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TEX > SEC Filings for TEX > Form 10-Q on 26-Jul-2013All Recent SEC Filings

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Form 10-Q for TEREX CORP


26-Jul-2013

Quarterly Report


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

BUSINESS DESCRIPTION

Terex is a lifting and material handling solutions company. We are focused on operational improvement and delivering reliable, customer-driven solutions for a wide range of commercial applications, including the construction, infrastructure, quarrying, mining, manufacturing, transportation, 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").

The AWP segment designs, manufactures, markets and services aerial work platform equipment, telehandlers, light towers, and bridge inspection 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 and for other commercial operations, as well as in a wide range of infrastructure projects.

The 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.

On March 8, 2013, we closed on our previously announced definitive agreement to divest the Roadbuilding operations in Brazil and assets for our asphalt paver, reclaimer stabilizer and material transfer product lines which are currently manufactured in Oklahoma City. We intend to sell the remaining roadbuilding product lines that we manufacture in Oklahoma City.

The Cranes segment designs, manufactures, markets, services and refurbishes rough terrain cranes, all terrain cranes, truck cranes, tower cranes, lattice boom crawler cranes, lattice boom truck cranes, utility equipment and truck-mounted cranes (boom trucks), as well as their related replacement parts and components. Customers use these products for construction, repair and maintenance of commercial buildings, manufacturing facilities, construction and maintenance of utility and telecommunication lines, tree trimming and certain construction and foundation drilling applications and a wide range of infrastructure projects. The segment also provides service and support for industrial cranes, utility and aerial products in North America.

The MHPS segment designs, manufactures, markets and services 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 carriers, gantry cranes, ship-to-shore cranes, reach stackers, 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 lifting and material handling at manufacturing and port and rail facilities. Effective July 1, 2012, we realigned certain operations to provide a single source for serving port equipment customers. Our reach stacker product line manufactured in France and legacy port equipment business, both formerly part of the Cranes segment, are now consolidated within the MHPS segment.

The MP segment designs, manufactures and markets materials processing equipment, including crushers, washing systems, screens, apron feeders, chippers and related components and replacement parts. Customers use MP products in construction, infrastructure and recycling projects, in various quarrying and mining applications, as well as in landscaping and biomass production industries.

We assist customers in their rental, leasing and acquisition of our products through Terex Financial Services ("TFS"). TFS uses its equipment financing experience to provide financing solutions to our customers.

Subsequent to December 31, 2012, we realigned certain operations in an effort to strengthen our ability to service customers and to recognize certain organizational efficiencies. Our Utilities business, formerly part of our AWP segment, is now consolidated within our Cranes segment. Our Crane America Services business, formerly part of our MHPS segment, and our legacy AWP services business, formerly part of our AWP segment, are now consolidated within our Cranes segment and will be run together as our Terex Services business. The historical results have been reclassified to reflect these changes.


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 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 and other charges that we do not believe are reflective of our ongoing operations.

Working capital is calculated using the Condensed Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories, less Trade accounts payable and Customer Advances. 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 ended 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 how efficiently we use our resources.

Non-GAAP measures we use also include Net Operating Profit After Tax ("NOPAT") as adjusted, income (loss) from operations 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

Overall, our performance in the first half of 2013 was somewhat disappointing. We did not experience the net sales growth we were expecting as the sales environment has softened compared to what we originally anticipated for 2013. The reduced net sales was a primary cause of our income from operations being below our expectations.

The performance among our segments in the first half of 2013 was mixed. 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. Our AWP segment performed well in the first half of 2013 and continued to see strong replacement demand for its products in the North American rental channel as well as early signs of replacement demand in some international markets. We are encouraged by AWP's year-over-year improvement in backlog and expect strong demand for AWP products, particularly in North America, to continue for the remainder of 2013. Our MP segment reported solid results, delivering double digit operating margins. This was a result of good operational execution by this segment in a challenging business environment.


