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TEX > SEC Filings for TEX > Form 10-Q on 29-Oct-2012All Recent SEC Filings

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Form 10-Q for TEREX CORP


29-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

BUSINESS DESCRIPTION

Terex is a diversified global equipment manufacturer of a variety of capital goods machinery products. We are focused on delivering reliable, customer-driven solutions for a wide range of commercial applications, including the construction, infrastructure, quarrying, mining, manufacturing, shipping, transportation, refining, energy and utility industries. We operate in five reportable segments: (i) Aerial Work Platforms ("AWP"); (ii) Construction; (iii) Cranes; (iv) Material Handling & Port Solutions ("MHPS"); and (v) Materials Processing ("MP").

Our AWP segment designs, manufactures, refurbishes, services and markets aerial work platform equipment, telehandlers, light towers, bridge inspection equipment and utility equipment, as well as their related replacement parts and components. Customers use these products to construct and maintain industrial, commercial and residential buildings and facilities, construct and maintain utility and telecommunication lines, trim trees in construction and foundation drilling applications and for other commercial operations, as well as in a wide range of infrastructure projects. Effective July 1, 2011, our bridge inspection equipment business, which was formerly included in the Construction segment, is now included in the AWP segment. The historical results have been reclassified to give effect to this change.

Our Construction segment designs, manufactures and markets heavy and compact construction equipment, roadbuilding equipment, including asphalt and concrete equipment and landfill compactors, as well as their related replacement parts and components. Customers use these products in construction and infrastructure projects, in building roads and bridges, in quarrying and mining operations and for material handling applications.

Our Cranes segment designs, manufactures, services and markets mobile telescopic cranes, tower cranes, lattice boom crawler cranes, lattice boom truck cranes and truck-mounted cranes (boom trucks), as well as their related replacement parts and components. Our Cranes products are used primarily for construction, repair and maintenance of commercial buildings, manufacturing facilities and infrastructure.

Our MHPS segment designs, manufactures, refurbishes, services and markets industrial cranes, including standard cranes, process cranes, rope and chain hoists, electric motors, light crane systems and crane components as well as a diverse portfolio of port and rail equipment including mobile harbor cranes, straddle and sprinter carriers, gantry cranes, ship-to-shore cranes, reach stackers, empty container handlers, full container handlers, general cargo lift trucks, automated stacking cranes, automated guided vehicles and terminal automation technology, including software. The segment operates an extensive global sales and service network. Customers use these products for material handling at manufacturing and port and rail facilities.

The MHPS segment was formed upon the completion of our acquisition of a majority interest in the shares of Demag Cranes AG. See Note H - "Acquisitions." Accordingly, the results of Demag Cranes AG and its subsidiaries ("Demag Cranes") are consolidated within MHPS from its date of acquisition. We acquired the port equipment businesses of Reggiane Cranes and Plants S.p.A. and Noell Crane Holding GmbH (collectively, "Terex Port Equipment" or the "Port Equipment Business") on July 23, 2009. Subsequently, effective July 1, 2012, we realigned certain operations to provide a single source for serving port equipment customers. The Terex Port Equipment Business and our French reach stacker business, both formerly part of our Cranes segment, are now consolidated within our MHPS segment. The results of the Port Equipment Business is included in the MHPS segment from its date of acquisition. As a result, the 2011 performance of this segment reflects approximately one and a half months of operations of Demag Cranes. Accordingly, comparisons between three and nine months ended September 30, 2011 and 2012, respectively must be reviewed in this context.

Our MP segment designs, manufactures and markets materials processing equipment, including crushers, washing systems, screens, apron feeders, chippers and related components and replacement parts. Construction, quarrying, mining, recycling, landscaping and government customers use our MP products in construction, recycling, landscaping and infrastructure projects, as well as various quarrying and mining applications.

We assist customers in renting, leasing and acquiring our products through Terex Financial Services ("TFS"). TFS uses its equipment and financial leasing experience to provide a variety of financing solutions to our customers.


