(Exact Name of Registrant as Specified in Its Charter)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED January 29, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from to
Commission File number 1-9299
|
JOY GLOBAL INC. (Exact Name of Registrant as Specified in Its Charter) |
|
Delaware (State of Incorporation) |
39-1566457 (I.R.S. Employer Identification No.) | |
| 100 East Wisconsin Ave, Suite 2780 Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code) (414) 319-8500 (Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ X ] No [
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ X ] No [
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
| Class Common Stock, $1 par value |
Outstanding at February 18, 2005 80,258,782 shares |
JOY GLOBAL INC.
FORM 10-Q – INDEX
January 29, 2005
| PART I. - FINANCIAL INFORMATION | Page No. | |
| Item 1 - Financial Statements (unaudited): | ||
|
Condensed Consolidated Statement of Income - Three Months Ended January 29, 2005 and January 31, 2004 |
3 | |
|
Condensed Consolidated Balance Sheet - January 29, 2005 and January 31, 2004 |
4 | |
|
Condensed Consolidated Statement of Cash Flows - Three Months Ended January 29, 2005 and January 31, 2004 |
5 | |
| Notes to Condensed Consolidated Financial Statements | 6 - 21 | |
| Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 - 27 | |
| Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 27 | |
| Item 4 - Controls and Procedures | 27 | |
| PART II. - OTHER INFORMATION | ||
| Item 1 - Legal Proceedings | 28 | |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 28 | |
| Item 3 - Defaults Upon Senior Securities | 28 | |
| Item 4 - Submission of Matters to a Vote of Security Holders | 28 | |
| Item 5 - Other Information | 28 - 29 | |
| Item 6 - Exhibits | 29 | |
| Signatures | 30 | |
| Three Months Ended | |||||
|---|---|---|---|---|---|
| January 29, 2005 |
January 31, 2004 | ||||
| Net sales | $ 383,690 | $ 283,686 | |||
| Costs and expenses: | |||||
| Cost of sales | 270,869 | 213,891 | |||
| Product development, selling | |||||
| and administrative expenses | 71,281 | 62,743 | |||
| Restructuring charges | — | 433 | |||
| Other income | (721 | ) | (1,108 | ) | |
| Operating income | 42,261 | 7,727 | |||
| Interest expense, net | (4,418 | ) | (5,674 | ) | |
| Loss on debt repurchase | (2,393 | ) | — | ||
| Income before reorganization items | 35,450 | 2,053 | |||
| Reorganization items | (116 | ) | (615 | ) | |
| Income before provision for income taxes | 35,334 | 1,438 | |||
| Provision for income taxes | (13,150 | ) | (500 | ) | |
| Net income | $ 22,184 | $ 938 | |||
| Net income per share: * | |||||
| Basic | $ 0.28 | $ 0.01 | |||
| Diluted | $ 0.27 | $ 0.01 | |||
| Dividends per share * | $ 0.075 | $ 0.033 | |||
| Weighted average shares outstanding: * | |||||
| Basic | 80,062 | 76,431 | |||
| Diluted | 82,134 | 78,429 | |||
| * | Share
data adjusted for effect of 3-for-2 stock split effective January 21, 2005 |
See accompanying notes to consolidated financial statements
| January 29, 2005 |
October 30, 2004 | ||||
|---|---|---|---|---|---|
| ASSETS | (Unaudited) | ||||
| Current assets: | |||||
| Cash and cash equivalents | $ 189,740 | $ 231,706 | |||
| Accounts receivable, net | 244,070 | 259,897 | |||
| Inventories | 507,765 | 443,810 | |||
| Other current assets | 64,474 | 56,639 | |||
| Total current assets | 1,006,049 | 992,052 | |||
Property, plant and equipment, net | 204,326 | 207,974 | |||
| Intangible assets, net | 42,220 | 40,213 | |||
| Deferred income taxes | 129,279 | 129,424 | |||
| Other assets | 69,976 | 70,696 | |||
| Total assets | $1,451,850 | $1,440,359 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||
| Current liabilities: | |||||
| Short-term notes payable, including current portion | |||||
| of long-term debt | $ 2,094 | $ 3,110 | |||
| Trade accounts payable | 127,754 | 139,178 | |||
| Employee compensation and benefits | 53,887 | 82,472 | |||
| Advance payments and progress billings | 100,512 | 87,507 | |||
| Income taxes payable | 14,616 | 4,910 | |||
| Other accrued liabilities | 124,208 | 114,675 | |||
| Total current liabilities | 423,071 | 431,852 | |||
Long-term obligations | 188,252 | 202,869 | |||
| Accrued pension costs | 270,684 | 268,933 | |||
| Other | 86,222 | 84,657 | |||
| Total liabilities | 968,229 | 988,311 | |||
| Shareholders' equity | 483,621 | 452,048 | |||
| Total liabilities and shareholders' equity | $1,451,850 | $1,440,359 | |||
See accompanying notes to consolidated financial statements
| Three Months Ended | |||||
|---|---|---|---|---|---|
| January 29, 2005 |
January 31, 2004 | ||||
| Cash flows from operating activities: | |||||
| Net income | $ 22,184 | $ 938 | |||
| Non-cash items: | |||||
| Depreciation and amortization | 10,463 | 12,001 | |||
| Amortization of financing fees | 433 | 1,889 | |||
| Loss on debt repurchase | 2,393 | -- | |||
| Increase (decrease) in deferred income taxes, net | |||||
| of change in valuation allowance | (188 | ) | (1,899 | ) | |
| Change in long-term accrued pension costs | 4,209 | 5,271 | |||
| Other, net | 647 | 872 | |||
| Changes in Working Capital Items: | |||||
| (Increase) decrease in accounts receivable, net | 19,371 | 6,656 | |||
| (Increase) decrease in inventories | (58,282 | ) | (8,049 | ) | |
| (Increase) decrease in other current assets | (5,773 | ) | (2,764 | ) | |
| Increase (decrease) in trade accounts payable | (13,980 | ) | (8,055 | ) | |
| Increase (decrease) in employee compensation and benefits | (25,561 | ) | (15,466 | ) | |
| Increase (decrease) in advance payments and progress billings | 12,220 | 3,308 | |||
| Increase (decrease) in other accrued liabilities | 19,408 | (2,979 | ) | ||
| Net cash used by operating activities | (12,456 | ) | (8,277 | ) | |
| Cash flows from investing activities: | |||||
| Property, plant and equipment acquired | (4,376 | ) | (2,626 | ) | |
| Proceeds from sale of property, plant and equipment | 322 | 2,283 | |||
| Intangibles acquired | (2,966 | ) | (1,529 | ) | |
| Other, net | (1,200 | ) | 2,128 | ||
| Net cash provided (used) by investing activities | (8,220 | ) | 256 | ||
| Cash flows from financing activities: | |||||
| Exercise of stock options | 1,265 | 24,790 | |||
| Dividends paid | (5,853 | ) | (2,491 | ) | |
| Repurchase of 8.75% Senior Subordinated Notes | (16,536 | ) | -- | ||
| Repayment of long-term obligations | (276 | ) | (353 | ) | |
| Increase (decrease) in short-term notes payable | (962 | ) | 338 | ||
| Financing fees | -- | (1,000 | ) | ||
| Net cash provided (used) by financing activities | (22,362 | ) | 21,284 | ||
| Effect of exchange rate changes on cash and cash equivalents | 1,072 | 33 | |||
| Increase (Decrease) in Cash and Cash Equivalents | (41,966 | ) | 13,296 | ||
| Cash and Cash Equivalents at Beginning of Period | 231,706 | 148,505 | |||
| Cash and Cash Equivalents at End of Period | $ 189,740 | $ 161,801 | |||
See accompanying notes to consolidated financial statements
| Joy Global Inc. manufactures and markets products classified into two business segments: underground mining machinery (Joy Mining Machinery or “Joy”) and surface mining equipment (P&H Mining Equipment or “P&H”). Joy is a major manufacturer of underground mining equipment for the extraction of coal and other bedded minerals and offers comprehensive service locations near major mining regions worldwide. P&H is a major producer of surface mining equipment for the extraction of ores and minerals and provides extensive operational support for many types of equipment used in surface mining. |
| The Condensed Consolidated Financial Statements presented in this quarterly report on Form 10-Q are unaudited and have been prepared by us in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. |
