Terex Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless stated otherwise. Terex manufactures equipment across Aerial Work Platforms (AWP), Construction, Cranes, and Materials Processing (MP). The Mining business was sold in February 2010 and is presented as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Net sales | $935.9 million | $965.8 million; down 3.1% reported and approximately 17% excluding favorable currency and the Port Equipment acquisition |
| Gross profit / margin | $98.5 million / 10.5% | $67.1 million / 6.9% |
| Operating loss / margin | $(66.5) million / (7.1)% | $(111.0) million / (11.5)% |
| Continuing-operations loss attributable to Terex common stockholders | $(79.0) million; $(0.73) per share | $(98.5) million; $(1.04) per share |
| Net income attributable to Terex | $539.9 million; $4.98 per share | $(74.9) million; $(0.79) per share |
| Cash used in operating activities, continuing operations | $(106.7) million | $(97.6) million |
| Cash and cash equivalents | $1,796.2 million | $929.5 million at December 31, 2009 |
| Total debt | $1,968.0 million | $1,966.4 million at December 31, 2009; net debt was approximately $171.8 million |
- Q1 net income includes a $620.4 million after-tax gain on the Mining sale; continuing operations remained loss-making.
- Cash from investing activities was $997.8 million, primarily reflecting $1,002.0 million of Mining sale proceeds. Capital expenditures were $8.5 million. Financing activities used $23.0 million.
- At March 31, Terex reported $384.3 million in marketable securities and $499.6 million of available revolving credit. There were no revolving borrowings outstanding. The filing states that $23.3 million of cash was not immediately available for use.
- Interest expense was $35.9 million, versus $23.4 million a year earlier. The company reported a 6.67% weighted-average interest rate on debt and approximately 42% floating-rate debt.
Material changes and segment performance
- Reported sales declined modestly, but the underlying decline was substantially greater after excluding currency effects and the acquired Port Equipment business. Management attributed weak demand to economic uncertainty and cautious customer spending.
- Gross margin improved to 10.5% from 6.9%, and the operating loss narrowed by $44.5 million. Management cited improved factory utilization, lower restructuring and capacity costs, lower inventory charges, and reduced SG&A.
- AWP sales were $215.7 million, down 4.7%; operating loss narrowed to $20.3 million from $39.5 million. Rental-channel demand remained soft.
- Construction sales were $204.5 million, down 13.2%; operating loss narrowed to $22.8 million from $68.1 million. Off-highway truck sales fell more than 60% year over year.
- Cranes sales were $413.7 million, down 6.6% reported; the segment moved to a $3.1 million operating loss from $29.6 million of income. Lower crane demand, restructuring costs, and Port Equipment profitability weighed on results.
- MP sales rose 30.8% to $108.2 million; operating loss narrowed to $0.3 million from $18.0 million. Management cited better demand, lower costs, and fewer inventory and foreign-exchange charges.
Outlook, management commentary, and risks
- Management expected full-year 2010 sales below $5 billion and a loss of approximately $1 per share, excluding restructuring and unusual items. It said it was focused on achieving positive EPS exiting 2010, while describing 2011–2013 as expected strong growth years for the industry. These are forward-looking statements, not assurances.
- Management reported moderately positive order activity in some early-cycle products, higher production schedules, and improving demand in certain developing markets. It expected MP to return to profitability later in 2010 and anticipated improved results in Cranes and AWP.
- Terex was shifting from cash preservation toward selective investment in growth, developing markets, inventory, and internal improvements. If suitable acquisitions did not arise, management expected to repay some debt.
- The Mining sale generated approximately $1.0 billion cash and 5.8 million Bucyrus shares. Terex disputed Bucyrus’s proposed closing net-asset-value adjustment, which it said could require a substantial payment; Terex expected its own revised calculation to require no payment. The shares were subject to a one-year transfer restriction, and Terex spent approximately $21 million on derivatives to hedge part of the share-price exposure; those derivatives had fallen to $13.5 million in value at quarter-end.
- Terex had entered an agreement to sell its Atlas heavy construction equipment and knuckle-boom crane businesses. The German portion closed April 15, 2010; remaining portions were expected to close later in 2010.
- Debt agreements require minimum liquidity of $250 million through June 30, 2011 and restrict certain uses of cash, including acquisitions, dividends, and share repurchases. Management said there were no significant debt maturities until 2013.
- Key risks include continued cyclical and non-residential market weakness, customer access to financing, supplier delivery constraints, possible steel-price increases, foreign-exchange and interest-rate movements, Bucyrus share volatility, debt-covenant compliance, and litigation. The DOJ antitrust investigation remained ongoing; the company said it could not predict the outcome. Securities and ERISA class actions and a stockholder derivative suit were also pending.
- The SEC settlement and court decree temporarily limited Terex’s access to certain securities-law provisions and capital-markets benefits, including WKSI status and the forward-looking-statement safe harbor. Management reported disclosure controls effective at March 31, 2010 and no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether continuing operations improve as expected: Q1 operating losses narrowed, but sales excluding currency and acquisition effects fell approximately 17%.
- The quality and sustainability of reported earnings: Q1’s $539.9 million net income was driven by the Mining-sale gain, while continuing operations lost $79.0 million attributable to common stockholders.
- The Mining-sale closing adjustment dispute, the fair value and eventual disposition of the Bucyrus shares, and the effectiveness and cost of the related derivatives.
- Cash deployment and covenant headroom, including compliance with the $250 million minimum liquidity requirement and the planned balance between reinvestment and debt repayment.
- Execution of the 2010 outlook and restructuring plans, including market demand, production recovery, supplier availability, and the remaining Atlas sale closings.
- Potential financial exposure from customer financing and equipment guarantees, pending litigation, tax audits, and the DOJ investigation.