Terex Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Terex designs, manufactures and services lifting, construction, material-handling and materials-processing equipment across five segments: AWP, Construction, Cranes, MHPS and Materials Processing. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,810.6 | $1,822.0 | $5,441.9 | $5,652.9 |
| Gross profit / margin | $387.1 / 21.4% | $378.6 / 20.8% | $1,071.1 / 19.7% | $1,138.0 / 20.1% |
| Operating income / margin | $140.9 / 7.8% | $131.9 / 7.2% | $294.6 / 5.4% | $370.7 / 6.6% |
| Net income attributable to Terex | $94.4 | $30.2 | $139.6 | $139.1 |
| Diluted EPS | $0.81 | $0.27 | $1.20 | $1.23 |
| Operating cash flow, continuing operations | Not presented for quarter | Not presented for quarter | $163.1 | $138.8 |
- Quarterly comparison: Sales declined 0.6%, while operating income increased 6.8% and operating margin improved 0.6 percentage points. Q3 net income included $5.5 million of discontinued-operations tax benefit and a $0.4 million after-tax disposition loss; continuing-operations income attributable to common stockholders was $89.3 million.
- Nine-month comparison: Sales declined 3.7% and operating income declined 20.5%. Approximately $71 million of restructuring and related charges and lower sales contributed to the operating-income decline. Net income attributable to Terex was broadly unchanged, while diluted EPS decreased.
- Segment trends: Q3 AWP sales rose 21.8% and operating income rose 39.4%, primarily on North American rental-channel demand and better pricing. Cranes sales fell 12.2% and operating income fell 43.9% amid weaker demand and less favorable product mix. Construction sales fell 16.8% and remained loss-making. MHPS sales increased 3.5% and operating income improved modestly; Materials Processing operating income rose 24.3% on manufacturing cost control and product mix. For the first nine months, AWP was the principal growth contributor; Construction and MHPS reported operating losses.
- Cash generation: Company-defined free cash flow was $262.0 million for the first nine months, versus operating cash flow of $163.1 million. Working-capital changes used $134.5 million of cash, including $114.3 million for inventory; capital expenditures were $60.9 million.
Balance sheet, debt and liquidity
- Cash and equivalents were $370.6 million at September 30, down from $678.0 million at December 31, 2012. The balance included $13.6 million not immediately available for use.
- Total debt, including current maturities, was approximately $1.906 billion, down from approximately $2.099 billion at year-end 2012; net debt was approximately $1.535 billion. Terex repaid term loans during the year and reported a $5.2 million early-extinguishment loss.
- Current assets were $3.604 billion and current liabilities were $1.828 billion. Working capital, as defined by Terex, was $1.886 billion, or 26.0% of trailing three-month annualized sales.
- Terex reported $395.7 million available under revolving credit facilities, with €35 million outstanding. The company stated that cash on hand, operating cash generation and available credit were adequate for planned operations and debt service. Credit-facility covenants include a minimum interest-coverage ratio and maximum senior-secured leverage ratio of 2.5 to 1.0.
- Cash declined by $307.4 million during the first nine months. Financing activities used $447.9 million, including $228.1 million to purchase noncontrolling shares in TMHPS AG.
Outlook, developments and risks
- Guidance: Terex raised its 2013 adjusted EPS outlook to $2.05–$2.25, excluding restructuring and unusual items, from $1.90–$2.10. It cited an expected adjusted full-year tax rate of approximately 33%, adding about $0.15 per share; underlying earnings expectations were unchanged, with lower expected sales of $7.3–$7.5 billion. Management expected more than $400 million of full-year free cash flow.
- Management commentary: Management said Q3 results were in line with revised expectations and described the operating environment as mixed and difficult to predict. North America was the most stable market. AWP demand was expected to remain strong through year-end; weakness in non-residential construction and commodity-related markets continued to weigh on Cranes and other businesses. Management cited delayed project conversion in Cranes and expected restructuring actions to benefit results, particularly in 2014 and beyond.
- TMHPS AG transaction: Terex acquired approximately 14% of TMHPS AG for about $228 million in July, taking ownership above 95%. It initiated a squeeze-out process, expected to conclude in late 2013 or the first half of 2014, and anticipated paying approximately $70 million for remaining shares.
- Restructuring and unusual items: Nine-month restructuring charges were $28.1 million in the current programs, and cumulative charges across listed programs were $81.0 million. Actions include workforce reductions and facility consolidation in Construction and MHPS. The company also recorded a $22.9 million Q3 tax benefit from reductions in uncertain tax-position reserves; the nine-month effective tax rate was 33.5%.
- Contingencies and exposures: Terex disclosed unresolved ERISA, securities and derivative lawsuits for which it could not estimate a loss range. Customer credit-guarantee exposure was $54.3 million; maximum buyback-guarantee exposure was $44.8 million and residual-value guarantees were $2.6 million. Letters of credit outstanding totaled $299.3 million. Foreign-exchange contracts had $536.3 million notional value. The filing cites cyclical demand, customer and supplier credit, debt covenants, liquidity, foreign exchange, interest rates, commodities, litigation, product liability and execution of cost reductions as risks. Terex prevailed on appeal in the Powerscreen patent case, reversing a prior $15.8 million jury verdict.
- Management reported effective disclosure controls as of September 30, 2013. An enterprise-software implementation at one business changed certain processes and related financial controls; the company said it reviewed and adjusted affected controls.
Important facts for investors to verify
- Whether the raised EPS and free-cash-flow targets were achieved, and how much reflects operating performance versus tax benefits or other unusual items.
- Whether AWP strength persists and whether weakness in Construction, Cranes and MHPS stabilizes; review segment backlog and margins alongside sales.
- Whether the TMHPS AG squeeze-out was completed near the expected timing and cost, and its effect on cash, debt and guaranteed-payment obligations.
- Whether working capital declines toward management’s approximately 22% year-end target and whether inventory converts to cash as expected.
- Debt-covenant headroom, available revolver capacity, and the potential cash impact of unresolved litigation and guarantee exposures.