Komatsu reported in-line quarterly results on Monday, meeting analyst’s expectations. As seen at competitors such as Caterpillar and Joy Global in recent quarters, Komatsu’s mining business suffered in the period, with sales falling 16.5% from a year ago. Although the firm’s construction equipment revenue grew 4.6%, Komatsu’s combined mining and construction equipment segment (92% of quarterly sales) saw revenue fall roughly 3% year over year, as mining was roughly 31% of the segment’s sales. Still, operating margin was roughly flat compared with last year, as favorable exchange rates, positive selling prices, and cost cuts helped to maintain profitability. In all, management maintained its full-year outlook, which calls for 9% top-line growth and improving operating margins as the year progresses.
In the construction and mining segment, weakness in former Soviet countries (down 15.3%) and Southeast Asia (falling 22.4%) more than offset strong gains in the Middle East and Africa (up nearly 40%), Europe (up more than 9%), and Japan and North America (each up roughly 6%). The gain in European sales was the first quarterly year-over-year climb in more than year, and China similarly returned to positive growth (rising 1.8%) following eight straight quarters of year-over-year declines. That said, we note that a sizable portion of these gains stemmed from positive foreign currency translation; total volume declines contributed a negative 16.5% to sales growth versus the first quarter a year ago, with favorable exchange rates providing a mitigating 12.3% positive performance. Nonetheless, we’re encouraged that selling prices were positive, indicating the weakened end markets haven’t yet forced Komatsu to slash prices to gain share.
Analysts expect mining new-equipment deliveries to remain weak for the rest of the year given continued capital spending cuts by customers, but Komatsu still believes parts sales (roughly 40% of the mining business) will climb this year because of continued lofty global mining production levels and recent years of strong equipment deliveries. This revenue stream tends to produce higher margins than original equipment, which should help to buoy profitability even as total revenue declines.
Komatsu’s industrial machinery segment also saw continued revenue declines, falling 4.5% from a year ago. While some pieces of this business enjoyed growth in the quarter (such as wire saws for the solar industry and machine tools for automotive), sheet-metal machinery and large presses saw declines. With this lower sales level, the business generated just a 2% operating margin, and contributed only 1.5% to consolidated operating income. We expect the segment’s contribution to overall income at Komatsu to remain relatively minimal.
The company’s free cash flow improved from a year ago, and we project further gains as the year progresses because of continued decent working capital management and higher net income. In addition, although Komatsu finished the quarter with a higher debt level than at the end of the fiscal year, we expect the firm to reduce this leverage over the next several quarters.
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