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Joy Global Inc. Announces Operating Results for Fourth Quarter and Fiscal Year 2005

22 December 2005

Joy Global Inc. (Nasdaq: JOYG), a worldwide leader in high-productivity mining solutions, today reported results for the fourth quarter and year ended October 29, 2005. Net sales for the quarter increased by 36 percent to $568 million, compared with $417 million in the fourth quarter of last year. Operating income totaled $88 million in the fourth quarter, versus $47 million in the corresponding quarter last year, an increase of 87 percent. Net income was $56 million, or $0.45 per diluted share in the quarter, compared with $19 million, or $0.16 per diluted share in the final quarter of fiscal 2004. EPS in the current quarter was reduced by $0.03 as a result of an arbitration award and reorganization costs, and $0.02 due to the write-off of deferred financing costs resulting from refinancing of the senior revolving credit agreement. Excluding these items, EPS would have been $0.50 ($0.75 on a pre-split basis). All results reflect the disposition of a small, non-essential subsidiary of the company, and all per share data reflect the 3-for-2 stock splits of the company's common stock in January and December 2005.
"This was a terrific finish to a strong growth year," commented John Hanson, chairman, president and CEO of Joy Global Inc. "The historic lumpiness in quarter-to-quarter orders was reflected by the solid order rate of the third quarter compared to the more robust order rates of the fourth quarter, driven by strong original equipment (OE) orders in both segments of our business and equally strong aftermarket (AM) orders. The strength of the commodities cycle has translated into nine consecutive quarters of year-over- year revenue growth. Our incremental profitability remains above 25 percent and we generated a record $100 million in operating cash flow for the fourth quarter. All of this bodes very well for fiscal 2006. That gives us the confidence to continue to raise production rates and expand realizable capacity to meet our customers' growing needs, while still restraining the significant longer-term cost impact of adding 'new roofline' to our original equipment capacity."
Fourth Quarter and Full-Year Operating Results
Bookings in the fourth quarter reflected the high level of market activity we have experienced for several quarters. In underground operations, Joy Mining's orders increased by 47 percent over the fourth quarter last year, with orders for machine rebuilds growing the fastest. P&H Mining's total orders increased 26 percent over the high rate in the last quarter of fiscal 2004. A number of orders for mining shovels were received in the current quarter, bringing total shovel orders in fiscal 2005 above those of 2004. AM orders for Joy Global in total accounted for 58 percent of all orders, increasing 36 percent over the comparable period in fiscal 2004. OE orders were up 38 percent for the quarter.
Total revenues in the fourth quarter were $568 million, with both P&H Mining and Joy Mining revenues rising more than 36 percent over the fourth quarter of fiscal 2004. The rate of revenue increase was approximately equal between aftermarket and original equipment, as was the case with incoming order rates. AM revenues increased to 62 percent of total revenues in the current quarter after falling below 60 percent in the third quarter. Improved supply chain performance and higher internal production rates led to overall revenues in the fourth quarter growing sequentially by 11 percent.
Incoming orders for fiscal 2005 amounted to $2.29 billion, an increase of 23 percent over $1.86 billion in 2004. Backlogs and related OE lead times increased dramatically during the year, with orders exceeding revenues by over $360 million in fiscal 2005. Current OE orders being received are generally for fiscal 2007 shipment, with some orders extending beyond 2007. The increase for the year in AM orders only slightly exceeded the growth in OE orders. AM orders accounted for 57 percent of total orders, similar to fiscal 2004. Management continues to believe that growth in AM order rates will moderate, as fleet utilization continues to 'mature' at today's high production levels.
Fiscal 2005 total revenues amounted to $1.93 billion, an increase of $530 million, or 38 percent over fiscal 2004. OE shipments were much stronger as a percentage of total revenues in the full-year results, increasing to 37 percent from 31 percent in fiscal 2004. This strengthening is expected to continue at least through fiscal 2006. OE shipments increased more rapidly for underground applications at Joy Mining, where OE revenues increased by more than two-thirds, due in large part to the growing opportunities in China. AM revenues in both operations registered strong double-digit increases in fiscal 2005, and grew by 26 percent overall. Emerging market revenues for fiscal 2005 totaled almost $290 million, or 15 percent of consolidated revenues for the year. Significant increases were witnessed in China, where shipments increased by 98 percent, and Russia with a 245 percent increase in fiscal 2005 revenues.