| In our opinion, all adjustments necessary for the fair presentation on a going concern basis of the results of operations, cash flows and financial position for all periods presented have been made. All adjustments made are of a normal recurring nature. |
| These financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended October 30, 2004. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. |
| The preparation of the financial statements in conformity with generally accepted accounting principles for interim financial information requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from the estimates. |
| On January 23, 2004, we entered into a second amended and restated credit agreement (“Credit Agreement”) which consists of a $200 million revolving credit facility maturing on October 15, 2008. Substantially all of our assets and our domestic subsidiaries’ assets, other than real estate, are pledged as collateral under the Credit Agreement. Outstanding borrowings bear interest equal to either LIBOR plus the applicable margin (3.25% to 2.00%) or the Base Rate (defined as the higher of the Prime Rate or the Federal Funds Effective Rate plus 0.50%) plus the applicable margin (2.25% to 1.00%) at our option depending on certain of our financial ratios. We pay a commitment fee ranging from 0.50% to 0.75% on the unused portion of the revolving credit facility. In 2002, we issued $200 million in 8.75% Senior Subordinated Notes due March 15, 2012. |
| Both the Credit Agreement and Senior Subordinated Note Indenture contain restrictions and financial covenants relating to, among other things, minimum financial performance and limitations on the incurrence of additional indebtedness, liens, asset sales, and capital expenditures. The covenants in the Senior Subordinated Note Indenture are generally less restrictive than the covenants in the Credit Agreement. Interest coverage, leverage and fixed charge coverage covenants in the Credit Agreement generally become more restrictive over the term of the agreement. At January 29, 2005, we were in compliance with financial covenants in the Credit Agreement and the Indenture. |
| In December, we purchased approximately $14.5 million of our 8.75% Senior Subordinated Notes in several open market purchases. These transactions, which resulted in a $2.4 million loss, consisted of approximately $16.5 million of cash and the writedown of unamortized finance costs of $0.4 million. Since these transactions are purchases, not redemption’s, the bonds remain outstanding in accordance with their terms of the Indenture. |
| At January 29, 2005, there were no outstanding borrowings under the Credit Agreement. Outstanding letters of credit issued under the Credit Agreement, which count toward the $200 million credit limit, totaled $84.7 million. The amount available for borrowings under the Credit Agreement is also limited by a borrowing base calculation. At January 29, 2005, there was $115.3 million available for borrowings under the Credit Agreement. |
| On December 15, 2004, our board of directors authorized a three-for-two split of our common shares, payable on January 21, 2005 to shareholders of record on January 6, 2005. References in the Consolidated Condensed Financial Statements to the number of common shares and related per share amounts have been restated to reflect the stock split. |
| On January 28, 2005, we began our sixth distribution of common stock to holders of allowed pre-petition claims against Harnischfeger Industries, Inc., the Company’s name prior to its reorganization in 2001. This is the final distribution of shares to holders of allowed pre-petition claims against the Company. The distribution consists of 1,850,074 shares (equivalent to 1,233,423 shares prior to the Company’s 3-for-2 stock split, less any fractional shares that would have resulted from the split) and $1,596 of cash paid in lieu of fractional shares, as well as $477,952 of cash payable in satisfaction of accrued dividends previously declared on the shares being distributed. |
| This distribution, under our Plan of Reorganization, brings the total number of shares distributed to date to 75,000,000 as adjusted to reflect the Company’s 3-for-2 stock split (equivalent to 50,000,000 shares prior to such stock split). This distribution is based on approximately $1.21 billion of allowed claims. This distribution, when added to the prior distributions, equates one share of Joy Global Inc. common stock prior to the stock split to a $24.11 allowed claim (equivalent to $16.08 on a split-adjusted basis). All subsequent references to stock shares will be on a post-split basis unless otherwise noted. |
| Our stock incentive plan authorizes the grant of up to 13,584,000 stock options, performance shares, restricted stock units and other stock-based awards to officers, employees and directors. As of January 29, 2005 stock option grants aggregating approximately 8.1 million shares of common stock had been made to approximately 250 individuals. Included in this aggregate were options to purchase 22,500 shares granted to each of our six outside directors. On February 25, 2003, and February 24, 2004, restricted stock unit grants of 8,373 and 3,238, respectively, were made to each of our six outside directors. These restricted stock units vest one year after the grant date and provide that a number of shares of common stock equal to the number of vested units will be delivered one year after the director’s service on the board terminates. On January 21, 2004 and November 15, 2004 restricted stock unit grants of 71,198 and 54,150, respectively, were made to certain executive officers and key employees. These restricted stock units vest over a five-year period with one-third vesting on the third, fourth and fifth anniversaries of the grant date and provide that a number of shares of common stock equal to the number of vested units will be delivered to the individual as the units vest. Individuals are credited with additional units to reflect cash dividends paid on the underlying common stock. In the event of a change in control, the units will be paid out in cash based on the market price of the common stock, as of the date of the change in control. |
| The 2003, 2004 and 2005 performance share award programs under our stock incentive plan provide long-term incentive compensation opportunities to certain senior executives. Up to approximately 593,000 shares of common stock may be earned by the senior executives under the 2003, 2004 and 2005 performance share award programs if at the end of a three year award cycle cumulative net cash flow, as defined in the performance award agreements, exceeds certain threshold amounts. Each performance share represents the right to earn one share of common stock. Awards can range from 0% to 150% of the target award opportunities and may be paid out in stock, cash or a combination of stock and cash. In the event of a change in control, the performance shares are paid out in cash based on the greater of actual performance or target award. During the first quarter of 2005 and prior to the 3-for-2 stock split, we distributed 155,882 of the 363,614 performance shares earned under the 2001 performance share award program. |
| As of January 29, 2005, awards under the stock incentive plan were accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The following table illustrates the effect on net income and net income per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. |
| Three Months Ended | |||||
|---|---|---|---|---|---|
| In thousands except per share data |
January 29, 2005 |
January 31, 2004 | |||
| Net income, as reported | $ 22,184 | $ 938 | |||
| Add: | |||||
| Compensation expense included | |||||
| in reported net income, net of | |||||
| related tax effect | 2,011 | 1,550 | |||
| Deduct: | |||||
