The Daily Magic Formula Stock for 11/05/2008 is Joy Global Inc. According to the Magic Formula Investing Web Site, the ebit yield is 21% and the EBIT ROIC is 50-75 %.
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Joy Global Inc. (â€śweâ€ť and â€śusâ€ť) 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. We operate in two business segments: underground mining machinery (Joy Mining Machinery or â€śJoyâ€ť) and surface mining equipment (P&H Mining Equipment or â€śP&Hâ€ť). 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 37%, 39%, and 37% of our consolidated sales for fiscal 2007, fiscal 2006, and fiscal 2005, 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 over 120 years ago and were known as Harnischfeger Industries, Inc. (the â€śPredecessor Companyâ€ť) 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 worldâ€™s 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 China, 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); feeder breakers; 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 2007 Developments:
The first armored face conveyor pan line was produced from the Tianjin, China manufacturing facility. In fiscal 2008, all production of the pan lines will be moved from the current manufacturing facility in the United Kingdom to China.
Support and manufacturing capabilities were further strengthened in Eastern Europe with the completion of the 70,000 square foot facility in Poland.
Aftermarket products and services continued to grow in China on increasing installed base of original equipment.
Our fiscal 2007 results were affected by our acquisition of the net assets of the Stamler business in the fourth fiscal quarter of 2006. The addition of Stamler provided complementary products such as feeder breakers, continuous haulage systems, and battery haulers to the Joy business. Stamler had sales offices and warehouse facilities in many of the same locations as Joy and P&H throughout the world.
Products and Services:
Continuous miners â€“ 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 â€“ 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 or more 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 â€“ 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 â€“ Armored face conveyors are used in longwall mining to transport material cut by the shearer away from the longwall face.
Shuttle cars â€“ 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) â€“ FCTâ€™s 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 FCTâ€™s 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 â€“ 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.
Feeder breakers â€“ 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.
Battery haulers â€“ 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 â€“ 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.
Joyâ€™s aftermarket infrastructure quickly and efficiently provides customers with high-quality parts, exchange components, repairs, rebuilds, whole machine exchanges, and services. Joyâ€™s 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. Joyâ€™s business is particularly sensitive to conditions in the coal mining industry, which accounts for substantially all of Joyâ€™s sales. Other drivers of cyclicality include product life cycles, new product introductions, competitive pressures and industry consolidation.
Surface Mining Equipment
P&H is the worldâ€™s 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 MineProÂ® 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 2007 Developments:
The prototype AC electric mining shovel was launched in the Canadian oil sands. All other P&H shovels are currently utilizing DC drives and DC motors. The AC system has been developed to give customers even better reliability and performance than the already proven DC technology. No significant issues were noted as part of the start up, with the machine meeting all pre-determined operational benchmarks.
The â€śC-Seriesâ€ť electronic mining shovels were introduced in major mining operations in Australia, Mexico, Peru, Canada, and the U.S. The P&H C-Series shovels are designed to increase productivity, reliability, and safety performance with the help of several new technology initiatives, primarily the Centurionâ„˘ control system. The Centurion control system coordinates and optimizes multiple systems and subsystems that comprise the overall shovel, which ultimately lead to increased performance, greater control over maintenance costs and increased shovel reliability.
The capabilities of the MinePro Services distribution group were increased at most major mine sites throughout the world and specifically in Australia, Southwest U.S. and the Canadian Oil Sands.
P&H broke ground on a new manufacturing facility in Tianjin, China. This expansion is one step in P&Hâ€™s goal of achieving an additional 25% of electric mining shovel capacity by fiscal 2010.
Products and Services:
Electric mining shovels â€“ 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 â€“ 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&Hâ€™s draglines weigh from 500 to 7,500 tons, with bucket sizes ranging from 30 to 160 cubic yards.
Blasthole drills â€“ 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 8 5/8 to 22 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 â€ślife cycle managementâ€ť refers to our strategy to maximize the productivity of our equipment over the equipmentâ€™s 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 customerâ€™s application of our equipment. Under each life cycle management 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:
â€˘ AmeriCable Incorporated
â€˘ Berkley Forge and Tool Inc.
