Terex Corporation — Q3 2011 Form 10-Q
Business context and period. Terex manufactures equipment for construction, infrastructure, materials processing, cranes, and related markets. This filing covers the quarter and nine months ended September 30, 2011. Results include Demag Cranes AG in the newly reported Material Handling & Port Solutions (MHPS) segment from its August 16 acquisition date.
Financial performance
- Q3 revenue: $1.804 billion, up 67.7% from $1.076 billion a year earlier; excluding foreign exchange and MHPS, management reported growth of approximately 35%.
- Q3 profitability: Gross profit was $275.6 million (15.3% margin, versus 15.2%); operating income was $52.6 million (2.9% margin, versus $3.6 million and 0.3%). Net income attributable to Terex was $36.9 million, or $0.34 basic and $0.33 diluted per share, compared with a $95.8 million loss, or $0.88 per share, in Q3 2010.
- Nine-month results: Revenue was $4.548 billion, up 47.1%; gross profit was $657.7 million (14.5% margin, versus 13.5%); operating income was $50.1 million versus an operating loss of $73.3 million. Terex-attributable net income was $48.1 million, or $0.44 basic and $0.43 diluted per share; 2010 net income of $403.8 million included a substantial gain on the Mining business sale.
- Drivers and segment results: All legacy segments reported higher Q3 sales. AWP operating income was $27.0 million; Construction recorded a $6.4 million operating loss; Cranes earned $25.9 million; MHPS recorded a $2.6 million loss; and Materials Processing earned $12.4 million. MHPS results included $19.3 million of acquisition-date inventory step-up charges.
- Cash flow: Continuing-operations operating cash use was $111.2 million for the first nine months, versus $468.8 million used in 2010. Investing activities used $557.9 million, principally reflecting the Demag acquisition; financing activities provided $455.6 million. Cash declined to $684.9 million from $894.2 million at year-end 2010. Terex reported Q3 free cash flow of $105.8 million using its stated non-GAAP definition.
- Liquidity and debt: Management stated liquidity of $1.204 billion at September 30, including $447.9 million available under Terex’s revolving facilities. Total debt was approximately $2.317 billion, versus approximately $1.686 billion at December 31, 2010. The company had $720.7 million outstanding under its new term loans and no borrowings under its revolving facilities; Demag also had $167.3 million outstanding under its own credit facility.
- Margins, costs, and taxes: Management cited higher input costs, supplier constraints, and manufacturing inefficiencies as pressures, though these eased from Q2. The Q3 effective tax rate was 50.8%; the nine-month rate was 60.1%, reflecting, among other factors, losses not benefiting from tax relief and nondeductible acquisition expenses.
Material changes and unusual items
- Terex acquired approximately 81% of Demag Cranes AG for about $1.1 billion in cash, bringing ownership to approximately 82%. Preliminary purchase accounting included $865.4 million of goodwill; valuations remained provisional. Integration and control are subject to German legal requirements and a planned domination and profit-and-loss transfer agreement.
- Other income included gains from selling Bucyrus shares of $76.2 million in Q3 and $167.8 million for the first nine months. The shares were received in connection with the 2010 Mining business sale; Terex had sold all of them by September 30. Acquisition-related expenses were $14.2 million in Q3 and $16.2 million year to date; the euro-hedging contracts related to the acquisition generated a $16.1 million loss.
- Terex redeemed $297.6 million of 7⅜% notes in January and replaced its prior credit agreement in August. The new agreement added $720.7 million of term loans and provides a $500 million revolving facility, subject to covenants and restrictions.
- Restructuring programs included manufacturing consolidation and workforce reductions, with $24.1 million of charges in the first nine months. Terex expected approximately $70 million in annualized Cranes cost benefits from actions taken and planned, about half expected to benefit 2011.
Outlook, risks, and contingencies
- Guidance: Terex forecast full-year 2011 revenue of $6.3–$6.5 billion, including MHPS. It expected Q4 adjusted EPS of $0.20–$0.25 and full-year adjusted EPS of $0.43–$0.48, excluding specified restructuring, acquisition, Bucyrus-sale, inventory step-up, and other items. These are management non-GAAP outlook measures.
- Management described uneven market recovery, with strength in AWP replacement demand and port equipment, but weakness in some construction truck and mobile crushing markets. It expected continued focus on margin expansion and cash generation, supported by price increases, including AWP increases averaging 4.5% effective January 2012, and cost initiatives.
- Management expected $200–$250 million of free cash flow for the remainder of 2011 and targeted working capital, excluding MHPS, of approximately 27% of sales by year-end. It said Q3 free cash flow was below expectations. Approximately $145 million of Demag cash was restricted to supporting Demag operations pending the planned agreement.
- Debt covenants tighten over time, and the filing warns that reduced earnings or higher debt could threaten compliance. Debt agreements also restrict additional borrowing, acquisitions, dividends, share repurchases, and other actions. Variable-rate debt exposes Terex to rate increases.
- Contingencies: Bucyrus sought approximately $149 million in a pending post-sale net-asset dispute; Terex disputed the claim and had not recorded it in the sale gain. A patent jury verdict against Terex and Powerscreen was approximately $16 million, with possible additional damages and fees; post-trial motions were pending and an injunction led to a redesigned product. Securities, ERISA, and derivative lawsuits remained pending, with losses not estimable. Customer credit, buyback, and residual-value guarantees also create exposure.
- Other risks include cyclical demand, acquisition integration and provisional purchase accounting, supplier availability and commodity costs, foreign exchange, customer financing, and the ability to generate cash and meet restrictive debt covenants. Disclosure controls were deemed effective; acquisition-related changes to internal financial controls were being addressed.
Most important facts for investors to verify
- How much of reported earnings and guidance depends on Bucyrus-sale gains and other excluded or nonrecurring items.
- Demag’s post-acquisition profitability, final purchase-price allocation, integration progress, and the timing and terms of the planned control agreement.
- Operating cash conversion, working-capital reduction, and whether the remainder-of-year free-cash-flow forecast was achieved.
- Debt covenant headroom, refinancing and maturity conditions, availability of liquidity across entities, and exposure to variable interest rates.
- Resolution and potential financial impact of the Bucyrus dispute, patent litigation, and securities-related lawsuits.
- Whether demand, pricing, input costs, and supplier constraints support the stated revenue, adjusted EPS, and margin outlook.