Business context and reporting period
Terex Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Terex manufactures lifting and materials-processing equipment and reports three segments: Aerial Work Platforms (AWP), Cranes, and Materials Processing (MP). The 2017 comparisons reflect a slimmer portfolio: the MHPS business was sold to Konecranes in January, and additional construction businesses were divested.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,181.7 million | $1,297.7 million | $2,188.6 million | $2,412.0 million |
| Gross profit / margin | $240.7 million / 20.4% | $242.1 million / 18.7% | $393.0 million / 18.0% | $423.8 million / 17.6% |
| Operating income / margin | $75.9 million / 6.4% | $73.4 million / 5.7% | $69.6 million / 3.2% | $84.7 million / 3.5% |
| Income from continuing operations attributable to Terex | $95.4 million | $109.6 million | $35.1 million | $87.6 million |
| Net income (loss) attributable to Terex | $100.8 million | $65.1 million | $96.2 million | $(5.7) million |
| Diluted EPS | $1.04 | $0.59 | $0.94 | $(0.05) |
Q2 earnings included material gains associated with Konecranes shares; reported net income and EPS therefore do not represent operating performance alone. Six-month results also included a $61.1 million after-tax gain on dispositions, primarily the MHPS sale.
- Cash flow: Operating cash flow was $(158.9) million for the first half, versus $(6.4) million in 2016. Capital spending was $17.6 million. Terex’s non-GAAP free cash flow was $(186.3) million for the half and $22.5 million in Q2.
- Liquidity: Cash and cash equivalents, including amounts classified as held for sale, totaled $558.6 million at June 30; cash from continuing operations was $555.5 million. Terex reported $450 million of undrawn revolver availability and total liquidity of $1,008.6 million.
- Debt: Reported debt was $992.0 million at June 30, down from $1,575.8 million of continuing-operations debt at year-end 2016. The new facility includes a $450 million revolver and $400 million term loan; no revolver borrowings were outstanding. The term loan’s weighted-average rate was 3.73%.
- Capital returns: Terex repurchased approximately 15.9 million shares for $516.6 million in the first half and declared dividends of $0.08 per share in each quarter.
Material changes versus comparable periods
- Q2 sales fell 8.9%; first-half sales fell 9.3%. Management attributed declines to divested construction businesses, lower Cranes sales and, for the half, lower AWP sales; foreign exchange also reduced sales by about 2% in each period.
- Q2 operating income increased 3.4% despite lower sales, with Cranes returning to profitability and MP improving. AWP operating income declined 16.1%, reflecting mix, steel and freight costs, and currency effects.
- For the first half, operating income fell 17.8%. AWP operating income declined 25.4%; Cranes remained loss-making for the half but improved from 2016; MP operating income increased 37.2%.
- Interest expense, net of interest income, declined by $10.8 million in Q2 and $14.7 million in the first half, reflecting lower borrowings and rates. First-half results included a $51.9 million loss on early debt extinguishment.
- In the MHPS transaction, Terex received approximately $835 million cash and 19.6 million Konecranes shares. It sold Konecranes shares for approximately $549 million through June and retained about 6.6% of Konecranes, valued at $218.0 million at quarter-end.
Outlook, management commentary, risks and unusual items
- Management raised its 2017 sales outlook from approximately 12% decline to approximately 6% decline, and raised adjusted EPS guidance to $1.05–$1.15. Adjusted EPS excludes restructuring and other items and is not reconciled to GAAP EPS because the timing and impact of excluded items cannot be reasonably predicted.
- Terex expects full-year 2017 free cash flow of $0–$50 million. Management said liquidity was sufficient for its business plans and operating and debt-service needs for at least the next 12 months.
- Backlog was up 36% and net bookings up 17% year over year. Management reported second consecutive-quarter backlog growth in each segment; it expects MP’s strong performance to continue and said the improving Cranes outlook and order book made it more optimistic about 2017. AWP demand was better than expected, but pricing and steel-cost headwinds were expected to persist.
- The Cranes restructuring program is expected to cost $79.5 million, reduce approximately 1,000 employees and be completed in 2018. The filing reports cumulative restructuring costs of $80.6 million and expected total costs of $82.8 million across restructuring activities.
- Risks include cyclical demand, pricing competition, steel and other input costs, foreign exchange, customer and supplier financing conditions, debt covenants and cash generation. Terex also disclosed ordinary-course litigation and guarantees; management said it had adequate reserves and did not expect these matters to have a material adverse effect, while noting adverse outcomes remain possible.
- Unusual items include Konecranes fair-value gains ($53.5 million in Q2; $44.2 million for the half), debt-extinguishment charges, disposition gains and severance/restructuring adjustments. The filing also notes that the Konecranes investment’s fair-value movements are recorded in earnings.
Most important facts for investors to verify
- How much of reported earnings and EPS came from Konecranes valuation changes, share-sale gains, disposition gains, debt charges and tax effects, versus recurring segment operations.
- Whether operating cash flow and free cash flow improve sufficiently to meet the $0–$50 million full-year free-cash-flow outlook, given first-half cash use and working-capital needs.
- Whether backlog and bookings convert to sales and margins, especially amid AWP pricing and steel-cost pressure and continued weakness in some Cranes markets.
- Progress and remaining cash costs of the Cranes restructuring, and the effect of completed and pending divestitures on future revenue and comparability.
- Debt, covenant headroom, liquidity availability and the sustainability of substantial share repurchases and dividends.