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Joy Global Lags, Lowers Guidance

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Mining equipment manufacturer and service provider Joy Global Inc. (JOY - Analyst Report) reported adjusted earnings of $1.79 per share in the third quarter of fiscal 2012, compared with $1.54 per share in the year-ago quarter.

The results of the company were 5.8% lower than the Zacks Consensus Estimate of $1.90.

On a GAAP basis, the company reported earnings of $1.82 per share compared with earnings of $1.61 per share in the year-ago quarter.  The difference of three cents between operating and GAAP earnings was due to the impact of one-time items.

Total Revenue

Joy Global reported net sales of $1.39 billion in the relevant quarter, up 22.2% from $1.13 billion in the year-earlier period. The growth was driven by higher contribution from Underground Mining Machinery (up 12.7%) and Surface Mining Equipment (up 33.1%), while eliminations were a marginal drag on total revenue.

Backlog at the end of the quarter was $2.8 billion, dipping sequentially from $3.1 billion at the end of the second quarter of fiscal 2012.

Net sales in the reported quarter came in lower than the Zacks Consensus forecast of $1.43 billion.

Quarter Highlights

Booking in the second quarter dropped 25% year over year. Lackluster booking was attributable to a decline in the domestic order book and sluggishness in some international pockets. Lower orders from the legacy business was marginally offset by the $68 million of incremental bookings from LeTourneau and $65 million of bookings from IMM.

During the quarter, cost of sales climbed 23.4% to $0.91 billion from $0.74 billion a year ago.

Selling and administrative expenses rose 8.5% from the previous year, but declined as a percentage of total revenue by 163 basis points year over year.

Operating income shot up 26.9% year over year mainly due to higher sales volume and a reduction in employee costs. Besides, contribution from the acquired assets also benefited results.
 
Interest expenses during the quarter rose to $16.8 million from $6 million in the year-ago quarter. Interest expense climbed because of the funds that were raised to finance the LeTourneau and IMM acquisitions.

Financial Update

Cash and cash equivalents of Joy Global as of July 27, 2012, were $454.2 million versus $288.3 million as of October 28, 2011.

Cash from operating activities was $150.9 million in the third quarter of fiscal 2012 versus $93.8 million in the third quarter of fiscal 2011.

Capital expenditure at Joy Global for the quarter was $55 million, up $33 million from the year-ago quarter. The noticeable rise in capital spending is part of the company’s plans for the year to increase its global capacity and aftermarket service infrastructure. Capital expenditure for the fiscal is expected to be $220 million.

Guidance

Joy Global expects waning international demand to completely outweigh any recovery in the US market.

The company thus expects total revenue for fiscal 2012 to be hit by roughly $100 million. Hence, it pegs the 2012 revenue guidance in a band of $5.450 billion and $5.550 billion. Earnings per share for the fiscal are expected to be to be between $7.05 and $7.20, down from the earlier range of $7.15 to $7.45.

Including restructuring changes, GAAP earnings for the fiscal are expected to be between $6.92 and $7.07.

Peer Comparison

Joy Global competes head to head with the industry behemoth Caterpillar Inc. (CAT - Analyst Report). Caterpillar’s second-quarter adjusted earnings per share increased 67% year over year to $2.54, ahead of the Zacks Consensus Estimate of $2.26.

Revenues increased 22% year over year to $17.37 billion, surpassing the Zacks Consensus Estimate of $16.97 billion. Volumes grew for both new equipment and aftermarket parts as well as across all geographic regions except China and Europe.

Our View

Joy Global fell short of our expectation as orders from the international markets disappointed. The company expects recovery in demand to remain muted, leading to a downward revision in expectation.

The decline in electricity demand and switching to natural gas for electricity production impacted U.S. thermal coal demand while uncertainties surrounding the Eurozone debt crisis affected the demand for Joy Global’s products.

However, as power production is estimated to increase in Europe and Asia in the next three to four years, demand for mining equipment would also concomitantly rise. India plans to add 97 gigawatts of coal-fired power generation over that period leading to an additional 300 million tons of coal. Europe will add 36 gigawatts of new generating capacity out of which 2/3rd will be coal-fired.

Besides, the global steel market is improving although very negligibly. So, there is still hope for this mining equipment maker in the long run.

Based in Milwaukee, Wisconsin, Joy Global Inc. was founded in 1884. The company caters to its global consumers and provides manufacturing, distributing and servicing equipment for surface and underground mining. The company has a market capital of $5.76 billion and 14,500 employees. Joy Global currently retains a Zacks #3 Rank (short-term Hold rating).

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