Terex Corporation (NYSE: TEX) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Terex manufactures materials-processing machinery and aerial work platforms; it reports Materials Processing (MP) and Aerial Work Platforms (AWP) segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,290.1 million | $1,120.5 million | $3,928.9 million | $3,200.1 million |
| Gross profit / margin | $292.5 million / 22.7% | $237.1 million / 21.2% | $914.1 million / 23.3% | $635.8 million / 19.9% |
| Operating income / margin | $163.2 million / 12.7% | $120.8 million / 10.8% | $520.8 million / 13.3% | $299.2 million / 9.3% |
| Net income | $119.2 million | $81.8 million | $391.1 million | $207.8 million |
| Diluted EPS | $1.75 | $1.20 | $5.72 | $2.99 |
- Q3 sales rose 15.1% year over year; operating income increased 35.1%. Management attributed improvement principally to higher volume, pricing, manufacturing efficiencies and expense discipline. Foreign exchange increased reported Q3 sales by approximately $25 million.
- Q3 MP sales grew 18.2% to $541.1 million and operating margin improved to 16.9% from 14.6%. AWP sales grew 13.3% to $751.0 million and operating margin rose to 12.5% from 9.6%.
- Nine-month operating cash flow was $268.6 million, versus $104.2 million. Free cash flow, a company-defined non-GAAP measure, was $230.6 million for nine months and $106.4 million for Q3. The company sold approximately $587 million of receivables without material recourse during the nine-month period.
- At September 30, cash was $352.3 million; total debt was $708.7 million, including $106.0 million drawn on the revolver. Undrawn revolver availability was $494 million, for reported total liquidity of approximately $846 million. Debt was $775.5 million at December 31, 2022. The company reported no significant debt maturities until 2026 and compliance with credit agreement covenants.
- Current assets were $2,244.5 million and current liabilities $1,062.1 million. Inventory was $1,117.0 million, up from $988.4 million at year-end 2022. Working capital was $1,061.4 million, or 20.6% of trailing-three-month annualized sales.
Material changes and management outlook
- Year-to-date sales increased 22.8%, while operating income rose 74.1%; both segments reported higher sales and operating income. AWP’s nine-month operating margin increased to 13.7% from 7.8%, and MP’s to 16.4% from 15.2%.
- Management raised full-year 2023 outlook to approximately $7.05 EPS and $5.15 billion in sales. EPS guidance excludes potential acquisitions, divestitures, restructuring and other unusual items; the filing says it cannot reconcile the non-GAAP outlook to GAAP without unreasonable effort.
- Reported backlogs were $0.9 billion for MP and $2.5 billion for AWP. Management described demand as strong, particularly in North America, but noted slight softening in Europe, ongoing supply-chain constraints and approximately $20 million of “hospital” inventory—substantially completed inventory awaiting final components.
- Management expects production-line moves and the Monterrey, Mexico facility ramp-up to cause near-term inefficiencies; supply-chain issues were also expected to weigh on Utilities in Q4. Higher interest rates, inflation, geopolitical uncertainty, foreign exchange, tariffs and component availability are cited risks.
- CEO and Chairman John Garrison announced plans to retire effective January 1, 2024; President of AWP Simon Meester was appointed to succeed him as President and CEO on that date. The company also completed a facility sale in April, recognizing an approximately $2 million gain; nine-month discontinued-operations results included a $2.3 million net gain on disposition adjustments.
Risks, contingencies and other items
- The company disclosed a Brazilian ICMS tax dispute involving an assessment of approximately BRL 112 million (about $22 million), including tax, penalties and interest. Terex contests the claim; the ultimate outcome is uncertain.
- Customer financing guarantees had maximum exposure of $89.5 million and an allowance for credit losses of $5.4 million at September 30, 2023. Recovery could be affected by used-equipment market conditions.
- Terex stated that it believes recorded contingency reserves are adequate and that other legal matters are not expected to have a material adverse effect, while cautioning that adverse litigation outcomes could be significant. It reported no material changes to previously disclosed risk factors.
- The board declared a $0.17-per-share dividend in October, payable December 19, 2023. The company repurchased 736,644 shares for $33.8 million during the first nine months of 2023.
Important facts for investors to verify
- Whether full-year sales and EPS guidance is achieved, and how much depends on backlog conversion, pricing, supply recovery and currency movements.
- Whether supplier delivery constraints and the approximately $20 million of hospital inventory ease, and whether production moves and the Mexico ramp-up affect margins as expected.
- The sustainability of cash generation, including the effect of receivables factoring, inventory investment and capital spending on reported operating cash flow and free cash flow.
- Developments in the Brazilian ICMS proceedings and potential exposure under customer financing guarantees.
- Debt, revolver availability and borrowing costs, including the reported 7.01% weighted-average rate on revolver borrowings.