Bucyrus International 10-Q 2006
Commission file number 000-50858
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
BUCYRUS INTERNATIONAL, INC. AND SUBSIDIARIES
See notes to consolidated condensed financial statements.
See notes to consolidated condensed financial statements
INC. AND SUBSIDIARIES
See notes to consolidated condensed financial statements.
INTERNATIONAL, INC. AND SUBSIDIARIES
See notes to consolidated condensed financial statements.
The Company designs, manufactures and markets large excavation machinery used for surface mining, and provides comprehensive aftermarket services, supplying replacement parts and offering maintenance and repair contracts and services for these machines. The Company manufactures its original equipment (OEM) products and the majority of aftermarket parts at its facility in South Milwaukee, Wisconsin. The Companys principal OEM products are draglines, electric mining shovels and rotary blasthole drills, which are used primarily by customers who mine copper, coal, oil sands and iron ore throughout the world. In addition, the Company provides aftermarket services in mining centers throughout the world, including Argentina, Australia, Brazil, Canada, Chile, China, India, Peru, South Africa and the United States. The largest markets for mining equipment have been in Australia, Canada, South Africa, South America and the United States. In the future, Brazil, Canada, China and India are expected to be increasingly important markets.
The market for OEM machines is closely correlated with customer expectations of sustained strength in prices of surface mined commodities. Growth in demand for these commodities is a function of, among other things, economic activity, population increases and continuing improvements in standards of living in many areas of the world. In 2003 and 2004, market prices for copper, coal, iron ore and oil increased and continued to be strong in 2005 and early 2006. Factors that could support sustained demand for these key commodities in 2006 and future years include continued economic growth in China, India and the developing world, and renewed economic strength in industrialized countries. Although the Company had no new machine orders for the quarter ended March 31, 2006, inquiries for new machines remain at a high level. The highest interest has been in the oil sands of Western Canada, and inquires related to coal, copper and iron ore mines in other areas of the world have also remained strong. Since April 1, 2006, the Company finalized the contract for the sale of four shovels in the China market and also sold four additional shovels in other markets.
The Companys aftermarket parts and service operations, which have accounted for approximately 70% of sales over the past ten years, tend to be more consistent than OEM machine sales. However, recent pronounced strength in commodity markets has positively affected aftermarket sales, although total aftermarket sales remain at approximately 70% of sales. The Companys complex machines are typically kept in continuous operation from 15 to 40 years, requiring regular maintenance and repair throughout their productive lives. The size of the Companys installed base of surface mining equipment and its ability to provide on-time delivery of reliable parts and prompt service are important drivers of aftermarket sales. Aftermarket orders and inquires continue to increase as the existing installed fleet of machines operates at very high utilization levels due to the current demand and increased prices of commodities.
The Company continues to forecast increased sales activity for both aftermarket parts sales and OEM machine sales relative to prior periods. The Company anticipates that the current commodity demand will continue for at least the next three to five years. Recent strong order volume has caused the Company to hire new employees and additional hiring is expected. As sustained order strength continues, the Company is taking steps to increase its manufacturing capacity. In early 2005, the Company entered into an agreement to lease a facility to be used for expansion of the Companys manufacturing operations. Also, on August 24, 2005, the Company announced that it was proceeding with plans to expand its
manufacturing facilities in South Milwaukee, Wisconsin. The initial phase of the expansion program includes the construction of a new facility on the grounds of the Companys South Milwaukee campus north of Rawson Avenue at an approximate cost of $22 million. This initial phase of the expansion is expected to be completed by the fourth quarter of 2006.
On February 16, 2006, the Company announced that it will undertake the second phase of its expansion program. The second phase, which has an approximate cost of $30 million and is expected to be completed in mid-2007, will expand the Companys new facility north of Rawson Avenue to over 350,000 square feet of welding, machining and outdoor hard-goods storage space.
A substantial portion of the Companys sales and operating earnings is attributable to operations located outside the United States. The Company generally sells its OEM machines, including those sold directly to foreign customers, and most of its aftermarket parts in United States dollars. A portion of the Companys aftermarket parts sales are also denominated in the local currencies of Australia, Brazil, Canada, Chile, South Africa and the United Kingdom. Aftermarket services are paid for primarily in local currency which is naturally hedged by the Companys payment of local labor in local currency. In the aggregate, approximately 75% of the Companys 2005 sales were priced in United States dollars.
