Joy Global 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED October 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD From to
Commission File number 001-09299
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates, as of May 2, 2008 the last business day of our most recently completed second fiscal quarter, based on a closing price of $76.97 per share, was approximately $8.3 billion.
The number of shares outstanding of registrants common stock, as of December 12, 2008, was 102,145,640.
Joy Global Inc.
ANNUAL REPORT ON FORM 10-K
For The Year Ended October 31, 2008
This document contains forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this document, terms such as anticipate, believe, estimate, expect, indicate, may be, objective, plan, predict, will be, and the like are intended to identify forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Actual results may differ for a variety of reasons, many of which are beyond our control. Forward-looking statements are based upon our expectations at the time they are made. Although we believe that our expectations are reasonable, we can give no assurance that our expectations will prove to be correct. Important factors that could cause actual results to differ materially from such expectations (Cautionary Statements) are described generally below and disclosed elsewhere in this document, including in Item 1A, Risk Factors, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
We describe these and other risks and uncertainties in greater detail under Item 1A Risk Factors below.
Item 1. Business
Joy Global Inc. (we and us) is a leading manufacturer and servicer of high productivity mining equipment for the extraction of coal and other minerals and ores. Our equipment is used in major mining regions throughout the world to mine coal, copper, iron ore, oil sands, and other minerals. In February 2008, we acquired N.E.S. Investment Co. and its wholly owned subsidiary, Continental Global Group, Inc. (Continental), a worldwide leader in conveyor systems for bulk material handling in mining and industrial applications. With the acquisition of Continental, we restructured our operating segments by combining the crushers and feeder breakers associated with the previous years Stamler acquisition with the legacy Continental business to create our third operating segment, Continental Crushing & Conveying (CCC). Along with the CCC segment, we have two other operating segments: underground mining machinery (Joy Mining Machinery or Joy) and surface mining equipment (P&H Mining Equipment or P&H). Joy is a major manufacturer of underground mining equipment for the extraction of coal and other bedded minerals and offers comprehensive service locations near major mining regions worldwide. P&H is a major producer of surface mining equipment for the extraction of ores and minerals and provides extensive operational support for many types of equipment used in surface mining. Sales of original equipment for the mining industry, as a class of products, accounted for 42%, 37%, and 39% of our consolidated sales for fiscal 2008, 2007, and 2006, respectively. Aftermarket sales, which includes revenues from maintenance and repair services, mining equipment and electric motor rebuilds, equipment erection services, and sales of replacement parts, account for the remainder of our consolidated sales for each of those years. Because these aftermarket sales generally include a combination of various products and services, it would be impracticable to determine whether any other class of products or services could be considered to exceed 10% of our consolidated revenues in any of the past three fiscal years.
We are the direct successor to a business begun almost 125 years ago and were known as Harnischfeger Industries, Inc. (the Predecessor Company) prior to our emergence from protection under Chapter 11 of the U.S. Bankruptcy Code on July 12, 2001.
Underground Mining Machinery
Joy is the worlds largest producer of high productivity underground mining machinery for the extraction of coal and other bedded materials. It has significant facilities in Australia, South Africa, the United Kingdom, China and the United States as well as sales offices and service facilities in India, Poland, and Russia. Joy products include: continuous miners; longwall shearers; powered roof supports; armored face conveyors; shuttle cars; flexible conveyor trains; complete longwall mining systems (consisting of powered roof supports, an armored face conveyor,
and a longwall shearer); continuous haulage systems; battery haulers and roof bolters. Joy also maintains an extensive network of service and replacement parts distribution centers to rebuild and service equipment and to sell replacement parts in support of its installed base. This network includes five service centers in the United States and eight outside of the United States, all of which are strategically located in major underground mining regions.
Fiscal 2008 Developments:
Products and Services:
Continuous miners Electric, self-propelled continuous miners cut material using carbide-tipped bits on a horizontal rotating drum. Once cut, the material is gathered onto an internal conveyor and loaded into a haulage vehicle or continuous haulage system for transportation to the main mine belt.
Longwall shearers A longwall shearer moves back and forth on an armored face conveyor parallel to the material face. Using carbide-tipped bits on cutting drums at each end, the shearer cuts a meter to 6.5 meters of material on each pass and simultaneously loads the material onto the armored face conveyor for transport to the main mine belt.
Powered roof supports Roof supports perform a jacking-like function that supports the mine roof during longwall mining. The supports advance with the longwall shearer, resulting in controlled roof falls behind the supports. A longwall face may range up to 400 meters in length.
Armored face conveyors Armored face conveyors are used in longwall mining to transport material cut by the shearer away from the longwall face.
Shuttle cars Shuttle cars, a type of haulage vehicle, are electric-powered with umbilical cable, rubber-tired vehicles used to transport material from continuous miners to the main mine belt where self-contained chain conveyors in the shuttle cars unload the material onto the belt. Some models of Joy shuttle cars can carry up to 22 metric tons of coal.
Flexible conveyor trains (FCT) FCTs are electric-powered, self-propelled conveyor systems that provide continuous haulage of material from a continuous miner to the main mine belt. The FCT uses a rubber belt similar to a standard fixed conveyor. The FCTs conveyor belt operates independently from the track chain propulsion system, allowing the FCT to move and convey material simultaneously. Available in lengths of up to 570 feet, the FCT is able to negotiate multiple 90-degree turns in an underground mine infrastructure.
Roof bolters Roof bolters are roof drills used to bore holes in the mine roof and to insert long metal bolts into the holes to reinforce the mine roof.
Battery haulers Battery haulers perform a similar function to shuttle cars. Shuttle cars are powered through cables and battery haulers are powered by portable rechargeable batteries.
Continuous haulage systems The continuous haulage system provides a similar function as the FCT in that it transports material from the continuous miner to the main mine belts on a continuous basis versus the batch process used by shuttle cars and battery haulers, but it does so with different technology. It is made up of a series of
connected bridge structures that utilize chain conveyors that transport the coal from one bridge structure to the next bridge structure and ultimately to the main mine belts.
Joys aftermarket infrastructure quickly and efficiently provides customers with high-quality parts, exchange components, repairs, rebuilds, whole machine exchanges, and services. Joys cost-per-ton programs allow its customers to pay fixed prices for each ton of material mined in order to match equipment costs with revenues, and its component exchange programs minimize production disruptions for repair or scheduled rebuilds. Both programs reduce customer capital requirements and ensure quality aftermarket parts and services for the life of the contract. Joy sells its products and services directly to its customers through a global network of sales and marketing personnel.
The Joy business has demonstrated cyclicality over the years. The primary drivers of the cyclicality are commodity prices (particularly coal prices) and coal production levels. Joys business is particularly sensitive to conditions in the coal mining industry, which accounts for substantially all of Joys sales. Other drivers of cyclicality include product life cycles, new product introductions, competitive pressures and industry consolidation.
Surface Mining Equipment
P&H is the worlds largest producer of electric mining shovels and a leading producer of rotary blasthole drills and walking draglines for open-pit mining operations. P&H has facilities in Australia, Brazil, Canada, Chile, China, South Africa, and the United States, as well as sales offices in India, Mexico, Peru, Russia, the United Kingdom, and Venezuela. P&H products are used in mining copper, coal, iron ore, oil sands, silver, gold, diamonds, phosphate, and other minerals and ores. P&H also provides a wide range of parts and services to mines through its P&H MinePro® Services distribution group. In some markets, electric motor rebuilds and other selected products and services are also provided to the non-mining industrial segment. P&H also sells used electric mining shovels in some markets.
Fiscal 2008 Developments:
Products and Services:
Electric mining shovels Mining shovels are primarily used to load copper ore, coal, iron ore, other mineral-bearing materials and overburden into trucks or other conveyances. There are two basic types of mining loaders: electric shovels and hydraulic excavators. Electric mining shovels feature larger buckets, allowing them to load greater volumes of material, while hydraulic excavators are smaller and more maneuverable. The electric mining shovel offers the lowest cost per ton of mineral mined. Its use is determined by the size of the mining operation and the availability of electricity. P&H manufactures only electric mining shovels rather than mechanically driven shovels. Dippers (buckets) can range in size from 12 to 82 cubic yards.
