Terex Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise stated. Terex designs, manufactures and services lifting, construction, materials-processing, and material-handling equipment through five reportable segments: AWP, Construction, Cranes, MHPS, and MP.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Net sales | $1,723.1 million | $1,819.4 million; down 5.3% |
| Gross profit and margin | $327.5 million; 19.0% | $330.8 million; 18.2% |
| Operating income and margin | $68.4 million; 4.0% | $63.8 million; 3.5% |
| Net income attributable to Terex | $23.9 million; diluted EPS $0.21 | $23.0 million; diluted EPS $0.20 |
| Cash from continuing operations | $58.8 million | Used $78.5 million |
| Free cash flow (company-defined, non-GAAP) | $134.8 million | Comparable value not provided here |
| Cash and cash equivalents | $729.7 million at March 31 | $678.0 million at December 31, 2012 |
| Total debt | $2,082.5 million | $2,098.7 million at December 31, 2012 |
Operating cash flow improved year over year, primarily because of lower tax payments. Q1 investing cash flow was positive $7.7 million, including $33.0 million of asset-sale proceeds; financing cash flow was positive $0.1 million. Cash increased $51.7 million during the quarter. Current assets were $3,869.7 million and current liabilities $1,799.9 million. Terex reported $455.2 million available under its revolving credit facilities and no revolving borrowings.
Working capital, as defined by Terex, was $1,773.7 million, or 25.7% of trailing three-month annualized sales. The company reported after-tax ROIC of 7.7% using its non-GAAP methodology. Q1 comprehensive loss was $56.6 million, largely reflecting a $78.2 million cumulative foreign-currency translation loss, despite positive net income.
Material changes and segment performance
- AWP: Sales rose 21.3% to $509.1 million; operating income increased to $72.4 million from $39.2 million. Management cited North American rental-channel replacement demand, better pricing, and favorable product mix.
- Construction: Sales fell 22.9% to $279.8 million, and the segment reported a $13.1 million operating loss versus break-even. Weak European demand and lower sales of material handlers, large trucks, and compact equipment were key factors.
- Cranes: Sales increased 3.4% to $470.9 million; operating income rose to $32.5 million from $13.0 million. Pricing, cost reductions, and mix helped, while Europe remained weak.
- MHPS: Sales declined 22.6% to $339.2 million; the segment swung to a $29.1 million operating loss from $0.6 million income. Softer demand, particularly in Europe and India, reduced volume and fixed-cost absorption.
- MP: Sales declined 8.8% to $154.3 million and operating income fell to $11.7 million from $15.3 million, reflecting weakness in minerals markets in Australia and South America and in European construction.
Terex completed the sale of its Brazilian roadbuilding operations and certain Oklahoma City product-line assets on March 8, 2013, and planned to sell remaining Oklahoma City roadbuilding lines. Operations were also realigned among segments, with certain AWP and MHPS activities moved into Cranes; prior-year segment results were reclassified.
Outlook, commentary, risks, and unusual items
- Management maintained its 2013 outlook of net sales of $7.9–$8.3 billion and EPS of $2.40–$2.70 excluding restructuring and unusual items. It expected free cash flow above $500 million and intended to use a portion to reduce debt.
- Management expected AWP demand, particularly in North America, to remain strong; anticipated positive Cranes results for the rest of the year; and cited improving MP backlog. Port Solutions had secured large contracts but faced near-term revenue pressure from long lead times.
- Terex planned further cost actions in Construction and MHPS. It anticipated $30–$50 million of MHPS restructuring or related charges in Q2 2013 and expected similar savings over the following 12–24 months.
- Q1 income included a $3.0 million after-tax gain on the disposition of discontinued operations, related to contractual earnings-based payments for the previously sold Atlas business. The higher effective tax rate—44.2% versus 28.9%—reduced earnings relative to pretax income.
- Material exposures include cyclical demand, customer and supplier financing conditions, foreign exchange and interest-rate movements, debt covenant compliance, and execution of restructuring and divestitures. A 10% currency movement would have changed the period’s reported operating-income translation effect by about $4 million; a 10% increase in average floating rates would have increased quarterly interest expense by about $1 million, based on company sensitivity analyses.
- Litigation includes an appealed Metso patent judgment; Terex posted an approximately $50 million appeal bond, and the ultimate damages remain unresolved. Securities, ERISA, and derivative lawsuits seek unspecified damages that the company says it cannot estimate. Credit, residual-value, and buyback guarantee maximum exposures were $55.3 million, $4.9 million, and $60.3 million, respectively; the recorded aggregate fair-value liability was approximately $6 million.
- Upon demand, Terex may have to acquire remaining outside shares of Demag Cranes AG for up to approximately €174 million; shareholders who do not tender receive guaranteed annual payments. Terex also noted ongoing tax audits and uncertainty around realization of certain deferred tax assets, including in Brazil and the UK.
Important facts for investors to verify
- Whether AWP strength and management’s full-year sales, EPS, and free-cash-flow targets remain achievable as weaker Construction and MHPS markets persist.
- The timing, cash cost, and realized savings from planned MHPS and Construction restructuring, and progress on remaining roadbuilding divestitures.
- Debt levels, covenant headroom, liquidity availability, and the potential cash demands from Demag share tenders and other obligations.
- Developments in the Metso appeal and other litigation, including any change in estimated exposure or required payment.
- Foreign-currency effects, working-capital conversion, and whether the reported Q1 cash generation is sustainable beyond seasonal and asset-sale effects.