| Compensation expense determined | |||||
| under SFAS No. 123, net of related taxes | (1,822 | ) | (2,279 | ) | |
| Pro forma net income | $ 22,373 | $ 209 | |||
| Net income per share * | |||||
| As reported | |||||
| Basic | $ 0.28 | $ 0.01 | |||
| Diluted | $ 0.27 | $ 0.01 | |||
| Pro forma * | |||||
| Basic | $ 0.28 | $ 0.00 | |||
| Diluted | $ 0.27 | $ 0.00 | |||
| * | Share
data adjusted for effect of 3-for-2 stock split effective January 21, 2005 |
| Separate Statements of Shareholders’ Equity are not required to be presented for interim periods. However, comprehensive income consisted of the following: |
| Three Months Ended | |||||
|---|---|---|---|---|---|
| In thousands |
January 29, 2005 |
January 31, 2004 | |||
| Net income | $22,184 | $ 938 | |||
| Comprehensive income: | |||||
| Translation adjustments | 8,082 | 7,426 | |||
| Derivative fair value adjustments | 936 | (234 | ) | ||
| Total comprehensive income | $31,202 | $ 8,130 | |||
| Basic net income per share is computed based on the weighted-average number of shares outstanding during each period. Diluted net income per share is computed based on the weighted average number of ordinary shares during each period, plus dilutive potential shares considered outstanding during the period in accordance with SFAS No. 128, “Earnings per Share.” |
The following table sets forth the computation of basic and diluted earnings per share:
| Three Months Ended | |||||
|---|---|---|---|---|---|
| In thousands except per share data |
January 29, 2005 |
January 31, 2004 | |||
| Numerator: | |||||
| Net income | $ 22,184 | $ 938 | |||
| Denominator: | |||||
| Denominator for basic net income per share - | |||||
| Weighted average shares | 80,062 | 76,431 | |||
| Effect of dilutive securities: | |||||
| Stock options, restricted stock and | |||||
| performance shares | 2,072 | 1,998 | |||
| Denominator for diluted net income per share - | |||||
| Adjusted weighted average shares and | |||||
| assumed conversions | 82,134 | 78,429 | |||
| Basic net income per share * | $ 0.28 | $ 0.01 | |||
| Diluted net income per share * | $ 0.27 | $ 0.01 | |||
| * | Share
data adjusted for effect of 3-for-2 stock split effective January 21, 2005 |
| We and our subsidiaries are involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to product liability (including asbestos-related and silicosis liability), employment and commercial matters. Also, as a normal part of their operations, our subsidiaries undertake contractual obligations, warranties and guarantees in connection with the sale of products or services. Although the outcome of these matters cannot be predicted with certainty and favorable or unfavorable resolutions may affect the results of operations on a quarter-to-quarter basis, we believe that the outcome of such legal and other matters will not have a materially adverse effect on our consolidated financial position, results of operations or liquidity. |
| John G. Kling, purportedly on his own behalf and “in a representative capacity for the Harnischfeger Industries Employees’ Savings Plan,” (the “Plan”) filed suit in the United States District Court for the District of Massachusetts on November 9, 2001, against certain of our present and former employees, officers and directors. We and the Plan were added as defendants in this case in early 2004. This action seeks damages in an unspecified amount based on, among other things, allegations that the members of our Pension Investment Committee, the Pension Committee of the Board of Directors, and Fidelity Management Trust Company failed to properly discharge their fiduciary obligations under ERISA with respect to the “Harnischfeger Common Stock Fund” in the Harnischfeger Industries Employees’ Savings Plan. On May 24, 2004, the court granted our motion to dismiss the Plan and the Board committee and denied our motion to dismiss us and our former directors from this action. |
| The General Organization for Industrial and Mining Projects (“IMC”), an agency of the government of Egypt commenced legal proceedings in Egypt in late 2002 against Joy Mining Machinery Limited (“Joy MM”), one of our subsidiaries located in the United Kingdom, to resolve certain disputes arising under an agreement entered into in 1998 between Joy MM and IMC relating to underground mining equipment for the Abu Tartur project in Egypt. IMC may also seek wrongfully to draw on approximately 9.7 million pounds sterling in bank guarantees established for the benefit of IMC in connection with the agreement. On August 6, 2004, The International Centre for Settlement of Investment Disputes declined to accept jurisdiction of arbitration proceedings initiated by Joy MM against IMC. IMC has now commenced proceedings against Joy MM in the Cairo Arbitration Centre to recover unspecified damages for the alleged breach of contract and delay. An arbitration panel has been selected and proceedings before it have commenced. |
| By notice dated May 16, 2003, Sokolovskaya Investment Company (“SIC”), a mining company in Russia, filed a request for arbitration with the ICC International Court of Arbitration against Joy MM to recover damages alleged to have arisen out of contracts entered into by Joy MM and SIC in 1995 and 1996 for the supply of underground mining equipment and related services. SIC seeks damages for loss of profit, delay, repairs, loss of use and other consequential damages of between $65 million and $82 million. An arbitration panel has been selected and hearings before it have commenced. |
| At January 29, 2005, we were contingently liable to banks, financial institutions and others for approximately $106.9 million for outstanding letters of credit, bank guarantees and surety bonds securing performance of sales contracts and other guarantees in the ordinary course of business. Of the $106.9 million, approximately $6.2 million was issued at our request on behalf of Beloit Corporation. At January 29, 2005, there were $2.5 million of outstanding letters of credit or other guarantees issued by non-U.S. banks for non-U.S. subsidiaries. |
| From time to time we and our subsidiaries become involved in proceedings relating to environmental matters. We believe that the resolution of such environmental matters will not have a materially adverse effect on our consolidated financial position, results of operations or liquidity. |
| We have entered into various forward foreign exchange contracts with major international financial institutions for the purpose of hedging our risk of loss associated with changes in foreign exchange rates. These contracts involve off-balance-sheet market and credit risk. As of January 29, 2005, the nominal or face value of forward foreign exchange contracts to which we are a party, in absolute U.S. dollar equivalent terms, was $246.8 million. |
| Forward exchange contracts are entered into to protect the value of committed future foreign currency receipts and disbursements and net investment hedges and consequently any market related loss on the forward contract would be offset by changes in the value of the hedged item. As a result, we are not exposed to net market risk associated with these instruments. |
| We are exposed to credit-related losses in the event of non-performance by counterparties to our forward exchange contracts, but we do not expect any counterparties to fail to meet their obligations. A contract is generally subject to credit risk only when it has a positive fair value and the maximum exposure is the amount of the positive fair value. |
Consolidated inventories, net consisted of the following:
| In thousands |
January 29, 2005 |
October 30, 2004 | |||
|---|---|---|---|---|---|
| Finished goods | $254,756 | $244,244 | |||
| Work in process and purchased parts | 204,071 | 164,660 | |||
| Raw materials | 48,938 | 34,906 | |||