Walking draglines Draglines are primarily used to remove overburden to uncover coal or mineral deposits and then to replace the overburden as part of reclamation activities. P&Hs draglines are equipped with bucket sizes ranging from 30 to 160 cubic yards.
Blasthole drills Most surface mines require breakage or blasting of rock, overburden, or ore using explosives. A pattern of holes to contain the explosives is created by a blasthole drill. Drills are usually described in terms of the diameter of the hole they bore. Blasthole drills manufactured by P&H bore holes ranging in size from 9 7/8 to 17.5 inches in diameter.
P&H MinePro Services provides life cycle management support, including equipment erections, relocations, inspections, service, repairs, rebuilds, upgrades, used equipment, new and used parts, enhancement kits, and training. The term life cycle management refers to our strategy to maximize the productivity of our equipment over the equipments entire operating life cycle through the optimization of the equipment, its operating and maintenance procedures, and its upgrade and refurbishment. Each life cycle management program is specifically designed for a particular customer and that customers application of our equipment. Under each program, we provide aftermarket products and services to support the equipment during its operating life cycle. Under some of the programs, the customer pays us an amount based upon hours of operation or units of production achieved by the equipment. The amount to be paid per unit is determined by the economic model developed on a case-by-case basis, and is set at a rate designed to include both the estimated costs and anticipated profit. Through life cycle management contracts, MinePro guarantees availability levels and reduces customer operating risk.
P&H MinePro Services personnel and MinePro distribution centers are strategically located close to customers in major mining centers around the world, supporting P&H and other brands. P&H sells its products and services directly to its customers through a global network of sales and marketing personnel. The P&H MinePro Services distribution organization also represents other leading providers of equipment and services to the mining industry and associated industries, which we refer to as Alliance Partners. Some of the P&H Alliance Partner relationships include the following companies:
For each Alliance Partner, we enter into an agreement that provides us with the right to distribute certain Alliance Partners products in specified geographic territories. Specific sales of new equipment are typically based on buy and resell arrangements or are direct sale from the Alliance Partner to the ultimate customer with a commission paid to us. The type of sales arrangement is typically agreed at the time of the customers commitment to purchase. Our aftermarket sales of parts produced by Alliance Partners are generally made under buy and resell arrangements. To support Alliance Partners products in certain geographic regions, we typically hold in inventory Alliance Partner parts.
P&Hs businesses are subject to cyclical movements in the markets. Sales of original equipment are driven to a large extent by commodity prices. Copper, coal, oil sands, and iron ore mining combined accounted for approximately 90% of total P&H sales in recent years. Rising commodity prices typically lead to the expansion of existing mines, opening of new mines, or re-opening of less efficient mines. Although the aftermarket segment is much less cyclical, severe reductions in commodity prices can result in the removal of machines from mining production, and thus dampen demand for parts and services. Conversely, significant increases in commodity prices can result in higher use of equipment and generate requirements for more parts and services.
Continental Crushing & Conveying
CCC is the nations largest manufacturer and distributer of bulk material crushing and conveyor systems. CCC has facilities in Australia, South Africa, the United Kingdom and the United States. CCCs products are used in coal, hard rock mining for metals and minerals, aggregates and tunneling.
Fiscal 2008 Developments:
Products and Services:
Feeder breakers Feeder breakers are a form of crusher that uses rotating drums with carbide-tipped bits to break down the size of the mined material for loading onto conveyor systems or feeding into processing facilities. Mined material is typically loaded into the feeder breaker by a shuttle car or battery hauler in underground applications and by haul trucks in surface applications.
Conveyor systems used in both above- and under-ground applications. The primary component of a conveyor system is the terminal which itself comprises a drive, discharge, take-up and tail loading section.
High angle conveyors The Continental High Angle Conveyor is a versatile method for elevating or lowering materials continuously from one level to another at extremely steep angles. One of the differentiating factors of the Continental technology is the use of the proprietary fully equalized pressing mechanism which secures material toward the center of the belt while gently, but effectively, sealing the belt edges together. The High Angle Conveyor has throughput rates ranging from .30 to 4,400 tons per hour.
All of our business segments are subject to moderate seasonality, with the first quarter of our fiscal year generally experiencing lower sales due to a decrease in working days caused by the Thanksgiving and year-end holidays.
Financial information about our business segments and geographic areas of operation is contained in Item 8 Financial Statements and Supplementary Data and Item 15 Exhibits and Financial Statement Schedules.
As of October 31, 2008, we employed approximately 11,800 people with approximately 5,700 employed in the United States. Collective bargaining agreements or similar type arrangements cover 36% of our U.S. workforce and 25% of our international employees.
Joy, P&H and CCC sell their products primarily to large global and regional mining companies. No customer or affiliated group of customers accounted for 10% or more of our consolidated sales for fiscal 2008.
Joy, P&H and CCC conduct their domestic and foreign operations under highly competitive market conditions, requiring that their products and services be competitive in price, quality, service, and delivery. The customers for these products are generally large mining companies with substantial purchasing power.
Joys continuous miners, longwall shearers, powered roof supports, armored face conveyors, continuous haulage systems, shuttle cars, and battery haulers compete with similar products made by a number of both established and emerging worldwide manufacturers of such equipment. Joys rebuild services compete with a large
number of local repair shops. Joy competes with various regional suppliers in the sale of replacement parts for Joy equipment.
P&Hs shovels and draglines compete with similar products produced by one competitor and with hydraulic excavators, large rubber-tired front-end loaders, and bucket wheel excavators made by several international manufacturers. P&Hs large rotary blasthole drills compete with several worldwide drill manufacturers. A manufacturers location is not a significant advantage or disadvantage in this industry, but it is important to have repair and rebuild capability near the customers operations. P&H MinePro Services competes with a large number of primarily regional suppliers in the sale of parts.
CCC faces strong competition throughout the world in all of its product lines. The various markets in which CCC competes are fragmented into a large number of competitors, many of which are smaller businesses that operate in relatively specialized or niche product areas.
Joy, P&H and CCC compete on the basis of providing superior productivity, reliability, and service that lower the overall cost of production for their customers. Joy, P&H and CCC compete with local and regional service providers in the provision of maintenance, rebuild and other services to mining equipment users.
Backlog represents unfilled customer orders for our products and services. The customer orders that are included in the backlog represent commitments to purchase specific products or services from us by customers who have satisfied our credit review procedures. The following table provides backlog by business segment as of the fiscal year end. These backlog amounts exclude customer arrangements under long-term equipment life cycle management programs. Such programs extend for up to thirteen years and totaled approximately $492.2 million as of October 31, 2008. Sales already recognized by fiscal year-end under the percentage-of-completion method of accounting are also excluded from the amounts shown.
The increase in backlog for Surface Mining Equipment from October 26, 2007 to October 31, 2008 is due to the strength of international coal, long-term growth prospects of copper and growth in Canadian oil sands. The increase in Underground Mining Machinery is due to the increasing demand in U.S. coal markets. CCC added terminals, structures and barge load out conveyors. Of the $3.1 billion of backlog approximately $746 million is expected to be recognized as revenue beyond fiscal 2009.
The increase in backlog for Surface Mining Equipment from October 28, 2006 to October 26, 2007 reflects continued strength in the Canadian oil sands, global copper markets, and other emerging markets, including China and Russia. The change in backlog for Underground Mining Machinery over the same period reflects the continued strong global demand for original equipment and aftermarket products and services. Of the $1.6 billion of backlog, approximately $140 million is expected to be recognized as revenue beyond fiscal 2008.
The eliminations represent the Stamler crushing equipment orders which are sold through the Underground Mining Machinery and Surface Mining Equipment segments but managed as part of the Crushing & Conveying segment.
Joy purchases electric motors, gears, hydraulic parts, electronic components, castings, forgings, steel, clutches, and other components and raw materials from outside suppliers. Although Joy purchases certain components and raw material from a single source, alternative suppliers are generally available for all such items.
