CAM Cameron International Corp.

Joy Global Incorporation (JOYG) reported adjusted earnings of $1.54 per share in the third quarter of fiscal 2011 ending July 29, compared with $1.11 per share in the year-ago quarter. The results of the company also surpassed the Zacks Consensus Estimate of $1.50 per share. Adjusted earnings increased 49% year over year to $163.5 million in the quarter under review.                                                        

Adjusting for earnings accretion from LeTourneau Mining Equipment acquisition, net of tax, of 4 cents, discrete tax benefit of 11 cents, acquisition cost, net of tax, of 8 cents and discontinued operations of 1 cent, the company reported earnings of $1.62 per share, compared with $1.13 per share in year ago quarter. Net income was $173.1 million compared with $118.5 million in the year ago quarter.

Operational Update

Joy Global reported net sales of $1.09 billion in the reported quarter, up 28.6% from $0.9 million in the year-earlier period. The growth was driven by higher contribution from Underground Mining Machinery (up 31%) and Surface Mining Equipment (up 24.5%), while eliminations were a marginal drag on total revenue. Sales, however, fell short of the Zacks Consensus Estimate of $1.15 billion.

Including contributions from recently acquired LeTourneau Mining Equipment business, sales grossed $1.14 billion, up 33% year over year.

Booking in the third quarter of fiscal 2011 grew 46% year over year. Original equipment bookings surged 78%, while aftermarket orders increased 22% from year ago level. The third quarter bookings included a benefit of $79 million from changes in foreign exchange rates.

Cost of sales climbed 32% to $739.6 million from $560.2 million a year ago. Similarly, selling and administrative expenses of $165.3 million rose 40% from the previous year.

Adjusted operating income grew up 20.3% year over year mainly attributable higher sales volume, favorable price realization and favorable manufacturing overhead absorption, partially offset by an increase in selling, engineering and administrative expenses.

Including contributions from recently acquired LeTourneau Mining Equipment business and acquisition cost, the company reported operating income of $236 million in the quarter.

Interest expenses during the quarter were $6 million, up from $4 million reported in the comparable quarter last year.

Financial Update

Cash and cash equivalents of Joy Global as of July 29, 2011, were $443.1 million versus $815.6 million as of October 29, 2010.

Cash provided by operating activities was $96.3 million in the third quarter of fiscal 2011 versus $294.9 million in the third quarter of fiscal 2010. The decline is attributable to increase in inventories, partially offset by an increase in advanced payments.

Capital expenditure at Joy Global for the third quarter was $22 million, up from $19 million spent in the year-ago quarter. For the full year, capital expenditure is expected to be $120 million.

Looking Forward

Taking into account the strong market fundamentals, improved throughput from Operational Excellence and synergies from acquisitions, Joy Global raised its total revenue expectation for 2011 to $4.3–$4.5 billion from $4.1–$4.1 billion for fiscal 2011. The guidance includes contribution of approximately $150 million from the LeTourneau mining equipment business.

The company also raised its earnings per share guidance for 2011 to a range of $5.70 to $6.00 from $5.30 to $5.60. The guidance includes 10 cents accretion from LeTourneau’s mining equipment business, net of 4 cents of inventory purchase accounting charges. It also takes into accounts 11 cents discreet tax benefit realized and 12 cents of acquisition transaction costs incurred in the third quarter.

Asset Repositioning

In the quarter, Joy Global closed the acquisition of LeTourneau Technologies Inc. from Rowan Companies Inc. (RDC) for $1.1 billion in cash. The company had agreed to buy Rowan’s LeTourneau assets in May 2011.

The company also entered into an agreement with TJCC Holdings Limited to purchase 534.8 million shares of International Mining Machinery Holdings Ltd. (IMM) representing 41.1% of the shares outstanding. It further purchased approximately 136.5 million shares of IMM in the open market at a price of HKD 8.00 per share. The number of shares bought represents 10.5% of the total shares outstanding. Together with the latest open market purchase, Joy Global’s stake in IMM aggregates to 51.6% of shares outstanding.

Subsequent to the reported quarter, Joy Global entered into an agreement to divest LeTourneau Technologies Drillings Systems and Offshore Products to Cameron International Corporation (CAM) for $375 million in cash. The transaction is scheduled for completion in the fourth quarter of 2011.

Peer Comparison

Joy Global competes head-to-head with the industry behemoth Caterpillar Inc. (CAT). Caterpillar's second-quarter adjusted EPS was $1.72, surged 58% over the prior year quarter. However, results failed to meet the Zacks Consensus Estimate of $1.77 per share.

Sales, which grossed $14.23 billion in the quarter, jumped to an all-time quarterly record due to increased machine demand and continued economic growth.

Our View

The company ended the third quarter of 2011 with a backlog of $3.20 billion versus $2.63 billion in the first quarter of 2011 and $1.82 billion in fiscal 2010.  It is encouraging to note that backlog has grown for both Underground Mining and Surface Mining equipment suggesting all-round growth in the mining sector.

We expect initiatives taken by the company to improve all areas of business through its Operational Excellence programs and the mine expansion plan that should help it to reach the updated guidance level. Also, the acquisition of LeTourneau Technologies Inc. is already accretive to the earnings of Joy Global.

Furthermore, the company’s 51.6% stake in China based International Mining Machinery Holdings Ltd. will help it in procuring leading positions in each of the major segments of the Chinese market.

We retain our Outperform recommendation on Joy Global. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the shares over the near term.

Mining equipment manufacturer and service provider Joy Global Inc. is based in Milwaukee, Wisconsin. The company caters to consumers all around the world and provides manufacturing, distributing and servicing equipment for surface mining, through its P&H Mining Equipment division, underground mining, through its Joy Mining Machinery division and bulk material conveyor systems, through its Continental Crushing & Conveying division.

 
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