| $507,765 | $443,810 | ||||
| We provide a warranty reserve for the estimated costs that may be incurred under product warranties to remedy deficiencies of quality or performance in our products. These product warranties extend over either a specified period of time, units of production or machine hours depending upon the product subject to the warranty. We accrue a provision for estimated future warranty costs based upon the historical relationship of warranty costs to sales. The warranty reserve is included in other accrued liabilities in the Condensed Consolidated Balance Sheet. We periodically review the adequacy of the accrual for product warranties and adjust the warranty percentage and accrued warranty reserve for actual experience as appropriate. |
The following table reconciles the changes in the Company’s product warranty reserve:
| Three Months Ended | |||||
|---|---|---|---|---|---|
| In thousands |
January 29, 2005 |
January 31, 2004 | |||
| Balance, beginning of period | $ 31,259 | $ 30,443 | |||
| Accrual for warranty expensed during | |||||
| the period | 5,387 | 3,595 | |||
| Settlements made during the period | (4,124 | ) | (4,056 | ) | |
| Change in liability for pre-existing warranties | |||||
| during the period, including expirations | (295 | ) | (215 | ) | |
| Effect of foreign currency translation | 288 | 401 | |||
| Balance, end of period | $ 32,515 | $ 30,168 | |||
| Reorganization items include income, expense and loss that were realized or incurred as a result of our reorganization under Chapter 11 of the Bankruptcy Code. For the three months ended January 29, 2005 and January 31, 2004, the $0.1 million and $0.6 million, respectively, of reorganization items represented post emergence professional fees. |
| Costs associated with restructuring activities other than those activities covered by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or that involve an entity newly acquired in a business combination, are accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Costs associated with such activities are recorded as restructuring costs in the consolidated statements of income when the liability is incurred. |
| During 2003, we implemented a manufacturing capacity rationalization at our P&H Mining Equipment Milwaukee location that reduced factory space by 350,000 square feet and resulted in a facility that is more efficient. The rationalization was completed in the fourth quarter of Fiscal 2004 at a cost of $2.0 million. We realized approximately $5.5 million in cost savings in our cost of sales in Fiscal 2004 as a result of the Fiscal 2003 rationalization plan at P&H. These savings are sustainable in future years, but will vary based upon sales. |
| During 2003, Joy Mining Machinery implemented a manufacturing capacity rationalization plan for North America. Total costs for the Joy North American manufacturing capacity rationalization included $1.5 million for one-time termination benefits for 132 employees, $0.8 million for abandoned assets, and $1.4 million for other associated costs. Also during 2003, Joy Mining Machinery implemented a manufacturing capacity rationalization plan for the United Kingdom and Australia. The total costs for the United Kingdom manufacturing capacity rationalization were $1.6 million for one-time termination benefits for 26 employees. The total costs for the Australian manufacturing capacity rationalization were $0.2 million for one-time termination benefits for 27 employees. The Fiscal 2003 rationalization plan at Joy was completed in the fourth quarter of Fiscal 2004 at a total cost of $5.5 million. We realized approximately $5.8 million in cost savings in Fiscal 2004 as a result of the Fiscal 2003 rationalization plan at Joy. These savings consisted of $4.7 million reflected in our cost of sales and $1.1 million reflected in our product development, selling and administrative expenses. These savings are sustainable in future years, but will vary based upon sales. |
The components of net periodic benefit costs recognized are as follows:
| U.S. Pension Benefits |
Postretirement Benefits | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended |
Three Months Ended | ||||||||
| In thousands |
January 29, 2005 |
January 31, 2004 |
January 29, 2005 |
January 31, 2004 | |||||
| Service cost | 3,313 | $ 3,068 | $ 42 | $ 42 | |||||
| Interest cost | 10,851 | 10,805 | 717 | 862 | |||||
| Expected return on assets | (12,062 | ) | (9,953 | ) | -- | -- | |||
| Amortization of: | |||||||||
| Prior service cost | 107 | 91 | -- | -- | |||||
| Actuarial (gain) loss | 2,731 | 1,632 | 52 | 100 | |||||
| Net periodic benefit cost | $ 4,940 | $ 5,643 | $811 | $1,004 | |||||
No contributions are required to be made to our U.S. qualified pension plans in Fiscal 2005.
| At January 29, 2005, we had two reportable segments: Underground Mining Machinery and Surface Mining Equipment. Operating income (loss) of the segments does not include interest income (expense) or provision for income taxes. There are no significant intersegment sales. Segment total assets are those used in our operations in each segment. Corporate assets consist primarily of cash and cash equivalents, deferred financing costs and deferred income taxes. |
| In thousands |
Net Sales |
Operating Income (Loss) |
Total Assets | ||||
|---|---|---|---|---|---|---|---|
| 2005 First Quarter | |||||||
| Underground Mining Machinery | $227,823 | $ 26,723 | $ 658,347 | ||||
| Surface Mining Equipment | 155,867 | 23,185 | 469,206 | ||||
| Total operations | 383,690 | 49,908 | 1,127,553 | ||||
| Corporate | -- | (7,647 | ) | 324,297 | |||
| Consolidated Total | $383,690 | $ 42,261 | $1,451,850 | ||||
| 2004 First Quarter | |||||||
| Underground Mining Machinery | $155,016 | $ 7,568 | $ 640,984 | ||||
| Surface Mining Equipment | 128,670 | 6,887 | 397,845 | ||||
| Total operations | 283,686 | 14,455 | 1,038,829 | ||||
| Corporate | -- | (6,728 | ) | 272,646 | |||
| Consolidated Total | $283,686 | $ 7,727 | $1,311,475 | ||||
| On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payments,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. |
| Statement 123(R) must be adopted in the first interim or annual period beginning after June 15, 2005, irrespective of the entity’s fiscal year. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) at the beginning of our fourth quarter on July 31, 2005. |
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
| A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have not decided on the method of application at this time. |
| As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method could have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 4 to our consolidated financial statements and Note 12 of our annual report on Form 10-K for the year ended October 30, 2004. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. Due to our tax position, we do not anticipate this to have any effect on our cash flow statement. |
| In December 2004, the FASB issued Statement No. 153, (“FAS 153”), “Exchanges of Nonmonetary Assets — Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions (“APB 29”).” FAS 153 is based on the principle that nonmonetary asset exchanges should be recorded and measured at the fair value of the assets exchanged, with certain exceptions. This standard requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (i) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (ii) the transactions lack commercial substance (as defined). In addition, the FASB decided to retain the guidance in APB 29 for assessing whether the fair value of a nonmonetary asset is determinable within reasonable limits. The new standard is the result of the convergence project between the FASB and the International Accounting Standards Board (“IASB”). We will adopt this standard for nonmonetary asset exchanges occurring beginning in fiscal year 2006. The adoption of FAS No. 153 is not expected to have a significant impact on the consolidated financial statements. |