P&H purchases raw and semi-processed steel, castings, forgings, copper, and other materials from a number of suppliers. In addition, component parts such as engines, bearings, controls, hydraulic components, and a wide variety of mechanical and electrical items are purchased from a group of pre-qualified suppliers.
CCC purchases steel and other miscellaneous parts such as bearings, electric motors and gear reducers from outside suppliers. CCC is not dependent upon any single supplier for any materials essential to its business or that are not otherwise commercially available.
Worldwide steel prices rose for most of fiscal 2008 in response to higher demand caused by continued higher consumption in emerging market countries such as China. Due to the continued high demand for steel in 2008, many suppliers of castings, forgings, and other products increased prices or added surcharges to the price of their products. We did not experience any issues in being able to obtain steel on a timely basis in fiscal 2008.
Patents and Trademarks
We own numerous patents and trademarks and license technology from others relating to our products and manufacturing methods. We have also granted patent and trademark licenses to other manufacturers and receive royalties under most of these licenses. While we do not consider any particular patent or license or group of patents or licenses to be material to our business segments, we believe that in the aggregate our patents and licenses are significant in distinguishing many of our product lines from those of our competitors. The value of patents and trademarks by segment are as follows:
Research and Development
We are strongly committed to pursuing technological development through the engineering of new products and systems, the improvement and enhancement of licensed technology, and related acquisitions of technology. Research and development expenses were $16.4 million, $11.5 million, and $10.4 million for fiscal 2008, 2007, and 2006, respectively.
Environmental, Health and Safety Matters
Our domestic activities are regulated by federal, state, and local statutes, regulations, and ordinances relating to both environmental protection and worker health and safety. These laws govern current operations, require remediation of environmental impacts associated with past or current operations, and under certain circumstances provide for civil and criminal penalties and fines as well as injunctive and remedial relief. Our foreign operations are subject to similar requirements as established by their respective countries.
We believe that we have substantially satisfied these diverse requirements. Compliance with environmental laws and regulations did not have a material effect on capital expenditures, earnings, or competitive position in 2008. Because these requirements are complex and, in many areas, rapidly evolving, there can be no guarantee against the possibility of sizeable additional costs for compliance in the future. However, we do not expect that our compliance with environmental laws and regulations will have a material effect on our capital expenditures, earnings or competitive position, and do not expect to make any material capital expenditures for environmental control facilities in fiscal 2009.
Our operations or facilities have been and may become the subject of formal or informal enforcement actions or proceedings for alleged noncompliance with either environmental or worker health and safety laws or regulations. Such matters have typically been resolved through direct negotiations with the regulatory agency and have typically resulted in corrective actions or abatement programs. However, in some cases, fines or other penalties have been paid.
For information on the risks faced by our international operations, see Item 1A, Risk Factors.
Our internet address is: www.joyglobal.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
Our international operations are subject to many uncertainties, and a significant reduction in international sales of our products could adversely affect us.
In addition to the other risk factors below, our international operations are subject to various political, economic, and other uncertainties which could adversely affect our business. A significant reduction of our international business due to any of these risks would adversely affect our sales. In fiscal 2008, 2007, and 2006, approximately 52%, 52%, and 51%, respectively of our sales were derived from sales outside the United States. Risks faced by our international operations include:
If we are unable to successfully manage the risks associated with expanding our global business or to adequately manage operational fluctuations internationally, it could adversely affect our business, financial condition, or results of operations.
The cyclical nature of our original equipment manufacturing business could cause fluctuations in our operating results.
Our business, in particular our original equipment manufacturing business, is cyclical in nature. The cyclicality of Joys and CCCs original equipment sales is driven primarily by commodity prices, product life cycles, competitive pressures, and other economic factors affecting the mining industry such as company consolidation. P&Hs original equipment sales are subject to cyclical movements based in large part on changes in copper, coal, iron ore, oil, and other commodity prices. Falling commodity prices have in the past and may in the future lead to reductions in the production levels of existing mines, a contraction in the number of existing mines, and the closure of less efficient mines. Decreased mining activity is likely to lead to a decrease in demand for new mining machinery. As a result of this cyclicality, we have previously experienced significant fluctuation in our business, results of operations, and financial condition. We expect that cyclicality in our equipment manufacturing business may cause us to experience further significant fluctuation in our business, financial condition, or results of operations.
We are largely dependent on the continued demand for coal, which is subject to economic and climate related risks.
Over two-thirds of our revenues come from our coal-mining customers. Many of these customers supply coal as fuel for the production of electricity in the United States and other countries. The pursuit of the most cost effective form of electricity generation continues to take place throughout the world. Efforts to reduce greenhouse gas emissions are also affecting the mix of electricity generation sources. If a more economical and/or lower greenhouse gas emitting form of electricity generation is discovered or developed or if one of more current alternative sources of energy such as nuclear, solar, natural gas or wind power becomes more widely accepted or cost effective, the demand for our mining equipment could be adversely affected.
We require cash to service our indebtedness, which reduces the cash available to finance our business.
Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory, and other factors. Some of these factors are beyond our control. If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we might be required to refinance our debt or to dispose of assets to obtain funds for such purpose. There is no assurance that refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, particularly if current credit market conditions continue or worsen. Furthermore, there can be no assurance that refinancings or asset dispositions would be permitted by the terms of our debt instruments.
Our unsecured revolving credit agreement contains certain financial tests. If we do not satisfy such tests, our lenders could declare a default under our debt instruments, and our indebtedness could be declared immediately due
and payable. Our ability to comply with the provisions of our unsecured revolving credit agreement may be affected by changes in economic or business conditions beyond our control.
Our unsecured revolving credit agreement contains covenants that limit our ability to incur indebtedness, acquire other businesses and imposes various other restrictions. These covenants could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. We cannot be certain that we will be able to comply with the foregoing financial ratios or covenants or, if we fail to do so, that we will be able to obtain waivers from our lenders.
Our continued success depends on our ability to protect our intellectual property.
Our future success depends in part upon our ability to protect our intellectual property. We rely principally on nondisclosure agreements and other contractual arrangements and trade secret law and, to a lesser extent, trademark and patent law, to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. Our inability to protect our proprietary information and enforce our intellectual property rights through infringement proceedings could adversely affect our business, financial condition or results of operations.
Our manufacturing operations are dependent upon third party suppliers, making us vulnerable to supply shortages and price increases, and we are also limited by our plant capacity constraints.
In the manufacture of our products, we use large amounts of raw materials and processed inputs including steel, engine components, copper and electronic controls. We obtain raw materials and certain manufactured components from third party suppliers. Our ability to grow revenues is constrained by the capacity of our plants, our ability to supplement that capacity with outside sources, and our success in securing critical supplies such as steel and copper. To reduce material costs and inventories, we rely on supplier arrangements with preferred vendors as a source for just in time delivery of many raw materials and manufactured components. Because we maintain limited raw material and component inventories, even brief unanticipated delays in delivery by suppliers, including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies, or other natural disasters, may adversely affect our ability to satisfy our customers on a timely basis and thereby affect our financial performance. This risk increases as we continue to change our manufacturing model to more closely align production with customer orders. In addition, recently market prices of some of the raw materials we use, in particular steel, have increased significantly. If we are not able to pass raw material or component price increases on to our customers, our margins could be adversely affected. In fiscal 2008, 2007 and 2006, we instituted price increases to offset, in part, the effect of higher steel prices. We cannot be certain that we will be able to maintain these price increases. Any of these events could adversely affect our business, financial condition, or results of operations.
We operate in a highly competitive environment, which could adversely affect our sales and pricing.
Our domestic and foreign manufacturing and service operations are subject to significant competitive pressures. Many of our customers are large global mining companies that have substantial bargaining power and require our equipment to meet high standards of availability, productivity, and cost effectiveness. In addition, some of our sales require us to participate in competitive tenders where we must compete on the basis of various factors, including performance guarantees and price. We compete directly and indirectly with other manufacturers of surface and underground mining equipment and with manufacturers of parts and components for such products. Some of our competitors are larger and may have greater access to financial resources.
Demand for our products may be adversely impacted by regulations related to mine safety.
