Terex Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Terex manufactures aerial work platforms, cranes, and materials-processing equipment. The sale of its Material Handling and Port Solutions (MHPS) business closed January 4, 2017; MHPS is presented as discontinued operations.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $4.363 billion | $4.443 billion |
| Gross profit / margin | $816.0 million / 18.7% | $712.4 million / 16.0% |
| Operating income (loss) | $173.6 million | $(147.8) million |
| Continuing-operations income (loss) | $60.0 million | $(193.3) million |
| Net income (loss) attributable to Terex | $128.7 million | $(176.1) million |
| Diluted EPS | $1.36; $0.63 from continuing operations | $(1.63) |
| Operating cash flow | $153.0 million | $377.1 million |
| Free cash flow (company-defined) | $52.7 million | Not stated here |
FY2017 net income included a $68.7 million after-tax gain on dispositions, including the MHPS sale. Fourth-quarter net sales were $1.064 billion; continuing-operations loss attributable to common stockholders was $31.7 million, and net loss attributable to Terex was $26.7 million.
Segments and operating trends
- AWP: Sales rose 4.7% to $2.072 billion; operating income declined 4.0% to $170.3 million, with margin at 8.2% versus 9.0%, reflecting steel costs and customer mix.
- Cranes: Sales fell 6.3% to $1.194 billion. Operating loss narrowed to $17.8 million from $321.7 million, benefiting from nonrecurring 2016 charges not repeated, restructuring, and lower warranty costs.
- MP: Sales increased 13.6% to $1.073 billion; operating income rose 44.6% to $124.8 million, supported by higher demand and volumes.
Balance sheet, liquidity, and capital allocation
- Cash and cash equivalents, including cash held for sale, were $630.1 million at year-end. Terex reported $450 million of undrawn revolving-credit availability and total liquidity of $1.080 billion.
- Total debt was $984.8 million, down from $1.576 billion at year-end 2016. Current assets were $2.383 billion and current liabilities $1.036 billion.
- During 2017, Terex generated approximately $835 million cash from the MHPS sale and approximately $770 million from selling its Konecranes shares; it repaid approximately $583 million of net debt and repurchased $923.7 million of stock.
- Operating cash flow declined year over year, partly due to settlement of prior-year accruals, inventory purchases supporting higher backlog, and higher receivables. The company sold $631 million of trade receivables without recourse during the year.
- Working capital was $924.5 million, or 21.7% of trailing three-month annualized sales, compared with 20.8% a year earlier.
Material changes and unusual items
- Sales declined 1.8%, primarily reflecting divested construction product lines and lower Cranes sales, partly offset by growth in AWP and MP. Operating results improved substantially from 2016, which included a $176 million Cranes goodwill impairment and significant restructuring and other charges.
- Terex recorded a $52.6 million loss on early extinguishment of debt following refinancing and retirement of existing notes. Net interest expense fell to $60.6 million from $97.7 million.
- The 2017 Federal Tax Act contributed $50.4 million of provisional tax expense: $29.8 million for the transition tax and $20.6 million from remeasurement of U.S. deferred tax balances. Reported effective tax rate on continuing operations was 46.4%.
- The MHPS disposition generated $65.7 million of after-tax gain; the sale of Konecranes shares generated a $42.0 million pretax gain, and Terex recorded $13.5 million of related dividend income.
- Backlog was $1.631 billion at year-end, up 52% from $1.073 billion; excluding Corporate and Other, management reported growth of 56%. Backlog rose across all three segments, but orders are not assured sales and can be delayed or cancelled.
Outlook, risks, and contingencies
- Management forecast 2018 sales of approximately $4.8 billion and adjusted EPS of $2.35–$2.65, excluding restructuring and other unusual items. It expected revenue and operating-margin improvement in each segment and approximately $100 million of free cash flow. Free-cash-flow outlook includes about $46 million of transformation spending and $40 million of additional AWP inventory, but excludes about $20 million to purchase Northern Ireland crushing and screening facilities.
- Management cited improving demand and strong backlog, while identifying steel prices as a potential AWP headwind and British-pound strength as a potential MP headwind. Cranes market recovery remained dependent on economic conditions, oil prices, used-equipment inventory, and new product launches.
- Principal risks include cyclical demand, customer access to financing, debt service and restrictive covenants, competition, commodity and supplier costs, foreign exchange, government spending, execution of transformation initiatives, and disruption at concentrated manufacturing sites.
- Terex disclosed securities and stockholder derivative litigation and Demag Cranes appraisal proceedings; the latter could result in additional payments that may be material. The company also remains subject to SEC injunction and cease-and-desist obligations. Management stated it believed other contingencies were adequately reserved and not expected to have a material adverse effect, but outcomes are uncertain.
- The company reported compliance with debt covenants at year-end and effective disclosure controls and internal control over financial reporting. Its 2017 financial statements and internal controls received unqualified auditor opinions.
Most important facts for investors to verify
- How much of reported earnings growth reflects sustainable operating improvement versus the 2016 comparison base, disposition gains, and other unusual items?
- Whether the backlog converts into shipments and cash without material cancellations, production delays, or margin pressure.
- Whether operating cash generation improves after the 2017 decline, and how factoring receivables affects reported cash flow and liquidity.
- Whether 2018 guidance is achieved, including planned free cash flow, segment margin gains, transformation spending, and the impact of tax-law changes.
- Potential outcomes and financial exposure from Demag appraisal proceedings, securities litigation, customer guarantees, and remaining tax-accounting estimates.
- How share repurchases and dividends are balanced against debt reduction, capital investment, and the company’s stated capital-structure objectives.