â€˘ Bridon American Corporation
â€˘ Carbone of America
â€˘ General Electric Industrial Systems
â€˘ Hensley Industries Inc.
â€˘ Hitachi Mining Division
â€˘ Immersive Technologies Pty Ltd.
â€˘ LeTourneau Inc.
â€˘ Lincoln Industrial
â€˘ Phillippi-Hagenbach Inc.
â€˘ Prodinsa Wire Rope
â€˘ Rimex Supply Ltd
â€˘ Terex Materials Processing & Mining
â€˘ Wire Rope Industries Ltd.
For each Alliance Partner, we enter into an agreement that provides us with the right to distribute certain Alliance partnerâ€™s products in specified geographic territories. Specific sales of new equipment are typically based on â€śbuy and resellâ€ť 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 customerâ€™s commitment to purchase. Our aftermarket sales of parts produced by Alliance Partners are generally made under â€śbuy and resellâ€ť arrangements. To support Alliance Partnerâ€™s products in certain geographic regions, we typically hold in inventory Alliance Partner parts.
P&Hâ€™s 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.
Both of our business segments are subject to moderate seasonality, with the first quarter of the 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 â€“ Financial Statements and Supplementary Data and Item 15 â€“ Exhibits and Financial Statement Schedules .
As of October 26, 2007, we employed approximately 9,200 people with approximately 4,300 employed in the United States. Collective bargaining agreements or similar type arrangements cover 36% of our U.S. workforce and 21% of our international employees. Further information relating to our unionized workforce is included in Item 8 â€“ Financial Statements and Supplementary Data , Note 17 â€“ Commitments, Contingencies and Off-Balance Sheet Risks .
Joy and P&H 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 2007.
Steven L. Gerard
Chairman and Chief Executive Officer of CBIZ, Inc., a leading provider of integrated business services and products headquartered in Cleveland, Ohio, since 2000. Mr. Gerard is also a director of Lennar Corporation. He is 62.
John Nils Hanson
Chairman of the corporation. Mr. Hanson was Chairman, President and Chief Executive Officer of the corporation from 2000 to 2006. He has been an officer of the corporation since 1995 and a director since 1996. Mr. Hanson is also a director of Arrow Electronics, Inc. He is 66.
Ken C. Johnsen
Director and Chief Executive Officer of Sweetwater Technologies, a privately owned producer and distributor of water treatment chemicals. Director of Amerityre Corporation, where he served as President from 2006 to 2007. He was a member of the Cox Group, a residential and commercial real estate firm, from 2005 to 2006 and President and Chief Executive Officer of Geneva Steel Holdings Corp. from 2001 to 2005. He is 49.
Gale E. Klappa
Chairman, President and Chief Executive Officer of Wisconsin Energy Corporation, a Milwaukee-based holding company with subsidiaries in utility and non-utility businesses. Prior to joining Wisconsin Energy in 2003, he was executive vice president, chief financial officer and treasurer of Southern Company in Atlanta. He is 57.
Richard B. Loynd
Chairman of the Executive Committee and former Chairman of the Board and Chief Executive Officer of Furniture Brands International, Inc., the largest home furniture manufacturer in the United States. He is 80.
P. Eric Siegert
Managing Director of Houlihan Lokey Howard & Zukin, an international investment banking firm. Mr. Siegert is also a director of Alabama River Group, Inc. He is 42.
Michael W. Sutherlin
President and Chief Executive Officer and a director of the corporation since 2006. He was Executive Vice President of the corporation and President and Chief Operating Officer of Joy Mining Machinery from 2003 to 2006. He is also a director of Tesco Corporation. He is 61.