| In November 2004, FASB issued FAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”, to improve financial reporting and global comparability of inventory accounting. The amendment, which adopted language similar to that used in the IASB International Accounting Standard 2 (“IAS 2”), clarifies that inventory related expenses, such as abnormal amounts of idle facility expense, freight, handling costs, and wasted or spoiled materials should be recognized as current period charges. The statement also requires fixed production overhead allocations to inventory based on normal capacity of the production facilities. The guidance is effective for inventory costs incurred beginning in our fiscal year 2006. The adoption of FAS No. 151 is not expected to have a significant impact on the consolidated financial statements. |
| The following tables present condensed consolidated financial information for the three months ended January 29, 2005 and January 31, 2004 for: (a) the Company; (b) on a combined basis, the guarantors of the Credit Agreement and Senior Subordinated Notes, which include substantially all of our domestic subsidiaries (“Subsidiary Guarantors”); and (c) on a combined basis, the non-guarantors, which include all of our foreign subsidiaries (“Non-Guarantor Subsidiaries”). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are unconditionally, jointly, and severally liable under the guarantees, and we believe such separate statements or disclosures would not be useful to investors. |
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ -- | $ 231,009 | $ 234,427 | $(81,746 | ) | $ 383,690 | |||||
| Cost of sales | -- | 159,607 | 177,708 | (66,446 | ) | 270,869 | |||||
| Product development, selling | |||||||||||
| and administrative expenses | 7,596 | 36,292 | 27,393 | -- | 71,281 | ||||||
| Restructuring charges | -- | -- | -- | -- | -- | ||||||
| Other (income) expense | -- | (772 | ) | 51 | -- | (721 | ) | ||||
| Operating income (loss) | (7,596 | ) | 35,882 | 29,275 | (15,300 | ) | 42,261 | ||||
| Intercompany items | 623 | 3,033 | (12,964 | ) | 9,308 | -- | |||||
| Interest income (expense), net | (4,482 | ) | (40 | ) | 104 | -- | (4,418 | ) | |||
| Loss on debt repurchase | (2,393 | ) | -- | -- | -- | (2,393 | ) | ||||
| Income (loss) before reorganization items | (13,848 | ) | 38,875 | 16,415 | (5,992 | ) | 35,450 | ||||
| Reorganization items | (116 | ) | -- | -- | -- | (116 | ) | ||||
| Income (loss) before income taxes | (13,964 | ) | 38,875 | 16,415 | (5,992 | ) | 35,334 | ||||
| (Provision) benefit for income taxes | 4,328 | (13,928 | ) | (3,550 | ) | -- | (13,150 | ) | |||
| Equity in income (loss) of subsidiaries | 31,820 | 19,926 | 993 | (52,739 | ) | -- | |||||
| Net income (loss) | $ 22,184 | $ 44,873 | $ 13,858 | $(58,731 | ) | $ 22,184 | |||||
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ — | $ 163,143 | $ 167,468 | $(46,925 | ) | $ 283,686 | |||||
| Cost of sales | — | 127,310 | 126,674 | (40,093 | ) | 213,891 | |||||
| Product development, selling | |||||||||||
| and administrative expenses | 6,689 | 33,992 | 22,062 | — | 62,743 | ||||||
| Restructuring charges | — | 227 | 206 | — | 433 | ||||||
| Other income | (70 | ) | (651 | ) | (387 | ) | — | (1,108 | ) | ||
| Operating income (loss) | (6,619 | ) | 2,265 | 18,913 | (6,832 | ) | 7,727 | ||||
| Intercompany items | 2,383 | 1,669 | (10,297 | ) | 6,245 | — | |||||
| Interest income (expense), net | (7,013 | ) | (88 | ) | 1,427 | — | (5,674 | ) | |||
| Income (loss) before reorganization items | (11,249 | ) | 3,846 | 10,043 | (587 | ) | 2,053 | ||||
| Reorganization items | (615 | ) | — | — | — | (615 | ) | ||||
| Income (loss) before income taxes | (11,864 | ) | 3,846 | 10,043 | (587 | ) | 1,438 | ||||
| (Provision) benefit for income taxes | 3,678 | (2,472 | ) | (1,706 | ) | — | (500 | ) | |||
| Equity in income (loss) of subsidiaries | 9,124 | 17,153 | 916 | (27,193 | ) | — | |||||
| Net income (loss) | $ 938 | $ 18,527 | $ 9,253 | $(27,780 | ) | $ 938 | |||||
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ 141,044 | $ (1,955 | ) | $ 50,651 | $ — | $ 189,740 | |||||
| Accounts receivable, net | — | 107,139 | 143,737 | (6,806 | ) | 244,070 | |||||
| Inventories | — | 288,434 | 265,404 | (46,073 | ) | 507,765 | |||||
| Other current assets | 36,461 | 7,295 | 20,672 | 46 | 64,474 | ||||||
| Total current assets | 177,505 | 400,913 | 480,464 | (52,833 | ) | 1,006,049 | |||||
Property, plant and equipment, net | 298 | 127,636 | 76,392 | — | 204,326 | ||||||
| Intangible assets, net | — | 42,220 | — | — | 42,220 | ||||||
| Investment in affiliates | 1,240,639 | 558,318 | 58,328 | (1,857,285 | ) | — | |||||
| Intercompany accounts, net | (545,480 | ) | 616,219 | (116,966 | ) | 46,227 | — | ||||
| Deferred income taxes | 129,279 | — | — | — | 129,279 | ||||||
| Other assets | 8,568 | 7,180 | 54,228 | — | 69,976 | ||||||
| Total assets | $ 1,010,809 | $ 1,752,486 | $ 552,446 | $(1,863,891 | ) | $1,451,850 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term notes payable, including current portion | |||||||||||
| of long-term debt | $ — | $ (15 | ) | $ 2,109 | $ — | $ 2,094 | |||||
| Trade accounts payable | 494 | 56,251 | 71,009 | — | 127,754 | ||||||
| Advance payments and progress billings | — | 53,508 | 64,329 | (17,325 | ) | 100,512 | |||||
| Income taxes payable | (3,845 | ) | 8,407 | 10,054 | — | 14,616 | |||||
| Other accrued liabilities | 32,217 | 85,328 | 77,216 | (16,666 | ) | 178,095 | |||||
| Total current liabilities | 28,866 | 203,479 | 224,717 | (33,991 | ) | 423,071 | |||||
Long-term obligations | 185,495 | 186 | 2,571 | — | 188,252 | ||||||
Other non-current liabilities | 312,827 | 13,999 | 30,080 | — | 356,906 | ||||||
Shareholders' equity | 483,621 | 1,534,822 | 295,078 | (1,829,900 | ) | 483,621 | |||||
| Total liabilities and shareholders' equity | $ 1,010,809 | $ 1,752,486 | $ 552,446 | $(1,863,891 | ) | $1,451,850 | |||||
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ 180,837 | $ 1,422 | $ 49,447 | $ — | $ 231,706 | ||||||
| Accounts receivable, net | — | 109,036 | 157,680 | (6,819 | ) | 259,897 | |||||
| Inventories | — | 252,237 | 228,130 | (36,557 | ) | 443,810 | |||||
| Other current assets | 36,637 | 3,149 | 16,786 | 67 | 56,639 | ||||||
| Total current assets | 217,474 | 365,844 | 452,043 | (43,309 | ) | 992,052 | |||||
Property, plant and equipment, net | 303 | 131,514 | 76,157 | — | 207,974 | ||||||
| Intangible assets, net | — | 40,213 | — | — | 40,213 | ||||||
| Investment in affiliates | 1,206,745 | 540,068 | 57,084 | (1,803,897 | ) | — | |||||
| Intercompany accounts, net | (572,278 | ) | 638,709 | (113,448 | ) | 47,017 | — | ||||
| Deferred income taxes | 129,424 | — | — | — | 129,424 | ||||||
| Other non-current assets | 12,233 | 6,410 | 52,053 | — | 70,696 | ||||||
| Total assets | $ 993,901 | $1,722,758 | $ 523,889 | $(1,800,189 | ) | $1,440,359 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term notes payable, including current portion | |||||||||||
| of long-term debt | $ — | $ 48 | $ 3,062 | $ — | $ 3,110 | ||||||
| Trade accounts payable | 1,633 | 58,444 | 79,101 | — | 139,178 | ||||||
| Advance payments and progress billings | — | 51,696 | 48,202 | (12,391 | ) | 87,507 | |||||
| Income taxes payable | (5,381 | ) | 2,495 | 7,796 | — | 4,910 | |||||
| Other accrued liabilities | 34,905 | 95,880 | 81,381 | (15,019 | ) | 197,147 | |||||
| Total current liabilities | 31,157 | 208,563 | 219,542 | (27,410 | ) | 431,852 | |||||
Long-term obligations | 200,000 | 182 | 2,687 | — | 202,869 | ||||||
Other non-current liabilities | 310,696 | 13,768 | 29,126 | — | 353,590 | ||||||
