Terex Corporation 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the three and nine months ended September 30, 2008. Terex Corporation is a diversified global manufacturer of capital equipment operating in five segments: Aerial Work Platforms, Construction, Cranes, Materials Processing & Mining, and Roadbuilding, Utility Products and Other. The reporting period coincides with a severe global credit crisis, which has significantly impacted demand in the U.S. and Western European markets, particularly for construction and aerial work platforms.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $2,514.6 | $7,813.2 |
| Gross Profit | $446.2 | $1,611.4 |
| Income from Operations | $167.2 | $794.4 |
| Net Income | $93.8 | $493.4 |
| Diluted EPS | $0.96 | $4.89 |
| Cash and Cash Equivalents | $487.9 | $487.9 (Ending Balance) |
| Long-Term Debt | $1,533.2 | $1,533.2 (Ending Balance) |
| Operating Cash Flow (9 Months) | $(35.1) Used |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.5% for the quarter and 19.3% for the nine months compared to 2007. Growth was driven by the Cranes and Materials Processing & Mining segments, acquisitions (ASV and SHM), and favorable foreign currency translation.
- Profitability Decline: Despite revenue growth, Income from Operations decreased 29.2% for the quarter ($167.2M vs. $236.3M) due to volume declines in Aerial Work Platforms and Construction, higher input costs (steel), and a $15.0M charge for a crane repair program. For the nine months, operating income increased 10.1%.
- Segment Performance:
- Cranes & Mining: Strong performance with sales increases of 36.2% and 25.4% respectively for the quarter.
- Aerial Work Platforms: Sales down 8.9% and operating income down 81.0% due to weak demand in North America and Europe.
- Construction: Sales up 4.9% (driven by acquisitions), but operating income turned negative at $(28.4M) due to high input costs and lower production levels.
- Acquisitions: Completed the acquisition of A.S.V., Inc. (ASV) for approximately $457M in February 2008. Announced the acquisition of Fantuzzi Industries (port equipment) for ~€215M, expected to close in Q4 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects 2009 net sales to be similar to 2008 full-year sales. This projection assumes strong results in Cranes and Mining will offset significant declines in Aerial Work Platforms (expected down 30-40%), Materials Processing (down 15-20%), and Construction (down 25-35%) compared to the prior twelve-month period.
- Liquidity Actions: Due to the global credit crisis, Terex has paused its share repurchase program (previously authorized for $1.2B) and slowed capital spending to preserve liquidity. The company maintains $393.3M in available borrowing capacity under its revolving credit facility.
- Cost Reductions: Aggressive actions are underway to reduce costs and inventories, including workforce reductions and temporary facility shutdowns in weaker segments.
- Risks:
- Credit Market Access: Uncertainty regarding the ability of customers to obtain financing and the company's own access to capital markets.
- Goodwill Impairment: The Construction and Roadbuilding reporting units did not meet performance expectations used in prior testing. While no impairment was recorded as of September 30, 2008, management continues to monitor fair values closely.
- Input Costs: Rising steel prices continue to pressure margins, though price increases to customers are partially offsetting these costs.
Investor Verification Checklist
- Inventory Levels: Verify the impact of inventory build-up ($2,449.3M) on future working capital requirements and potential write-downs given slowing demand.
- Goodwill Valuation: Monitor the Construction and Roadbuilding segments for potential future goodwill impairment charges given the downturn in U.S. housing and infrastructure spending.
- Debt Covenants: Confirm continued compliance with the 2006 Credit Agreement covenants (leverage ratio max 3.75:1; fixed charge coverage min 1.25:1) amidst reduced operating income.
- Share Repurchase Status: Track the resumption of the $1.2B share repurchase program, which is currently paused due to market volatility.
- Acquisition Integration: Assess the financial impact and integration progress of the ASV acquisition and the pending Fantuzzi acquisition.