Over the past three years, the Company increased gross profits by improving manufacturing overhead variances, achieving productivity gains and growing the Companys high margin aftermarket parts and services business and increasing the prices of its products. To date, increasing costs of steel and other raw materials have not had a significant impact on the Companys gross profit due to the higher selling prices of its products.
Following is a discussion of key measures which contributed to the Companys operating results.
On-Time Delivery and Lead Times
Due to the high fixed cost structure of the Companys customers, it is critical that they avoid equipment downtime. On-time delivery and reduced lead time of aftermarket parts and services allow customers to reduce downtime and are therefore key measures of customer service, and the Company believes they are fundamental drivers of aftermarket customer demand. The Companys on-time delivery percentage in the aftermarket, based on achieved promised delivery dates to customers, was 87% for the first quarter of 2006 and 92% for the year 2005. Lead times for deliveries of aftermarket parts have increased slightly in the first quarter of 2006 as compared to the year 2005. Lead times are expected to increase due to the expected increase in sales volume.
The Company maintained on-time deliveries and shortened lead times in recent years by focusing on development of key shop floor metrics, improved communication between sales, manufacturing and shipping, daily or weekly meetings to resolve issues, changing of shipment methods and the hiring of an additional supervisory person dedicated to on-time delivery. The information to accomplish much of these improvements is available from the Companys enterprise resource planning (ERP) system.
Sales per full time equivalent employee is a measure of the Companys operational efficiency. Sales per full time equivalent employee were $.3 million and $.2 million for the first quarters of 2006 and 2005, respectively, and were $.3 million for the year 2005. The Company has experienced productivity
increases in recent years, primarily due to the application of worldwide sales and inventory ERP systems and personnel upgrades which, collectively, allowed sales to grow with minimal changes in headcount.
Product quality is another key driver of customer satisfaction and, as a result, sales. Management uses warranty claims as a percentage of total sales as one objective benchmark to evaluate product quality. During the first quarter of 2006 and the year 2005, warranty claims as a percentage of total sales were less than 1%.
A strong backlog is a tool which allows more accurate sales forecast and production planning. Due to the high cost of some OEM products, backlog is subject to volatility, particularly over relatively short periods. A portion of the Companys backlog is related to multi-year contracts that will generate revenue in future years. The following table shows backlog at March 31, 2006 and December 31, 2005, as well as the portion of backlog which is or was expected to be recognized within twelve months of these dates:
Inventory is one of the Companys significant assets. As of March 31, 2006, the Company had $145.5 million in inventory. Raw materials and work in process inventory have increased in anticipation of future increased sales activity. Inventory turned at a rate of approximately 3.3 times in the first quarter of 2006. Inventory turns is calculated based on cost of sales and the average inventory balance during the prior twelve months. The Company believes that it has appropriately recorded at the lower of cost or market any slow moving or obsolete inventory in its financial statements. The factors that could reduce the carrying value of the Companys inventory include reduced demand for aftermarket parts due to decreased sales volumes attributable to new or improved technology or customers discontinuing the use of the Companys older model machines, which could render inventory obsolete or excess. With the exception of the normal inventory obsolescence provision recorded in the ordinary course of business, the Company does not anticipate recording any significant inventory impairments.
Results of Operations
Quarter Ended March 31, 2006 Compared to Quarter Ended March 31, 2005
Sales for the first quarter of 2006 were $165.7 million compared with $105.5 million for the first quarter of 2005. Sales of aftermarket parts and services for the first quarter of 2006 were $112.2 million, an increase of 44.2% from $77.8 million in the first quarter of 2005. The increase in aftermarket sales reflects the Companys continuing initiatives and strategies to capture additional market share as well as
continued strong commodity prices. Aftermarket sales increased in both the United States and international markets. Machine sales for the first quarter of 2006 were $53.5 million, an increase of 93.0% from $27.7 million for the first quarter of 2005. The increase in new machine sales resulted from sustained demand and increased prices of commodities that are surfaced mined by the Companys machines. The increase in machine sales in 2006 was in all three product lines and was for both replacement machines and machines for new production requirements. Approximately $.4 million of the increase in sales for the first quarter of 2006 was attributable to a weakening United States dollar, which primarily impacted aftermarket sales (see Foreign Currency Fluctuations below).