Non-GAAP Measures

In this document, we refer to various GAAP (U.S. generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Non-GAAP measures we use include the translation effect of foreign currency exchange rate changes on net sales, gross profit, Selling, General & Administrative ("SG&A") costs and operating profit, as well as the net sales, gross profit, SG&A costs and operating profit excluding the impact of acquisitions.

As changes in foreign currency exchange rates have a non-operating impact on our financial results, we believe excluding the effect of these changes assists in the assessment of our business results between periods. We calculate the translation effect of foreign currency exchange rate changes by translating the current period results at the rates that the comparable prior periods were translated to isolate the foreign exchange component of the fluctuation from the operational component. Similarly, the impact of changes in our results from acquisitions that were not included in comparable prior periods is subtracted from the absolute change in results to allow for better comparability of results between periods.

We calculate a non-GAAP measure of free cash flow as income from operations plus certain impairments and write downs, depreciation, amortization, proceeds from the sale of assets, plus or minus cash changes in working capital, customer advances and rental/demo equipment and less capital expenditures. We believe that the measure of free cash flow provides management and investors further information on cash generation or use.

We discuss forward looking information related to expected earnings per share ("EPS") excluding restructuring charges and other items. This adjusted EPS is a non-GAAP measure that provides guidance to investors about our expected EPS excluding restructuring or other charges that we do not believe are reflective of our ongoing earnings.

Working capital is calculated using the Condensed Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories, less Trade accounts payable. We view excessive working capital as an inefficient use of resources, and seek to minimize the level of investment without adversely impacting the ongoing operations of the business. Trailing three month annualized net sales is calculated using the net sales for the most recent quarter multiplied by four. The ratio calculated by dividing working capital by trailing three months annualized net sales is a non-GAAP measure that we believe measures our resource use efficiency.

Non-GAAP measures we use also include Net Operating Profit After Tax ("NOPAT") as adjusted, income (loss) before income taxes as adjusted, income (loss) from operations as adjusted, (benefit from) provision for income taxes as adjusted and stockholders' equity as adjusted, which are used in the calculation of our after tax return on invested capital ("ROIC") (collectively the "Non-GAAP Measures"), which are discussed in detail below.

Overview

Our performance for the third quarter of 2012 was in line with our expectations and reflects the continued achievement of our stated goals: margin improvement, cash generation and integration of Demag Cranes AG. Our operating margin improved from approximately 2.9% in the prior year period to 7.2% in the third quarter of 2012. We have accomplished this by maintaining price discipline and containing costs as actions taken in 2011 continue to have a favorable impact on our current results. See Note K - "Restructuring and Other Charges" in our Condensed Consolidated Financial Statements for a detailed description of our restructuring activities, including the reasons, timing and costs associated with such actions.
We generated free cash flow of approximately $176 million in the third quarter of 2012 and approximately $415 million year to date, reflecting excellent progress to our full year goal of over $500 million. In addition, we took several important steps during the third quarter of 2012 to further improve our debt structure and operating results by reducing interest expense through the purchase of approximately 25% of our 4% Convertible Notes and the redemption of our 10-7/8 % Senior Notes. We also amended our 2011 Credit Agreement in October 2012 to, among other things, reduce our interest rates. See Note L - "Long-Term Obligations" in our Condensed Consolidated Financial Statements for further details regarding these actions. We are pleased with the pace of the integration of our Demag Cranes AG acquisition and believe we will meet or exceed our 2013 target cost reduction goals. We are also looking forward to realizing the benefits of realigning our Port Equipment Business into the MHPS segment, which will provide our port and rail customers with a single source of access to our extensive portfolio of world class products.


