Terex Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial results are unaudited. Terex manufactures lifting and materials-processing equipment. Following a reporting reorganization and the classification of Material Handling and Port Solutions (MHPS) as discontinued operations, continuing operations comprise Aerial Work Platforms (AWP), Cranes, Materials Processing (MP), and Corporate and Other.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales, continuing operations | $1,297.7 million | $1,442.9 million | $2,412.0 million | $2,598.7 million |
| Gross profit / margin | $242.1 million / 18.7% | $302.2 million / 20.9% | $423.8 million / 17.6% | $503.5 million / 19.4% |
| Operating income / margin | $73.4 million / 5.7% | $136.1 million / 9.4% | $84.7 million / 3.5% | $174.4 million / 6.7% |
| Net income (loss) attributable to Terex | $65.1 million | $84.8 million | $(5.7) million | $85.8 million |
| Diluted EPS | $0.59 | $0.78 | $(0.05) | $0.78 |
Q2 continuing-operations income attributable to common stockholders was $109.6 million, or $1.00 diluted EPS, compared with $75.9 million, or $0.70, a year earlier. The increase was substantially affected by a $67.1 million income-tax benefit, primarily from releasing valuation allowances for German and Italian deferred tax assets. The tax benefit does not offset the deterioration in operating performance. Q2 discontinued operations generated a $45.1 million net loss, including the MHPS disposal-group impairment.
- Segment results, Q2: AWP sales were $593.7 million, down 13.7%, and operating income was $72.5 million versus $105.1 million. Cranes sales were $357.4 million, down 16.4%, and the segment reported a $12.8 million operating loss versus $21.3 million income. MP sales rose 2.6% to $256.2 million, and operating income increased to $28.6 million from $25.6 million.
- Cash flow, six months: Operating activities used $15.6 million, versus $84.8 million used in the prior-year period. Investing activities used $43.9 million; financing activities used $113.4 million. Cash and cash equivalents, including discontinued operations, were $298.1 million at June 30, down from $466.5 million at year-end. Management reported free cash flow of negative $74 million for the first half and positive $72.2 million in Q2.
- Liquidity and debt: Cash in continuing operations was $200.8 million. Terex reported $500 million available under its $600 million revolving facility, with $100 million drawn. Continuing-operations debt was $1,686.3 million; including $22.7 million of debt classified in liabilities held for sale, management’s adjusted total was $1,709.0 million. The balance sheet reported total current assets of $3,066.7 million and current liabilities of $1,524.8 million, including substantial held-for-sale balances.
- Other metrics: Working capital was $1,244.9 million, or 24.0% of trailing-three-month annualized sales. Six-month dividends declared were $0.14 per share. Inventory reserves increased to $92.9 million from $76.8 million at year-end.
Material changes and strategic transactions
- Net sales fell 10.1% in Q2 and 7.2% in the first half, primarily because of lower AWP and Cranes volumes. Q2 operating income declined 46.1%; first-half operating income declined 51.4%. Management cited weaker demand, lower volumes, pricing and product mix, and restructuring and reserve charges.
- Terex and Konecranes terminated their proposed merger in May 2016 without penalties and entered into an agreement for Konecranes to acquire MHPS. Stated consideration is approximately $1.3 billion: $595 million and €200 million in cash, plus 19.6 million newly created Konecranes Class B shares. Share value and purchase price are subject to adjustments. Closing, expected in early 2017, requires customary regulatory approvals and Konecranes shareholder approval. If completed, Terex expects to hold approximately 25% of Konecranes and use equity-method accounting.
- MHPS is reported as discontinued operations. Terex recorded a $55.6 million pretax impairment in Q2 to write the disposal group down to fair value less costs to sell. The charge is sensitive to Konecranes’ share price and the dollar/euro exchange rate. A separate construction-assets disposal group was written down by $5.7 million; expected sale proceeds were approximately $60 million in the second half of 2016.
- Terex recorded $24.4 million of restructuring expense in the first half, with total expected costs of $38.6 million. Programs include facility consolidation and production transfers and are expected to reduce approximately 750 positions across the identified Cranes and Corporate programs. Management also described a plan to remove approximately $30 million of costs from continuing operations.
- The company terminated its securitization facility on May 31, 2016, repaid its outstanding borrowings, and recorded a $0.4 million debt-extinguishment loss.
Outlook, management commentary and risks
- For full-year 2016, Terex expected continuing-operations sales of $4.3 billion to $4.5 billion and adjusted EPS of $0.85 to $1.15, excluding restructuring and other unusual items. Management said comparable full-year sales and EPS expectations were consistent with prior guidance.
- Management continued to expect $200 million to $250 million of 2016 free cash flow despite first-half negative free cash flow. AWP and Cranes sales were each expected to decline approximately 15% from 2015; MP sales were expected to be relatively flat, with slightly higher operating margins.
- Management described large-capital-equipment markets as challenging, with no near-term improvement expected. North American AWP and mobile-crane demand was soft; oil, gas and commodity-market weakness weighed on cranes. Management cited cautious customer spending, pricing pressure and ongoing margin compression. It reported modest Western European sales growth but noted uncertainty following Brexit.
- Key risks include cyclicality and economic weakness, foreign-exchange movements, customer and supplier financial health, access to financing and cash generation, debt covenants and refinancing, execution of restructuring and divestitures, and the Konecranes transaction’s approvals and valuation adjustments. Litigation, product-liability exposure, credit and equipment-value guarantees, and possible losses beyond reserves are also disclosed. Management said it believed existing contingency reserves were adequate and material adverse outcomes were not expected, while noting litigation outcomes cannot be predicted.
Most important facts for investors to verify
- Whether the MHPS sale closes on the expected timetable and the final cash, share value, and working-capital and other purchase-price adjustments.
- Whether reported free cash flow supports the $200 million to $250 million full-year target, given first-half cash use and working-capital requirements.
- Whether AWP and Cranes demand and margins stabilize, and whether MP can sustain its improved results.
- The durability of earnings excluding the unusually large tax benefit, and the reconciliation of adjusted EPS guidance to GAAP results.
- Progress and realized savings from restructuring, along with the cost and operational effects of facility closures and asset sales.
- Debt and liquidity after divestitures, including revolver availability, covenant compliance, and obligations associated with guarantees and held-for-sale businesses.