Terex Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. Terex designs, manufactures, and services lifting and material-handling equipment across five segments: Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP). The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $7,084.0 million | $6,982.2 million |
| Gross profit / margin | $1,439.5 million / 20.3% | $1,400.1 million / 20.1% |
| Operating income / margin | $419.1 million / 5.9% | $366.8 million / 5.3% |
| Income from continuing operations | $203.9 million | $74.8 million |
| Net income attributable to Terex | $226.0 million | $105.8 million |
| Diluted EPS | $1.93 | $0.93 |
| Cash provided by operating activities | $188.5 million | $292.3 million |
- Net sales rose 1.5%; operating income increased 14.3%. Management attributed improved profitability mainly to AWP performance and lower overall SG&A.
- Cash and cash equivalents were $408.1 million at year-end, down from $678.0 million. Total debt was $1,976.7 million, versus $2,098.7 million; $328.1 million was available under revolving credit facilities.
- Current assets were $3,639.4 million and current liabilities were $1,724.7 million. Working capital, as defined by Terex, was $1,798.8 million, or 24.8% of trailing-three-month annualized sales.
- Operating cash flow fell by $103.8 million year over year, primarily reflecting working-capital use. Capital expenditures were $82.8 million in the cash-flow statement; the company’s free-cash-flow reconciliation uses $79.5 million.
- Free cash flow was reported as approximately $376 million under Terex’s 2013 definition. Under the definition it plans to use in 2014—operating cash flow less capital expenditures—2013 free cash flow was approximately $106 million.
Material changes and segment trends
- AWP: Sales increased 22.3% to $2,131.0 million; operating income rose to $325.8 million from $210.9 million. Strong replacement demand, particularly from North American rental customers, supported growth and margin improvement.
- Construction: Sales declined 13.9% to $820.0 million. The segment recorded a $24.8 million operating loss, improved from a $69.3 million loss, reflecting lower costs and charges despite weaker demand.
- Cranes: Sales decreased 3.1% to $1,925.5 million; operating income fell to $110.5 million from $168.0 million amid softer demand, lower-margin sales mix, and restructuring costs.
- MHPS: Sales decreased 2.5% to $1,698.5 million, and the segment recorded a $41.8 million operating loss versus $5.6 million income. Management cited weak markets and restructuring charges, while reporting stronger second-half sales and lower-trending SG&A.
- MP: Sales fell 5.0% to $628.2 million; operating income was $71.8 million versus $75.3 million. Management reported double-digit operating margins despite soft demand.
- Year-end backlog declined to $1,827.7 million from $1,976.1 million. MHPS backlog increased about 40% on port automation programs, while AWP fell about 42% and Cranes about 22%.
- Terex agreed to sell its off-highway truck business to Volvo Construction Equipment for approximately $160 million, subject to approvals and closing conditions, with closing targeted for the first half of 2014. The business is reported as discontinued operations. Terex also divested roadbuilding operations in 2013.
Outlook, risks, and unusual items
- For 2014 continuing operations, management forecast net sales of $7.3–$7.7 billion and adjusted EPS of $2.50–$2.80, excluding restructuring and unusual items. It expected a 33%–35% tax rate and an average share count of approximately 118 million. Management projected more than $250 million of free cash flow using its revised definition.
- Management expected AWP, MHPS, and MP to be the main earnings-growth contributors; Construction and Cranes were expected to improve more slowly. It described North America as the most stable market and cited improving momentum in North America and Europe, tempered by uncertainty in developing markets.
- The company incurred $20.9 million of restructuring charges in 2013; cumulative program costs were $63.1 million. Management cited additional “restructuring and related” charges in segment results. The filing does not equate that broader category with the $20.9 million restructuring-charge total.
- Interest expense, net of interest income, declined to $119.4 million from $155.8 million, helped by debt repayment and lower borrowing costs. The 2013 early-extinguishment loss was $5.2 million, compared with $83.0 million in 2012.
- In July 2013 Terex bought approximately 14% of TMHPS AG for about $228 million; in January 2014 it paid approximately $77 million for the remaining shares and reported 100% ownership. The filing says liquidity remained sufficient after the additional purchase.
- Key risks include cyclical end markets, debt and covenant compliance, cash generation and refinancing, customer financing and receivable collection, integration of MHPS, supplier availability and costs, foreign exchange, litigation and product liability, environmental and emissions requirements, and implementation of the global ERP system. Terex disclosed an SEC injunction arising from a 2009 settlement and pending securities, ERISA, and derivative lawsuits; the company says it believes the suits lack merit.
- Management and the auditor reported effective internal control over financial reporting as of December 31, 2013. The company stated it was in compliance with financial covenants at year-end.
Important facts for investors to verify
- Whether the truck-business sale closed on the stated terms and how proceeds were applied.
- Whether 2014 sales, adjusted EPS, tax-rate, share-count, and free-cash-flow guidance was achieved; note the change in free-cash-flow definition.
- Whether MHPS integration and restructuring deliver the anticipated cost savings and profitability, and whether port-program backlog converts to sales as scheduled.
- Cash conversion and working-capital trends, debt maturities and covenant headroom, and the effect of the January 2014 TMHPS share purchase on liquidity.
- Developments in disclosed litigation, customer guarantees and receivable exposures, and the execution and control risks of the ERP implementation.