The increases in orders and shipments in the current quarter were accompanied by improved gross profit margins. Gross margins in the fourth quarter totaled 30 percent, comparing favorably with both the fourth quarter of fiscal 2004 at under 29 percent, and 28 percent achieved in the third quarter of this year. The increase in profit margins reflect continued strength in operations, control of manufacturing expenses and increased absorption, and recovery of higher steel and steel-related costs.
Product development, selling and administrative expenses totaled $81 million, or 14 percent of sales, in the current quarter, compared with $73 million, or 18 percent of sales, in the comparable quarter of fiscal 2004. Included in the current quarter expenses for Joy Mining was a charge of $4.4 million, plus related legal costs, from the arbitration award announced in September.
The quarterly results were impacted by a number of other charges, including a write-off of deferred financing costs from the prior senior credit facility that reduced pre-tax income by $3.2 million. Combined with the arbitration award, and $700,000 of reorganization-related expenses, these adjustments reduced EBIT in the fourth quarter by $8.3 million. In the fourth quarter of last year, the elimination of $4.5 million of reorganization income would have reduced the comparable EBIT amount, while net income should be adjusted upwards for the $10 million non-cash increase to tax valuation reserves.
The following table reconciles fourth quarter earnings per share for fiscal 2005 and 2004 on both a pre-December 2005 stock split and post-split basis:
-- Post Stock Split -- -- Pre Stock Split --
FY5Q4FY4Q4 FY5Q4FY4Q4
Unadjusted Results$0.45$0.16 $0.68$0.24
Tax Valuation Reserves --- .08 --- .12
Debt Repurchase Costs .02 --- .03 --- Other Pre-Tax Items .03 (.02) .04 (.03)
Adjusted Amounts $0.50$0.22 $0.75$0.33
Subsequent to the fiscal 2005 year end, the company sold a small, specialty machining operation that generally served non-mining customers. This $12 million transaction will result in a small gain to be recognized once realizability of the gain is assured. All financial results presented reflect this as a discontinued operation. Reported revenues have been reduced by $39 and $33 million for fiscal 2005 and 2004, respectively, as a result of this presentation. Reported earnings per share are relatively unaffected by this transaction.
Cash and Liquidity
The company previously announced the refinancing of its senior revolving credit line with a new five-year $400 million facility. This facility accomplishes a number of corporate objectives including obtaining an unsecured revolver, reducing borrowing costs such as those associated with issuing letters of credit and fewer restrictions. The facility is expected to meet the company's needs for the foreseeable future, and represents an important milestone toward the company's goal of returning to full investment grade status.
In November, the company announced the second 3-for-2 split of its common stock in calendar 2005. Combined with the stock split last January, Joy Global now has almost 124 million fully-diluted shares. Concurrently, the board of directors maintained the quarterly dividend rate of $0.1125 per share, which in tandem with the stock split, represented another 50 percent increase over the previous dividend, the fourth such increase in two years. The annual dividend yield is now beginning to approach management's stated long-term goal of 1.5 to 2.0 percent of the stock price.
Significant adjustments were recorded in the current quarter related to income taxes. Upon the company's emergence from reorganization in fiscal 2001, valuation allowances were recorded against the company's deferred tax assets associated with net operating loss carryovers. At the end of fiscal 2005, reductions to these valuation allowances were recorded. The elimination of this portion of the allowances was deemed appropriate based on the strength of current operating results, the business outlook and improved future financial capabilities. The effect of these adjustments was a reduction in intangible assets of $28 million and an increase to shareholders' equity of $100 million. Additional valuation allowances of $317 million remain at year- end for recognition in future periods, of which approximately $35 million will be available to reduce future period book tax provisions.
Cash taxes for fiscal 2005 were $14 million, equating to a 6 percent cash tax rate, and were substantially lower than fiscal 2005 book taxes. A low cash tax rate is expected to continue, although the rate could range as high as 15 percent of pre-tax income, as the cash tax benefits of the company's more than $750 million in remaining net operating loss carryforwards are realized.
