Terex Corporation — Q3 2012 Form 10-Q
Business context and reporting period. Terex is a global manufacturer of equipment for construction, infrastructure, material handling, ports, and related markets. This unaudited filing covers the quarter and nine months ended September 30, 2012. Results include Demag Cranes AG, acquired in August 2011; year-over-year MHPS comparisons are therefore affected by the acquisition. Terex reports five segments: AWP, Construction, Cranes, MHPS, and Materials Processing.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,822.0 million | $1,803.6 million | $5,652.9 million | $4,548.0 million |
| Gross profit / margin | $378.6 million / 20.8% | $275.6 million / 15.3% | $1,138.0 million / 20.1% | $657.7 million / 14.5% |
| Operating income / margin | $131.9 million / 7.2% | $52.6 million / 2.9% | $370.7 million / 6.6% | $50.1 million / 1.1% |
| Net income attributable to Terex | $30.2 million | $36.9 million | $139.1 million | $48.1 million |
| Diluted EPS attributable to Terex | $0.27 | $0.33 | $1.23 | $0.43 |
| Operating cash flow | Nine months: $138.8 million | Prior-year nine months: $(107.6) million |
Q3 revenue increased 1.0%; nine-month revenue increased 24.3%. Management said nine-month sales excluding Demag and currency effects rose approximately 10%. Operating profit and gross margin improved substantially, reflecting stronger pricing, product mix, prior cost reductions, and Demag’s contribution. Q3 Terex-attributable net income declined despite stronger operating income, largely because of debt-retirement charges and the absence of the prior-year Bucyrus share-sale gain.
Cash generation and liquidity: Management’s non-GAAP free cash flow was $176.0 million in Q3 and $414.8 million year to date. Cash and equivalents were $542.6 million at September 30, down from $774.1 million at year-end 2011. Current assets were $3,795.2 million and current liabilities $1,759.8 million. The company reported $440.4 million available under its $500 million revolving facilities and no revolver borrowings.
Debt: Balance-sheet debt totaled approximately $2,063.8 million, versus $2,300.4 million at December 31, 2011; net debt was approximately $1,521.2 million. During Q3 Terex redeemed $299.9 million principal of 10⅞% notes, paying $347.3 million including premium and accrued interest, and repurchased about 25% of its 4% convertible notes for approximately $64 million. The resulting nine-month loss on early debt extinguishment was $52.3 million. An October 2012 credit agreement amendment reduced term-loan spreads and eased certain covenants.
Segment and period changes
- AWP: Q3 sales rose 17.2% to $526.1 million; operating income increased to $59.3 million from $27.0 million, supported by North American rental-channel replacement demand, pricing, and lower manufacturing costs.
- Construction: Q3 sales fell 26.6% to $290.4 million and the operating loss widened to $8.3 million. Demand weakened particularly in Western Europe; material handlers, large trucks, and compact equipment were soft.
- Cranes: Q3 sales declined 5.4% to $394.6 million, partly due to currency translation; operating income rose to $47.6 million from $25.1 million, helped by pricing, mix, and cost actions.
- MHPS: Q3 sales were $470.8 million and operating income was $19.9 million, versus an operating loss of $1.8 million a year earlier. Comparability is affected by a full quarter of Demag in 2012 versus only about six weeks in the 2011 comparison quarter.
- Materials Processing: Q3 sales declined 12.4% to $149.9 million, while operating income rose to $15.2 million from $12.4 million. Western Europe and India were weak; North America and Australia provided offsets.
Effective July 1, 2012, Terex moved certain port-equipment and French reach-stacker operations from Cranes into MHPS. Nine-month performance also benefited from including Demag for a full period, unlike 2011.
Outlook, commentary, and risks
- Terex maintained full-year 2012 adjusted EPS guidance of $1.95–$2.05, based on approximately 114 million average shares and excluding debt repayments, restructuring, and unusual items; it expected full-year sales of approximately $7.5 billion.
- Management continued to target more than $500 million of 2012 free cash flow. It expected moderate revenue growth in 2013 with favorable EPS and ROIC improvement, and estimated approximately $44 million of reduced interest expense from recent debt repayments and repricing.
- Management said Q3 results were in line with expectations, cited continued Demag integration progress, and expected to meet or exceed its 2013 cost-reduction targets. It noted near-term demand uncertainty, especially in Construction and Materials Processing, while expressing confidence in longer-term growth and profitability.
- Key exposures include cyclical demand, foreign exchange and interest rates, customer and supplier credit, working-capital needs, covenant compliance, and the ability to generate cash and service debt. A 10% currency movement was estimated to change the period’s currency-translation impact on operating income by about $3 million; a 10% increase in floating rates would have increased nine-month interest expense by about $4 million.
- Contingencies include securities, ERISA, and derivative lawsuits for which Terex could not estimate a loss range; a Metso patent judgment and injunction under appeal, backed by an approximately $50 million bond; and the Bucyrus sale-price dispute, with Bucyrus revising its requested amount to approximately $23 million. Demag minority shareholders are also pursuing German appraisal proceedings concerning tender price and guaranteed payments.
- Terex reported effective disclosure controls at quarter-end. It noted continuing work to enhance financial controls following the Demag acquisition and related systems and accounting integration.
Investor verification points
- Separate organic operating improvement from Demag acquisition effects, foreign-exchange impacts, and segment realignment when assessing growth and margins.
- Reconcile the $414.8 million non-GAAP free-cash-flow measure to GAAP operating and investing cash flows, including working-capital movements and asset-sale proceeds.
- Assess the cash, earnings, and covenant implications of debt redemptions, the credit amendment, remaining maturities, and Demag minority-shareholder obligations.
- Track whether demand weakness in Construction and Materials Processing spreads, and whether AWP, Cranes, and MHPS sustain their margin gains.
- Monitor the Bucyrus dispute, Metso appeal, shareholder litigation, tax uncertainties, and Demag appraisal proceedings for changes in exposure.