Shareholders' equity | 452,048 | 1,500,245 | 272,534 | (1,772,779 | ) | 452,048 | |||||
| Total liabilities and shareholders' equity | $ 993,901 | $1,722,758 | $ 523,889 | $(1,800,189 | ) | $1,440,359 | |||||
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Consolidated | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net cash provided (used) by operations | $(18,488 | ) | $ 2,991 | $ 3,041 | $(12,456 | ) | |||
| Investing activities: | |||||||||
| Property, plant and equipment acquired | (26 | ) | (2,693 | ) | (1,657 | ) | (4,376 | ) | |
| Proceeds from sale of property, plant and equipment | — | 292 | 30 | 322 | |||||
| Other, net | (155 | ) | (3,908 | ) | (103 | ) | (4,166 | ) | |
| Net cash provided (used) by investing activities | (181 | ) | (6,309 | ) | (1,730 | ) | (8,220 | ) | |
| Financing activities: | |||||||||
| Exercise of stock options | 1,265 | — | — | 1,265 | |||||
| Dividends paid | (5,853 | ) | — | — | (5,853 | ) | |||
| Net issuance (payments) of long-term obligations | (16,536 | ) | (59 | ) | (217 | ) | (16,812 | ) | |
| Increase (decrease) in short-term notes payable, net | — | — | (962 | ) | (962 | ) | |||
| Net cash provided (used) by financing activities | (21,124 | ) | (59 | ) | (1,179 | ) | (22,362 | ) | |
| Effect of Exchange Rate Changes on Cash and | |||||||||
| Cash Equivalents | — | — | 1,072 | 1,072 | |||||
| Increase (Decrease) in Cash and Cash Equivalents | (39,793 | ) | (3,377 | ) | 1,204 | (41,966 | ) | ||
| Cash and Cash Equivalents at Beginning of Period | 180,837 | 1,422 | 49,447 | 231,706 | |||||
| Cash and Cash Equivalents at End of Period | $ 141,044 | $(1,955 | ) | $ 50,651 | $ 189,740 | ||||
| Parent Company |
Subsidiary Guarantors |
Non-Guarantor Subsidiaries |
Consolidated | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net cash provided (used) by operations | $ 7,719 | $(15,364 | ) | $ (632 | ) | $ (8,277 | ) | ||
| Investing activities: | |||||||||
| Property, plant and equipment acquired | — | (1,083 | ) | (1,543 | ) | (2,626 | ) | ||
| Proceeds from sale of property, plant and equipment | — | 1,239 | 1,044 | 2,283 | |||||
| Other, net | (1 | ) | (1,393 | ) | 1,993 | 599 | |||
| Net cash provided (used) by investing activities | (1 | ) | (1,237 | ) | 1,494 | 256 | |||
| Financing activities: | |||||||||
| Exercise of stock options | 24,790 | — | — | 24,790 | |||||
| Dividends paid | (2,491 | ) | — | — | (2,491 | ) | |||
| Credit Agreement financing fees | (1,000 | ) | — | — | (1,000 | ) | |||
| Net issuance (payments) of long-term obligations | — | (98 | ) | (255 | ) | (353 | ) | ||
| Increase (decrease) in short-term notes payable, net | — | — | 338 | 338 | |||||
| Net cash provided (used) by financing activities | 21,299 | (98 | ) | 83 | 21,284 | ||||
| Effect of Exchange Rate Changes on Cash and | |||||||||
| Cash Equivalents | — | — | 33 | 33 | |||||
| Increase (Decrease) in Cash and Cash Equivalents | 29,017 | (16,699 | ) | 978 | 13,296 | ||||
| Cash and Cash Equivalents at Beginning of Period | 57,840 | 16,222 | 74,443 | 148,505 | |||||
| Cash and Cash Equivalents at End of Period | $ 86,857 | $ (477 | ) | $ 75,421 | $ 161,801 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions which could cause actual results to differ materially from those projected, including those described in Item 5 — Other Information – Forward-Looking Statements and Cautionary Factors in Part II of this report.
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes to the Condensed Consolidated Financial Statements in Part I of this report.
Joy Global Inc., a worldwide leader in high-productivity mining solutions, manufactures and markets original equipment and aftermarket parts and services for both the underground and aboveground mining industries through two business segments, Joy Mining Machinery and P&H Mining Equipment. Our principal manufacturing facilities are located in the United States, including facilities in Pennsylvania and Wisconsin, and in the United Kingdom, South Africa, Chile and Australia.
The continuing recovery in commodity markets is evident in our first quarter results. A booming Chinese economy continues to dominate global coal markets, which continue to be very strong. Worldwide coal demand is rising rapidly with consumption rising faster than the use of any other source of energy. While the strong demand has caused coal prices to shoot up, on average the cost of power generated using coal is still less than half the cost of natural gas generated power. Surging demand for metallurgical coal used in steelmaking shows no signs of letting up as China’s steel industry absorbs a growing share of the available supply. Copper prices have doubled and copper stockpiles have been cut in half during the past year. Demand for copper is being driven primarily by consumption in China, although demand is also increasing in the United States and other countries. Though demand is strong, the rising value of currencies in Australia and South Africa constrains coal sales from those countries. Other commodities are also seeing strong growth in demand, especially iron ore which is also being driven by China’s steel industry. Although steel costs increased during the quarter, we were able to recover substantial portions of those costs.
Customer orders were very strong in the first quarter of Fiscal 2005, with an approximate 44% increase over the first quarter of Fiscal 2004. This increase was particularly strong in original equipment orders, due largely to domestic coal customers increasing their order rates. In addition, both segments experienced increases in aftermarket orders. The first quarter of our fiscal year is typically our weakest quarter; however, revenues increased 35% for the first quarter of Fiscal 2005 and gross profit margins improved to 29% of sales compared to 25% in the first quarter of Fiscal 2004. Operating income was $42.3 million in the first quarter of Fiscal 2005 compared to operating income of $7.7 million in the first quarter of Fiscal 2004.
Net Sales
The following table sets forth the combined net sales included in our Condensed Consolidated Statement of Income:
| Three Months Ended |
|||||||||
|---|---|---|---|---|---|---|---|---|---|
| Net Sales (In thousands) |
January 29, 2005 |
January 31, 2004 |
$ Change |
% Change | |||||
| Underground Mining Machinery | $227,823 | $155,016 | $ 72,807 | 47 | % | ||||
| Surface Mining Equipment | 155,867 | 128,670 | 27,197 | 21 | % | ||||
| Total | $383,690 | $283,686 | $100,004 | 35 | % | ||||
The increase in net sales for underground mining machinery in the first quarter was the result of a $31.5 million, or 67%, increase in shipments of original equipment and a $41.3 million, or 38%, increase in aftermarket products and service. The market for original equipment continues to remain strong, especially in the United States and the international markets we serve from the United Kingdom (primarily China, Russia, India and Poland). Original equipment sales to these two regions, which increased by $9.2 million and $29.4 million, respectively, were primarily attributable to increased shipments in miners, shuttle cars, roof supports and armored face conveyors. These increases were partially offset by a decrease of $7.3 million in Australia due primarily to two longwall shearers and armored face conveyors included in the first quarter of 2004 and not repeated in the first quarter of 2005. Aftermarket sales increased by $19.8 million in the United States, $6.1 million in South Africa, $6.4 million in Australia and $9.2 million in the markets we serve from the United Kingdom. These aftermarket sales increases were primarily due to an increase of $22.9 million in complete machine rebuilds and an increase of $17.5 million for the sales of aftermarket parts and components.