Gross profit for the first quarter of 2006 was $40.9 million or 24.7% of sales compared with $29.0 million or 27.5% of sales for the first quarter of 2005. The increase in gross profit was primarily due to an increased sales volume. The lower gross profit percentage for the first quarter of 2006 was due to increased machine sales which have a lower gross profit and the mix of aftermarket parts sold. The gross profit percentage for the year 2005 was 23.9%. Gross profit for 2006 and 2005 was reduced by $1.3 million of additional depreciation expense as a result of the purchase price allocation to plant and equipment in connection with acquisitions involving the Company. Approximately $.2 million of the increase in gross profit in the first quarter of 2006 was attributable to a weakening United States dollar (see Foreign Currency Fluctuations below).
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2006 were $15.5 million or 9.3% of sales compared with $12.3 million or 11.7% of sales for the first quarter of 2005. In the first quarter of 2006, the Company had increased selling and administrative expenses, primarily in the aftermarket support areas, when compared to the first quarter of 2005. Selling, general and administrative expenses for the first quarter of 2006 and 2005 included $.6 million and $45,000, respectively, related to non-cash stock-based employee compensation. Foreign currency transaction gains for the first quarter of 2006 and 2005 were $.3 million and $.8 million, respectively.
Research and Development Expenses
Research and development expenses for the first quarter of 2006 and 2005 were $1.9 million and $1.4 million, respectively. The increase was in part due to the continuing development of electrical and machine upgrade systems.
Amortization of Intangible Assets
Amortization of intangible assets, consisting primarily of engineering drawings, bill of material listings and software, was $.5 million for each of the quarters ended March 31, 2006 and 2005.
Operating earnings for the first quarter of 2006 were $23.0 million or 13.9% of sales, compared with $14.9 million or 14.1% of sales for the first quarter of 2005. Operating earnings for the first quarter of 2006 increased from 2005 due to increased gross profit resulting from an increased sales volume.
Interest expense for the first quarter of 2006 was $.6 million compared with $1.3 million for the first quarter of 2005. The decrease in interest expense in 2006 was due to reduced borrowings.
Income tax expense for the first quarter of 2006 was $7.8 million compared to $4.5 million for the first quarter of 2005. U.S. and foreign taxes are calculated at applicable statutory rates. The change in the effective tax rate was primarily due to the mix of domestic and foreign earnings. During the fourth quarter of 2005, the Company quantified the amount of previously unclaimed foreign tax credits, which it now believes can be utilized in part by amending prior year income tax returns. In 2006, the Company is continuing to evaluate the potential to claim additional foreign tax credits originating from other jurisdictions and may record further income tax benefits in the future. At March 31, 2006, the Company had available approximately $10.7 million of federal net operating loss carryforwards compared to $14.3 million at December 31, 2005. The carryforwards are useable at the rate of $3.6 million per year.
Foreign Currency Fluctuations
The following table summarizes the approximate effect of changes in foreign currency exchange rates on the Companys sales, gross profit and operating earnings for the quarters ended March 31, 2006 and 2005 in each case compared to the same quarter in the prior year:
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarters ended March 31, 2006 and 2005 was $26.6 million and $18.2 million, respectively. EBITDA is presented (i) because the Company uses EBITDA to measure its liquidity and financial performance and (ii) because the Company believes EBITDA is frequently used by securities analysts, investors and other interested parties in evaluating the performance and enterprise value of companies in general, and in evaluating the liquidity of companies with significant debt service obligations and their ability to service their indebtedness. The EBITDA calculation is not an alternative to operating earnings under accounting principles generally accepted in the United States of America (GAAP) as an indicator of operating performance or of cash flows as a measure of liquidity. The following table reconciles Net Earnings as shown in the Consolidated Condensed Statements of Earnings to EBITDA and reconciles EBITDA to Net Cash Provided by Operating Activities as shown in the Consolidated Condensed Statements of Cash Flows:
Liquidity and Capital Resources
Stock Split and Dividend Policy
On March 8, 2006, the Companys Board of Directors authorized a three-for-two split of the Companys Class A common stock. The stock split was paid on March 29, 2006 to Company shareholders of record on March 20, 2006. The Companys Class A common stock began trading on a split-adjusted basis on March 30, 2006. The Companys Board of Directors also authorized, and shareholders approved at the 2006 annual meeting of shareholders, an increase in the number of authorized shares of the Companys Class A common stock to 75,000,000 shares. This increase in authorized shares became effective upon filing the Companys Amended and Restated Certificate of Incorporation with the State of Delaware on May 3, 2006.
