Terex Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Terex manufactures equipment across Aerial Work Platforms (AWP), Construction, Cranes and Materials Processing (MP), with operations exposed to construction, infrastructure and other cyclical end markets. Dollar amounts are in millions except per-share data.
Financial performance and position
- Revenue and margins: Net sales rose 34.2% to $1,256.2. Gross profit increased to $167.2, or 13.3% of sales, from $98.5, or 10.5%. Operating loss narrowed to $9.3 (0.7% of sales) from $66.5 (7.1%).
- Earnings: Continuing-operations income attributable to Terex common stockholders was $5.0, or $0.05 basic and $0.04 diluted per share. Net income attributable to Terex was $11.7, or $0.11 basic and $0.10 diluted per share, including $6.4 of discontinued-operations income and a $0.3 disposal gain. Q1 2010 net income of $539.9 included a $620.4 after-tax gain on the Mining business sale, making headline earnings comparisons misleading.
- Cash flow: Continuing-operations operating cash use was $76.6, versus $84.1 used in Q1 2010. Investing activities provided $152.7, including $166.1 proceeds from asset sales, primarily the Bucyrus stock sale; financing activities used $281.4, including $297.6 of debt repayment. Cash and equivalents decreased $170.5 to $723.7.
- Liquidity and debt: Management reported liquidity of $1,219.0 at quarter-end, comprising cash and available revolving credit; $495.3 was available under the $550 revolving facility, with no revolving borrowings outstanding. Marketable securities were $367.3. Total reported debt was $1,417.1, down from $1,686.3 at year-end 2010. Current liabilities were $1,485.2 and current assets were $3,809.6.
- Working capital: Inventories increased to $1,565.9 from $1,448.7 at year-end; trade receivables rose to $896.6 from $782.5. Management cited working-capital investment as a key use of cash.
Material changes and segment performance
- AWP: Sales rose 74.7% to $376.8; operating income improved to $6.0 from a $20.3 loss, with stronger rental-channel demand, especially in North America.
- Construction: Sales rose 67.7% to $342.9; operating loss narrowed to $3.5 from $22.8. Management expected the segment to return to profitability in Q2.
- Cranes: Sales declined 3.7% to $398.3, and operating loss widened to $22.5 from $3.1. Port-equipment delivery delays, weak large-crawler demand, higher material costs, foreign-exchange losses and a customer insolvency weighed on results.
- MP: Sales rose 40.7% to $152.2; operating income improved to $12.3 from a $0.3 loss.
- Higher production utilization and prior cost reductions supported improvement. Increased input costs, including steel, hydraulics and tires, and about $8 of inventory write-downs and transactional foreign-exchange losses partly offset gains.
- Other income was $51.9, mainly reflecting a $51.6 gain on the sale of approximately 1.8 million Bucyrus shares. Interest expense, net of interest income, fell by $8.7 year over year to $26.1. A $6.3 debt-extinguishment charge followed the January redemption of $297.6 principal of 7⅜% notes.
Outlook, risks and unusual items
- Guidance: Terex maintained its 2011 adjusted EPS outlook of $0.60–$0.75, excluding restructuring and unusual items, and increased its sales range to $5.2–$5.5 billion from $5.0–$5.4 billion. Management expected positive net income and EPS in each remaining quarter. It anticipated AWP improvement, continued Construction progress, solid MP performance and reduced Cranes losses or modest segment profitability.
- Management described improving demand and higher backlogs, but warned that component-cost inflation and availability could pressure margins and production. It expected improved operating cash flow to depend on profitability and inventory reduction, particularly in Cranes.
- Management reported ROIC of negative 0.1%. It said cash was sufficient for operating and debt-service needs, while continuing to consider acquisitions and invest in developing markets and Terex Financial Services.
- Contingencies: Bucyrus sought approximately $149 for a post-sale net-asset adjustment; Terex disputed the claim, sought court relief and recorded no related reduction to the Mining sale gain. The filing says a substantial payment remains possible. A Metso patent verdict was approximately $16, with a motion seeking treble damages of up to approximately $47 plus costs; Terex planned to appeal.
- ERISA, securities and shareholder derivative suits seek unspecified damages; Terex said it could not estimate a loss range. Tax-audit outcomes could materially change unrecognized tax benefits; the company estimated those reserves could decrease by approximately $35 over the next 12 months. Cranes goodwill fair value exceeded carrying value by about 16% at quarter-end, but weaker projected cash flows could prompt future impairment.
- Other exposures include customer credit guarantees with maximum exposure of $196.9, buyback guarantees of $82.3 and residual-value guarantees of $13.3; estimated liabilities for all guarantees were approximately $16. Debt covenants restrict certain actions, and the revolving facility expires in July 2012. Terex also disclosed limits on relying on forward-looking-statement safe-harbor provisions under its SEC settlement.
Important facts for investors to verify
- Whether the sales and backlog recovery converts into sustained profitability and cash generation, especially in Cranes.
- Working-capital trends: receivables, inventory, collection timing and management’s planned inventory reduction.
- Progress on pricing actions versus materials inflation and component availability.
- Resolution and potential financial impact of the Bucyrus net-asset dispute and Metso patent case.
- Use of Bucyrus-share sale proceeds, remaining share exposure, debt-covenant compliance and refinancing plans before the July 2012 facility expiry.
- Realization of 2011 guidance and the effect of tax-audit settlements, guarantee calls and any future Cranes goodwill impairment.