TEREX CORP quarterly report, Q1 FY2012

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Terex Corporation — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012. The interim financial statements are unaudited. Terex manufactures equipment for construction, infrastructure, materials processing, cranes, and material handling markets. Results include Demag Cranes AG, acquired in August 2011, as the Material Handling & Port Solutions (MHPS) segment.

Financial performance

  • Revenue: $1.819 billion, up 44.8% year over year; excluding MHPS, sales increased approximately 16%.
  • Profitability: Gross profit was $330.8 million, or 18.2% of sales, versus $167.2 million, or 13.3%. Operating income was $63.8 million (3.5% margin), compared with an operating loss of $9.3 million. Net income attributable to Terex was $23.0 million versus $11.7 million; diluted EPS was $0.20 versus $0.10. Continuing-operations income attributable to Terex was $20.5 million, or $0.18 diluted EPS.
  • Interest and taxes: Interest expense, net of interest income, was $37.9 million, up $11.8 million, primarily due to Demag-related debt. The effective tax rate was 28.9%, compared with 58.8% in Q1 2011.
  • Cash flow: GAAP cash used in continuing operating activities was $78.5 million, compared with $76.6 million used in the prior-year quarter. This included approximately $124 million of tax payments related primarily to the Mining business sale; management said operating cash flow was positive excluding those payments. Company-defined free cash flow was $83.9 million, a non-GAAP measure. Capital expenditures were $19.6 million.
  • Liquidity and working capital: Cash and equivalents were $973.2 million, up from $774.1 million at year-end. Terex reported total liquidity of $1.488 billion, including available credit. Working capital was $2.218 billion, or 30.5% of annualized quarterly sales; inventory was $1.827 billion.
  • Debt: Total current and long-term debt was $2.609 billion, versus $2.300 billion at December 31, 2011. The company issued $300 million of 6.5% notes due 2020 during the quarter. It had $716.9 million outstanding under its term loans and no borrowings on its $500 million revolving facility; $457.3 million was available under that facility.

Material changes and segment results

  • Higher sales and improved operating results reflected stronger demand, particularly in North America, and prior cost-reduction actions. Acquisition inclusion contributed substantially to reported growth.
  • AWP: Sales of $513.4 million, up 35.7%; operating income rose to $42.6 million from $5.7 million. Management cited stronger rental-channel demand and a 51% year-over-year increase in backlog.
  • Construction: Sales increased 6.3% to $363.1 million; operating results reached breakeven from a $3.2 million loss. Roadbuilding remained weak.
  • Cranes: Sales increased 5.3% to $419.4 million; operating income improved to $7.3 million from a $22.5 million loss. A $12.3 million acquisition-related note receivable write-down partly offset improvement.
  • MHPS: Sales were $367.5 million and operating income was $2.9 million; there is no comparable Q1 2011 segment period because Demag was acquired in 2011.
  • Materials Processing: Sales increased 11.2% to $169.2 million and operating income rose 24.4% to $15.3 million.

Outlook, risks, and unusual items

  • Management reaffirmed 2012 targets of sales of $7.5–$8.0 billion, operating profit of $475–$525 million, and adjusted EPS of $1.65–$1.85, based on approximately 116 million average shares and excluding restructuring and unusual items. It also expected approximately $500 million of free cash flow and working capital of about 25% of annualized sales by year-end.
  • Management described North America as strong in most product categories, but remained cautious about mixed European conditions and noted some softening in China. Input costs rose modestly, particularly for tires and engines; management did not anticipate significant input-cost variances during 2012.
  • The Demag domination and profit-transfer agreement became effective April 18, 2012, after quarter-end. Terex may have to buy outside shareholders’ shares for up to approximately €174 million; shareholders retaining shares are entitled to a guaranteed annual dividend. The agreement also gives Demag’s lenders an option to terminate its credit facility, and related borrowings were classified as current.
  • Terex paid approximately $124 million in Mining-sale taxes during the quarter. A post-closing dispute with Bucyrus involves a claimed payment of approximately $149 million; an April 17, 2012 appellate ruling supported Terex’s interpretation of the agreement, but final resolution remained uncertain.
  • A patent case involving Metso resulted in a $15.8 million jury verdict, with additional damages and doubling awarded; the final amount had not been determined. Terex appealed and said current products were not affected by the injunction.
  • Other risks include cyclical demand, customer and supplier financing conditions, foreign-exchange and interest-rate movements, debt covenant compliance, acquisition integration, litigation, and potential losses on customer credit, residual-value, and buyback guarantees. The company reported $86.2 million of maximum credit-guarantee exposure, $11.0 million of residual-value exposure, and $100.3 million of buyback exposure.
  • Management concluded disclosure controls were effective. Internal-control changes related to Demag integration and the continuing enterprise-software implementation were noted.

Important facts for investors to verify

  1. Whether Terex meets its 2012 sales, operating-profit, adjusted-EPS, free-cash-flow, and working-capital targets, and how the company defines its non-GAAP measures.
  2. Whether reported cash generation is sustained after the Mining-sale tax payments and as inventory and other working-capital needs evolve.
  3. The cash, debt, and liquidity consequences of the Demag agreement, including any shareholder share purchases, guaranteed dividends, or termination of Demag’s credit facility.
  4. Progress in segment margins and backlog, particularly the recovery in Cranes, Construction/Roadbuilding performance, and MHPS profitability.
  5. Resolution and potential financial impact of the Bucyrus dispute and Metso patent litigation, as well as compliance with debt covenants.