Our MHPS, Cranes and Construction segments all experienced lower revenues in the first half of 2013 than originally anticipated. As a result, we took substantive actions in the second quarter to further adjust the cost structure of these three segments and to align our workforce with the demands of these businesses. The benefits to our stakeholders from these actions are expected to have a meaningful impact on our future results, particularly in 2014 and beyond. See Note J - "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.

Our Cranes segment reported a modest growth in net sales, however backlog was down significantly year-over-year as we have experienced softer global markets than we anticipated, particularly in Europe and Latin America, while Australia remains down as expected. Quoting activity continues to be strong, however, financing and project delays have impacted the timing of order realization.

We still have challenges in our Construction and MHPS segments. Our European based Construction businesses continue to experience weak demand, as the market remains soft globally for dirt and scrap handling equipment. We continue to focus on streamlining our Construction segment as we sold a number of compact construction component manufacturing businesses in Germany during the second quarter. Our Port Solutions business experienced a 26% decline in net sales and our Material Handling business experienced a 13% decline in net sales. Despite this, the backlog for MHPS has increased significantly year-over-year as the existing large port equipment orders are now deliverable in the next 12 months. We expect stronger MHPS performance in the second half of 2013 as we begin to deliver increased revenue from their large backlog. In addition, we believe the restructuring actions we have taken will help return this segment back to profitability.

We generated free cash flow of approximately $175 million in the first half of 2013. As a result of the lower income from operations expected for 2013, resulting from our revised guidance announced in June 2013, we are now expecting to generate over $400 million in free cash flow in 2013.

In May 2013, we retired approximately $220 million of senior bank debt, further executing our plan of deleveraging the Company. In July 2013, we acquired approximately 14% of the shares of Terex Material Handling & Port Solutions AG ("TMHPS AG") for approximately $225 million. As we now own over 95% of the shares of TMHPS AG, we have initiated a squeeze-out process that will lead to us owning 100% of TMHPS AG. These actions are consistent with our plans to simplify our capital structure as this will eliminate the obligation to make guaranteed payments to the minority shareholders and will also remove the financial and administrative burden of maintaining the entity as a German public company. We believe our liquidity after the acquisition of additional shares in TMHPS AG continues to be sufficient to meet our business plans. See "Liquidity and Capital Resources" for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels.
Looking ahead to the second half of 2013, we remain focused on improving profit through continued vigilance on pricing and operating costs. We continue to work towards integrating our businesses more thoroughly and generating consistent free cash flow. The actions we have taken provide us with confidence in the near-term execution of our revised plan. We expect to achieve 2013 earnings per share of between $1.90 and $2.10 (excluding restructuring and unusual items) on net sales of between $7.5 billion and $7.7 billion.

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 our primary operations and, therefore, TFS finance receivable assets and results from operations have been excluded from 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 June 30, 2013 was 5.6%.

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.

                                       Jun '13     Mar '13     Dec '12     Sep '12     Jun '12
Provision for (benefit from) income
taxes                                $    28.1   $    15.3   $    (7.5 ) $     8.8
Divided by: Income (loss) before
income taxes                              47.7        34.6       (36.5 )      37.1
Effective tax rate                        58.9 %      44.2 %      20.5 %      23.7 %
Income (loss) from operations as
adjusted                             $    85.6   $    68.9   $    26.3   $   132.6
Multiplied by: 1 minus Effective tax
rate                                      41.1 %      55.8 %      79.5 %      76.3 %
Adjusted net operating income (loss)
after tax                            $    35.2   $    38.4   $    20.9   $   101.2
Debt (as defined above)              $ 1,870.4   $ 2,082.5   $ 2,098.7   $ 2,063.8   $ 2,402.8
Less: Cash and cash equivalents         (548.2 )    (729.7 )    (678.0 )    (542.6 )    (841.5 )
Debt less Cash and cash equivalents  $ 1,322.2   $ 1,352.8   $ 1,420.7   $ 1,521.2   $ 1,561.3
Total Terex Corporation
stockholders' equity as adjusted     $ 2,042.7   $ 2,053.8   $ 2,103.7   $ 2,149.2   $ 2,089.2
Debt less Cash and cash equivalents
plus Total Terex Corporation
stockholders' equity as adjusted     $ 3,364.9   $ 3,406.6   $ 3,524.4   $ 3,670.4   $ 3,650.5



