Business context and reporting period
Terex Corporation is a global manufacturer of aerial work platforms (AWP), cranes, and materials-processing equipment. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparative results are for the three months ended March 31, 2017 unless noted.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $1,260.9 million | $1,006.9 million; up 25.2% |
| Gross profit / margin | $230.9 million / 18.3% | $152.3 million / 15.1% |
| Operating income (loss) / margin | $71.3 million / 5.7% | $(4.7) million / (0.5)% |
| Continuing-operations income (loss) | $47.6 million | $(60.3) million |
| Net income (loss) | $50.3 million; diluted EPS $0.62 | $(4.6) million; diluted EPS $(0.04) |
| Cash from operating activities | $(44.4) million | $(164.6) million |
| Free cash flow (non-GAAP) | $(87.6) million | Comparable-period figure not provided here |
| Cash and cash equivalents | $447.9 million on balance sheet; $451.4 million including held-for-sale cash | $626.5 million at December 31, 2017 on balance sheet |
| Total debt | $1,083.0 million | $984.8 million at December 31, 2017 |
| Liquidity | Approximately $803 million at March 31, including $451.4 million cash and $351.5 million revolver availability | Not stated on a comparable basis |
Q1 sales benefited from higher demand across all three segments and approximately $64 million of favorable foreign-exchange translation. Gross-margin expansion reflected higher volumes, improved factory utilization and currency effects. The effective tax rate was 19.3%, versus a 31.9% tax benefit rate in the prior-year loss period. Q1 2018 net income included a $2.7 million after-tax discontinued-operations gain; Q1 2017 included a $55.7 million gain, principally from the MHPS divestiture.
Material changes versus prior period
- AWP sales increased 35.2% to $638.9 million and operating income rose to $60.1 million from $21.7 million; margin improved to 9.4% from 4.6%.
- Cranes sales increased 19.0% to $314.0 million. The operating loss narrowed to $9.7 million from $31.9 million, but supply constraints in mobile cranes kept results below management expectations.
- Materials Processing sales increased 21.8% to $303.3 million and operating income rose to $38.9 million from $25.6 million; margin increased to 12.8% from 10.3%.
- Interest expense net of interest income declined by $7.0 million year over year. The prior-year quarter included $45.4 million of debt-extinguishment losses; Q1 2018 included $0.7 million related to a term-loan repricing.
- Cash fell during the quarter amid $44.4 million of operating cash use and approximately $205 million of share repurchases. The company reported $209.2 million of repurchases for the quarter, including amounts not cash-settled by March 31.
Outlook, management commentary, risks and contingencies
- Management raised full-year 2018 guidance to adjusted EPS of $2.70–$3.00, excluding restructuring and other unusual items and any additional share repurchases, on approximately $5 billion of sales. It forecast approximately $100 million of full-year free cash flow; both are forward-looking estimates.
- Management reported backlog up 54% year over year across segments, excluding Corporate and Other. AWP backlog was up 43% and MP backlog up 77%. It described a favorable multi-year AWP growth opportunity and expected improved 2018 margins in AWP and MP on higher volumes.
- Cranes management expects performance to improve over the rest of the year, but anticipates an operating loss in Q2 and a return to profitability in the second half. It cited mobile-crane supplier capacity and continuity issues, with productivity expected to normalize by Q4.
- Steel and other input-cost inflation, associated in part with U.S. steel and aluminum tariffs, was a headwind. Terex introduced steel surcharges on affected product lines and said it intended to maintain them until steel prices normalize; failure to recover costs could pressure margins. The company also cited potential foreign-exchange and supply-chain risks.
- Liquidity was described as sufficient for business needs. On April 10, 2018, after quarter-end, Terex increased its revolving credit facility from $450 million to $600 million, adding $150 million of stated capacity. The term loan rate was reduced by 0.25 percentage points in February.
- Risks include cyclical demand, customer and supplier financing conditions, debt covenants and cash generation, currency movements, tariffs and trade responses, and dependence on suppliers. A securities lawsuit continues against Terex and one named individual; the company says it will defend the claims. A Demag Cranes appraisal proceeding remains pending after settlement of a separate proceeding for an amount described as not material.
- Customer credit guarantees had maximum exposure of $50.5 million and residual-value guarantees $4.2 million at March 31. Management said it had adequate reserves for current contingencies, while noting that adverse legal outcomes could create significant liabilities.
Important facts for investors to verify
- Whether backlog converts into sales and the raised EPS and free-cash-flow guidance, particularly given seasonal working-capital needs and Q1 negative cash flow.
- Whether Crane supply constraints ease on the stated schedule and whether the anticipated Q2 loss and second-half recovery materialize.
- Whether steel surcharges and other pricing actions offset tariff-related and broader input-cost increases without reducing demand.
- How share repurchases, debt growth and the expanded revolver affect cash, leverage, covenant headroom and liquidity through the year.
- Developments in the securities and Demag Cranes proceedings, and any changes in guarantee exposures or credit losses.