The management of working capital was a focus of both operations in the fourth quarter. A slight increase in accounts receivable days outstanding was more than offset by improvements in inventory turnover rates, which at 2.95 turns approached the company's target of 3.0 turns, as well as increased receipt of customer deposits. Despite the significant revenue growth, total non-cash working capital was reduced by $19 million in the quarter. The combination of strong working capital management, very good operating results and low cash taxes resulted in a $100 million increase in fourth quarter cash and year-end cash balances of $144 million.
The company did not repurchase any stock during the quarter. However, subsequent to year-end and following the completion of the senior revolver refinancing, approximately 325,000 shares (post-split) of company stock were purchased. As part of a $300 million repurchase authorization, the company anticipates continuing to execute open-market purchases of its stock from time-to-time, using cash generated from operations or additional borrowings under the new senior revolving facility.
A number of resolutions of outstanding legal contingencies have recently been reached. In addition to the arbitration award discussed earlier, settlement has been reached in the Egyptian dispute with no additional charges being incurred. Finally, the courts have recently declared our reorganization case closed with little reorganization income or expense anticipated in fiscal 2006.
Current Outlook on Market Conditions and Capacity Actions
Coal prices in the U.S. remain strong, particularly in the Powder River Basin. Although producers have added considerable equipment in the eastern underground production areas, tougher geology, fewer experienced miners and a number of operating problems have resulted in very little incremental production. As new power plants and more scrubbers come on line, coal demand will continue to increase. Coupled with high gas prices and little ability to obtain gas with certainty long-term, coal demand is expected to remain strong for at least several years. There will be some shift of production from metallurgical coal applications to steam coal applications as demand for coking coal comes into better balance with supply and continues to shift to Asia. The very strong aftermarket activity we have experienced in the U.S. reflects both the strong demand levels and the desire to maximize production in the near term.
Coal markets in the rest of the world remain strong. Although the gradual improvement in transportation bottlenecks, particularly with respect to seaborne trade, has improved supply availability, demand remains strong and prices high enough to keep miners focused on maintaining high production levels. There is some expectation that steam coal prices will decline somewhat in 2006 while metallurgical coal prices remain strong. However, prices will still be solid and the focus will be on production. Some new capacity for metallurgical coal is beginning to be added as mine expansions and even some new mine plans come on line.
However, the company's non-U.S. coal business will increasingly be driven by the emerging markets of China, Russia and India. China in particular continues to grow demand as the production of electricity leads economic growth and the country drives to convert much of its production capacity from low productivity to high productivity mining. The establishment of a number of new mining entities at the beginning of 2004 has resulted in a growth of our customer base in China so that almost 40 percent of 2005 underground orders came from these new customers, compared to less than 10 percent in 2004. The continued commitment in China to close large numbers of small, relatively unsafe mines will only accelerate the conversion to high productivity mining.
Copper, iron ore and gold selling prices remain at high levels reflecting demand in excess of supply, and some analysts are raising their price forecasts for 2006 and beyond. Higher oil prices are spurring both current production and new projects in the Canadian oil sands. All of this activity resulted in total shovel orders in fiscal 2005 exceeding current annual shovel capacity by a significant amount. More of the same is expected in fiscal 2006, driven by coal and copper demand in the near-term and new projects in the oil sands longer term. The company has not experienced any softness in activity for current shovel orders, and does not expect to through at least fiscal 2006.
Actions to expand capacity continued on a number of fronts during the quarter. The machining expansion project at P&H Mining, which will improve shovel capacity by 40 percent by the end of 2006, remains on schedule. The company is implementing global production rate increases in several of the OE products at Joy Mining, which will accelerate their respective OE unit builds by double-digit rates in both fiscal 2006 and 2007. Supply chain constraints continue to limit the company's ability to fill growing OE orders in the short-term, but these constraints are beginning to be resolved, which will help both OE production and AM support.
"We are committed to maintaining high levels of AM support to our customers," remarked Hanson. "Our ability to expand capacity is very important as we see continued AM and OE demand in this heady cycle. We are optimistic that we will continue to participate profitably in the cyclical upturn, as we have over the last two fiscal years."
