surface business were up slightly, before first quarter 2009 cancellations and adjustments, primarily due to increased orders from South America and Canada. Underground original equipment orders in the current quarter were lower than original equipment orders a year ago, with strong order activity from China offset by decreases in the US and Australia. Aftermarket orders for underground equipment increased 11% compared to the first quarter of 2009 primarily due to increases in the US and South Africa. The improvement reflects increases in rebuilds as machines sold a couple of years ago reach their first rebuild interval.
Net sales in the current quarter decreased by $26 million to $729 million despite a $49 million increase due to foreign currency translation. Including the impact of currency, sales increased by 6% for the surface mining equipment business compared to last year’s first quarter. Surface original equipment sales were essentially flat, while aftermarket sales increased by 10%, primarily related to the rebuild and refurbishment of equipment in Australia. The underground mining machinery business reported a sales decrease of 12% compared to a year ago, including the impact of currency. Underground original equipment sales declined by 18% for the quarter. An increase in longwall equipment sales in China was offset by decreased longwall equipment sales in the US and Australia. Aftermarket sales declined by 8%, as sales increases in Australia were offset by decreases in the US.
Operating profit declined by $18 million to $118 million. The decrease in operating profit was substantially due to $10 million associated with lower sales volumes and unfavorable absorption on decreased manufacturing levels, and a $9 million increase in pension expense. These items were partially offset by $6 million of favorable foreign currency translation. In addition, prior year operating income included cancellation fees of $6 million, which were not repeated in the current quarter.
Net interest expense in the current quarter was $5 million as compared to $7 million of expense in the first quarter of last year. The decrease in net interest expense was primarily due to interest earned on additional cash and cash equivalents and the decrease in amounts outstanding on our credit facility from the prior year first quarter. The effective tax rate in both periods was approximately 33%. Net income for the current quarter was $76 million, down $10 million, compared to $86 million in the first quarter of last year.