In addition, the Companys Board of Directors authorized a 30% increase in the quarterly dividend to the amount of $.05 per share per quarter for dividends payable after the date of the stock split. On May 3, 2006, a cash dividend of $.05 per share was declared and is to be paid on June 5, 2006 to shareholders of record on May 18, 2006.
During the remainder of 2006, the Company anticipates strong cash flows from operations due to continued strength in aftermarket parts sales as well as increased demand for new machines. In expanding markets, customers are contractually obligated to make progress payments under purchase contracts for machine orders and certain large parts orders. As a result, the Company does not anticipate significant outside financing requirements to fund production of these machines and does not believe that new machine sales will have a negative effect on its liquidity. If additional borrowings are necessary during 2006, the Company believes it has sufficient capacity under its revolving credit facility.
On August 24, 2005, the Company announced that it was proceeding with plans to expand its manufacturing facilities in South Milwaukee, Wisconsin. The initial phase of the expansion program will include the construction of a new facility on the grounds of the Companys South Milwaukee campus north of Rawson Avenue at an approximate cost of $22 million. The construction of this new facility is expected to be completed during the fourth quarter of 2006. On February 16, 2006, the Company announced that it will undertake the second phase of its expansion program. The second phase, which has an approximate cost of $30 million and is expected to be completed in mid-2007, will expand the Companys new facility north of Rawson Avenue. The Company intends to finance the expansion program through working capital and funds available under its existing revolving credit facility, and is exploring the availability of governmental grants and other programs.
At March 31, 2006, the Company had contractual obligations of approximately $27.7 million with respect to the expansion program. As of March 31, 2006, there have been no other material changes to the contractual obligations with respect to purchase obligations and operating leases and rental and service agreements as presented in the Companys 2005 Annual Report to Shareholders.
The Companys capital expenditures for the quarter ended March 31, 2006 were $8.8 million compared with $2.6 million for the quarter ended March 31, 2005. Included in capital expenditures for the quarter ended March 31, 2006 was $4.1 million related to the expansion program. The remaining expenditures consist primarily of production machinery at the Companys main manufacturing facility. The Company expects a continued increase in capital expenditures during the remainder of 2006 as it increases manufacturing capacity and upgrades and replaces manufacturing equipment to support increased sales activity. The Company believes cash flows from operating activities will be sufficient to fund capital expenditures in 2006.
At March 31, 2006, there were $40.7 million of standby letters of credit outstanding under all Company bank facilities.
The Company believes that cash flows from operations will be sufficient to fund its cash requirements for the next twelve months. The Company also believes that cash flows from operations will be sufficient to repay any borrowings under its revolving credit facility. During the first quarter of 2006, the Company reduced its borrowings under the revolving credit facility by $42.7 million.
Sources and Uses of Cash
The Company had $8.4 million of cash and cash equivalents as of March 31, 2006. All of this cash is located at various foreign subsidiaries and will be used for working capital purposes. Cash receipts in the United States are applied against the Companys revolving credit facility.
Operating Cash Flows
During the first quarter of 2006, the Company generated cash from operating activities of $42.8 million compared to $15.3 million for the first quarter of 2005. The increase in cash flows from operating activities was driven primarily by increased sales activity.
The Company recognizes revenues on machine orders using the percentage-of-completion method. Accordingly, accounts receivable are generated when revenue is recognized, which can be before the funds are collected or in some cases, before the customer is billed. As of March 31, 2006, the Company had $123.2 million of accounts receivable compared to $155.5 million of accounts receivable at December 31, 2005. Receivables at March 31, 2006 and December 31, 2005 included $37.5 million and $68.2 million, respectively, of revenues from long-term contracts which were not billable at these dates. The decrease in receivables was primarily due to increased revenues recognized in the fourth quarter of 2005 that were collected in the first quarter of 2006.
Liabilities to Customers on Uncompleted Contracts and Warranties
Customers generally make down payments at the time of the order for a new machine as well as progress payments throughout the manufacturing process. In accordance with Statement of Position No. 81-1, these payments are recorded as Liabilities to Customers on Uncompleted Contracts and Warranties.
