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TEX > SEC Filings for TEX > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for TEREX CORP


25-Oct-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, 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.

In 2013, we divested our Roadbuilding operations in Brazil and most of our Roadbuilding operations 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 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.

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 these 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 are run together as our Terex Services North America 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 third quarter of 2013 was in line with our revised expectations provided in the second quarter, but with a lower tax rate. Through the first nine months of 2013, the Company's global operating environment has been mixed overall and difficult to predict. Our operating margins have remained consistent. However, we expected 2013 to be a year of significant sales growth, and this has not occurred. Our businesses that have a significant portion of products dependent on non-residential construction have not recovered as quickly as we had expected. Businesses that are less dependent on non-residential construction are seeing improving business conditions and we are encouraged by the recovery in these businesses.

We are seeing strength in early-cycle product categories where demand is mostly replacement driven. Our AWP segment continued to perform well in the third quarter of 2013, with improved net sales year-over-year, and continued strong orders for its products in the North American rental channel and, to a lesser extent in Latin American markets. We 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.

Although our Cranes segment remains profitable, it has not seen the net sales growth we were expecting and reported a decline in net sales in the third quarter on a year-over-year basis. In addition, backlog was down significantly year-over-year as we have experienced lower demand for our Cranes products in most geographies. These declines are primarily connected to the delayed recovery of non-residential construction activities and declines in commodity related demand. Our quoting activity continues to be strong, however, conversion of these opportunities into sales is slow as related projects are often delayed. We have announced previous restructuring plans in this segment and expect to further align our businesses with the lower demand that we are currently experiencing.

Our Construction businesses remain challenged. Net sales in our Construction segment declined year-over-year and we have continued to streamline this business by selling certain underperforming product lines during the year. Our European-based Construction businesses continue to experience weak demand, as the market remains soft globally for dirt and scrap handling equipment.


We expected improved performance from our MHPS segment this quarter and we have seen positive developments that are encouraging for this segment. Net sales and income from operations were up slightly year-over-year and the segment performed significantly better in the third quarter of 2013 than it did in the first half of 2013. Importantly, SG&A costs are trending downward, primarily due to actions taken to reduce our cost structure, as well as the focus on continued integration of these businesses. Backlog for the MHPS segment is up significantly year-over-year due to the major automation programs in Port Solutions scheduled to ship in the next twelve months, but slightly down sequentially. Although the Material Handling business continues to be under pressure, we expect this to stabilize in the coming months.

We took substantive actions in 2013 to adjust the cost structure in our Cranes, Construction and MHPS segments 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.

Geographically, North America remains the most stable market overall. Europe has seen slight improvements in certain products, mostly in our AWP segment, and the Middle East continues to provide growth. However, overall weakness in Europe and Australia have offset the growth we have seen in other markets.

We have generated free cash flow of approximately $262 million year-to-date in 2013. We are expecting to generate over $400 million in free cash flow for the full year 2013.

In July 2013, we acquired approximately 14% of the shares of Terex Material Handling & Port Solutions AG ("TMHPS AG") for approximately $228 million. As we now own over 95% of the shares of TMHPS AG, we have initiated a squeeze-out process that will lead to our owning 100% of TMHPS AG and expect this to be completed in late 2013 or the first half of 2014. These actions are consistent with our plans to simplify our capital structure as this will eliminate the obligation to make guaranteed payments to noncontrolling 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 remainder of 2013, we now expect to achieve 2013 earnings per share of between $2.05 and $2.25 (excluding restructuring and unusual items). Our previous guidance was to achieve 2013 earnings per share of between $1.90 and $2.10 (excluding restructuring and unusual items). The improvement in guidance is driven by an anticipated lower full year adjusted effective tax rate of approximately 33% which adds approximately $0.15 of earnings per share. With respect to our underlying business, earnings expectations remain unchanged although on slightly lower net sales of $7.3 billion to $7.5 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 September 30, 2013 was 6.0%.

