Terex Corporation — Q2 2013 Form 10-Q
Business context and reporting period
Terex designs, manufactures and services lifting, construction, crane, material-handling, port and materials-processing equipment. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Results are reported in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,908.2 million | $2,011.5 million | $3,631.3 million | $3,830.9 million |
| Gross profit / margin | $356.5 million / 18.7% | $428.6 million / 21.3% | $684.0 million / 18.8% | $759.4 million / 19.8% |
| Operating income / margin | $85.3 million / 4.5% | $175.0 million / 8.7% | $153.7 million / 4.2% | $238.8 million / 6.2% |
| Net income attributable to Terex | $21.3 million | $85.9 million | $45.2 million | $108.9 million |
| Diluted EPS attributable to Terex | $0.18 | $0.77 | $0.39 | $0.98 |
- Q2 sales declined 5.1% and operating income fell 51.3% year over year. First-half sales declined 5.2% and operating income fell 35.6%.
- First-half operating cash flow was $129.9 million, versus $17.8 million in 2012. Company-defined free cash flow, a non-GAAP measure, was $175.1 million, versus approximately $400 million expected for full-year 2013.
- Cash and equivalents were $548.2 million at June 30, down from $678.0 million at year-end 2012. Total debt was $1,870.4 million, down from $2,098.7 million; reported net debt was $1,322.2 million. The company had no revolving borrowings and reported $447.7 million available under its revolving facilities.
- Current assets were $3,708.6 million and current liabilities $1,839.0 million. Working capital was $1,782.8 million, or 23.4% of trailing-three-month annualized sales.
- First-half cash flow included $41.4 million of capital expenditures and $276.3 million of debt repayments. Cash fell partly due to financing outflows and $18.1 million of adverse exchange-rate effects.
Material changes and segment performance
- AWP was the strongest segment: first-half sales rose 19.1% to $1,115.7 million and operating income rose 48.0% to $173.6 million, supported by North American rental-channel replacement demand.
- Construction first-half sales fell 26.2% to $554.6 million and recorded an $18.1 million operating loss, reflecting weak demand, particularly in Europe.
- Cranes sales increased 3.3% to $992.1 million, but operating income declined 10.7% to $55.9 million. Management cited restructuring costs and softer-than-expected markets.
- MHPS sales declined 19.5% to $709.0 million and the segment recorded an $86.3 million operating loss, versus $11.4 million income a year earlier. Weak demand and restructuring charges were significant factors.
- Materials Processing sales fell 8.0% to $330.6 million and operating income fell 17.5% to $36.2 million, while the segment maintained a 10.9% operating margin.
- First-half results included approximately $71 million of restructuring and related charges. A second-quarter MHPS restructuring is expected to cost $24.7 million and reduce headcount by 299; a Construction program is expected to cost $1.8 million and reduce headcount by 18. The company reported $26.9 million of restructuring charges in the first half.
- Terex repaid approximately $220 million of senior term debt in May and recognized a $5.2 million loss on early debt extinguishment. It completed the divestiture of certain Roadbuilding operations and assets in March.
Outlook, commentary, risks and unusual items
- Management lowered its 2013 free-cash-flow expectation from more than $500 million to more than $400 million. It forecast 2013 net sales of $7.5–$7.7 billion and adjusted EPS of $1.90–$2.10, excluding restructuring and unusual items.
- Management described first-half performance as disappointing, citing softer sales than anticipated. It expected AWP demand to remain strong and MHPS to improve in the second half as large port-equipment orders are delivered. Cranes backlog was down significantly year over year; financing and project delays were affecting order timing.
- In July 2013, after quarter-end, Terex acquired approximately 14% of Terex Material Handling & Port Solutions AG for about $225 million, taking its ownership above 95%, and initiated a squeeze-out process. Management said liquidity remained sufficient after the purchase.
- The Q2 effective tax rate was 58.9% versus 35.4% a year earlier; the first-half rate was 52.7% versus 34.1%. Management attributed the increase mainly to losses that generated no tax benefit and provisions for uncertain tax positions.
- Currency translation contributed to a $69.8 million first-half comprehensive loss, including a $117.1 million cumulative translation adjustment. Foreign-exchange contracts had $539.8 million notional value; management estimated a 10% currency movement would change the period’s reported operating-income translation effect by about $2 million.
- Key exposures include cyclical and regionally weak demand, debt covenant compliance and cash generation, customer and supplier financing, foreign-exchange and interest-rate movements, and potential warranty, product-liability, tax and litigation losses. The filing says the potential loss range for pending ERISA, securities and stockholder derivative lawsuits cannot be estimated. Terex prevailed on appeal in May 2013 in the Powerscreen patent case, reversing a prior $15.8 million jury verdict.
- Management reported effective disclosure controls as of June 30, 2013 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the full-year sales, adjusted EPS and free-cash-flow outlook was achieved, and how exclusions from adjusted EPS and free cash flow reconcile to GAAP results.
- Whether MHPS restructuring and the expected second-half delivery of port orders restored segment profitability, and whether Cranes backlog recovered.
- Cash availability after the July TMHPS AG share purchase and the cost and timing of completing the squeeze-out.
- Debt covenant headroom, future debt maturities, and the company’s ability to sustain cash generation while funding working capital needs.
- Whether elevated tax rates, uncertain tax positions, litigation, guarantees or other contingencies resulted in material cash costs or reserve changes.