While we generally achieved the overall performance we expected for the third quarter of 2012, the mix of performance among the segments was varied. Our results match the trends we have observed on a macroeconomic level with the market environment for some of our categories of equipment showing pockets of strength and others showing weakened demand. Accordingly, our AWP, Cranes and MHPS segments achieved favorable results while the results of our Construction and MP segments showed some softening. The continuing strength in many of our markets, combined with our persistent focus on margin improvement, cash generation, and the integration of our MHPS segment, provide us with continued confidence for favorable long term growth and profitability. However, macro events have created some near term softening of demand and uncertainty for our Construction and MP segments.
Our AWP segment continued to see strong replacement demand for its products in the North American rental channel and some evidence of fleet growth. In addition, AWP experienced moderate growth in Europe and Latin America. While we continued to see a strong market for AWP products, seasonal order patterns and, in particular, the timing of order placement by rental companies impacted backlog. In 2011, large recurring fleet orders were received in the third quarter; in 2012, however, we generally did not receive these similar fleet orders until the beginning of the fourth quarter of 2012. This year-over-year seasonal order change was a primary contributor to backlog decline in the third quarter of 2012. Our Cranes segment experienced continued strong demand for most of its products in North America, Australia, South America and the Middle East, while demand in other geographies for most products generally remained stable. In addition, the third quarter of 2012 again represented improved operating performance over the prior year period with an operating margin of approximately 12% versus 6% in the prior year period. Our MHPS segment also showed significant improvement both sequentially and over the prior year period as a result of increased sales of standard and process cranes as well as higher levels of service activity.
Somewhat offsetting these favorable trends were the results of our Construction segment which experienced significantly softer demand in many of its end markets, particularly Western Europe. Globally, demand for material handlers remained weak and the truck and compact construction equipment businesses also experienced lower demand. The negative impacts of these factors was partially mitigated by cost saving initiatives taken in 2011. In addition, we have aggressively moved to match production to the changing demand environment in some of our Construction businesses through reductions in force and temporary production shutdowns which we instituted in the third quarter of 2012. Similarly, our MP segment was negatively impacted by continued softness in Western Europe and India for its mobile screening products. This was partially offset by general strength in the North American and Australian markets and good demand for mobile equipment in Latin America. Despite some softening in end market demand, the segment increased its operating margin over the prior year period from 7.2% to 10.1%. Continuing uncertainty and lower demand has had a negative impact on the backlog for both segments.
Looking to the remainder of 2012, when balancing the different demand environments in each of our businesses and factoring in the benefits of our recent capital structure activities, we now expect full year 2012 sales of approximately $7.5 billion and maintain our earnings guidance for the full year of $1.95 to $2.05 per share (based on an average share count of approximately 114 million shares and excluding the impact of debt repayments, restructuring and unusual items). As we transition into 2013, we expect to see further growth as we generally do not view the near term uncertainty as evidence of a protracted slowdown. We remain focused on our margin and cash improvement as well as the integration of MHPS into our global team. When combined with the approximately $44 million in reduced interest expense associated with our recent debt repayments and re-pricing, we expect 2013 to be a year of moderate revenue growth along with favorable increases in earnings per share and return on invested capital.
ROIC continues to be the unifying metric that we use to measure our operating performance. ROIC and the Non-GAAP Measures assist in showing how effectively we utilize the capital invested in our operations. After-tax ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of the sum of Total Terex Corporation stockholders' equity plus Debt (as defined below) less Cash and cash equivalents for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from continuing operations by a figure equal to one minus the effective tax rate of the Company. We believe that returns on capital deployed in TFS do not represent management of our primary operations and, therefore, TFS finance receivable assets and results from operations have been excluded from the Non-GAAP Measures. Additionally, we do not believe that the realized and deferred gains on marketable securities reflects our operations and, therefore, such gains have been excluded from the calculation of the Non-GAAP Measures. The effective tax rate is equal to the (Provision for) benefit from income taxes divided by Income
(loss) before income taxes for the respective quarter. Total Terex Corporation stockholders' equity is adjusted to include redeemable noncontrolling interest as this item is deemed to be temporary equity and therefore should be included in the denominator of the ROIC ratio. Debt is calculated using the amounts for Notes payable and current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters' NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters' ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital.


Terex management and the Board of Directors use ROIC as one of the primary measures to assess operational performance, including in connection with certain compensation programs. We use ROIC as a unifying metric because we believe that it measures how effectively we invest our capital and provides a better measure to compare ourselves to peer companies to assist in assessing how we drive operational improvement. We believe that ROIC measures return on the amount of capital invested in our primary businesses, excluding TFS, as opposed to another metric such as return on stockholders' equity that only incorporates book equity, and is thus a more accurate and descriptive measure of our performance. We also believe that adding Debt less Cash and cash equivalents to Total stockholders' equity provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC at September 30, 2012 was 7.7%.