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 '13     Jun '13     Mar '13     Dec '12     Sep '12
Provision for (benefit from) income
taxes                                $    20.8   $    28.1   $    15.3   $    (7.5 )
Divided by: Income (loss) before
income taxes                             109.4        47.7        34.6       (36.5 )
Effective tax rate                        19.0 %      58.9 %      44.2 %      20.5 %
Income (loss) from operations as
adjusted                             $   141.7   $    85.6   $    68.9   $    26.3
Multiplied by: 1 minus Effective tax
rate                                      81.0 %      41.1 %      55.8 %      79.5 %
Adjusted net operating income (loss)
after tax                            $   114.8   $    35.2   $    38.4   $    20.9
Debt (as defined above)              $ 1,905.9   $ 1,870.4   $ 2,082.5   $ 2,098.7   $ 2,063.8
Less: Cash and cash equivalents         (370.6 )    (548.2 )    (729.7 )    (678.0 )    (542.6 )
Debt less Cash and cash equivalents  $ 1,535.3   $ 1,322.2   $ 1,352.8   $ 1,420.7   $ 1,521.2
Total Terex Corporation
stockholders' equity as adjusted     $ 2,002.2   $ 2,042.7   $ 2,053.8   $ 2,103.7   $ 2,149.2
Debt less Cash and cash equivalents
plus Total Terex Corporation
stockholders' equity as adjusted     $ 3,537.5   $ 3,364.9   $ 3,406.6   $ 3,524.4   $ 3,670.4



                    September 30, 2013 ROIC                                   6.0 %
NOPAT as adjusted (last 4 quarters)                              $          209.3
Average Debt less Cash and cash equivalents plus Total Terex
Corporation stockholders' equity as adjusted (5 quarters)        $        3,500.8



                                      Three months    Three months    Three months    Three months
                                      ended 9/30/13   ended 6/30/13   ended 3/31/13  ended 12/31/12
Reconciliation of income (loss) from
operations:
Income (loss) from operations as
reported                             $     140.9     $      85.3     $      68.4     $      27.9
(Income) loss from operations for
TFS                                          0.8             0.3             0.5            (1.6 )
Income (loss) from operations as
adjusted                             $     141.7     $      85.6     $      68.9     $      26.3

Reconciliation of Terex Corporation
stockholders' equity:                 As of 9/30/13   As of 6/30/13   As of 3/31/13  As of 12/31/12   As of 9/30/12
Terex Corporation stockholders'
equity as reported                   $   2,094.2     $   1,955.8     $   1,957.5     $   2,007.7     $      2,054.6
TFS Assets                                (149.8 )        (139.7 )        (147.5 )        (150.9 )           (142.3 )
Redeemable noncontrolling interest          57.8           226.6           243.8           246.9              236.9
Terex Corporation stockholders'
equity as adjusted                   $   2,002.2     $   2,042.7     $   2,053.8     $   2,103.7     $      2,149.2


RESULTS OF OPERATIONS

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

Consolidated
                              Three Months Ended September 30,
                                 2013                    2012
                                          % of                  % of       % Change In
                                         Sales                 Sales     Reported Amounts
                                  ($ amounts in millions)
Net sales              $   1,810.6          -     $ 1,822.0       -            (0.6 )%
Gross profit           $     387.1       21.4 %   $   378.6    20.8 %           2.2  %
SG&A                   $     246.2       13.6 %   $   246.7    13.5 %          (0.2 )%
Income from operations $     140.9        7.8 %   $   131.9     7.2 %           6.8  %

Net sales for the three months ended September 30, 2013 decreased $11.4 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 MHPS segment also experienced net sales growth primarily from its port solutions businesses. However, the impact of weak demand in European and other markets on our Construction, Cranes and, to a lesser extent, MP segments more than offset those net sales increases.

Gross profit for the three months ended September 30, 2013 increased $8.5 million when compared to the same period in 2012. Our AWP and MP segments' gross profit improved from the prior year period, partially offset by decreased gross profit in the other three segments.

SG&A costs for the three months ended September 30, 2013 decreased by $0.5 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.

Income from operations for the three months ended September 30, 2013 increased $9.0 million when compared to the same period in 2012. The increase was primarily due to the improved operating performance in our AWP segment.