Forward Twelve-Month Guidance Increased for 10th Consecutive Quarter
Hanson stated, "This commodity and mining cycle is still driven by strong fundamentals. Volatility may be apparent in incoming order rates, as with the last couple of quarters, but there is no noticeable change in the overall upward trend of activity. Assuming the strength in our AM business remains and our efforts to realize additional capacity are successful, we are anticipating total revenues in fiscal 2006 in the range of $2.25 to $2.45 billion. This represents 17-27 percent growth over the past year. One of our objectives for fiscal 2006 is to keep delivery lead times from growing and perhaps even improve them as we continue to increase realizable capacity."
Hanson concluded, "Our strong incremental operating profitability again in the fourth quarter gives us increased confidence that we can perform at these levels in fiscal 2006. We have believed the higher percentage of OE revenues and the attendant manufacturing dislocations would limit the growth of incremental profits to a range of 20-25 percent of revenue. We now believe that for fiscal 2006 we will maintain a rate in the range of 25-30 percent. Achieving this rate of incremental profitability will require us to remain focused on driving operating initiatives, improving supply chain performance and controlling both manufacturing costs and SG&A expenses. If successful, operating profits in the upcoming twelve months are expected to be in the range of $360 to $410 million and operating margins will grow to a range of 16.0-16.7 percent of sales in fiscal 2006 from 13.8 percent in fiscal 2005. These margins will put us much closer to our stated goal of operating margins in the high teens. This level of operating performance should result in earnings per share in fiscal 2006 ranging from $1.85 to $2.15, representing growth of 54-79 percent over fiscal 2005."
The EPS guidance is based on current outstanding shares, before any effect of additional purchases under the company's stock buyback program. Results in the first quarter of fiscal 2006 are expected to be lower than subsequent quarters, as is typical of this period of the year. However, this particular year the impact will be somewhat mitigated by a strong production schedule and some relief being realized in the supply chain. Finally, the added effect of the adoption of the new accounting standard for stock option compensation is expected to decrease fiscal 2006 EPS by less than $0.05 per share.
Quarterly Conference Call
Management will discuss fourth quarter results on a conference call to be held at 11:00 AM EDT on December 21, 2005. 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 #2786330. Accompanying discussion slides are available on the company's website. A rebroadcast of the call will be available until the close of business on January 13, 2006 by dialing 800-642- 1687 or 706-645-9291, access code #2786330. Finally, a replay of the webcast will be accessible until January 31, 2006, through the Investor Relations section of our web site (http://www.joyglobal.com/investorrelations/confcalls.jsp).
Forward Looking Statements
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: the duration of the recovery of coal and copper commodity markets; the cyclical nature of our original equipment businesses and the high costs of our manufacturing operations that can result in the underabsorption 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; and other risks, uncertainties and cautionary factors set forth in our public filings with the Securities and Exchange Commission.
-FINANCIAL TABLES FOLLOW-
JOY GLOBAL INC.
SUMMARY OF CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Year Ended
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
Net sales $568,226 $416,843 $1,927,474 $1,399,357
Costs and expenses:
Cost of sales 399,685297,021 1,365,496 1,021,334
Product development,
selling an dministrative expenses 80,821 73,485297,904 272,967
Restructuring charges 64521 849625
Other income (869) (737)(3,465) (3,415)
Operating income 87,944 47,053266,690 107,846
Interest expense, net (48)(4,895)(9,616)(19,951)
Loss on early retirement
of debt (3,189)-(32,431) - Income from continuing
operations before
reorganization items 84,707 42,158224,643 87,895
Reorganization items - income (expense) (680) 4,456 2,810 6,842
Income from continuing
operations before
provision for income
taxes 84,027 46,614227,453 94,737
Provision for income
taxes (28,109) (27,588) (80,532)(39,281)
Income from continuing
operations 55,918 19,026146,921 55,456
Income (loss) from
discontinued
operations, net of
applicable income
taxes 342 263 1,128 (134)
Net income $56,260$19,289 $148,049 $55,322
Basic earnings (loss)
per share:
Income from continuin perations $0.46 $0.16 $1.21 $0.47
Income (loss) fro iscontinue perations 0.00 0.00 0.01 (0.00)
Net income per share $0.46 $0.16 $1.22 $0.47
Diluted earnings (loss)
per share:
Income from continuin perations $0.45 $0.16 $1.19 $0.46
Income (loss) fro iscontinue perations 0.00 0.00 0.01 (0.00)
Net income per share $0.45 $0.16 $1.20 $0.46
Dividends per share$0.075 $0.033 $0.275 $0.122
Weighted average shares
outstanding:
Basic 122,080119,158121,121 117,277
Diluted 123,781122,697123,443 120,654
Note - for complete information, including footnote disclosures, pleas efer to the Company's Form 10-K filing with the SEC.
