Terex Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are U.S. dollars; financial figures are in millions except per-share data. Terex manufactures equipment across five segments: Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP).
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $2,011.5 | $1,488.2 | $3,830.9 | $2,744.4 |
| Gross profit / margin | $428.6 / 21.3% | $214.9 / 14.4% | $759.4 / 19.8% | $382.1 / 13.9% |
| Operating income (loss) / margin | $175.0 / 8.7% | $6.8 / 0.5% | $238.8 / 6.2% | $(2.5) / (0.1)% |
| Income from continuing operations | $80.5 | $0.2 | $102.1 | $4.4 |
| Net income attributable to Terex | $85.9 | $(0.5) | $108.9 | $11.2 |
| Diluted EPS attributable to Terex | $0.77 | $0.00 | $0.98 | $0.10 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $17.8 | $(218.9) |
- Sales and profit: Q2 sales increased 35.2% as reported; first-half sales increased 39.6%. Excluding MHPS and foreign-exchange effects, management reported sales growth of approximately 16% for both periods. MHPS, acquired in August 2011, makes year-over-year comparisons less like-for-like.
- Profitability: Management attributed the improvement principally to better price realization, higher volumes and production, and cost reductions implemented earlier. First-half operating income also benefited from lower inventory and restructuring charges. Q2 net income included a $2.3 million after-tax gain on the Atlas business disposition; continuing-operations diluted EPS was $0.75.
- Cash flow and liquidity: First-half free cash flow, a company-defined non-GAAP measure, was $238.8 million, versus operating cash flow of $17.8 million. Terex said the gap reflected adjustments including depreciation and amortization, asset-sale proceeds, working capital, customer advances and capital expenditures. Cash was $841.5 million at June 30, including $10.7 million not immediately available. Management reported liquidity of $1,283.1 million, including $441.6 million of revolver availability.
- Debt: Current and long-term debt totaled approximately $2,402.8 million, compared with $2,300.4 million at December 31, 2011; cash-adjusted debt was approximately $1,561.3 million. Terex issued $300 million of 6.5% notes due 2020 and repaid Demag’s €135 million credit facility. No revolving loans were outstanding. The weighted-average rate on the term loans was 5.68%; approximately 52% of total debt was floating-rate.
- Working capital: Receivables were $1,266.7 million, inventory $1,734.8 million and accounts payable $829.8 million at June 30. Working capital was $2,171.7 million, or 27.0% of trailing-three-month annualized sales.
Material changes and segment performance
- All established segments reported higher Q2 sales than a year earlier. Q2 operating income was $83.2 million for AWP, $9.6 million for Construction, $43.5 million for Cranes, $11.8 million for MHPS and $28.6 million for MP. Cranes moved from a $34.0 million operating loss to profit; Construction also returned to profitability.
- AWP and Cranes benefited from North American demand and fleet replacement; Cranes also cited demand in the Middle East, Latin America and Australia. MP remained profitable, but Western European demand was weak. Construction reported softness in material handlers and trucks and losses in Roadbuilding.
- MHPS contributed $361.0 million of Q2 sales and $11.8 million of operating income, but had no comparable 2011 period in Terex’s results because it was acquired in August 2011. Industrial cranes were below expectations; port equipment and services were stronger.
- Effective July 1, 2012, Terex moved its port equipment business from Cranes to MHPS for future segment reporting. Management also cited weaker sequential backlogs in Construction and MP and planned to align production with demand.
- The prior-year comparison included substantial Bucyrus-share sale gains in other income: approximately $52 million in Q2 2011 and $92 million in the first half of 2011. These gains did not recur. Q2 2012 interest expense, net of interest income, rose $19.5 million year over year, primarily due to Demag-related debt.
Outlook, risks and unusual items
- Guidance: Terex forecast full-year 2012 sales of $7.5–$7.8 billion and EPS of $1.95–$2.05, based on approximately 114 million average shares and excluding restructuring and unusual items. The outlook included an estimated $0.05 per share second-half cost for Demag minority-shareholder guaranteed payments.
- Management expected more than $500 million of free cash flow for 2012 and approximately 25% working capital as a percentage of trailing-three-month annualized sales at year-end. It said first-half free cash flow was in line with expectations and Demag integration was progressing faster than anticipated, increasing confidence in achieving 2013 cost-reduction targets.
- Management was cautious about Europe and foreign-exchange headwinds, while expecting strength in AWP, Cranes, North America and select markets to offset some weakness. It cited soft demand in certain product lines and regions as a reason to adjust production.
- Demag obligations: Under the DPLA, eligible outside shareholders may tender shares at €45.52 each, potentially up to approximately €174 million in total; non-tendering shareholders are entitled to annual guaranteed payments. Shareholders have challenged the tender price and payment in German appraisal proceedings. Redeemable noncontrolling interest was $229.5 million at June 30.
- Contingencies: Terex disputes Bucyrus’s approximately $149 million claim concerning the net-asset calculation for the Mining business sale. A New York appellate ruling supported Terex’s interpretation of the agreement, but final resolution remained uncertain. In the Metso patent case, an adverse verdict and judgment had been entered; damages were not final, and Terex had posted an approximately $50 million appeal bond. The company also disclosed securities, ERISA and derivative lawsuits for which it could not estimate a possible loss or range.
- Other risks include cyclical demand, customer and supplier financing conditions, foreign exchange and interest-rate exposure, debt covenant compliance, acquisition integration, and litigation. Terex reported no material change in its previously disclosed risk factors. Disclosure controls were considered effective; integration of Demag systems and a global enterprise-software rollout were affecting internal controls.
- After June 30, Terex reported purchasing approximately 25% of the principal amount outstanding of its 4% convertible notes for about $63 million.
Key facts for investors to verify
- Whether full-year sales, adjusted EPS and free-cash-flow guidance were achieved, and how the company-defined exclusions reconcile to GAAP results.
- How much reported growth and margin improvement came from Demag, pricing, volume, restructuring and other nonrecurring or prior-year comparison effects.
- Cash conversion, working-capital trends, and the amount and accessibility of cash held outside the United States.
- Debt maturities, covenant headroom, floating-rate exposure, and the cash requirements arising from the DPLA and convertible-note purchases.
- Developments and potential financial exposure in the Bucyrus dispute, Metso appeal and shareholder litigation.