Terex Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Terex manufactures equipment across Aerial Work Platforms (AWP), Construction, Cranes and Materials Processing (MP). The Mining business was sold in February 2010; its results are presented as discontinued operations.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,079.9m | $947.3m | $2,015.8m | $1,913.1m |
| Gross profit / margin | $154.9m / 14.3% | $65.8m / 6.9% | $253.4m / 12.6% | $132.9m / 6.9% |
| Operating loss / margin | $(10.4)m / (1.0)% | $(115.1)m / (12.2)% | $(76.9)m / (3.8)% | $(226.1)m / (11.8)% |
| Loss from continuing operations | $(11.7)m | $(99.2)m | $(89.0)m | $(197.3)m |
| Net income (loss) attributable to Terex | $(40.3)m | $(77.6)m | $499.6m | $(152.5)m |
Q2 diluted EPS was $(0.37), including a $(0.23) per-share loss on discontinued-operation dispositions. First-half EPS was $4.60, largely reflecting a $595.4m after-tax disposition gain; continuing-operations EPS was $(0.85). Q2 net sales rose 14% year over year as reported; management said sales increased about 6% excluding acquisitions. First-half sales rose 5.4% reported but declined about 6% excluding acquisitions and favorable currency translation.
Cash flow and liquidity: Continuing-operations operating cash use was $261.5m in the first half, versus $43.7m used a year earlier, primarily due to working-capital investment. Investing activities provided $987.3m, including $1,002.0m of discontinued-business sale proceeds; capital expenditures were $20.8m. Cash and equivalents were $1,513.6m at June 30, up from $929.5m at year-end; $18.5m was not immediately available. Marketable securities were $276.3m.
Debt: Total reported debt was approximately $1,960.8m ($59.7m current and $1,901.1m long-term), versus $1,966.4m at year-end. Cash less debt was approximately $447.2m. No revolving loans were outstanding; $509.8m was available under revolving facilities. The company reported $171.1m of letters of credit. The credit agreement requires at least $250m of defined liquidity quarterly through June 30, 2011 and includes restrictions on borrowing, acquisitions, dividends and repurchases.
Material changes and segment trends
- Q2 sales and operating results improved substantially year over year, with higher production utilization, prior cost reductions, lower restructuring and inventory charges, and stronger sales in most segments.
- AWP sales rose 11.7% to $232.4m; operating loss narrowed to $2.3m from $32.4m. Demand in North American and European rental channels remained soft but showed selective improvement.
- Construction sales rose 45.5% to $279.0m; operating loss narrowed to $16.8m from $73.4m, supported by compact equipment and material-handler demand.
- Cranes sales fell 5.0% to $449.1m and operating income declined to $17.0m from $25.0m. Excluding currency and acquisitions, sales fell about 21%; commercial construction demand remained weak. Port Equipment performance improved.
- MP sales increased 49.9% to $135.5m; the segment returned to operating profit of $9.2m from a $12.1m loss as dealers resumed ordering closer to end demand.
- Mining sale proceeds included about $1bn cash and 5.8m Bucyrus shares. Terex also sold several smaller businesses and began divesting Atlas; the German portion closed in April, with remaining sales expected later in 2010. These exits reduce portfolio diversification.
Outlook, risks and unusual items
- Management maintained expectations for full-year 2010 operating break-even before interest, restructuring and unusual items, and an approximately $1.00 per-share loss excluding restructuring and unusual items. Revenue guidance was reduced to $4.5–$4.6bn, reflecting the Atlas divestiture and adverse currency effects. Terex aimed to return to EPS profitability in Q4 and described 2011 as a profitable-growth year.
- Management cited improving order activity and production schedules, but expected continued non-residential market softness in North America and Europe. Developing markets—particularly Brazil, China, India and Saudi Arabia—were expected to support growth; about one-third of sales came from developing markets.
- Terex expected cumulative restructuring costs of $102.8m, of which $92.7m had been incurred by June 30. Current restructuring included facility consolidation and workforce reductions.
- A key contingency is Bucyrus’s claim for approximately $149m following its closing net-asset calculation for the Mining sale. Terex disputes the claim; the ultimate outcome and any payment are uncertain.
- Other material exposures include securities and ERISA class actions and a derivative suit, plus a GSA inquiry that could affect eligibility for federal contracts. Terex said it believed the lawsuits lacked merit and did not expect the GSA matter to materially affect consolidated financial position. The DOJ antitrust investigation concluded July 2, 2010 without charges or fines.
- Customer credit guarantees had maximum exposure of $228.8m; buyback guarantees $121.5m; residual-value guarantees $22.6m. The recorded aggregate liability for guarantees was about $20m. Bucyrus-share value remains exposed to market movements despite derivative hedges; the hedge correlation is not assured.
- Interest expense increased: Q2 net interest expense was $33.4m, up $9.0m year over year, chiefly due to higher debt from 2009 financing and the Port Equipment acquisition. A $7m AWP provision for historical foreign-duty and related obligations and gains on Bucyrus-related derivatives also affected results.
Important facts for investors to verify
- Whether operating cash use and working-capital investment improve as production and sales recover.
- Progress against 2010 revenue, break-even operating-profit and Q4 profitability objectives, noting exclusions for restructuring and unusual items.
- Resolution and potential cash impact of Bucyrus’s approximately $149m disputed claim.
- Available liquidity and compliance with credit-facility covenants, including restrictions on use of cash and the 8% notes waiver concerning Mining-sale proceeds.
- Remaining Atlas divestitures, restructuring costs, guarantee exposures and developments in litigation and the GSA matter.