The increase in net sales for surface mining equipment in the first quarter was the result of a $5.2 million, or 15% increase in original equipment and a $22.0 million, or 23%, increase in aftermarket parts and service. The market for original equipment showed strong results in the Southwestern U.S., Canada, the international markets we serve from the United Kingdom (primarily Russia) and South Africa. Original equipment sales to these regions, which increased by $9.1 million, $7.2 million, $3.8 million and $2.4 million respectively, were primarily due to increased sales of electric mining shovels in Russia, the Southwestern U.S. and Canada and an increase in sales of rotary blasthole drills in South Africa. These increases were partially offset by reduced original equipment sales of $9.4 million for Australia and $6.2 million for Eastern U.S. The demand for copper, gold, oilsands and coal impacted our original equipment sales. Aftermarket parts and service sales increased $13.1 million for the United States, $8.4 million for Australia and $3.1 million in Brazil. These aftermarket sales increases were primarily due to the increase in demand for iron ore, coal and copper.
Operating Income
The following table sets forth the operating income (loss) included in our Condensed Consolidated Statement of Income:
| Three Months Ended |
|||||||||
|---|---|---|---|---|---|---|---|---|---|
| In thousands |
January 29, 2005 |
January 31, 2004 |
$ Change |
% Change | |||||
| Operating income (loss): | |||||||||
| Underground Mining Machinery | $ 26,723 | $ 7,568 | $ 19,155 | 253 | % | ||||
| Surface Mining Equipment | 23,185 | 6,887 | 16,298 | 237 | % | ||||
| Corporate Expense | (7,647 | ) | (6,728 | ) | (919 | ) | 14 | % | |
| Total | $ 42,261 | $ 7,727 | $ 34,534 | 447 | % | ||||
The improvement in operating income for underground mining machinery resulted from the increase in sales volume and a $13.3 million, or 42%, improvement in our manufacturing overhead absorption (due to the increase in production hours). The primary items that adversely affected operating income were increases in our manufacturing spending of $6.0 million, a $3.5 million decrease in gross margin due to product mix, a $1.9 million increase in administrative expenses in the United Kingdom primarily due to pension expense and legal fees and $3.4 million additional compensation expenses associated with performance-based incentive programs.
The improvement in operating income for surface mining equipment was due to the increase in sales volume, a $4.8 million increase in gross margin due to a favorable sales mix (that included a larger percentage of parts sales and higher margin electric mining shovels) and a $5.3 million improvement in our manufacturing absorption (due to the increase in production hours). These positive factors were partially offset by an increase in manufacturing spending of $1.9 million and a $1.8 million increase in compensation expenses associated with performance-based incentive programs.
The increase in corporate expenses was primarily due to a $0.9 million increase in compensation expense associated with performance-based incentive programs accrued in the first quarter of Fiscal 2005. During the first quarter of Fiscal 2004, compensation expenses had not been accrued for some of our performance-based incentive programs but were subsequently accrued in later quarters as the performance requirements were met.
Product Development, Selling and Administrative Expense
Product development, selling and administrative expense totaled $71.3 million, or 19% of sales, in the first quarter of Fiscal 2005, as compared to $62.7 million, or 22% of sales, in the first quarter of Fiscal 2004. While a lower percentage of total sales, the 14% increase in product development, selling and administrative expense was primarily attributable to higher selling expenses related to increased business activity during the quarter, which accounted for $1.4 million of the increase, a $6.0 million increase in performance based compensation costs quarter over quarter, a $1.9 million increase in administrative expenses in the United Kingdom primarily due to pension expenses and legal fees and the impact of foreign currency translations. Offsetting these increases was lower amortization expense associated with adjustments to deferred tax assets which reduced intangible assets at the end of Fiscal 2004, which was $0.4 million lower than in the prior year.
Provision for Income Taxes
Income tax expense for the first quarter of Fiscal 2005 increased to $13.2 million as compared to $0.5 million in the first quarter of Fiscal 2004. On a consolidated basis, these income tax provisions represented effective income tax rates for the first quarters of Fiscal 2005 and 2004 of 37% and 35%, respectively. The main drivers of the variance in tax rates were the increased global profitability and mix of earnings year over year and differences in local statutory tax rates. Additionally, a discreet tax expense provision was recognized in the amount of $0.3 million in the first quarter of Fiscal 2005 related to the impact on deferred income taxes of income tax rate changes in certain of the foreign countries in which the Company conducts business.
A review of income tax valuation reserves was performed as part of the analysis of the first quarter Fiscal 2005 income tax provision and no discreet adjustments of any amount recorded as of the end of Fiscal 2004 were warranted.
Cash taxes paid for the first quarter of Fiscal 2005 were $2.4 million compared to $1.9 million in the first quarter of Fiscal 2004. This increase in cash taxes paid was primarily due to year over year increased profitability in locations where we pay cash taxes.
Bookings and Backlog
Bookings for the first quarter of 2005 were approximately $538 million compared to bookings of $374 million in the first quarter of 2004. Orders in the first quarter of Fiscal 2005 for original equipment and aftermarket parts and service increased 71% and 26%, respectively. Both the underground and surface mining businesses had increases in new orders of $117 million and $47 million, respectively, compared to a year ago.
As a result of the strong level of new orders, backlog increased from $722.1 million at the beginning of Fiscal 2005 to $876.5 million at the end of the first quarter.
Discussion of Cash Flows
At the end of the first quarter, we had $189.7 million in cash and cash equivalents and working capital of $583.0 million as compared to $231.7 million in cash and cash equivalents and working capital of $560.2 million at the beginning of the fiscal year. Our total debt less cash on hand of $189.7 million at the end of the first quarter was $0.6 million while cash on hand exceeded total debt by $25.8 million at the beginning of the fiscal year.
Operating Activities
Net cash provided or used by operating activities fluctuates between periods primarily as a result of differences in net income, the timing of the collection of accounts receivable, purchase of inventory, level of sales, payment of compensation, collection of advance payments and progress billings and payment of accounts payable. Cash used by operations during the first quarter of Fiscal 2005 was $12.5 million compared to $8.3 million in the first quarter of Fiscal 2004. The increase in the usage of cash was primarily a result of a $50.2 million increase in inventory due to increased production activities, a $10.1 million increase in employee compensation and benefits due to a higher performance based compensation payout and a $5.9 million decrease in accounts payable due to timing. These items were partially offset by the $21.2 million increase in net income, a $12.7 decrease in accounts receivable associated with aggressive collection efforts, and a $10.7 million increase in income taxes payable associated with the improved earnings.
Investing Activities
During the first quarter of Fiscal 2005 cash used by investing activities was $8.2 million compared to cash provided by investing activities of $0.3 million during the first quarter of Fiscal 2004. This increase was due to an increase in property, plant and equipment of $1.8 million, an increase in intangible purchases of $1.4 million, an increase in long-term receivables of approximately $3.4 million and a reduction of capital retirements of $2.0 million. We expect to fund capital expenditures in 2005 with operating cash flows and available cash.
Financing Activities
During the first quarter of Fiscal 2005 cash used by financing activities was $22.4 million compared to cash provided by financing activities of $21.3 million in the first quarter of Fiscal 2004. Approximately $16.5 million was used to repurchase our 8.75% Senior Subordinated Notes, we received approximately $23.5 million less cash from the exercise of employee stock options in Fiscal 2005 compared to Fiscal 2004 and we had an increase of $3.4 million in dividends paid.