Financing Cash Flows
On May 27, 2005, the Company entered into a credit agreement with GMAC Commercial Finance LLC as lead lender. The credit agreement provides for a five year $120.0 million revolving credit facility that may, at the Companys request and with the lenders approval, be increased to $150.0 million. The credit agreement provides that interest on borrowed amounts would initially be set at either the prime rate plus .25% or LIBOR plus 1.25%, with quarterly adjustments to interest rates beginning after nine months. Borrowings under the revolving credit facility are subject to a borrowing base formula based on the value of eligible receivables and inventory. At March 31, 2006, the Company had $20.8 million of borrowings under its revolving credit facility at a weighted average interest rate of 5.9%. The amount available for borrowings under the revolving credit facility at March 31, 2006 was $64.2 million.
The credit agreement contains covenants limiting the discretion of management with respect to key business matters and places significant restrictions on, among other things, the Companys ability to incur additional indebtedness, create liens or other encumbrances, make certain payments or investments, loans and guarantees, and sell or otherwise dispose of assets and merge or consolidate with another entity. All of the Companys domestic assets and the receivables and inventory of the Companys Canadian subsidiary are pledged as collateral under the revolving credit facility. In addition, the outstanding capital stock of the Companys domestic subsidiaries as well as the majority of the capital stock of the Companys foreign subsidiaries are pledged as collateral. The Company is also required to
maintain compliance with certain financial covenants, including a leverage ratio (as defined). The Company was in compliance with all applicable covenants as of March 31, 2006.
Critical Accounting Policies and Estimates
See Critical Accounting Policies and Estimates in the Managements Discussion and Analysis section of the Companys 2005 Annual Report to Shareholders. There have been no material changes to these policies.
The Companys market risk is impacted by changes in interest rates and foreign currency exchange rates.
The Companys interest rate exposure relates primarily to floating rate debt obligations in the United States. The Company manages borrowings under its credit agreement through the selection of LIBOR based borrowings or prime-rate based borrowings. If market conditions warrant, interest rate swaps may be used to adjust interest rate exposures, although none have been used to date.
At March 31, 2006, a sensitivity analysis was performed for the Companys floating rate debt obligations. Based on this sensitivity analysis, the Company has determined that a 10% change in the Companys weighted average interest rate at March 31, 2006 would not have a material effect on the Companys financial position, results of operations or cash flows.
The Company sells new machines, including those sold directly to foreign customers, and most of its aftermarket parts in United States dollars. A limited amount of aftermarket parts sales are denominated in the local currencies of Australia, Canada, Chile, South Africa, Brazil and the United Kingdom which subjects the Company to foreign currency risk. Aftermarket sales and a portion of the labor costs associated with such activities are denominated or paid in local currencies. As a result, a relatively strong United States dollar could decrease the United States dollar equivalent of the Companys sales without a corresponding decrease of the United States dollar value of certain related expenses. A relatively weak United States dollar could have the opposite effect. The Company utilizes some foreign currency derivatives to mitigate foreign exchange risk.
Currency controls, devaluations, trade restrictions and other disruptions in the currency convertibility and in the market for currency exchange could limit the Companys ability to timely convert sales earned abroad into United States dollars, which could adversely affect the Companys ability to service its United States dollar indebtedness, fund its United States dollar costs and finance capital expenditures and pay dividends on its common stock.
Based on the derivative instruments outstanding at March 31, 2006, a 10% change in foreign currency exchange rates would not have a material effect on the Companys financial position, results of operations or cash flows.
As of the end of the period covered by this Report, an evaluation was carried out under the supervision and with the participation of the Companys management, including its Chief Executive Officer and President and its Chief Financial Officer, Controller and Secretary, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer, Controller and Secretary concluded that the disclosure controls and procedures were effective as of the end of the quarter ended March 31, 2006 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Report was being prepared.
There were no changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of predictive, future tense or forward-looking terminology, such as believes, anticipates, expects, estimates, intends, may, will or similar terms. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those contained in the forward-looking statements as a result of various factors, some of which are unknown. The factors that could adversely affect the Companys actual results and performance include, without limitation:
The review of important factors above is not exhaustive, and should be read in conjunction with the other cautionary statements included in this report and in the Companys 2005 Annual Report to Shareholders and Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2006. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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.
BUCYRUS INTERNATIONAL, INC.