Terex Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Terex manufactures capital equipment across Aerial Work Platforms, Construction, Cranes, and Materials Processing & Mining. Amounts are in U.S. dollars, millions, except per-share data.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $1,320.2 | $2,935.9 | $2,622.8 | $5,298.6 |
| Gross profit / margin | $127.9 / 9.7% | $651.2 / 22.2% | $272.4 / 10.4% | $1,165.2 / 22.0% |
| Operating income (loss) / margin | $(85.7) / (6.5)% | $370.9 / 12.6% | $(158.2) / (6.0)% | $627.2 / 11.8% |
| Net income (loss) attributable to Terex | $(77.6) | $236.3 | $(152.5) | $399.6 |
| Diluted EPS | $(0.78) | $2.32 | $(1.57) | $3.89 |
- Sales declined 55.0% in Q2 and 50.5% in the first half. Management attributed the declines primarily to sharply lower volumes amid the global recession, with unfavorable currency translation also reducing sales.
- Q2 operating results included lower-volume impacts, restructuring and production-reduction charges, and higher unabsorbed manufacturing overhead. SG&A fell, but not enough to offset lost gross profit.
- Q2 segment sales and operating income (loss): Aerial Work Platforms $209.9 and $(32.8); Construction $219.9 and $(79.7); Cranes $491.0 and $20.0; Materials Processing & Mining $416.6 and $22.8. The Construction and Aerial Work Platforms losses outweighed profits in the other segments.
Cash flow, debt and liquidity
- Six-month operating cash flow was $(36.3), versus $(56.1) in 2008; working capital provided approximately $179 million, but operating losses weighed on cash generation. Investing cash use was $(33.7), mainly capital expenditure of $34.9 million. Financing provided $513.6, including debt and equity proceeds.
- Cash at June 30 was $938.5, up from $484.4 at year-end. Revolver borrowing availability was approximately $485.9; together, cash and availability were about $1.424 billion. Total debt was approximately $1.737 billion, implying net debt of about $798 million.
- In June, Terex issued $300 million of 10.875% senior notes due 2016 and $172.5 million of 4% convertible notes due 2015, and sold 12.65 million common shares at $13 each for about $156 million net proceeds. Proceeds helped repay $58.4 million of term loans and eliminate revolver borrowings at quarter-end. The convertible notes’ accounting treatment produces an effective interest rate of 11.375%.
- A June credit amendment reduced domestic revolver commitments by $150 million, raised interest rates, added collateral, and replaced leverage and fixed-charge coverage tests with a minimum $250 million liquidity requirement through June 30, 2011. Thereafter, a senior secured leverage covenant applies. Terex reported compliance with the liquidity requirement; future covenant compliance depends on cash generation and asset management.
Outlook, risks and unusual items
- Management expected full-year 2009 sales to decline approximately 50% versus 2008, including an estimated 7% currency-translation effect. It expected a challenging second half, little market support through the remainder of 2009 and 2010, and no second-half profitability excluding ongoing restructuring charges.
- Management targeted quarterly manufacturing and SG&A spending reductions of $300 million by year-end versus Q2 2008; reductions had reached $246 million. It expected more than $500 million of cash from inventory reductions by year-end, after approximately $278 million generated in Q2. These are management targets, not guarantees.
- Demand remained weak and backlogs were sharply lower; Aerial Work Platforms, Construction and Materials Processing backlogs were each down more than 65% year over year. Management cited constrained customer credit, delayed or cancelled orders, and depressed construction markets. Most steel costs had returned to 2007 levels, with further input-cost benefits expected in the second half.
- Restructuring programs reduced headcount by approximately 2,074 in the first half; the June 30 restructuring reserve was $45.7 million, expected primarily to be paid in the second half. A $3.3 million debt-extinguishment charge was recorded in Q2. The June interim goodwill test found no impairment, though management continued monitoring; the 2008 annual test had recorded a $459.9 million impairment.
- Terex reserved $8 million for a proposed SEC settlement concerning historical financial-statement restatements and transactions involving United Rentals. The proposed settlement remained subject to SEC and court approval and did not address potential proceedings against individuals. A separate DOJ investigation into pricing practices in the rock-crushing and screening industry remained unresolved.
- On July 23, 2009, after quarter-end, Terex acquired Fantuzzi port-equipment businesses for approximately €155 million. Financing included approximately $66 million borrowed and an additional approximately €48 million expected to be funded after specified bonds were discharged.
- Other material risks include the ability to generate cash and meet debt covenants, customer and supplier credit conditions, receivables-sale facility availability, product and guarantee exposures, foreign exchange, interest rates, and pension asset performance. Credit ratings declined during the quarter: Moody’s B2 with stable outlook and S&P BB- with negative outlook.
Important facts for investors to verify
- Whether the forecast sales decline, cost reductions, and inventory cash-generation targets were achieved, and how operating cash flow developed.
- Available liquidity and covenant headroom under the amended credit agreement, including the effects of the Fantuzzi acquisition and related borrowing.
- Customer credit quality, receivables collection and sale capacity, inventory levels, and exposure to credit, residual-value and buyback guarantees.
- Final approval and terms of the proposed SEC settlement, and developments in the DOJ investigation.
- Segment demand, backlog trends, restructuring payments, and any further goodwill impairment indicators.