Aerial Work Platforms
                              Three Months Ended September 30,
                                  2013                     2012
                                             % of                % of       % Change In
                                            Sales               Sales     Reported Amounts
                                   ($ amounts in millions)
Net sales              $    533.3              -     $ 437.7       -              21.8 %
Gross profit           $    127.6           23.9 %   $ 100.3    22.9 %            27.2 %
SG&A                   $     46.9            8.8 %   $  42.4     9.7 %            10.6 %
Income from operations $     80.7           15.1 %   $  57.9    13.2 %            39.4 %

Net sales for the AWP segment for the three months ended September 30, 2013 increased $95.6 million when compared to the same period in 2012. Net sales improvement was primarily due to continued replacement demand and capital expenditures for growth from the North American rental channel and increased demand in Latin America partially offset by weaker demand in Australia.

Gross profit for the three months ended September 30, 2013 increased $27.3 million when compared to the same period in 2012. Increased net sales and improved price realization, partially offset by Tier 4 engine implementation costs, contributed approximately $26 million to the improvement in gross profit.


SG&A costs for the three months ended September 30, 2013 increased $4.5 million when compared to the same period in 2012. Increased spending on engineering along with higher selling and marketing costs associated with higher net sales increased SG&A spending by approximately $3 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 September 30, 2013 increased $22.8 million when compared to the same period in 2012. The increase was due to the items noted above, particularly increased net sales volume and improved price realization.

Construction
                           Three Months Ended September 30,
                              2013                   2012
                                     % of                  % of        % Change In
                                     Sales                 Sales     Reported Amounts
                               ($ amounts in millions)
Net sales            $   241.7         -      $ 290.4        -             (16.8 )%
Gross profit         $    24.5      10.1  %   $  26.0      9.0  %           (5.8 )%
SG&A                 $    28.8      11.9  %   $  34.3     11.8  %          (16.0 )%

Loss from operations $ (4.3 ) (1.8 )% $ (8.3 ) (2.9 )% *

* Not meaningful as a percentage

Net sales in the Construction segment for the three months ended September 30, 2013 decreased by $48.7 million when compared to the same period in 2012. Demand for Construction products remained weak, particularly in Europe and China. Decreased demand for our large trucks, material handlers and aftermarket parts negatively impacted net sales in the current year period.

Gross profit for the three months ended September 30, 2013 decreased $1.5 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 aftermarket parts, partially offset by an improved manufacturing cost structure.

SG&A costs for the three months ended September 30, 2013 decreased $5.5 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.

Loss from operations for the three months ended September 30, 2013 improved $4.0 million when compared to the same period in 2012. The lower current period loss was primarily due to the impact of decreased SG&A costs.


Cranes
                              Three Months Ended September 30,
                                  2013                     2012
                                             % of                % of       % Change In
                                            Sales               Sales     Reported Amounts
                                   ($ amounts in millions)
Net sales              $    453.0              -     $ 516.1       -            (12.2 )%
Gross profit           $     82.1           18.1 %   $ 102.2    19.8 %          (19.7 )%
SG&A                   $     53.2           11.7 %   $  50.7     9.8 %            4.9  %
Income from operations $     28.9            6.4 %   $  51.5    10.0 %          (43.9 )%

Net sales for the Cranes segment for the three months ended September 30, 2013 decreased by $63.1 million when compared to the same period in 2012. We have experienced declines in demand for our products in Australia, North America, Asia and Latin America. These declines are primarily connected to the delayed recovery of non-residential construction activities and declines in commodity related demand. These declines were partially offset by stronger sales into the Middle East and stronger sales of tower cranes.

Gross profit for the three months ended September 30, 2013 decreased by $20.1 million when compared to the same period in 2012. The decrease was primarily related to lower net sales and a less profitable mix of products sold in the current year period.

SG&A costs for the three months ended September 30, 2013 increased $2.5 million over the same period in 2012. Greater activity on engineering projects, higher allocation of corporate costs and asset impairment charges, more than offset the benefit of cost reduction activities taken in prior periods.

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