The amounts described below are reported in millions of U.S. dollars, except for the effective tax rates. Amounts are as of and for the three months ended for the periods referenced in the tables below.

                                       Sep '12     Jun '12     Mar '12     Dec '11     Sep '11
Provision for (benefit from) income
taxes as adjusted                    $     8.8   $    44.1   $     8.8   $    (6.1 )
Divided by: Income (loss) before
income taxes as adjusted                  37.1       124.6        30.4        (9.5 )
Effective tax rate as adjusted            23.7 %      35.4 %      28.9 %      64.2 %
Income (loss) from operations as
adjusted                             $   132.6   $   175.5   $    64.2   $    30.7
Multiplied by: 1 minus Effective tax
rate as adjusted                          76.3 %      64.6 %      71.1 %      35.8 %
Adjusted net operating income (loss)
after tax                            $   101.2   $   113.4   $    45.6   $    11.0
Debt (as defined above)              $ 2,063.8   $ 2,402.8   $ 2,608.5   $ 2,300.4   $ 2,316.6
Less: Cash and cash equivalents         (542.6 )    (841.5 )    (973.2 )    (774.1 )    (684.9 )
Debt less Cash and cash equivalents  $ 1,521.2   $ 1,561.3   $ 1,635.3   $ 1,526.3   $ 1,631.7
Total Terex Corporation
stockholders' equity as adjusted     $ 2,149.2   $ 2,089.2   $ 1,881.0   $ 1,785.4   $ 1,854.4
Debt less Cash and cash equivalents
plus Total Terex Corporation
stockholders' equity as adjusted     $ 3,670.4   $ 3,650.5   $ 3,516.3   $ 3,311.7   $ 3,486.1



                    September 30, 2012 ROIC                                   7.7 %
NOPAT as adjusted (last 4 quarters)                              $          271.2
Average Debt less Cash and cash equivalents plus Total Terex
Corporation stockholders' equity as adjusted (5 quarters)        $        3,527.0



                                      Three months    Three months    Three months    Three months
                                      ended 9/30/12   ended 6/30/12   ended 3/31/12  ended 12/31/11
Reconciliation of income (loss) from
operations:
Income (loss) from operations as
reported                             $     131.9     $     175.0     $      63.8     $      31.1
(Income) loss from operations for
TFS                                          0.7             0.5             0.4            (0.4 )
Income (loss) from operations as
adjusted                             $     132.6     $     175.5     $      64.2     $      30.7

Reconciliation of Terex Corporation
stockholders' equity:                 As of 9/30/12   As of 6/30/12   As of 3/31/12  As of 12/31/11   As of 9/30/11
Terex Corporation stockholders'
equity as reported                   $   2,054.6     $   1,989.6     $   1,996.7     $   1,910.3     $      1,991.7
TFS Assets                                (142.3 )        (129.9 )        (115.7 )        (124.6 )           (138.0 )
Redeemable noncontrolling interest         236.9           229.5               -               -                  -
Deferred loss (gain) on marketable
securities                                     -               -               -            (0.3 )              0.7
Terex Corporation stockholders'
equity as adjusted                   $   2,149.2     $   2,089.2     $   1,881.0     $   1,785.4     $      1,854.4


RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared with Three Months Ended
September 30, 2011

Consolidated
                              Three Months Ended September 30,
                                 2012                    2011
                                          % of                  % of       % Change In
                                         Sales                 Sales     Reported Amounts
                                  ($ amounts in millions)
Net sales              $   1,822.0          -     $ 1,803.6       -                1.0 %
Gross profit           $     378.6       20.8 %   $   275.6    15.3 %             37.4 %
SG&A                   $     246.7       13.5 %   $   223.0    12.4 %             10.6 %
Income from operations $     131.9        7.2 %   $    52.6     2.9 %            150.8 %

Net sales for the three months ended September 30, 2012 increased $18.4 million when compared to the same period in 2011. Excluding the effect of the addition from Demag Cranes AG in both periods and the negative impact of foreign currency exchange rate changes, net sales decreased approximately 2% from the prior year period. Changes in foreign currency exchange rates negatively impacted net sales by approximately 6%. Three of our pre-existing segments had lower net sales compared to the third quarter of 2011, except for the AWP segment, which had approximately 17% higher net sales in the current year period. Inclusion of the Demag Cranes AG acquisition for a full quarter in the current year period, offset in part by the pre-existing businesses in the MHPS segment, increased net sales by approximately $86 million.

