Takeaways from JOY’s Q4 Results

Howard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Joy Global (NYSE: JOY), one of the world’s leading manufacturers and distributors of mining equipment, reported fiscal 4Q12 earnings before the bell Wednesday morning. Results initially led to a bump in its stock price, as investors focused on EPS beating consensus and quarterly revenue and profit both topping year-ago figures. However, a deeper dive into the figures and comments on the firm’s mid-morning conference call show challenges in several areas for 2013 despite an emphasis on cost reductions and other adjustments designed to meet the market’s new challenges.

The 128 year old JOY offers a wide range of underground and surface mining products worldwide, with 54% of its business derived from sales outside the U.S. As we reported a week ago its stock is up in the mid-single digits over the last three months but down almost 40% over the past year, with weakening 3Q12 results and lowered 2012 guidance reported in late August, along with an initial warning that 2013 may be “difficult,” ratcheting up investor concerns.

Top Line Good, Underlying News Not so Much

While 4Q12 net sales rose 19% and net income climbed 23%, overall bookings in JOYs legacy business — which excludes recent acquisitions International Mining Machinery (IMM) and LeTourneau Technologies — fell 15% from the year-ago period. Underground original equipment orders were flat year-over-year and aftermarket orders fell 9%, with both pulled down by the weak U.S. coal market. Surface original equipment orders declined 47%, down in all regions but Africa and Australia, while aftermarket orders in this category rose 3% on strength in these regions plus South America. Backlog dropped 7% over the past 90 days.

For the full fiscal year, the back story is even weaker. Overall legacy bookings for 2012 declined 20% compared to 2011, with aftermarket orders flat and original equipment orders down 40%. Underground bookings declined 17% and surface bookings fell 16%, fueled by cuts in original equipment orders. Total backlog for the year was down 21%.

Company officials said they expect the downturn to continue into next year as customers trim their spending on mining equipment by as much as 10-15%. “We not only had slowing in several of our key markets in 2012, this decline occurred progressively during the year,” CEO Mike Sutherlin said in a statement. “The expectation [is] that current market conditions will continue and result in lower volumes in 2013.” As a result, JOY lowered fiscal 2013 EPS and revenue guidance below analyst consensus.

3 Things to Watch as the New Year Unfolds

Commodity Prices — U.S. thermal coal prices fell significantly this year as natural gas became more economical for power generation, cutting heavily into demand and disproportionately impacting JOY (which realizes 27% of its business from that market). Demand was also down globally for iron ore, copper and numerous other commodities, while supply coming back online in Australia and other locales further depressed pricing and, with it, capital spending by mining companies. JOY said it expects prices to rebound, but cautioned that this won’t immediately boost new orders. “Our customers are confident that they have enough available excess capacity in their fleets to enable them to respond to initial improvements in demand,” Sutherlin said.

China Demand — JOY said a decline in orders for its products in China accelerated as 2012 wore on, due to continually slowing economic growth and industrial production there. This proved particularly troublesome as the company purchased IMM last year in a specific (and costly) attempt to capture more of China’s mid-tier mining market. Consequently, results of the acquisition have so far not been especially helpful to JOY’s bottom line. “Our International Mining Machinery acquisition has been a challenge in 2012. The startup of our integration and synergy programs were offset by the weakness in the domestic China coal market. Volumes were further impacted in our fourth quarter by disruptions related to regime change,” officials said in a statement.

Global Economics — The U.S. recovery remains lumpy, sovereign debt issues continue to shadow Europe, and China has seen exports soften while its once torrid growth pace has decelerated. To battle conditions over which it has no control, JOY has “begun the process of taking out costs and structurally lowering our cost base. This will be necessary if current market conditions persist for a longer period, and will provide increased leverage if market conditions improve,” it said. Certain U.S. pension plans were restructured during Q4, while production was downsized to match current order levels. The efforts will continue in 2013 “with the focus on balancing and optimizing our global manufacturing footprint,” officials added, noting most savings will not be realized until 2014.

Conclusion

Investors seem relatively pleased with JOY’s Q4 results, possibly feeling most of its negatives were already baked into the cake. Continuing short-term pain seems certain, however, while long-range recovery is at present more speculative than certain for this company as well as others who sell into the market. Caterpillar (NYSE: CAT), the world's number-one mining equipment supplier, is obviously most exposed and noted in its 3Q12 earnings that new orders have declined while reductions, cancellations and delays have increased, and company officials said sales “are expected to be down in 2013." Other players that will be impacted include the new GE Mining unit of General Electric, based in Australia, which was launched last September following GE's acquistion of underground equipment manufacturer Fairchild International; Terex (NYSE: TEX), which sold off its mining division several years ago but still makes related machinery like paving and construction equipment, aerial work platforms and light towers that remain staples in the industry; and Komatsu (NASDAQOTH: KMTUY), which builds giant trucks and other ancillary equipment favored in this space in many parts of the world.

For all of these companies, cost reductions and increased efficiencies may prove more critical to a mining industry revival over the next several quarters than any hoped-for improvement in areas they cannot control.


TheChiefToo has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and Joy Global. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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