Terex Corporation — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; unaudited interim results. Terex is a global manufacturer of capital equipment operating in Aerial Work Platforms, Construction, Cranes, and Materials Processing & Mining. The company acquired the Port Equipment Business in July 2009 and realigned certain businesses among segments at the start of 2009.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $1,226.1 million | $2,514.6 million | $3,848.9 million | $7,813.2 million |
| Gross profit / margin | $109.6 million / 8.9% | $446.2 million / 17.7% | $382.0 million / 9.9% | $1,611.4 million / 20.6% |
| Operating income (loss) / margin | $(94.5) million / (7.7)% | $167.2 million / 6.6% | $(252.7) million / (6.6)% | $794.4 million / 10.2% |
| Net income (loss) attributable to Terex | $(103.1) million | $93.8 million | $(255.6) million | $493.4 million |
| Diluted EPS | $(0.95) | $0.96 | $(2.54) | $4.89 |
| Operating cash flow | Not provided for the quarter | $(8.1) million | $(32.5) million |
- Year-over-year sales fell 51.2% in Q3 and 50.7% year to date. Management attributed the decline primarily to lower volumes amid weak global demand and constrained customer financing; currency translation also reduced sales.
- Q3 gross margin fell to 8.9% from 17.7%. Lower volume, reduced production and restructuring costs weighed on profitability, partly offset by cost reductions, lower input costs and other cost improvements.
- All four segments had lower Q3 sales and operating results. Aerial Work Platforms lost $50.1 million and Construction lost $59.8 million; Cranes earned $12.1 million and Materials Processing & Mining earned $5.4 million in operating income.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $1,033.2 million, including $17.8 million not immediately available. Current assets were $4,124.2 million and current liabilities were $1,601.7 million.
- Total debt was approximately $2,002.9 million, comprising $90.8 million current debt and $1,912.1 million long-term debt; cash-adjusted debt was approximately $969.7 million. Debt increased from approximately $1,435.8 million at year-end 2008.
- Terex reported $470.7 million available under revolving credit facilities and no revolver borrowings at quarter-end. It said cash, operating cash generation and credit-facility access were expected to provide adequate liquidity, while noting that liquidity and covenant compliance depend on operating performance.
- The amended credit agreement requires at least $250 million of defined liquidity each quarter through June 30, 2011. The company reported a consolidated leverage ratio above 3.75:1 and restrictions on acquisitions, share repurchases, dividends, certain debt redemptions and additional borrowing. The filing also describes a 2.50:1 leverage trigger for specified restrictions through June 2011.
- Debt financing included $300 million of 10⅞% notes and $172.5 million of 4% convertible notes issued in June 2009, as well as $136.5 million of incremental term loans for the Port Equipment acquisition. The convertible notes’ accounting effective interest rate is 11.375%. The company also issued 12.65 million common shares for net proceeds of approximately $156 million.
- Operating cash flow was slightly negative despite approximately $497 million of cash generated from inventory reductions year to date; receivables also provided cash, partly offset by lower accounts payable. Financing activities provided $584.2 million year to date, mainly from debt and equity issuance.
Material changes, outlook and risks
- Management expected full-year 2009 sales to decline approximately 50% versus 2008, including an estimated 5% adverse currency-translation effect. It did not expect Q4 2009 profitability, even excluding ongoing restructuring charges.
- Management described signs of stabilization in some markets, but expected no near-term material demand increase. Year-over-year backlog was down approximately 58%; Aerial Work Platforms and Materials Processing bookings showed some stabilization or improvement from recent low levels.
- The company reported a $265 million quarterly run-rate spending reduction versus Q2 2008 and targeted $300 million by year-end. It had generated approximately $497 million from inventory reduction year to date, close to its $500 million goal.
- Restructuring charges were $59.1 million in the first nine months of 2009; cumulative charges were $76.7 million, with $85.9 million expected in total. Programs included facility moves and closures and reductions of 3,161 employees during the period.
- The Port Equipment acquisition added preliminary goodwill of $86.6 million. A September 2009 interim goodwill test indicated no impairment; the filing notes that the 2008 annual test had resulted in a $459.9 million goodwill impairment charge.
- The SEC investigation was settled in Q3. Terex consented to an injunction without admitting or denying allegations and paid an $8 million civil penalty, recorded in Q2; the settlement resolved matters relating to the company’s potential liability. A separate DOJ grand-jury investigation into U.S. rock-crushing and screening industry pricing practices remained ongoing, with outcome not predictable.
- Other key risks include cyclical demand, customer and supplier credit conditions, access to capital, debt service and covenant compliance, foreign exchange and interest rates, product liability, guarantees and potential tax-audit adjustments. Maximum exposures included $268.0 million of customer credit guarantees, $32.4 million of residual-value guarantees and $148.9 million of buyback guarantees; the recorded aggregate liability for guarantees was approximately $23 million.
Most important facts for investors to verify
- Whether sales, orders and backlog stabilized as management anticipated, and whether the approximately 50% full-year sales decline estimate and Q4 profitability outlook were borne out.
- Whether cost reductions and restructuring deliver sustainable margin improvement, and whether the $300 million quarterly run-rate savings target was achieved.
- Whether liquidity remains above the credit agreement’s $250 million covenant threshold and the company complies with debt restrictions amid operating losses and higher debt.
- Whether working-capital reductions continue without impairing production readiness or customer and supplier relationships; operating cash flow remained negative year to date.
- Whether guarantee, tax, goodwill and litigation exposures change materially, particularly the unresolved DOJ investigation and the Port Equipment acquisition’s preliminary purchase accounting.