Terex Corporation — Q2 2011 Form 10-Q
Business context and reporting period. Terex is a global equipment manufacturer operating in Aerial Work Platforms (AWP), Construction, Cranes and Materials Processing (MP). This filing covers the quarter and six months ended June 30, 2011. Segment results reflect continuing operations; bridge inspection equipment moved from Construction to AWP effective July 1, 2011.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,488.2 million | $1,079.9 million | $2,744.4 million | $2,015.8 million |
| Gross profit / margin | $214.9 million / 14.4% | $154.9 million / 14.3% | $382.1 million / 13.9% | $253.4 million / 12.6% |
| Operating income (loss) / margin | $6.8 million / 0.5% | $(10.4) million / (1.0)% | $(2.5) million / (0.1)% | $(76.9) million / (3.8)% |
| Net income (loss) attributable to Terex | $(0.5) million | $(40.3) million | $11.2 million | $499.6 million |
| EPS attributable to Terex | $0.00 | $(0.37) | $0.10 | $4.60 |
Q2 continuing-operations income attributable to common stockholders was $0.9 million, or $0.01 per diluted share; the reported quarterly net loss also included discontinued-operation and disposition losses. First-half results included $91.6 million of gain on Bucyrus share sales in other income. The 2010 comparison included a large gain on the sale of the Mining business, making reported net income and EPS comparisons unrepresentative of recurring performance.
- Cash flow: Continuing-operations operating cash use was $218.9 million in the first half, versus $240.4 million a year earlier. Investing activities provided $246.6 million and financing activities used $271.6 million. Capital expenditures were $32.8 million.
- Liquidity and debt: June 30 cash was $702.0 million; marketable securities were $254.6 million. Management reported liquidity of $1,197.1 million, including $495.1 million available under the existing revolver. Total debt was $1,426.5 million, or $724.5 million net of cash. Terex repaid $297.6 million principal of its 7⅜% notes in January.
- Segments: Q2 sales rose in AWP to $484.1 million, Construction to $361.3 million and MP to $188.7 million; Cranes sales were $464.1 million. AWP and MP generated operating income of $28.2 million and $21.1 million, respectively. Construction had a $6.8 million operating loss and Cranes a $34.0 million loss.
Material changes and management commentary
Q2 sales increased 37.8% year over year (about 30% excluding currency translation); operating results improved by $17.2 million. First-half sales grew 36.1% reported (about 32% excluding currency). Management attributed stronger sales and gross profit to improving demand, volume and manufacturing utilization, while citing higher input costs, supplier constraints and production inefficiencies as drags on earnings. Cranes performance deteriorated amid unfavorable product mix, material costs, restructuring and inventory write-downs.
Management described the recovery as fragile. It cited strong AWP demand and backlog growth, improving MP demand, and some stronger North American crane demand, offset by soft European cranes markets and weaker Brazilian roadbuilding demand. Supplier deliveries had improved by quarter-end; management expected second-half productivity, utilization and pricing improvements to more than offset remaining input-cost pressure. It expected about $70 million in annualized benefits from Cranes cost actions, with roughly half benefiting 2011.
Outlook, financing and notable items
- Terex lowered full-year 2011 adjusted EPS guidance to $0.40–$0.60 from $0.60–$0.75, while raising sales guidance to $5.4–$5.6 billion from $5.2–$5.5 billion. These are non-GAAP estimates excluding restructuring and other items and exclude Demag.
- Management forecast second-half free cash flow of $350–$400 million, expecting inventory and working-capital reductions, particularly in Cranes. This followed six quarters of approximately $829 million of operating cash use.
- The Demag Cranes acquisition remained subject to European Commission merger clearance. About 82% of shares had been tendered or were already owned as of July 19; Terex expected to pay approximately €800 million, including estimated fees, and expected a third-quarter closing. A new credit facility provided $750 million of term-loan commitments and $500 million of revolving commitments, conditional on the transaction.
- Second-quarter restructuring charges were substantial, including $16.0 million in the Cranes segment for the six-month period and new manufacturing consolidation actions. First-half fixed-asset impairments were $8.9 million.
- The effective tax rate was unusually high: 98.8% in Q2 and 83.5% for the first half, mainly because tax benefits on losses in certain jurisdictions were not recognized.
Risks, contingencies and unusual items
- A Bucyrus post-closing dispute sought approximately $149 million from Terex. Terex disputed the claim and had not accrued it; the filing cautions that an adverse outcome could require a substantial payment. Terex received approximately $239 million in July for its remaining Bucyrus shares after Caterpillar’s acquisition of Bucyrus.
- A jury awarded Metso approximately $16 million in a patent case, with possible additional fees, interest and treble damages. Terex planned to appeal; an injunction prompted redesign of affected screening equipment.
- ERISA, securities and shareholder derivative lawsuits remained pending; Terex said it could not estimate a loss range.
- Debt agreements contain financial and other restrictive covenants. The Demag financing would increase debt materially, and management warned that insufficient cash flow could require reduced spending, asset sales or refinancing. The company also cited cyclical demand, customer financing, foreign exchange, supplier availability and integration risks.
- Management reported effective disclosure controls as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Demag transaction closed, its final purchase price and financing, and subsequent debt and covenant levels.
- Whether second-half free cash flow and working-capital targets were achieved, especially planned Cranes inventory reductions.
- Whether the revised full-year sales and adjusted EPS guidance was met, and how restructuring and other exclusions affected reported earnings.
- Developments in the Bucyrus dispute, Metso appeal and class-action litigation, including any change to recorded reserves or exposure.
- Whether supplier availability, input costs, pricing and productivity improved enough to restore operating margins, particularly in Cranes and Construction.