James H. Tate
Independent consultant. From 2005 to 2006, he was Executive Vice President, Chief Administrative Officer and Chief Financial Officer of TIMCO Aviation Services, Inc. Mr. Tate was an independent consultant from 2004 to 2005 and from 1995 to 2004 he was Senior Vice President and Chief Financial Officer of Thermadyne Holdings Corporation, a manufacturer of welding and cutting equipment. He is 60.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are the direct successor to businesses that have been manufacturing mining equipment for over 120 years. We operate in two business segments: Underground Mining Machinery, comprised of our Joy Mining Machinery business (â€śJoyâ€ť), and Surface Mining Equipment, comprised of our P&H Mining Equipment business (â€śP&Hâ€ť). Joy is the worldâ€™s largest producer of high productivity underground mining equipment used primarily for the extraction of coal. P&H is the worldâ€™s 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.
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 â€śAlliance Partners.â€ť We emphasize our aftermarket products and services as an integral part of lowering our customersâ€™ cost per unit of production and are focused on continuing to grow this part of our business.
Demand for new equipment is cyclical in nature, being driven by commodity prices and other factors. Original equipment sales have ranged from $316.4 million in fiscal 2001 to $947.5 million in fiscal 2007. Our aftermarket business has shown more consistent growth since fiscal 2001 with sales ranging from $799.8 million in 2001 to $1.6 billion in fiscal 2007. Along with record revenues in fiscal 2007, our backlog has also continued to grow. Our backlog of $1.3 billion as of October 28, 2006 increased to $1.6 billion as of October 26, 2007 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. The continued strength and positive long-term outlook of commodity markets, including those for copper, iron ore, oil sands, and international coal, support sustained demand for our original equipment and aftermarket services.
Sustained demand for our equipment and aftermarket services globally has led to further expansion plans in fiscal 2007. Consistent with our plan to expand manufacturing in low-cost regions of the world, the surface mining business broke ground on a facility in Tianjin, China which will expand our proprietary component machining capabilities. The surface mining business also continued to expand its presence and capabilities at mine sites through field service extensions in the southwest region of the United States and in Australia. The underground mining business continues to make significant investments in China, with the newly constructed manufacturing facility in Tianjin producing its first set of armored face conveyor pan lines. The underground business also expanded its manufacturing and service center capabilities with the completion of a facility in Poland.
Fiscal 2007 continues to support a prolonged commodity growth cycle. Global commodities have continued to show strength, and the global economy is looking to maintain 4% to 5% growth, led by China and India with expected growth of 8% to 10%, respectively. International coal, copper, iron ore, and oil sands continue to trade near historical highs and as a result continued investment in new projects is needed to support global demand. The U.S. underground coal market has started to show early signs of recovery, but will continue to be impacted by current and future energy regulations.
Approximately 85% of our sales in fiscal 2007 were recorded at the time of shipment of the product or delivery of the service. The remaining 15% 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 and powered roof support 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 2007 were indicative of the volatility associated with the commodity markets. Net sales for fiscal 2007 totaled $2.5 billion, compared with $2.4 billion in fiscal 2006. The acquisition of Stamler in the beginning of the fourth quarter of fiscal 2006 added $84.3 million in fiscal 2007 and the continued strength of all surface markets added $148.7 million, while U.S. underground activity partially offset this increase by $116 million. Our gross profit margin in fiscal 2007 increased to 32.5% from 31.4% in fiscal 2006 due to the continued strength of commodity markets, a heavier mix of aftermarket products and services and disciplined cost control. Operating income totaled $473 million in fiscal 2007, up $30.9 million from fiscal 2006. The increase in operating income was the result of increased sales related to strong international demand and the inclusion of Stamler in the full year, offset by increased warranty costs of $15.0 million, increased costs of $8.2 million associated with the Stamler acquisition, and costs of $5.9 million associated with our continuing investment in China. Net income was $279.8 million, or $2.51 per diluted share in fiscal 2007 compared with $416.4 million or $3.38 per diluted share in the prior year. Net income in the prior year was benefited from a reversal of certain deferred tax asset valuation allowances of $110 million. Reorganization income also benefited the prior year by $7.0 million related to a settled claim by a former subsidiary.
Results of Operations
2007 Compared with 2006
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. Chinaâ€™s 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 is 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.
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.