Our principal customers are surface and underground mining companies. The industry has encountered increased scrutiny as it relates to safety regulations primarily due to recent high profile mine accidents. Current or proposed legislation on safety standards and the increased cost of compliance may induce customers to discontinue or limit their mining operations, and may discourage companies from developing new mines.
Demand for our products may be adversely impacted by environmental regulations impacting the mining industry or electric utilities.
Many of our customers supply coal as a power generating source for the production of electricity in the United States and other countries. The operations of these mining companies are geographically diverse and are subject to or impacted by a wide array of regulations in the jurisdictions where they operate, including those directly impacting mining activities and those indirectly affecting their businesses, such as applicable environmental laws. The high cost of compliance with environmental regulations may also cause customers to discontinue or limit their mining operations, and may discourage companies from developing new mines. Additionally, government regulation of electric utilities may adversely impact the demand for coal to the extent that such regulations cause electric utilities to select alternative energy sources and technologies as a source of electric power. As a result of these factors, demand for our mining equipment could be substantially affected by environmental regulations adversely impacting the mining industry or altering the consumption patterns of electric utilities.
We may not be able to integrate the acquisition of Continental successfully, which may have a material adverse impact on our ability to realize anticipated synergies from the acquisition and our future growth and operating performance.
On February 14, 2008, we completed the acquisition of N.E.S. Investment Co. and its subsidiary, Continental Global Group. The successful integration of Continental will require substantial attention from our management team. The diversion of management attention and any other difficulties we encounter in the integration process could have a material adverse effect on our ability to realize anticipated cost savings and synergies from the acquisition. Difficulties that arise integrating Continental may also have a material adverse effect on our future growth and results of operations. We cannot provide assurance that we will be able to integrate the operations of Continental successfully, that we will be able to fully realize anticipated synergies from the acquisition, or that we will be able to operate Continentals business successfully.
Labor disputes and increasing labor costs could adversely affect us.
Many of our principal domestic and foreign operating subsidiaries are parties to collective bargaining agreements with their employees. We cannot be certain that any disputes, work stoppages, or strikes will not arise in the future. In addition, when existing collective bargaining agreements expire, we cannot be certain that we will be able to reach new agreements with our employees. Such new agreements may be on substantially different terms and may result in increased direct and indirect labor costs. Future disputes with our employees could adversely affect our business, financial condition, or results of operations.
Our business could be adversely affected by our failure to develop new technologies.
The mining industry is a capital-intensive business, with extensive planning and development necessary to open a new mine. The success of our customers mining projects is largely dependent on the efficiency with which the mine operates. If we are unable to provide continued technological improvements in our equipment that meet our customers expectations, or the industrys expectations, on mine productivity, the demand for our mining equipment could be substantially affected.
We are subject to litigation risk, which could adversely affect us.
We and our subsidiaries are involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to product liability (including asbestos related and silicosis liability), employment, and commercial matters. In addition, we and our subsidiaries become involved from time to time in proceedings relating to environmental matters. Also, as a normal part of their operations, our subsidiaries may undertake contractual obligations, warranties, and guarantees in connection with the sale of products or services. Some of these claims and obligations involve significant potential liability.
Product liability claims could adversely affect us.
The sale of mining equipment entails an inherent risk of product liability and other claims. Although we maintain product liability insurance covering certain types of claims, our policies are subject to substantial deductibles. We cannot be certain that the coverage limits of our insurance policies will be adequate or that our policies will cover any particular loss. Insurance can be expensive, and we may not always be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against us that are not covered by insurance or that result in recoveries in excess of insurance coverage could adversely affect our business, financial condition, or results of operations.
If we are unable to retain qualified employees, our growth may be hindered.
Our ability to provide high quality products and services depends in part on our ability to retain our skilled personnel in the areas of senior management, product engineering, servicing, and sales. Competition for such personnel is intense and our competitors can be expected to attempt to hire our skilled employees from time to time. In particular, our results of operations could be adversely affected if we are unable to retain the customer relationships and technical expertise provided by our management team and our professional personnel.
We rely on significant customers.
We are dependent on maintaining significant customers by delivering reliable, high performance mining equipment and other products on a timely basis. We do not consider ourselves to be dependent upon any single customer; however, our top ten customers collectively accounted for approximately 35% of our sales for fiscal 2008. Our sales have become more concentrated in recent years as consolidation has occurred in the mining industry. The consolidation and divestitures in the mining industry may result in different equipment preferences among current and former significant customers. The loss of one or more of our significant customers could, at least on a short term basis, have an adverse effect on our business, financial condition, or results of operations.
We may acquire other businesses or engage in other transactions, which may adversely affect our operating results, financial condition, and existing business.
From time to time, we explore transaction opportunities which may complement our core business. These transaction opportunities may come in the form of acquisitions, joint ventures, start ups or other structures. Any such transaction may entail any number of risk factors including (without limitation) general business risk, integration risk, technology risk, and market acceptance risk. Additionally, any such transaction may require utilization of debt, equity or other capital resources and our managements time and attention, and may not create value for us or our stockholders.
Item 1B. Unresolved Staff Comments
Item 2. Properties
As of October 31, 2008 the following principal properties of our operations were owned, except as indicated. Our worldwide corporate headquarters are currently housed in 10,000 square feet of leased space in Milwaukee, Wisconsin. All of these properties are generally suitable for the operations currently conducted at them.
Underground Mining Machinery Locations
Surface Mining Equipment Locations
Crushing & Conveying Locations
(1) Under a month to month lease
(2) Under a lease expiring in 2008
(3) Under a lease expiring in 2009
(4) Under a lease expiring in 2010
(5) Under a lease expiring in 2011
(6) Under a lease expiring in 2013
(7) Under a lease expiring in 2014
(8) Under a lease expiring in 2018
(9) Under a lease expiring in 2021
* Property includes a warehouse.
Joy also operates warehouses in Meadowlands, Pennsylvania; Green River, Wyoming; Pineville, West Virginia; Brookwood, Alabama; Carlsbad, New Mexico; Price, Utah; Norton, Virginia; Lovely and Henderson, Kentucky; Nashville, Illinois; Emerald, Moss Vale, Thornton and Lithgow, Australia; Siberia, Russia; and Chirimiri, India. All warehouses are owned except for the warehouses in Price; Lovely and Henderson; Nashville; Moss Vale and Thornton; and Siberia, which are leased.
P&H also operates warehouses in Cleveland, Ohio; Hibbing and Virginia, Minnesota; Charleston, West Virginia; Negaunee, Michigan; Gilbert, Arizona; Hinton, Sparwood, Labrador City, Fort McMurray and Sept. Iles, Canada; Iquique and Calama, Chile; Johannesburg, South Africa; Puerto Ordaz, Venezuela; and Rutherford, Australia. The warehouses in Hibbing, Fort McMurray, Johannesburg, and Calama are owned; the others are leased. In addition, P&H leases sales offices throughout the United States and in principal surface mining locations in other countries.
Continental leases sales offices in Illinois, Kentucky, West Virginia, and Pennsylvania and also leases a maintenance facility in Alabama. Continental does not lease any warehouses.
Item 3. Legal Proceedings
We and our subsidiaries are involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to product liability (including over 1,000 asbestos and silica-related cases), employment, and commercial matters. Although the outcome of these matters cannot be predicted with certainty and favorable or unfavorable resolutions may affect the results of operations on a quarter-to-quarter basis, based upon our case evaluations and availability of insurance coverage we believe that the outcome of such legal and other matters will not have a materially adverse effect on our consolidated financial position, results of operations, or liquidity.
On April 19, 2004, Joy South Africa declared a dividend to our wholly owned subsidiary in the United Kingdom in the amount of approximately $46.0 million. As part of the transaction and in accordance with the South African Tax Act (Act), Joy South Africa was not required to pay tax on the transaction. In August 2004 the South African Revenue Service (SARS) stated that it disagreed with the Joy South Africa interpretation of the Act and would attempt to collect this tax. In September 2005, we received a notice of assessment from SARS, which as of October 2007 was approximately $8.0 million, including interest and penalties. During the fourth quarter of fiscal 2007, we recorded a liability related to the assessment based on the increased probability of a negative outcome and representing an amount for which we would agree to settle. In December 2008, we reached agreement with SARS in the matter for $4.2 million, inclusive of interest, which approximated the accrued amount. The settlement is expected to be paid in March 2009.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
Executive Officers of the Registrant
The following table shows certain information for each of our executive officers, including position with the corporation and business experience. Our executive officers are elected each year at the organizational meeting of our Board of Directors, which follows the annual meeting of shareholders, and at other meetings as appropriate.