Credit Agreement
As of the end of the first quarter, we had $189.7 million in cash and cash equivalents and $115.3 million available for borrowings under the Credit Agreement. In December, we purchased approximately $14.5 million of our 8.75% Senior Subordinated Notes in several open market purchases. These transactions, which resulted in a $2.4 million loss, consisted of approximately $16.5 million of cash and the writedown of unamortized finance costs of $0.4 million. Since these transactions are purchases, not redemption’s, the bonds remain outstanding in accordance with the terms of the Indenture. Based upon our current level of operations, we believe that cash flow from operations, together with available borrowings under the Credit Agreement, will be adequate to meet our anticipated future cash requirements.
Off-Balance Sheet Arrangements
We lease various assets under operating leases. No significant changes to lease commitments have occurred since our fiscal year ended October 30, 2004. We have no other off-balance sheet arrangements.
Conditions in the majority of our customers’ markets continue to strengthen. U.S. coal is enjoying stronger spot pricing, which should translate into higher selling prices and cash flow for our customers, as the effect of new supply contracts take hold over the next couple of years. Total domestic coal demand is forecasted to increase in 2005, both in consumption by utilities and for exports, particularly in metallurgical coal. International coal markets also continue to strengthen, particularly for metallurgical coal used in the production of steel. Management continues to believe that the emerging underground coal markets will contribute a larger portion of our overall revenues over the next few years.
Customers producing copper are enjoying a strong market. Copper prices have risen by approximately 37% in the past 12 months, driven by demand from China and production constraints by the major producers. Copper stockpiles have fallen during the past year and producers have begun either increasing production or announcing plans to increase production. While the impact of the strength in the copper market on our business to date has largely been an increase in aftermarket sales, historically this commodity market has comprised the largest component of our surface mining equipment operation.
Positive trends are being seen in several of the other commodity markets that our surface mining equipment operations serve. Iron ore fundamentals are equal to, or even stronger than, those of copper, with demand from China contributing to the current strength. Finally, further development of the oil sands of Canada continues to drive production, and therefore equipment utilization, higher.
We will continue to focus on cash flow in the upcoming 12 months. This focus will be necessary to insure that the ramp up of business activity uses the minimum amount of working capital possible. Capital spending should be approximately $35 million for Fiscal 2005. Although there are essentially no pension funding required in Fiscal 2005, we now estimate that our funding in Fiscal 2005 will be approximately $44 million.
The positive effects we are seeing on our business as a result of higher customer production and capital-spending levels could be offset by increasing lead times at our facilities and tightening steel supplies. Several factors temper our outlook. We believe the current buying cycle for mining equipment and services will be sustained and that our customers will exercise discipline in increasing their production. Our ability to grow revenues is constrained by the capacity of our plants, our ability to supplement that capacity with outside sources, and our success in securing critical supplies such as steel and copper. As we increase our production to meet the increased demand for mining equipment, our challenge is to manage our working capital and the other aspects of our business so that we meet the needs of our customers while maximizing returns to shareholders. We will need to continue to control pension and health care costs.
Our discussion and analysis of financial condition and results of operations is based upon our Condensed Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an ongoing basis, our estimates and judgments, including those related to bad debts, excess inventory, warranty, intangible assets, income taxes, and contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
We believe our accounting policies for revenue recognition, inventories, intangible assets, accrued warranties, pension and postretirement benefits and costs, and income taxes are the ones that most frequently require us to make estimates and judgments, and therefore are critical to the understanding of our results of operations. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of our annual report on Form 10-K for the year ended October 30, 2004 for a discussion of these policies. There were no material changes to these policies during the first quarter.
As more fully described in our Annual Report on Form 10-K for the year ended October 30, 2004, we are exposed to various types of market risks, primarily foreign currency risks. We monitor our risks in this area on a continuous basis and generally enter into forward foreign currency contracts to minimize these exposures for periods of less than one year. We do not engage in speculation in our derivative strategies. Gains and losses from foreign currency contract activities are offset by changes in the underlying costs of the transactions being hedged.
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of October 30, 2004. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
Starting in the first quarter of Fiscal 2005, we have engaged an independent tax consulting firm to assist with our evaluation of the judgmental issues concerning tax accounting and tax reserves and help us ensure that all procedural steps appropriate under FAS No. 109 are fully complied with.
There were no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation.
See Item 3 – Legal Proceedings of Part I of our annual report on Form 10-K for the year ended October 30, 2004.
Not applicable.
Not applicable.
Not applicable.
Forward-Looking Statements and Cautionary Factors
This report and other documents or oral statements we make or made on our behalf contain both historical and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are predictions and generally can be identified by use of statements that include phrases such as “believe,”“expect,” “anticipate,” “intend,” “plan,”“foresee,” or other words or phrases of similar import. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated. In addition to any factors that may accompany forward-looking statements, factors that could materially affect actual results include the following.
Our principal businesses involve designing, manufacturing, marketing and servicing large, complex machines. Significant periods of time are necessary to design and build these machines. Large amounts of capital must be devoted by our customers to purchase these machines and to finance the mines that use them. Our success in obtaining and managing a relatively small number of sales opportunities, including our success in securing payment for such sales and meeting the requirements of warranties and guarantees associated with such sales, can affect our financial performance. In addition, many mines are located in undeveloped or developing economies where business conditions are less predictable. In recent years, up to 47% of our total sales occurred outside the United States.
Additional factors that could cause actual results to differ materially from those contemplated include:
| |X| | Factors affecting customers’ purchases of new equipment, rebuilds, parts and services such as: production capacity, stockpiles, and production and consumption rates of coal, copper, iron, gold, oil and other ores and minerals; the cash flows of customers; the cost and availability of financing to customers and the ability of customers to obtain regulatory approval for investments in mining projects; consolidations among customers; the effects of rising energy costs on customer operations; work stoppages at customers or providers of transportation; and the timing, severity and duration of customer buying cycles. |
| |X| | Factors affecting our ability to capture available sales opportunities, including: customers’ perceptions of the quality and value of our products and services as compared to competitors’ products and services; customers’ perceptions of the financial health and stability as compared to our competitors; and the availability of manufacturing capacity at our factories. |
| |X| | Factors affecting our ability to successfully manage the sales we obtain, such as: the accuracy of our cost and time estimates; the adequacy of our cost and control systems; and our success in delivering products and completing service projects on time and within budget; our success in recruiting and retaining managers and key employees; wage stability and cooperative labor relations; plant capacity and utilization; increases in the costs and constraints on the supply of major purchased items such as steel can adversely affect profits and revenues; and whether acquisitions are assimilated and divestitures completed without notable surprises or unexpected difficulties. |
| |X| | Factors affecting general business levels, such as: political and economic turmoil in major markets such as the United States, Canada, Europe, Asia and the Pacific Rim, South Africa, Australia and Chile; environmental and trade regulations; and the stability and ease of exchange of currencies. |
| |X| | Factors affecting our general business, such as: unforeseen patent, tax, product, environmental, employee health and benefit, or contractual liabilities; nonrecurring restructuring and other special charges; changes in accounting or tax rules or regulations; reassessments of asset valuations for such assets as receivables, inventories, fixed assets and intangible assets; and leverage and debt service. |
| |X| | Various other factors beyond our control. |
(a) Exhibits:
| 31(a) Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certifications |
| 31(b) Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certifications |
| 32 Section 1350 Certifications |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date February 28, 2005 | JOY GLOBAL INC. (Registrant) Donald C. Roof Donald C. Roof Executive Vice President, Chief Financial Officer and Treasurer |
| Date February 28, 2005 | Michael S. Olsen Michael S. Olsen Vice President and Controller and Chief Accounting Officer |