Reorganization items include income and expenses that were realized or incurred as a result of our 2001 reorganization under Chapter 11 of the Bankruptcy Code. Fiscal 2007 reorganization related items included the resolution of a contingent payable of $1.5 million partially offset by continuing professional fees related to the reorganization of $0.8 million. Fiscal 2006 reorganization items included $7.0 million of income related to a Beloit claim settlement.
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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Quarter Ended August 1, 2008 to Quarter Ended July 27, 2007.
The increase in net sales for Underground Mining Machinery in the third quarter was the result of a $67.9 million increase in original equipment sales and a $38.0 million increase in the sale of aftermarket products and service. Increased original equipment sales were reported in Eurasia of $45.4 million, the United States of $25.7 million and South Africa of $11.4 million offset by decreased sales in China of $12.0 million. Increased original equipment sales in Eurasia were primarily the result of a roof support system shipped in the quarter while increases in the United States were due to additional shuttle cars, battery cars and a roof support system. Aftermarket sales increases were experienced globally, led by the United States due to the recovery of the United States underground coal market.
The increase in net sales for Surface Mining Equipment in the third quarter was the result of a $37.1 million increase in original equipment sales and a $53.8 million increase in aftermarket products and service. Original equipment sales increased in the United States, Chile and Canada due to the continued growth in global commodity markets offset by decreased sales in Australasia as weather and transportation issues have impacted mine productivity. Aftermarket sales increases were experienced globally, with the exception of Australasia.
The net sales in Crushing & Conveying represented the strength of the conveying systems and aftermarket parts and services in the United States, Australia and United Kingdom.
The eliminations represent the Stamler crushing equipment which is sold through the Underground Mining Machinery segment but managed as part of the Crushing & Conveying segment.
Operating income for Underground Mining Machinery was $87.8 million in the third quarter of 2008, 19.4% of net sales, compared to operating income of $63.6 million in the third quarter of 2007, which was 18.3% of net sales. Operating income increased in the current quarter compared to a year ago as the result of strong sales in the United States, Eurasia and South Africa, partially offset by a slight decline in China. The third quarter of 2008 also included $7.2 million of performance-based compensation expense. The increase of the return on sales percentage in the current quarter to 19.4% was primarily due to product development, selling and administrative cost control initiatives.
Operating income for Surface Mining Equipment was $53.2 million in the third quarter of 2008, 14.5% of net sales, compared to operating income of $53.7 million in the third quarter of 2007, which was 19.5% of net sales. Operating income decreased by $0.5 million in the quarter despite $90.9 million increase in sales due to the foreign currency losses primarily in Chile of $5.4 million, the retiree benefit cost associated with the execution of the Steelworkers agreement in Milwaukee of $5.3 million, increased performance-based compensation expense of $4.5 million and increased product development, selling and administrative expense to support increased global infrastructure. The decrease in operating income as a percentage of sales was driven by the same factors as disclosed above.
Operating income for Crushing & Conveying included $6.9 million of purchase accounting charges.
Corporate expense increased by $2.3 million primarily related to increased legal fees and performance-based compensation expense.
The eliminations represent the Stamler crushing equipment which are sold through the Underground Mining Machinery segment but managed as part of the Crushing & Conveying segment.
Product Development, Selling and Administrative Expense
Product development, selling and administrative expense totaled $113.5 million, or 12.6% of sales, in the third quarter of 2008, as compared to $88.9 million, or 14.3% of sales, in the third quarter of 2007. Increased product development, selling and administrative expense was attributable to $10.8 million related to the Continental acquisition, $4.6 million of performance based compensation expense, $4.1 million of higher selling expenses related to increased business activity and the development of current and emerging markets.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2008 decreased to $15.5 million as compared to $30.3 million in the third quarter of 2007. On a consolidated basis, these income tax provisions represented effective income tax rates for the third quarters of 2008 and 2007 of 12.1% and 29.4%, respectively. On a recurring basis, the main drivers of the variance in tax rates in relation to the U.S. statutory rate of 35% were the geographic mix of earnings with the corresponding differences in foreign statutory tax rates and the utilization of tax credits and tax holidays offset by U.S. State income taxes. Additionally, a discrete net tax benefit of $23.6 million was recorded in the third quarter of 2008 primarily related to U.S. foreign tax credits available for future utilization. In the third quarter of 2007, a discrete net tax benefit of $4.5 million was recorded relating to the true-up of prior yearsâ€™ tax provision and certain U.S. Subpart F inclusions.
