What Did Joy Global's Q3 Results Reveal

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Sep 06, 2014

Joy Global (JOY, Financial), the U.S. company that manufactures and services mining equipment for coal mining reported its third quarter earnings on September 4 which did not delight the investors much. There was substantial dip noticed in both the top and bottom lines which fell below analysts’ estimates. And the company has lowered its full-year guidance, even though certain analysts opine that now is the time to be bullish on thermal coal.

Against this backdrop, let’s assess the financial performance of Joy Global by diving directly into the numbers reported in the quarter.

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Revenue shows a dip

The company reported $875.7 million as third quarter revenue, a 33.7% drop from the year-ago quarter. Net sales even dipped below the Street consensus of $949 million for the quarter. The lowered revenue highlighted the challenges being faced by Joy Global which includes everything from the geopolitical tension in Ukraine to production cuts in China as the coal industry revival faces several headwinds. Also warm winter in Europe along with increase in global coal inventories has led to oversupply conditions, thus decreasing coal prices substantially.

Even domestically the picture is pretty dull with the U.S. thermal coal market continuously facing challenging conditions despite the 4% economic growth in the U.S. during the second quarter. In the earnings call, Ted Doheny, Joy Global’s CEO said– “U.S. coal production is still lagging behind last year as depressed prices, cooler than normal summer weather, and decreased export activity has weighed on overall demand.”

Earnings get beaten up

Net income came in at $71.3 million, down 61% from $183.2 million a year-ago. Earnings per share fell to $0.71 per share, down from $1.72 a share reported in the same quarter last year. Operating profit also fell to $119 million, compared to $274 million in the third quarter of fiscal 2013. Excluding special items, the earnings were $0.80 per share and missed the analyst consensus by $0.06.

The decrease in operating profit and net income was due to lowered sales and lower manufacturing cost absorption that was partially offset by cost savings through the company’s restructuring program and lower incentive based compensation expense.

The company has adopted brisk restructuring activities in the fiscal year to optimize its footprint and to align its overall cost structure with anticipated demand.

Outlook stands lowered

As the coal landscape remains weak and keeping the macroeconomic challenges in mind, the management has lowered their full-year revenue guidance to a range of $3.65 billion to $3.75 billion, down from the prior range of $3.6 billion to $3.8 billion. The earnings are now being expected to be between $3.15 to $3.30 a share, compared to the previous reported range of $3.10 to$3.50 per share.

Investors’ reward continue

Lower earnings and reduced cash generation from changes in trade working capital levels led to decline in cash from operations which stood at $92 million, down by a whopping 74% from $350 million reported in the third quarter of fiscal 2013.

However, to keep investors’ interested in the stock the company has repurchased approximately 1.1 million shares for $65 million during the quarter. The share repurchase program has been initiated from the fourth quarter of the last fiscal year. Since then, the company has repurchased 7.6 million shares for $408 million.

To conclude

Joy Global’s future grossly depends on the coal-industry revival which is under immense pressure and is facing cyclical headwinds. However, the management is cautious and is taking appropriate measures to effectively control costs till the industry sees a revival. Let’s keep a close watch on Joy Global and find out if it can still add to investors’ kitty though it’s currently reporting stressed numbers.