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our common stock is traded on the Nasdaq Global SelectMarket under the symbol JOYG. As of October 31, 2008, there were approximately 71,000 shareholders of record. The following table sets forth the high and low sales prices and dividend payments for our common stock during the periods indicated.
We made the following purchases of our common stock, par value $1.00 per share, during the fourth quarter of fiscal 2008:
The following graph sets forth the cumulative total shareholder return, including reinvestment of dividends on a quarterly basis, on common stock during the preceding five years, as compared to the cumulative total returns of the Standard and Poors (S&P) 500 Composite Stock Index and the Dow Jones United States Commercial Vehicle Truck Index (DJUSHR). The DJUSHR was known as the Dow Jones U.S. Total Market Heavy Machinery Index until December 20, 2004. This graph assumes $100 was invested on November 2, 2002, in Common Stock, the S&P 500 Composite Stock Index, and the DJUSHR.
Item 6. Selected Financial Data
The following table sets forth certain selected historical financial data on a consolidated basis. The selected consolidated financial data was derived from our Consolidated Financial Statements. Prior to fiscal 2007 our fiscal year end was the Saturday nearest October 31. Each of our fiscal quarters consists of 13 weeks, except for any fiscal years consisting of 53 weeks that will add one week to the first quarter. On December 18, 2006, we further amended our bylaws so that starting in fiscal 2007 our fiscal year-end date will be the last Friday in October. The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements appearing in Item 8 Financial Statements and Supplementary Data and Item 15 Exhibits and Financial Statement Schedules.
RESULTS OF OPERATIONS
(1) - Per share amounts have been adjusted for three-for-two stock splits, effective on January 21, 2005 and December 12, 2005.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes. References made to years are for fiscal year periods. Dollar amounts are in thousands, except share and per-share data and as indicated.
The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Joy Global Inc. and its subsidiaries for fiscal 2008, 2007, and 2006. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report.
We are the direct successor to businesses that have been manufacturing mining equipment for almost 125 years. We operate in three business segments: Underground Mining Machinery, comprised of our Joy Mining Machinery business, Surface Mining Equipment, comprised of our P&H Mining Equipment business and Continental Crushing & Conveying. Joy is the worlds largest producer of high productivity underground mining equipment used primarily for the extraction of coal. P&H is the worlds largest producer of high productivity electric mining shovels and a leading producer of walking draglines and large rotary blasthole drills, used primarily for surface mining copper, coal, iron ore, oil sands, and other minerals. CCC is a worldwide leader in breakage equipment and conveyor systems for bulk material handling in mining and industrial applications.
In addition to selling new equipment, we provide parts, components, repairs, rebuilds, diagnostic analysis, fabrication, training, and other aftermarket services for our installed base of machines. In the case of Surface Mining Equipment, we also provide aftermarket services for equipment manufactured by other companies, including manufacturers with which we have ongoing relationships and which we refer to as Alliance Partners. We emphasize our aftermarket products and services as an integral part of lowering our customers cost per unit of production and are focused on continuing to grow this part of our business.
Original equipment sales have ranged from $316.4 million in fiscal 2001 to $1.4 billion in fiscal 2008. Our aftermarket business has shown more consistent growth since fiscal 2001 with sales ranging from $799.8 million in 2001 to $2.0 billion in fiscal 2008. Along with record revenues in fiscal 2008, our backlog has also continued to grow. Our backlog of $1.6 billion as of October 26, 2007 increased to $3.2 billion as of October 31, 2008 driven by increased original equipment orders for expansion projects as well as aftermarket products and services to support the high utilization of the current installed fleet.
Demand for new equipment is cyclical in nature, being driven by commodity prices and other factors. The evolving economic crisis increasingly impacts the outlook for the mining industry. Slowing of the worlds economies is reducing demand for commodities, forcing prices down and limiting mining company cash flows. This combination has created a general downward bias on commodity prices. As a result of this outlook, we expect our customers to become more selective about their next new mine expansion projects, but at the same time expect projects to continue to be approved.
Approximately 79% of our sales in fiscal 2008 were recorded at the time of shipment of the product or delivery of the service. The remaining 21% of sales was recorded using percentage of completion accounting, a practice we follow in recognizing revenue on the sale of long lead-time equipment such as electric mining shovels, walking draglines, powered roof support systems and conveyor systems. Under percentage of completion accounting, revenue is recognized on firm orders from customers as the product is manufactured based on the ratio of actual costs incurred to estimated total costs to be incurred. We generally receive progress payments on long lead-time equipment.
Operating results of fiscal 2008 were indicative of the strength of the underground coal market in the U.S. and overall strength of surfaced mined commodities, including coal, iron ore, and copper for the most part of fiscal 2008. Net sales for fiscal 2008 totaled $3.4 billion, compared with $2.5 billion in fiscal 2007. The acquisition of Continental in the beginning of the second quarter of fiscal 2008 added $251.0 million of revenue for the year, the continued strength of all surface markets added $305.9 million and the rebound of the U.S. underground activity
contributed $314.8 million. Operating income totaled $551.2 million in fiscal 2008, up $77.9 million from fiscal 2007. The increase in operating income was the result of increased sales related to strong demand across all surface and underground markets, offset by increased incentive based compensation expense of $43.5 million and a $22.7 million charge related to a maintenance and repair contract in Australia. Net income was $374.3 million, or $3.45 per diluted share in fiscal 2008 compared with $279.8 million or $2.51 per diluted share in the prior year.
Results of Operations
2008 Compared with 2007
The following table sets forth fiscal 2008 and fiscal 2007 net sales as derived from our Consolidated Statement of Income:
The increase in net sales for Underground Mining Machinery in fiscal 2008 compared to fiscal 2007 was the result of a $211.3 million increase in original equipment combined with a $103.5 million increase in aftermarket products and service. After a challenging fiscal 2007, the Central Appalachia region of the United States experienced growth across substantially all original equipment product lines. Chinas original equipment sales also increased primarily due to increased armored face conveyor and shearer sales. Increased original equipment sales were reported in Eurasia primarily due to the sale of a powered roof support system in fiscal 2008. United States aftermarket sales increased reflecting continued investment in both existing and greenfield metallurgical and thermal projects.
The increase in net sales for Surface Mining Equipment in fiscal 2008 compared to fiscal 2007 was the result of a $142.0 million increase in original equipment combined with a $163.9 million increase in aftermarket parts and service. Increases in original equipment sales due to timing of production schedules primarily consisted of increased shovel revenue in the Canadian oil sands, the United States, Chile and China. As a result of the increasing installed base of electric mining shovels, aftermarket sales increased by $61.3 million in the United States, $60.0 million in Chile and $48.0 million in Canada.
The net sales in Crushing & Conveying represented the strength of the crushing equipment and conveying systems and aftermarket parts and services in the United States, Australia and the United Kingdom. Revenue from this segment was included from the February 14, 2008 acquisition date of N.E.S. Investment Co.
The eliminations represent the Stamler crushing equipment which is sold through the Underground Mining Machinery and Surface Mining Equipment segments but managed as part of the Crushing & Conveying segment.
The following table sets forth fiscal 2008 and fiscal 2007 operating income as derived from our Consolidated Statement of Income:
Operating income for Underground Mining Machinery increased to $348.8 million in fiscal 2008, or 20.1% of sales, as compared to $285.9 million in fiscal 2007, or 20.1% of sales. The increase in operating income was principally due to the impact of higher volume of $132.0 million and lower pension expense of $12.6 million, partially offset by the impact of a greater mix of lower margin original equipment of $37.0 million, and increased performance based incentive compensation of $23.8 million.