A review of income tax valuation reserves was performed as part of the analysis of the third quarter of 2008 and 2007 income tax provisions, respectively, and no material discrete adjustments were warranted for either period. Additionally, tax contingencies reserved under FIN 48 were reviewed and no adjustments were required.
Cash taxes paid for the third quarter of 2008 were $12.2 million, or 9.5% of pre-tax income, compared to $18.8 million, or 18.2% of pre-tax income, in the third quarter of 2007. This decrease in cash taxes paid was primarily due to timing requirements of local tax payments and utilization of tax credits and holidays offset by increased U.S. and international profitability year over year and reduced net operating loss availability.
Sara Leuchter Wilkins - Vice President, Investor Relations and Corporate Communications
Good morning, and welcome everyone. Thank you for participating in today's conference call and for your continued interest in our company.
Joining me on today's call are Mike Sutherlin, President and Chief Executive Officer of Joy Global; Jim Tate, our Chief Financial Officer; Mike Olsen, our Chief Accounting Officer; Sean Major, our General Counsel and Secretary, and Gene Furman [ph], our Corporate Controller.
This morning, Mike Olsen will begin with some brief comments which expand upon our press release, and which provide the results of third quarter of our 2008 fiscal year. Mike Sutherlin will then provide his insights into our operations and our market outlook.
We will then conduct a question-and-answer session and would appreciate it, if you would limit yourself to one question and one follow-up, before going back into the queue. This will allow us to accommodate as many questioners as possible.
During the call today, our executives will be making forward-looking statements. These statements should be considered along with the various risk factors, detailed in our press release, and other SEC filings. We encourage you to read and become familiar with these risk factors. We may also be referring to a number of non-GAAP measures, which we believe are important to understanding our business. For a reconciliation of non-GAAP metrics to GAAP, as well as for other investor information, we refer you to our website at www.joyglobal.com.
Now, I would like to turn the call over to Mike Olsen. Please go ahead, Mike.
Michael S. Olsen - Chief Accounting Officer
Thank you, Sara. Let's take a minute and review some of the highlights from our third quarter results.
After exceeding $1 billion of new orders for the first time in the company's history in the second quarter of 2008, bookings in the third quarter totaled $1.5 billion, an $872 million increase over bookings in the third quarter last year. This increase was a result of a $410 million and a $350 million increase in new orders, for the surface mining equipment business and the underground mining equipments business respectively, combined with a $112 million of bookings for the crushing and conveyor business. This growth represents a 147% increase for the surface mining equipment business, and an 89% increase for the underground mining machinery business.
Orders for new equipment were up over $700 million, while the aftermarket bookings were up $170 million or 40%. The increase in orders for underground mining equipment was led by the continuing recovery in the North American market while the improvement for the surface mining equipment was achieved across most of our global markets.
Backlog at the end of the third quarter was almost $3 billion and was more than $1.3 billion greater than backlog at the beginning of the 2008 fiscal year.
Net sales for the third quarter were $904 million, compared to $622 million in the third quarter last year. Excluding sales from the Continental acquisition of $85 million, net sales increased by 32% over last year. Sales increased by 33% and 30% for the surface equipment and underground equipment businesses, respectively.
At the same time, original equipment shipments were 61% greater than a year ago, as new machine sales have begun to reflect the strength [of original equipment orders for the last several quarters.
Aftermarket sales for the current quarter were 35%, 24% excluding crushing and conveyor sales, greater than they were in the third quarter of 2007. Sales were higher than a year ago in most of the company's markets, led by strength in the U.S. underground market and for surface mining equipment in North and South America.