Gross profit for the three months ended September 30, 2012 increased $103.0 million when compared to the same period in 2011. Inclusion of the Demag Cranes AG acquisition for a full quarter in the current year period and improved price realization and product sales mix with higher margins at certain businesses, contributed approximately $85 million to the increase.

SG&A costs increased for the three months ended September 30, 2012 by $23.7 million when compared to the same period in 2011. Inclusion of the Demag Cranes AG acquisition for a full quarter in the current year period increased SG&A costs by approximately $35 million, excluding the impact of foreign currency exchange rate changes. Foreign currency exchange rate changes lowered SG&A costs in the current year period by approximately $16 million.

Income from operations for the three months ended September 30, 2012 increased $79.3 million when compared to the same period in 2011. The increase was primarily due to price realization and a mix of sales with higher margins at certain businesses as well as the inclusion of the Demag Cranes AG acquisition for a full quarter in the current year period.


Aerial Work Platforms
                              Three Months Ended September 30,
                                  2012                     2011
                                             % of                % of       % Change In
                                            Sales               Sales     Reported Amounts
                                   ($ amounts in millions)
Net sales              $    526.1              -     $ 448.7       -               17.2 %
Gross profit           $    111.4           21.2 %   $  73.5    16.4 %             51.6 %
SG&A                   $     52.1            9.9 %   $  46.5    10.4 %             12.0 %
Income from operations $     59.3           11.3 %   $  27.0     6.0 %            119.6 %

Net sales for the AWP segment for the three months ended September 30, 2012 increased $77.4 million when compared to the same period in 2011. Net sales improvement was primarily due to continued replacement demand in the North American rental channel combined with some evidence of fleet growth for aerial work platforms products. Net sales from an acquired business and modest growth in European and Latin American markets also contributed to the increase.

Gross profit for the three months ended September 30, 2012 increased $37.9 million when compared to the same period in 2011. Improved price realization, increased net sales, the mix of product sales and lower manufacturing costs, contributed approximately $37 million to the improvement in gross profit.

SG&A costs for the three months ended September 30, 2012 increased $5.6 million when compared to the same period in 2011. Higher general and administrative costs, including costs for an acquired business not included in the prior year period, increased SG&A spending by approximately $7 million as compared to the prior year period.

Income from operations for the three months ended September 30, 2012 increased $32.3 million when compared to the same period in 2011. The increase was due to the items noted above, particularly improved price realization and increased net sales volume, partially offset by higher SG&A costs.

Construction
                           Three Months Ended September 30,
                              2012                   2011
                                     % of                  % of        % Change In
                                     Sales                 Sales     Reported Amounts
                               ($ amounts in millions)
Net sales            $   290.4         -      $ 395.4        -             (26.6 )%
Gross profit         $    26.0       9.0  %   $  36.2      9.2  %          (28.2 )%
SG&A                 $    34.3      11.8  %   $  42.6     10.8  %          (19.5 )%

Loss from operations $ (8.3 ) (2.9 )% $ (6.4 ) (1.6 )% (29.7 )%

Net sales in the Construction segment for the three months ended September 30, 2012 decreased by $105.0 million when compared to the same period in 2011. Demand for certain of our Construction products have significantly weakened, particularly in Western Europe. Softness for our material handler product line continued and decreased demand for our large trucks and compact construction equipment negatively impacted net sales in the current year period.

Gross profit for the three months ended September 30, 2012 decreased $10.2 million when compared to the same period in 2011. The decrease was primarily due to lower net sales and unfavorable product and geographic mix, partially offset by improved price realization and the favorable impact of prior cost savings activities.

SG&A costs for the three months ended September 30, 2012 decreased $8.3 million when compared to the same period in 2011. Cost reduction activities taken in . . .

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