Operating income for Surface Mining Equipment increased to $227.4 million in fiscal 2008, or 15.9% of sales, as compared to $217.8 million in fiscal 2007, or 19.4% of sales. The increase in operating income was principally due to increased sales volume of $88.2 million offset by the settlement of a maintenance and repair contract in Australia of $23.0 million, increased performance based incentive compensation of $16.3 million, the retiree benefit cost associated upon the execution of the Steelworkers agreement in Milwaukee of $5.4 million and increased selling, general and administrative expenses to support the global mining infrastructure.
Operating income for Crushing & Conveying included $19.6 million of purchase accounting charges in fiscal 2008.
Corporate expense increased by $4.3 million due to increased performance-based compensation, legal fees and severance costs.
The eliminations represent the Stamler crushing equipment which is sold through the Underground Mining Machinery and Surface Mining Equipment segment but managed as part of the Crushing & Conveying segment.
Product Development, Selling and Administrative Expense
Product development, selling and administrative expense for fiscal 2008 was $441.5 million as compared to $358.5 million for fiscal 2007. The increase in product development, selling and administrative expense was primarily due to $27.4 of additional expenses related to the Continental acquisition, $16.9 million of higher selling expenses related to increased business activity and $28.3 increase in administrative costs due to increased incentive based compensation of $17.2 million and global infrastructure development.
Provision for Income Taxes
The effective income tax rates from continuing operations were 29.2% and 37.7%, for fiscal 2008 and fiscal 2007, respectively. Income tax expense from continuing operations decreased to $154.0 million in fiscal 2008 as compared to $169.3 million in fiscal 2007. The main drivers of the variance in tax rates and income tax expense
were higher utilization of U.S. foreign tax credits and the associated Subpart F earnings, tax holidays and incentives in fiscal 2008, U.S. State income taxes, mix of earnings year over year and differences in local statutory tax rates.
A discrete tax benefit of $10.4 million was recorded in fiscal 2008 to reflect U.S. foreign tax credits recognition offset partially by U.S. Subpart F income not previously recognized, completion of an R&D study to validate the credits available and offset by the tax required on a dividend between foreign subsidiaries. Fiscal 2007 also included a discrete tax expense of $18.0 million which included taxes on dividends received from foreign subsidiaries during the fourth quarter not previously forecasted, the resolution of an R&D study which resulted in the write-off of pre-bankruptcy R&D credits, and a reserve added following the quarterly evaluation of a previously disclosed contingent tax liability in South Africa.
A review of uncertain income tax positions was performed throughout fiscal 2008 and 2007 as part of the overall income tax provision and a net benefit of $3.5 million and $1.3 million, respectively, was recorded on a global basis.
2007 Compared with 2006
The following table sets forth fiscal 2007 and fiscal 2006 net sales as derived from our Consolidated Statement of Income:
The slight decrease in net sales for Underground Mining Machinery in fiscal 2007 compared to fiscal 2006 was the result of a $41.8 million decrease in original equipment combined with a $38.7 million increase in aftermarket products and service. Weakness in the Central Appalachia region of the United States resulted in a decrease across substantially all original equipment product lines. Chinas original equipment sales also decreased primarily due to lower armored face conveyor and powered roof support sales and on more local competition. Offsetting the impact of the United States and China, increased original equipment sales were reported in Australia and associated with Stamler. International aftermarket sales increased in South Africa and China reflecting continued high level of coal mining activity on a global basis.
The increase in net sales for Surface Mining Equipment in fiscal 2007 compared to fiscal 2006 was the result of a $51.6 million increase in original equipment combined with a $97.1 million increase in aftermarket parts and service. Increases in original equipment sales due to timing of production schedules primarily consisted of increased shovel revenue in two key markets, the Canadian oil sands and China. Aftermarket sales increases were primarily due to $13.7 million in emerging markets and $86.6 million in the United States and most notably in the southwest region of the United States. The emerging market increase was primarily related to continued strength of coal markets in China and Russia, while the southwest increase was due to the continued global demand for copper.
The following table sets forth fiscal 2007 and fiscal 2006 operating income as derived from our Consolidated Statement of Income:
Operating income as a percentage of net sales for Underground Mining Machinery decreased to 20.1% in fiscal 2007 from 21.6% in fiscal 2006. The decrease in operating income was principally due to increased warranty expense of $10.0 million and increased product development, selling and administrative expense of $32.8 million offset by a greater mix of higher margin aftermarket sales and decreased incentive compensation expense. The increase in product development, selling and administrative expense was related to international infrastructure development, the inclusion of Stamler for all of fiscal 2007, and increased pension expense.
Operating income as a percentage of net sales for Surface Mining Equipment increased to 19.4% in fiscal 2007 from 16.9% in fiscal 2006. The increase in operating income was principally due to increased sales volume of $40.6 million and a more profitable mix of original equipment and aftermarket sales. Product development, selling and administrative expenses were up approximately $4.0 million in fiscal 2007, but were down 1.1 percentage points in comparison to net sales year over year.
Product Development, Selling and Administrative Expense
Product development, selling and administrative expense for fiscal 2007 was $358.5 million as compared to $321.8 million for fiscal 2006. The increase in product development, selling and administrative expense was primarily due to $15.0 million of increased warranty costs, $9.7 million of costs related to the development and expansion of global infrastructure, $8.2 million of expenses related to the inclusion of Stamler for all of fiscal 2007, $6.3 million of foreign exchange impact, $3.3 million increase in pension expense, and general inflation. This increase was offset by a $7.2 million decrease in incentive based compensation expense.
Interest expense for fiscal 2007 was $31.9 million as compared to $5.7 million for fiscal 2006. The $26.2 million increase was principally due to the November 2006 issuance of $250.0 million of 6% Senior Notes due 2016 and $150.0 million of 6.625% Senior Notes due 2036. The proceeds from the notes were primarily used to finance our common stock repurchase program and to repay amounts outstanding under our revolving credit agreement.
Provision for Income Taxes
Our consolidated effective income tax rates from continuing operations for fiscal 2007 and fiscal 2006 were approximately 37.7% and 7.9%, respectively. Consolidated income tax expense from continuing operations increased to $169.3 million in fiscal 2007 as compared to $35.5 million in fiscal 2006. The main drivers of the variance in tax rates and income tax expense were U.S. Subpart F earnings, U.S. State income taxes, mix of earnings year over year, differences in local statutory tax rates and the reversal of certain U.S. and Australian deferred income tax valuation reserves in fiscal 2006.
Fiscal 2007 also included tax adjustments of $18.0 million which included taxes on dividends received from foreign subsidiaries during the quarter not previously forecasted, the resolution of an R&D study which resulted in
the write-off of pre-bankruptcy R&D credits, and a reserve added following the quarterly evaluation of a previously disclosed contingent tax liability in South Africa.
A review of income tax valuation reserves was performed throughout fiscal 2007 as part of the overall income tax provision and a net benefit of $1.3 million was recorded on a global basis. For fiscal 2006, a tax benefit of $110.4 million was recorded relating to the reversal of certain valuation reserves, principally $95.6 million applicable to U.S. deferred income tax assets and $12.5 million related to certain deferred income tax assets applicable to our Australian consolidated tax group.
Reorganization items include income, expenses, and losses that were realized or incurred by the Predecessor Company as a result of its decision to reorganize under Chapter 11 of the Bankruptcy Code.
Net reorganization items for fiscal 2008, fiscal 2007, and fiscal 2006 consisted of the following:
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments, including those related to bad debts, excess inventory, warranty, intangible assets, income taxes, and contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
We believe the accounting policies described below are the ones that most frequently require us to make estimates and judgments, and therefore are critical to the understanding of our results of operations.
We generally recognize revenue at the time of shipment and passage of title for sales of products and at the time of performance for sales of services. We recognize revenue on long-term contracts, such as the manufacture of mining shovels, drills, draglines and roof support systems, using either the percentage-of-completion or inventory sales methods. When using the percentage-of-completion method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recognized in full when identified.
