Terex Corporation — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. Terex manufactures lifting and materials-processing equipment. Its continuing operations report three segments: Aerial Work Platforms (AWP), Cranes, and Materials Processing (MP). Material Handling and Port Solutions (MHPS) is classified as discontinued operations following the planned sale to Konecranes.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales from continuing operations | $1,056.4 million | $1,255.4 million | $3,468.4 million | $3,854.1 million |
| Gross profit / margin | $183.9 million / 17.4% | $252.4 million / 20.1% | $607.7 million / 17.5% | $755.9 million / 19.6% |
| Operating income / margin | $39.6 million / 3.7% | $92.1 million / 7.3% | $124.3 million / 3.6% | $266.5 million / 6.9% |
| Income from continuing operations attributable to Terex common stockholders | $33.3 million; diluted EPS $0.31 | $30.3 million; diluted EPS $0.28 | $120.9 million; diluted EPS $1.10 | $104.6 million; diluted EPS $0.95 |
| Net income attributable to Terex | $96.8 million; diluted EPS $0.89 | $43.6 million; diluted EPS $0.40 | $91.1 million; diluted EPS $0.83 | $129.4 million; diluted EPS $1.18 |
Q3 net income included $63.5 million of after-tax income from discontinued operations, including the $55.6 million reversal of the second-quarter MHPS impairment. Nine-month discontinued operations recorded an after-tax loss of $33.3 million attributable to Terex. Accordingly, total net income and continuing-operations results moved in different directions.
- Cash flow: Net cash from operating activities was $90.8 million for the first nine months, versus cash used of $56.6 million a year earlier. Capital expenditures were $64.2 million. Free cash flow, as defined by Terex, was negative $27 million for nine months and positive $47 million in Q3.
- Cash and liquidity: Cash and equivalents totaled $343.7 million, including $94.9 million classified as held for sale; continuing-operations cash was $248.8 million. Terex reported $530 million available under its revolving credit facilities and $70 million drawn. Working capital was $1,118.6 million, or 26.5% of trailing-three-month annualized sales.
- Debt: Balance-sheet debt was $1,663.5 million in continuing operations, plus $24.5 million classified in liabilities held for sale. The company had $443.7 million of term loans outstanding and $850 million of 6% notes and $300 million of 6.5% notes. Total reported debt decreased from year-end, while revolving-credit borrowings increased to $70 million.
- Taxes: Terex recognized an $82.5 million income-tax benefit on $38.3 million of pretax continuing-operations income for the first nine months, primarily reflecting releases of valuation allowances for German and Italian subsidiaries and other tax benefits. This materially affected reported earnings.
Material changes versus the prior comparable period
- Q3 continuing-operations sales fell 15.9%; gross profit declined 27.1% and operating income declined 57.0%. Lower volume and weaker margins in AWP and Cranes were the main drivers; foreign exchange also reduced Q3 sales by about $24 million.
- AWP Q3 sales fell 16.6% and operating income fell 38.4%. Cranes sales fell 25.4%, and the segment moved from $12.1 million of operating income to a $12.1 million loss. MP sales declined 4.4%, but operating income increased 10.8%.
- For the nine-month period, Cranes recorded a $41.5 million operating loss versus $35.8 million of operating income in 2015. AWP operating income declined 30.4%; MP operating income increased 16.6%.
- Consolidated nine-month operating cash flow improved by $147.4 million versus the prior year, while investing cash use narrowed substantially, mainly due to asset-sale proceeds and lower acquisition spending.
Outlook, management commentary, and risks
- Management lowered full-year 2016 continuing-operations EPS guidance to $0.70–$0.80, excluding restructuring and other unusual items, on net sales of $4.2–$4.4 billion. It expects full-year free cash flow of $150–$200 million. These are non-GAAP guidance measures.
- Management described markets for large capital equipment as challenging and did not expect near-term improvement. AWP faced softer North American rental demand and European replacement demand; Cranes was affected by weak global demand, low oil, gas and commodity prices, and regional market pressures. MP reported firmer bookings and backlog.
- Terex agreed to sell MHPS to Konecranes for approximately $1.5 billion, comprising $595 million and €200 million in cash plus 19.6 million Konecranes shares. Share value and purchase price remain subject to adjustments; closing was expected in early 2017, subject to regulatory approvals. Terex expected to retain about 25% of Konecranes and nominate two directors. The credit-agreement amendment requires $300 million of sale proceeds to reduce senior debt within 60 days of receipt.
- The MHPS impairment reversal was driven primarily by an increase in Konecranes’ share price; no disposal gain can be recorded before closing, and a future impairment charge remains possible if relevant valuations decline.
- Terex recorded $25.9 million of restructuring expense in the first nine months and expected total program costs of $38.7 million, including planned reductions of about 250 Cranes employees and about 500 corporate employees. It also wrote off $132.8 million of fully impaired former Construction-segment goodwill. Management warned that continued Cranes weakness could lead to future goodwill impairment.
- Risks include cyclical end markets, customer financing and credit availability, foreign-exchange and commodity movements, debt covenants and cash generation, litigation, and the uncertainty of the MHPS transaction. A dispute involving former Demag Cranes shareholders could result in an additional payment that may be material; the company disputes the claims. Terex also cited potential Brexit-related market and currency uncertainty.
Important facts for investors to verify
- Progress, closing conditions, final consideration, share valuation, and post-closing adjustments for the Konecranes transaction; also verify the required $300 million debt reduction.
- Whether 2016 EPS and free-cash-flow guidance was achieved, noting the guidance excludes specified unusual items and is non-GAAP.
- Underlying AWP and Cranes demand, margins, bookings, and backlog, and whether restructuring actions offset lower volumes.
- The persistence and cash-flow impact of tax benefits, and the assumptions supporting German and Italian deferred-tax-asset realization.
- Debt covenant compliance, liquidity, and the resolution or potential exposure from the Demag shareholder proceedings and other contingencies.