Operating profit in the current quarter was $134 million or 14.8% of net sales, compared to $110 million or 17.7% of net sales a year ago. The decrease in the return on net sales percentage from a year ago was due to $5.8 million charges for purchase accounting, related to the Continental acquisition, a $5.3 million charge associated with the settlement and extension of a labor agreement at the surface mining equipments main U.S. manufacturing facility, a $5.2 million foreign exchange costs, primarily associated with the valuation of the Chilean peso, and a $12.4 million increase in the company's variable performance-related compensation expense.
Net income for the current quarter was $113 million or $1.03 per share, compared to $73 million or $0.66 per share last year. The current quarter tax rate was only 12% of income before tax.
During the current quarter, we benefited from a discrete tax credit of $23.4 million or $0.22 per share, associated with the recognition of foreign tax credits from previous periods, which now can be recognized as the company's U.S. taxable income exceeds the benefits of its net operating losses.
Working capital at the end of the third quarter, excluding cash, was $588 million compared to $611 million at the end of the 2007 fiscal year. The increase in inventories to support the anticipated increased sales over the next several quarters was offset by additional advance payments from customers, while increase in accounts payable was primarily responsible for the decrease in working capital from the beginning of the year.
Cash flow from operations in the current quarter was $142 million compared to $150 million in the same quarter last year, reflecting the company's continuing ability to generate positive cash flows during all stages of the business cycle.
Now, let me turn the discussion over to Mike Sutherlin.
Michael W. Sutherlin - Chief Executive Officer and President
Thank you, Mike and I'd like to add my welcome to those on the call. We were obviously very pleased with the record level of orders and shipments that we had this quarter. We are gratified that our customers continue to expand their decision of horizons to purchase our equipment and believe they do so because of the high levels of machine reliability we are able to achieve with the strong aftermarket infrastructure and effective life cycle management programs.
As a result, those customers are now placing orders for underground equipment into 2010 and for surface equipment well into 2011. Our strongest order growth rate came from the U.S. underground business, which contributed almost two-thirds of the underground orders booked this quarter.
Order bookings were up well over four-fold on original equipment with record bookings of our continuous miners and shuttle cars. U.S. aftermarket orders were also strong, up 70% from last year. This is partially due to the fact that our U.S. underground business was just starting to recover in last year's third quarter. However, orders this quarter were at record levels and primarily reflect the resurgence in the U.S. market.
We are even more pleased that we have been able to significantly increase our realizable capacity in response to demand. Original equipment shipments were up more than 40% across both Joy and P&H businesses, and aftermarket revenues were up more than 20% before adding in Continental.
Speaking of Continental, they've reported a sequential gain in margins from last quarter and its integration continues to be in line with our expectations.
On our last earnings call, we mentioned contract negotiation on a P&H [ph] reopening with our union in Milwaukee. We are not only able to conclude those negotiations successfully, we are also able to extend the contract through August of 2012. It contributed a portion of the settlement to a defined contribution plan and this is an important step in moving our workforce from defined benefit to defined contribution.
Only last week we announced that we signed a definitive agreement to purchase Wuxi Shengda, a Chinese manufacturer of longwall shearing machines. This is a small company, but one with a strong brand and a significant growth potential. It was also below the size limit for Central Government approval that was therefore doable. We have repeatedly said that we cannot be successful in China by serving only the top few customers. Wuxi Shengda gives us the access to provincial mining companies and significantly expands our market reach in China.
Despite the many things that went well this quarter, profitability was an issue. Some of this was a result of conscious decisions to better enable us to take advantage of future market opportunities. This includes decisions to increase the investment in R&D programs that will lead to significant new revenues streams and decisions to carry a higher cost needed to support the start-up of manufacturing in China.
As anticipated, Continental purchasing accounting was lower this quarter but still significant. However these charges will decline on an... it will decline to an annual run rate of about $6 million for our next fiscal year.
On top of these items, we had a number of costs tied to specific events of the quarter. The union settlement to the defined contribution plan was an important step in the right direction although it required expansion in the current quarter.
Majority of the foreign exchange charges came from Chile and results from our expanding business level in that country impacted by the recent weakening of the peso. This is a transaction-related expense, and we have modified our hedge program to significantly mitigate this going forward.