We have life cycle management contracts with customers to supply parts and service for terms of 1 to 13 years. These contracts are set up based on the projected costs and revenues of servicing the respective machines over the specified contract terms. Accounting for these contracts requires us to make various estimates, including estimates of the relevant machines long-term maintenance requirements. Under these contracts, customers are generally billed monthly and the respective deferred revenues are recorded when billed. Revenue is recognized in the period in which parts are supplied or services provided. These contracts are reviewed periodically and revenue recognition
is adjusted appropriately for future estimated costs. If a loss is expected at any time, the full amount of the loss is recognized immediately.
In limited circumstances, we have customer agreements that are multiple element arrangements as defined by the Financial Accounting Standards Board Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables. The agreements are considered for multiple elements based on the following criteria: the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered item and the arrangement includes a general right of return relative to the delivered item, and delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. Revenue is then allocated to each identified unit of accounting based on our estimate of their relative fair values.
Revenue recognition involves judgments, assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. We analyze various factors, including a review of specific transactions, historical experience, credit-worthiness of customers, and current market and economic conditions, in determining when to recognize revenue. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income.
Inventories are carried at the lower of cost or net realizable value using the first-in, first-out (FIFO) method for all inventories. We evaluate the need to record valuation adjustments for inventory on a regular basis. Our policy is to evaluate all inventories including raw material, work-in-process, finished goods, and spare parts. Inventory in excess of our estimated usage requirements is written down to its estimated net realizable value. Inherent in the estimates of net realizable value are estimates related to our future manufacturing schedules, customer demand, possible alternative uses, and ultimate realization of potentially excess inventory.
Goodwill and Other Intangible Assets
Intangible assets include drawings, patents, trademarks, technology, customer relationships and other specifically identifiable assets. Indefinite-lived intangible assets are not being amortized. These assets are evaluated for impairment annually or more frequently if events or changes occur that suggest impairment in carrying value. Finite-lived intangible assets are amortized to reflect the pattern of economic benefits consumed, which is principally the straight-line method. Intangible assets that are subject to amortization are evaluated for impairment annually or more frequently if events or changes occur that suggest impairment in carrying value.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is tested for impairment using the two-step approach, in accordance with Statement on Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill is assigned to specific reporting units and tested for impairment at least annually, during the fourth quarter of our fiscal year, or more frequently upon the occurrence of an event or when circumstances indicate that a reporting units carrying amount is greater than its fair value. Management judgment is used in the development of assumptions in the impairment testing process, including growth and discount rate assumptions. We performed our goodwill impairment testing in the fourth quarter of fiscal 2008 and no impairment was identified.
We record accruals for potential warranty claims based on prior claim experience. Warranty costs are accrued at the time revenue is recognized. These warranty costs are based upon managements assessment of past claims and current experience. However, actual claims could be higher or lower than amounts estimated, as the amount and value of warranty claims are subject to variation as a result of many factors that cannot be predicted with certainty.
Pension and Postretirement Benefits and Costs
We have pension and postretirement benefits and expenses which are developed from actuarial valuations. These valuations are based on assumptions including, among other things, discount rates, expected returns on plan
assets, retirement ages, years of service, future salary increases, and future health care cost trend rates. Future changes affecting the assumptions will change the related pension benefit or expense. As such, a .25% change in the discount rate and rate of return on net assets would have the following effects on projected benefit obligation and pension expense, respectively, as of and for the fiscal year ended October 31, 2008:
Deferred taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates. Deferred income tax provisions are based on changes in the deferred tax assets and liabilities from period to period, adjusted for certain reclassifications under fresh start accounting. Additionally, we analyze our ability to recognize the net deferred tax assets created in each jurisdiction in which we operate to determine if valuation allowances are necessary based on the more likely than not criteria.
As required under the application of fresh start accounting, the release of pre-emergence tax valuation reserves was not recorded in the income statement but instead was treated first as a reduction of excess reorganization value until exhausted, then intangibles until exhausted, and thereafter reported as additional paid in capital. Consequently, a net tax charge will be incurred in future years when these tax assets are utilized. We will continue to monitor the appropriateness of the existing valuation allowances and determine annually the amount of valuation allowances that are required to be maintained. As of October 31, 2008, there were $70.5 million of valuation allowances against pre-emergence net operating loss carryforwards. All future reversals of pre-emergence valuation allowances will be recorded to additional paid in capital.
We estimate the effective tax rate expected to be applicable for the full fiscal year on an interim basis. The estimated effective tax rate contemplates the expected jurisdiction where income is earned (e.g., United States compared to non-United States) as well as tax planning strategies. If the actual results are different from these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized. To the extent recognized, these items will impact the effective tax rate in aggregate but will not adjust the amount used for future periods within the same fiscal year.
Liquidity and Capital Resources
Working capital and cash flow are two financial measurements that provide an indication of our ability to meet our financial obligations. We currently use a combination of cash generated by operations, borrowings on our line of credit and debt offerings to fund continuing operations.
The following table summarizes the major elements of our working capital as of October 31, 2008 and October 26, 2007, respectively:
We currently use working capital and cash flow production as two financial measurements to evaluate the performance of our operations and our ability to meet our financial obligations. We continue to require working capital investment to maintain our position as a leading manufacturer and servicer of high productivity mining equipment. The primary drivers of these requirements are funding for purchases of production and replacement parts inventories. Our position as a market leader in providing timely service and repair requires us to maintain a certain level of replacement parts. As part of our continuous improvement of purchasing and manufacturing processes, we continue to strive for alignment of inventory levels with customer demand and current production schedules.
We expect fiscal 2009 capital spending to be between 2.5% and 3.0% of sales. This represents an increase from fiscal 2008 capital spending as a percentage of sales of up to 0.5%. Capital projects will be monitored to ensure alignment with customer needs and prevailing economic conditions.
In addition, cash is required for capital expenditures for the repair, replacement, and upgrading of existing facilities. We have debt service requirements, including commitment and letter of credit fees under our revolving credit facility and biannual interest payments due to holders of our Senior Notes issued in November 2006. We believe that cash generated from operations, together with borrowings available under our credit facility, provide us with adequate liquidity to meet our operating and debt service requirements and planned capital expenditures. For the long-term the fundamentals of the commodity cycle remain positive, near-term softness will require continuous reevaluation of new projects to ensure that we are effectively allocating resources in line with current market conditions.
In fiscal 2008, we completed a $50 million 130,000 square foot expansion in proprietary component machining capabilities for P&H Mining at our Tianjin, China campus, with first piece runoff of currently installed equipment completed early in the fourth quarter of fiscal 2008, with full production targeted for the second half of fiscal 2009.
As we look to provide more efficient operations amongst our customers and three operating segments, we are in the process of consolidating six smaller existing facilities in Australia into one combined underground and surface mining service center and manufacturing facility.
Cash provided by operations for fiscal 2008 was $577.3 million as compared to $382.0 million provided by operations for fiscal 2007. The increase in our cash provided by operating activities was primarily attributable to our continued focus on obtaining advance payments for original equipment. The increase in advance payments was offset by further increases in inventory and accounts receivable. Inventory management and forecasting remains a key initiative for us in fiscal 2009.
Cash used by investment activities for fiscal 2008 was $328.7 million as compared to $62.3 million used by investment activities for fiscal 2007. The increase in cash used by investment activities was primarily due to the $252.1 million acquisition of Continental in the second quarter of fiscal 2008. Capital expenditures increased by $33.0 million in fiscal 2008 up to $84.2 million primarily related to the upgrade of existing facilities, machines tools related to the Tianjin facility, further SAP implementations, and other projects.
Cash used by financing activities for fiscal 2008 was $180.6 million as compared to $255.1 million used by financing activities for fiscal 2007. The cash used by financing activities for fiscal 2008 primarily consisted of the repurchase of outstanding stock of $307.7 million, offset by the increase of $161.9 million outstanding on our term loan supplement under the revolving credit facility.
During fiscal 2008, we contributed $58.7 million to our worldwide pension plans compared to $18.5 million during fiscal 2007. Although no contributions were required to be made to qualified U.S. plans, a contribution of $32.5 million was made in fiscal 2008 in order to maintain plan flexibility. We expect to make required contributions of $58.2 million to our U.S. plans and $19.2 million to our Non-U.S. plans in fiscal 2009. The significance of the required funding requirements of our pension plans will be largely based on the investment performance of the plans assets, the actual results of the other actuarial assumptions and most importantly, the impact of the Pension Protection Act of 2006 (PPA).
