Company Outlook

“The outlook for our business has continued to decline over the past quarter,” continued Sutherlin. “Although the U.S. market has progressed in line with our expectations, the deceleration of China demand has deteriorated international markets more quickly and severely than previously expected.”

“The U.S. customers have adjusted quickly to their market conditions. Second quarter production was reduced on an annualized basis to a level in the range estimated to balance the market. We have seen natural gas prices start to move back to more normalized levels, and this has resulted in some switching back to coal. As a result, we see the U.S. coal market at the bottom, with opportunities to recover volume through return of power demand and switching back to coal. However, this will be a slow recovery, and therefore we must adjust to a structural change in the U.S. market. Natural gas will continue to be a competitive fuel, and this will force U.S. coal production into lower cost basins. We expect much of the production cuts in Central Appalachia to be permanent, but replaced by increases in the Illinois and Powder River basins.”

“We are also encouraged to see signs of demand stabilization in China. Although this limits growth until broader economic recovery is realized, it will also limit the downside. IMM was adversely impacted by lower order rates in June and July as domestic stockpiles grew, and we expect this to continue until the Chinese domestic market returns to balance later this year. At that point, we expect IMM to return to growth rates more consistent with those earlier this year. In addition, we expect upside from integration programs focused on technology transfer, operational excellence, and aftermarket development.”

“The deceleration of China is also affecting those regions that are commodity exporters. Some projects no longer make the economic threshold, but most of the impact is to rationalize capital expenditures and to improve project returns though additional engineering and project management review. This results in project slowing, and in some cases, time gaps between the higher potential projects. As a result, we expect to experience greater lumpiness in original equipment bookings going forward. To put this in context, we did not have any major contracts in our second or third quarter bookings, but continue to work several projects that are expected to become bookings in the next few months.”

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