Joy Global Inc. (JOYG) reported adjusted earnings of $1.15 per share in the second quarter of fiscal 2010, compared with $1.17 per share in the year-ago period. EPS results came in 38 cents higher than the Zacks Consensus expectation of 77 cents.
 
The results were better than the average forecast primarily attributable to improvement in North America and strong international demand.
 
Operational Update
 
Joy Global reported net sales of $896.2 million, which declined 3% year over year from $923.5 million reported in the second quarter of 2009. Original equipment revenue was down 9% on a year-over-year basis, while the aftermarket revenues were up 2% from the year-ago period. The decline in original equipment sales was due to a lower level of backlog, while the improvement in aftermarket sales was attributable to increased demand in South America.
 
Joy Global’s operating profit in the current quarter was $181 million versus $188 million in the year-ago period. The positive impact from the favorable material cost variance, sales mix and benefits of the 2009 cost reduction programs was offset by negatives like the decline in sales volume, unfavorable manufacturing overhead absorption from factory load, higher performance based compensation and increased pension expense.
 
Joy Global generated a net income of $120 million, which was at par with last year’s second quarter. Net income in the reported quarter included a $2 million pre-tax reduction in interest expenses.
 
Higher New Order and Backlog
 
Joy Global received new orders worth $1.05 billion in the second quarter, a growth of 43% from $731 million in the second quarter of 2009. The year-over-year increase in order was driven by a 55% growth in original equipment orders and a 36% spike in aftermarket orders over the second quarter of last year.
 
Backlog increased to $1.7 billion at the end of second-quarter 2010 from $1.5 billion at the end of fiscal 2009. The increment in backlog was due to strong booking in the first and second quarters of 2010.
 
Financial Condition
 
Cash and cash equivalents of Joy Global were $583 million versus $181.2 million at the end of second-quarter 2009.
 
Cash provided by operating activities was $108 million in the current quarter compared with $63 million in the comparable period last year. The cash flow during the quarter was positively impacted by a reduction in inventories partially offset by decreased advance payments.
 
Joy Global incurred capital expenditure of $18 million, compared with $26 million in the year-ago quarter.
 
Potential Headwinds
 
The European sovereign debts crisis will have a deleterious effect on the global financial markets and also on U.S. dollars. A somewhat stronger dollar will impact the global commodity prices and will make U.S. manufactured products dearer for international customers.
 
Another cause of vexing concern is the new Resource Super Profits Tax proposed by Australia. This new Australian resource tax will push some expansion projects below the required return on investment and will move some capital investment to projects outside of Australia. An estimated $34 billion of announced projects could be affected in Australia because of the proposed tax legislation, and the decisions on these projects will certainly slow until the full effect of the tax can be evaluated.
 
Guidance
 
Although Joy Global expects some near-term uncertainty, it is confident that industry fundamentals will lead to a robust demand over the longer term. The company’s revised full-year revenue guidance is in the range of $3.3 to $3.4 billion, up from the previous view of $2.8 billion to $3 billion. Joy Global expects full-year earnings per share to range between $3.85 and $4, up from the previous expectation of $2.85 to $3.05 per share. The Zacks Consensus Estimate for Joy Global is 78 cents for the third quarter and $3.10 for the full-year 2010.
 
Our View
 
We are encouraged by the strong long-term fundamentals of the mining industry and improving conditions in the U.S., China and India , which will likely have a positive impact on the long-term prospects of the company. The sovereign debts issue in Europe and the new proposed Australian tax remain causes for concern. We presently maintain our Neutral outlook and expect Joy Global to perform in line with the broader market.
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