On February 14, 2008 we completed the acquisition of N.E.S. Investment Co. (Parent) and thereby its subsidiary, Continental Global Group, Inc. a worldwide leader in conveyor systems for bulk material handling in mining and industrial applications. The Continental acquisition further strengthens our ability to provide a more complete mining solution to our customers. We purchased all of the outstanding shares of the Parent for an aggregate amount of $252.1 million, which was net of approximately $5.9 million of indebtedness we assumed at closing and $12.0 million of cash acquired. We also incurred $2.3 million of direct acquisition costs related to the acquisition. The purchase price was funded in part through available cash and credit resources and a new $175.0 million term loan supplement to our existing Credit Agreement (Second Amendment), as discussed below.
Following the Continental acquisition, the reportable segments for Joy Global Inc. were reevaluated and a new segment was created, Crushing & Conveying. Included in the Crushing & Conveying segment is the entire acquired Continental entity, along with the Stamler crushing equipment business, which was acquired in the fourth quarter of fiscal 2006. The Stamler crushing equipment is currently being sold through the Underground Mining Machinery or Surface Mining Equipment segments to third parties, but is being supplied to each unit through the Crushing & Conveying segment.
We have a $400.0 million unsecured revolving credit facility (Credit Agreement) which expires November 10, 2011. Outstanding borrowings bear interest equal to the London Interbank Offered Rate (LIBOR Rate) (defined as applicable LIBOR Rate for the equivalent interest period plus 0.5% to 1.25%) or the Base Rate (defined as the higher of the Prime Rate or the Federal Funds Effective Rate plus 0.5%) at our option. We pay a commitment fee ranging from 0.125% to 0.25% on the unused portion of the revolving credit facility based on our credit rating. The Credit Agreement requires the maintenance of certain financial covenants including leverage and interest coverage. The Credit Agreement also restricts payments of dividends or other return of capital based on the consolidated leverage ratio. At October 31, 2008, we were in compliance with all financial covenants in the Credit Agreement and had no restrictions on the payment of dividends or return of capital.
At October 31, 2008, there were no direct borrowings under the Credit Agreement. Outstanding letters of credit issued under the Credit Agreement, which count toward the $400.0 million credit limit, totaled $141.4 million. At October 31, 2008, there was $258.6 million available for borrowings under the Credit Agreement.
The Continental acquisition was funded in part through the Second Amendment, which calls for quarterly principal payments of 2.5% of the initial term loan through October 31, 2011, at which time the remaining outstanding principal equal to 62.5% of the initial term loan is due. As of October 31, 2008, $161.9 million is outstanding on the term loan. Outstanding borrowings bear interest equal to the LIBOR rate which has a weighted average interest rate of 3.70%. As part of the Second Amendment, we have the option to request an increase to the term loan outstanding not to exceed $75.0 million. No changes were made to existing financial covenants in fiscal 2008.
In November 2006, we issued $250.0 million aggregate principal amount of 6.0% Senior Notes due 2016 and $150.0 million aggregate principal amount of 6.625% Senior Notes due 2036 (Notes) with interest on the Notes being paid semi-annually in arrears on May 15 and November 15 of each year, starting on May 15, 2007. The Notes are guaranteed by each of our current and future significant domestic subsidiaries. The Notes were issued in a private placement under an exemption from registration provided by the Securities Act of 1933 (Securities Act), as amended. In the second quarter of fiscal 2007, the Notes were exchanged for similar notes registered under the Securities Act. At our option, we may redeem some or all of the Notes at a redemption price of the greater of 100% of the principal amount of the Notes to be redeemed or the sum of the present values of the principal amounts and the remaining scheduled interest payments using a discount rate equal to the sum of a treasury rate of a comparable treasury issue plus 0.3% for the 2016 Notes and 0.375% for the 2036 Notes.
Our credit rating by both Standard and Poors and Moodys has remained consistent in fiscal 2008. Standard and Poors credit rating is BBB- with an outlook of Stable. Moodys credit rating is Baa3 with a continued outlook of Stable. In the first quarter of fiscal 2009, Moodys confirmed the Baa3 rating with a positive outlook. These investment grade credit ratings provide us with greater flexibility to access financing on the open market as our business circumstances justify.
Advance Payments and Progress Billings
As part of the negotiation process associated with original equipment orders, there are generally advance payments obtained from our customers. As of October 31, 2008, advance payments and progress billings were $491.7 million. As orders are shipped or costs incurred, the advanced payments and progress billings are reclassified to revenue on the consolidated income statement.
Stock Repurchase Program
Under our original share repurchase program, management is authorized to repurchase up to $1.0 billion in shares in the open market or through privately negotiated transactions until December 31, 2008. On September 9, 2008, the Board of Directors revised the authorization to permit the repurchase of up to an additional $1.0 billion of outstanding common stock until December 31, 2011. During fiscal 2008 and fiscal 2007, we repurchased $307.7 million of common stock representing 6,040,727 shares and $499.7 million of common stock, representing 11,076,960 shares, respectively.
Off-Balance Sheet Arrangements
We lease various assets under operating leases. The aggregate payments under operating leases as of October 31, 2008 are disclosed in the table of Disclosures about Contractual Obligations and Commercial Commitments below. No significant changes to lease commitments have occurred since October 26, 2007. We have no other off-balance sheet arrangements.
Disclosures about Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments as of October 31, 2008:
New Accounting Pronouncements
Our new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Volatility in interest rates, commodity price risk, and foreign exchange rates can impact our earnings, equity, and cash flow. From time to time we undertake transactions to hedge this impact. Under generally accepted accounting principles, a hedge instrument is considered effective if it offsets partially or completely the impact on earnings, equity, and cash flow due to fluctuations in interest, commodity, and foreign exchange rates. In accordance with our policy, we do not execute derivatives that are speculative or that increase our risk from interest rate, commodity price, or foreign exchange rate fluctuations.
Interest Rate Risk
We are exposed to market risk from changes in interest rates on long-term debt obligations. The interest rate environment causes volatility in our variable rate borrowings and affects the value of our fixed rate debt. We manage this risk through the use of a combination of fixed and variable rate debt (See Note 4 Borrowings and Credit Facilities). At October 31, 2008 we were not party to any interest rate derivative contracts.
Commodity Price Risk
For most of fiscal 2008, the increased global demand for certain commodities correlated directly with the risk of higher prices for certain raw materials. As compared to fiscal 2007, the higher consumption levels of steel from emerging markets continued to increase prices we were charged. We currently manage this risk by passing on a portion of these price increases to our customers. At October 31, 2008, we are not party to any commodity forward contracts.
Foreign Currency Risk
Most of our foreign subsidiaries use local currencies as their functional currency. For consolidation purposes, assets and liabilities are translated at month-end exchange rates. Items of income and expense are translated at average exchange rates. Translation gains and losses are not included in determining net income (loss) but are accumulated as a separate component of shareholders equity. Gains (losses) arising from foreign currency transactions are included in determining net income (loss). During fiscal 2008, we realized a gain of $3.3 million arising from foreign currency transactions. Foreign exchange derivatives at October 31, 2008 were in the form of forward exchange contracts executed over the counter. There is a concentration of these contracts held with Bank of America, N.A. which maintains an investment grade rating.
We have a risk-averse Foreign Exchange Risk Management Policy under which significant exposures that impact earnings and cash flows are fully hedged. Exposures that impact only equity or do not have a cash flow impact are generally not hedged with derivatives. We hedge two categories of foreign exchange exposures: assets and liabilities denominated in a foreign currency, which include future committed receipts or payments denominated in a foreign currency and certain U.S. functional currency entity balance sheet accounts denominated in local currencies. These exposures normally arise from imports and exports of goods and from intercompany trade and lending activity.
The fair value of our forward exchange contracts at October 31, 2008 is analyzed in the following table of dollar equivalent terms:
The following tables present our forward exchange contract balances with an aggregate notional amount greater than $5.0 million.