TEREX CORP annual report, FY2012

Terex Corporation — FY 2012 Form 10-K

Reporting period: Year ended December 31, 2012. Terex is a global manufacturer of specialized equipment, reporting in Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP). The filing is an annual report; fourth-quarter figures are included below where relevant.

Financial results and position

Metric	FY 2012	FY 2011
Net sales	$7,348.4 million	$6,504.6 million
Gross profit / gross margin	$1,445.6 million / 19.7%	$960.3 million / 14.8%
Operating income / margin	$398.6 million / 5.4%	$81.2 million / 1.2%
Income from continuing operations	$101.4 million	$34.1 million
Net income attributable to Terex	$105.8 million	$45.2 million
Diluted EPS attributable to Terex	$0.93	$0.41
Cash provided by operations	$292.3 million	$22.7 million
Free cash flow (non-GAAP)	$554.3 million	$168.0 million

• FY 2012 sales increased 13%. Excluding Demag Cranes and foreign-exchange effects, sales rose approximately 3%; Demag added approximately $822 million of reported sales through full-year inclusion.
• Fourth-quarter sales were $1,695.5 million; Terex reported a $33.3 million net loss attributable to the company, compared with a $2.9 million loss in Q4 2011. Q4 operating income was $27.9 million.
• At year-end, cash and cash equivalents were $678.0 million, current assets $3,797.4 million, and current liabilities $1,708.8 million. The current ratio was approximately 2.2x, calculated from reported balances.
• Total debt was $2,098.7 million, down from $2,300.4 million. The company had no revolving-credit borrowings and reported $454.6 million available under its revolving facilities. Approximately 40% of debt was floating rate; weighted-average interest rate was approximately 5.80%.
• Working capital was $1,844.9 million, or 27.2% of trailing-three-month annualized sales. Inventories were $1,715.6 million; trade receivables were $1,077.7 million.

Material changes versus prior periods

• Operating income rose $317.4 million, reflecting better pricing, cost reductions and Demag Cranes’ full-year contribution. Excluding the acquisition and currency effects, gross profit improved by approximately $238 million.
• AWP sales grew 20.3% and operating margin reached 10.8%, supported by North American rental-fleet replacement demand and pricing. Cranes operating income rose to $143.4 million from $25.7 million, despite lower sales. MP operating income increased to $75.3 million from $59.5 million.
• Construction sales fell 13.1%; the segment recorded a $43.6 million operating loss, versus a $18.4 million loss. Weaker compact-equipment demand, reduced infrastructure spending and approximately $31 million of roadbuilding and compact-construction-related charges weighed on results.
• MHPS reported $13.4 million operating income versus a $64.7 million loss in 2011. Comparability is limited because 2011 included only about four and a half months of Demag Cranes results and approximately $41 million of acquisition-related inventory revaluation charges.
• Year-end backlog declined to $2,009.1 million from $2,160.7 million, approximately 7%. AWP backlog was stable; most other segments reported declines.
• Terex issued $300 million of 6.5% notes and $850 million of 6% notes and used proceeds and cash to refinance or repay higher-cost debt, including the $800 million 8% notes and approximately $300 million of 10.875% notes. Early debt extinguishment resulted in an $83.0 million FY 2012 loss.

Outlook, commentary and risks

• Management forecast 2013 net sales of $7.9–$8.3 billion and adjusted EPS of $2.40–$2.70, excluding restructuring and unusual items. It expected more than $500 million in free cash flow, approximately $130 million in capital expenditures, a 36% tax rate and approximately 117 million average shares.
• 2013 segment operating-margin expectations: AWP 11%–14%; Construction 1%–3%; Cranes 10%–12%; MHPS 3%–5%; and MP 11%–13%. Management anticipated stronger AWP demand and pricing, while noting possible further MHPS restructuring charges.
• Management described a $5 EPS, $10 billion sales and 15% ROIC target for 2015 as an internal goal, not guidance. FY 2012 ROIC was 8.0% under the company’s non-GAAP calculation.
• Management cited uneven global markets, particularly softness in Europe and Asia, and expected macroeconomic uncertainty affecting Q4 to ease by mid-2013. It said Demag integration was progressing and expected to exceed the original $35 million annual savings target in 2013.
• After year-end, Terex agreed to divest Brazilian roadbuilding operations and certain Oklahoma City product-line assets, and decided to exit remaining Oklahoma City roadbuilding product lines. It also planned exits or restructuring in certain German compact-construction businesses. Certain utility and service operations were reassigned to Cranes for 2013 reporting.
• Key risks include cyclical demand, dependence on customer financing and infrastructure spending, substantial debt and covenant compliance, cash-flow and refinancing risk, supplier and commodity exposure, foreign-exchange changes, acquisition integration, goodwill and inventory valuation, and product liability, environmental and regulatory matters. Terex reported a $50 million appeal bond in the Metso patent case; an adverse outcome could require a significant payment. Securities, ERISA and derivative lawsuits remained unresolved, with losses not estimable.
• Other notable exposures include $324.0 million of letters of credit, maximum customer credit guarantees of $64.3 million, residual-value guarantees of $5.7 million and buyback guarantees of $73.8 million. The company reported $141.7 million of uncertain income-tax-position liabilities in its contractual-obligations discussion; note disclosures separately report $148.6 million of unrecognized tax benefits.
• Before Demag subsidiaries adopted Terex’s Iran-sales policy in June 2012, a German subsidiary made limited exports of crane components and spare parts to Iranian entities. Terex stated the transactions were permitted when made and that it did not intend future Iran transactions.

Important facts for investors to verify

• Whether 2013 sales, adjusted EPS, free-cash-flow and segment-margin guidance was achieved, and how much depended on market recovery versus pricing and cost actions.
• Actual Demag integration savings and the performance of MHPS, including any additional restructuring costs and the timing of large port-project revenue.
• Cash conversion, working-capital reduction, customer advances and liquidity availability, alongside debt service, floating-rate exposure and covenant headroom.
• Progress and financial effects of the announced roadbuilding divestiture and exits, German compact-construction actions, and the 2013 segment realignments.
• Developments in the Metso appeal and other litigation, Demag minority-shareholder appraisal proceedings and related guaranteed payments, and tax audits or uncertain tax positions.
• The source of reported free cash flow: Terex’s non-GAAP reconciliation includes depreciation and amortization, asset-sale proceeds, working-capital changes, customer advances and capital expenditures.