JOY GLOBAL INC.
SUMMARY CONSOLIDATED BALANCE SHEET
(In thousands)
October 29, October 30,
2005 2004
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $143,917$231,706
Accounts receivable, net 351,501 259,897
Inventories 548,195 443,810
Other current assets 73,070 56,639
Total current assets 1,116,683 992,052
Property, plant and equipment, net 199,180 210,756
Intangible assets, net 6,515 37,431
Deferred income taxes 225,138 129,424
Prepaid benefit cost 87,308 49,119
Other non-current assets13,704 21,577
Total assets $1,648,528 $1,440,359
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable, including
current portion of long-term
obligations $964 $3,110
Trade accounts payable 160,627 139,178
Employee compensation and benefits 91,172 82,472
Advance payments and progress
billings 187,710 87,507
Accrued warranties 34,183 31,259
Other accrued liabilities124,857 88,326
Total current liabilities 599,513 431,852
Long-term obligations 1,703 202,869
Other non-current liabilities 379,686 353,590
Shareholders' equity 667,626 452,048
Total liabilities and
shareholders' equity $1,648,528 $1,440,359
Note - for complete information, including footnote disclosures, pleas efer to the Company's Form 10-K filing with the SEC.
JOY GLOBAL INC.
SUPPLEMENTAL FINANCIAL DATA
(Unaudited)
(In thousands)
Three Months Ended Year Ended
October 29, October 30, October 29, October 30,
2005 20042005 2004
BREAKDOWN OF SALE EVENUE:
Net Sales By Operation:
Underground Mining
Machinery $331,845 $240,482$1,132,334 $820,121
Surface Mining
Equipment 236,381 176,361 795,140579,236
Total Sales By
Operation $568,226 $416,843$1,927,474 $1,399,357
Net Sales By Produc tream:
Aftermarket Revenues $352,478 $259,199$1,210,676 $961,801
Original Equipment 215,748 157,644 716,798437,556
Total Sales By
Product Stream $568,226 $416,843$1,927,474 $1,399,357
Net Sales By Geography:
United States$263,004 $199,700 $869,792 $639,417
Rest of World 305,222 217,143 1,057,682759,940
Total Sales By
Geography $568,226 $416,843$1,927,474 $1,399,357
CASH FLOW DATA:
Depreciation and
Amortization (1) $10,716 $11,653 $43,309$49,367
Decrease (Increase)
in Net Working
Capital Items 8,522 17,527 (50,599)30,884
Contribution to US
Qualified Pension
Plan - 104 48,400 88,104
Property, Plant and
Equipment Acquired 11,563 10,159 38,753 21,135
Cash Interest Paid 1,806 10,101 16,538 22,022
Cash Taxes Paid (133) 3,000 14,389 13,745
(1) - Including the
amortization of
financing fees
BOOKINGS DATA:
Underground Mining
Machinery $354,985 $240,730$1,359,343 $1,107,690
Surface Mining
Equipment 298,524 236,685 931,926750,748
Total Bookings $653,509 $477,415$2,291,269 $1,858,438
Amounts as of
BACKLOG DATA:October 29, July 30,April 30, January 29,
2005 20052005 2005
Underground Mining
Machinery $661,326 $638,186 $589,323 $562,992
Surface Mining
Equipment 393,520 331,377 356,836281,290
Total Backlog $1,054,846 $969,563 $946,159 $844,282