We believe we're clear of the event-driven charges we have experienced the last couple of quarters and expect the next quarter's profit leverage to return to the 20% plus range.
But before going into guidance, I would like to review our markets since they largely determine the long-term value of this business. When we look at the fundamentals, such as commodity, supply and demand and our customer specific mine expansion plans, we continue to see significant strength in our equipment demand across all geographies and all commodities.
Although there have been recent price corrections in some index-traded commodities, contracts for physical delivery continued to be priced at consistently higher levels. While the Central Appalachia coal index was floating with the $100 level, we saw several of the U.S. customers sign multi-year thermal coal supply contracts at prices in the low triple digits with one customer citing the specific price of $125 a ton.
Across the Pacific, China is experiencing the worst series of power shortages in over four years. The average stockpile levels remained below three days and a recent report indicated that 39 of the county's power generating plants were down due to lack of coal. And this occurred during the industrial low and a build-up to the Olympics.
China has further reduced the amount of export licenses for the remainder of this year to about half of that of the year ago. It has also imposed a 10% duty to further restrict exports. As a result, the Australian spot price jumped almost $8 to $164 a ton. And one of the major diversified miners recently announced plans to double the Australian production by 2015.
The met coal market will remain in significant deficit for several more years and pricing continues to increase as a result. Recent met coal sales to India have touched $400 a ton while the general price remains around $350, both well above the benchmark of $305. Two of our customers recently signed five and ten-year met coal supply contracts to lock in current pricing levels.
Conversely, coal end-users are aggressively investing in their suppliers to provide surety of supply and to hedge against future price increases. The prices being paid are running in the mid $200 a ton range into perpetuity for the suppliers met coal production. This is 2.5 times the price of just a year ago and is higher than most coal analysts have in their long-term models.
All of these economics and commercial moves indicate that both coal producer and end-user expect the market to remain in supply deficit for several more years.
Like met coal, iron ore has not been able to meet the demand for steel, which continues to grow at 5% to 6% a year. Iron ore prices almost doubled this year and are set for another meaningful next year. Despite the strong increase in contract prices, spot prices continue to run 50% or more higher than the benchmark. And as with coal, end-users are investing in new sources to gain surety of supply.
In contrast to other commodities, copper is an index-traded commodity and its price is down to a six-month low. Despite this price weakness, inventories are not down, because production is up 3.5%. Production is suffering from the increasingly normal effects of labor, weather and declining grades. Of relevant is that the current price is still about twice the cost of production in the upper cost quartile and therefore continues to provide very strong economics.
In addition, greenfield copper projects require long lead time to develop and current expansions have based upon the market outlook for 2011 and beyond rather than being driven by current index prices. That's why copper and oil sands are seeing recent declines in their commodity prices but the current oil prices are still multiples above the cost of production. As a result, oil sands investment will reach $20 billion this year, up 20% from last year and double that of just three years ago.
More important to us and validating the market fundamentals, a list of qualified prospects continues to stay at historically high levels, despite, the number of record quarterly bookings. This indicates that our customers continue to add new projects at rate at least equal to this year's exceptionally strong order rates. This longer-term view of the project pipeline is the basis for our belief that equipment demand will remain strong for several more years. It also supports our conviction to continue to increase our capacity to catch up to and keep pace with this market demand.
I would like to conclude my comments by returning to our fiscal 2008 guidance. We have a limited ability increase capacity in the short time remaining this year except for plans that were put into place a year ago or longer and those were previously considered in setting our prior year's... setting our prior guidance.
As I said earlier, we expect our incremental profit leverage to return to the 20% plus range in the fourth quarter. But this must be applied to a somewhat lower base as we blend in the Continental starting margins and as we continue to invest in R&D programs and China manufacturing start-up.
As a result, our operating earnings will remain in the previous guidance range. But EPS is now expected to be higher by the $0.22 favorable tax adjustment we recognized this quarter.
Therefore we continue to expect revenues between $3.3 and $3.4 billion and expect earnings per fully diluted share to now be between $3.37 and $3.52.
With that I would like to open the call to questions.