                       June 30, 2013 ROIC                                     5.6 %
NOPAT as adjusted (last 4 quarters)                              $          195.7
Average Debt less Cash and cash equivalents plus Total Terex
Corporation stockholders' equity as adjusted (5 quarters)        $        3,523.4



                                      Three months    Three months    Three months    Three months
                                      ended 6/30/13   ended 3/31/13  ended 12/31/12   ended 9/30/12
Reconciliation of income (loss) from
operations:
Income (loss) from operations as
reported                             $      85.3            68.4            27.9     $     131.9
(Income) loss from operations for
TFS                                          0.3             0.5            (1.6 )           0.7
Income (loss) from operations as
adjusted                             $      85.6     $      68.9     $      26.3     $     132.6

Reconciliation of Terex Corporation
stockholders' equity:                 As of 6/30/13   As of 3/31/13  As of 12/31/12   As of 9/30/12   As of 6/30/12
Terex Corporation stockholders'
equity as reported                   $   1,955.8     $   1,957.5     $   2,007.7     $   2,054.6     $      1,989.6
TFS Assets                                (139.7 )        (147.5 )        (150.9 )        (142.3 )           (129.9 )
Redeemable noncontrolling interest         226.6           243.8           246.9           236.9              229.5
Terex Corporation stockholders'
equity as adjusted                   $   2,042.7     $   2,053.8     $   2,103.7     $   2,149.2     $      2,089.2


RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Consolidated
                              Three Months Ended June 30,
                              2013                  2012
                                     % of                  % of       % Change In
                                    Sales                 Sales     Reported Amounts
                                ($ amounts in millions)
Net sales              $ 1,908.2       -     $ 2,011.5       -             (5.1 )%
Gross profit           $   356.5    18.7 %   $   428.6    21.3 %          (16.8 )%
SG&A                   $   271.2    14.2 %   $   253.6    12.6 %            6.9  %
Income from operations $    85.3     4.5 %   $   175.0     8.7 %          (51.3 )%

Net sales for the three months ended June 30, 2013 decreased $103.3 million when compared to the same period in 2012. Our AWP segment had significant growth in net sales from continued rental channel replenishment, particularly in North America, and also experienced growth in Latin America and other international markets. Our Cranes segment also experienced net sales growth although at a lower rate. However, the impact of weak demand in European and other markets on our Construction, MHPS and, to a lesser extent, MP segments more than offset those net sales increases.

Gross profit for the three months ended June 30, 2013 decreased $72.1 million when compared to the same period in 2012. Approximately $41 million of restructuring and related charges impacted gross profit in the current year period. The remaining decrease in gross profit was primarily attributable to the reduced overall net sales volume. Our AWP segment's gross profit improved from the prior year period, offset by decreased gross profit in the other four segments.

SG&A costs increased for the three months ended June 30, 2013 by $17.6 million when compared to the same period in 2012. Approximately $24 million of restructuring and related charges affected SG&A costs in the current year period.

Income from operations for the three months ended June 30, 2013 decreased $89.7 million when compared to the same period in 2012. The decrease was primarily due to approximately $65 million of restructuring and related charges as well as the impact of decreased net sales.

Aerial Work Platforms
                             Three Months Ended June 30,
                              2013                 2012
                                     % of                % of       % Change In
                                    Sales               Sales     Reported Amounts
                               ($ amounts in millions)
Net sales              $   606.6       -     $ 516.6       -              17.4 %
Gross profit           $   147.0    24.2 %   $ 121.3    23.5 %            21.2 %
SG&A                   $    45.8     7.6 %   $  43.2     8.4 %             6.0 %
Income from operations $   101.2    16.7 %   $  78.1    15.1 %            29.6 %

Net sales for the AWP segment for the three months ended June 30, 2013 increased $90.0 million when compared to the same period in 2012. Net sales improvement was primarily due to continued replacement demand from the North American rental channel, as well as increased demand arising from the early stages of replacement demand in many international markets.


Gross profit for the three months ended June 30, 2013 increased $25.7 million when compared to the same period in 2012. Increased net sales, improved price realization and the mix of product sales contributed approximately $26 million to the improvement in gross profit.

SG&A costs for the three months ended June 30, 2013 increased $2.6 million when compared to the same period in 2012. Higher selling and marketing costs associated with higher net sales increased SG&A spending by approximately $2 million as compared to the prior year period. Additionally, the allocation of corporate costs was approximately $2 million higher in the current year period.

Income from operations for the three months ended June 30, 2013 increased $23.1 million when compared to the same period in 2012. The increase was due to the items noted above, particularly increased net sales volume and gross profit, partially offset by higher SG&A costs.

Construction
                                    Three Months Ended June 30,
                                     2013                 2012
                                           % of                 % of       % Change In
                                           Sales               Sales     Reported Amounts
                                      ($ amounts in millions)
Net sales                     $ 274.8        -      $ 388.8       -            (29.3 )%
Gross profit                  $  31.1     11.3  %   $  48.7    12.5 %          (36.1 )%
SG&A                          $  36.1     13.1  %   $  39.1    10.1 %           (7.7 )%

Income (loss) from operations $ (5.0 ) (1.8 )% $ 9.6 2.5 % *

* Not meaningful as a percentage

Net sales in the Construction segment for the three months ended June 30, 2013 decreased by $114.0 million when compared to the same period in 2012. Demand for Construction products remained weak, particularly in Europe. Decreased demand for our large trucks, material handlers and compact construction equipment negatively impacted net sales in the current year period.

Gross profit for the three months ended June 30, 2013 decreased $17.6 million when compared to the same period in 2012. The decrease was primarily due to lower net sales for our large trucks, material handlers and compact construction product lines and an unfavorable geographic mix primarily as a result of decreased sales in Europe.

SG&A costs for the three months ended June 30, 2013 decreased $3.0 million when compared to the same period in 2012. Cost reduction activities taken in prior periods are reflected in lower current period SG&A costs. However, approximately $3 million of restructuring and related charges affected SG&A costs in the current year period.

Income (loss) from operations for the three months ended June 30, 2013 declined $14.6 million when compared to the same period in 2012. The loss was primarily due to the impact of lower net sales.


Cranes
                             Three Months Ended June 30,
                              2013                 2012
                                     % of                % of       % Change In
                                    Sales               Sales     Reported Amounts
                               ($ amounts in millions)
Net sales              $   521.2       -     $ 505.1       -              3.2  %
Gross profit           $    84.8    16.3 %   $ 102.9    20.4 %          (17.6 )%
SG&A                   $    61.4    11.8 %   $  53.3    10.6 %           15.2  %
Income from operations $    23.4     4.5 %   $  49.6     9.8 %          (52.8 )%

Net sales for the Cranes segment for the three months ended June 30, 2013 increased by $16.1 million when compared to the same period in 2012. Improved demand for our larger crawler cranes in Europe and the Middle East, truck cranes in North America and all terrain cranes in Asia, contributed to the improvement in net sales. These improvements were partially offset by lower net sales of our mobile cranes in Latin America and Australia.

Gross profit for the three months ended June 30, 2013 decreased by $18.1 million when compared to the same period in 2012. Approximately $15 million of restructuring and related charges impacted gross profit in the current year period. The remaining decrease was primarily due to the mix of product sales with lower margins in the current year period.

SG&A costs for the three months ended June 30, 2013 increased $8.1 million over the same period in 2012. This was primarily due to approximately $4 million of higher selling. marketing and engineering costs in the current year period. Additionally, the allocation of corporate costs was approximately $3 million higher in the current year period.

Income from operations for the three months ended June 30, 2013 decreased $26.2 million when compared to the same period in 2012, resulting primarily from . . .

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