Terex Corporation — 2014 Form 10-K Summary
Business context and reporting period
Terex designs, manufactures, services and markets lifting and material-handling equipment across five segments: Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP). This annual report covers the fiscal year ended December 31, 2014. The truck business sale is reported as discontinued operations for all periods presented.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $7,308.9 million | $7,084.0 million |
| Gross profit / margin | $1,453.5 million / 19.9% | $1,439.5 million / 20.3% |
| Operating income / margin | $423.1 million / 5.8% | $419.1 million / 5.9% |
| Continuing-operations income attributable to common stockholders | $259.0 million; diluted EPS $2.27 | $209.0 million; diluted EPS $1.79 |
| Net income attributable to Terex | $319.0 million; diluted EPS $2.79 | $226.0 million; diluted EPS $1.93 |
| Cash from operations / capital expenditures | $410.7 million / $81.5 million | $188.5 million / $82.8 million |
| Free cash flow | $329.2 million | Not stated in the supplied comparative table |
| Cash and cash equivalents | $478.2 million | $408.1 million |
| Total debt | $1,788.8 million | $1,976.7 million |
| Current assets / current liabilities | $3,356.2 million / $1,643.1 million | $3,639.4 million / $1,724.7 million |
Annual revenue rose 3.2%, while operating income rose 1.0%. Net income includes a $58.6 million after-tax gain on disposition of discontinued operations, primarily the truck business sale; continuing-operations results provide a more direct view of ongoing earnings. The effective tax rate on continuing operations was 12.7%, versus 30.0% in 2013, mainly reflecting disposition-related tax benefits and a more favorable geographic earnings mix.
Material changes and segment performance
- AWP: Sales grew 11.2% to $2,369.7 million, but operating income fell 7.1% to $302.8 million. Higher factory and startup costs, commodities, distribution costs and currency effects pressured margins.
- Construction: Sales increased 2.0% to $836.6 million. The segment moved from a $24.8 million operating loss to $1.2 million operating income, largely through lower SG&A and improved factory utilization.
- Cranes: Sales declined 7.0% to $1,791.1 million and operating income declined 22.3% to $85.9 million, reflecting weaker mobile-crane demand and unfavorable sales mix.
- MHPS: Sales increased 5.0% to $1,783.4 million. Operating loss narrowed to $17.2 million from $41.8 million, helped by port projects, prior cost actions and lower restructuring and inventory charges. Results included an approximately $33 million loss on sale of an entity.
- MP: Sales increased 4.0% to $653.1 million, but operating income fell 15.6% to $60.6 million due to geographic mix, lower productivity and higher SG&A. The annual goodwill test found fair value 24% above carrying value; management reported no impairment at year-end but noted future impairment risk if projected cash flows are not achieved.
Backlog increased to $2,001.0 million from $1,827.7 million, mainly due to AWP orders placed by large rental customers for 2015 deliveries. MHPS backlog declined 29%, largely after shipments of major port-automation projects. Foreign exchange reduced total year-over-year backlog by approximately 7%.
Outlook, liquidity, risks and unusual items
- Management forecast 2015 net sales of $6.2–$6.6 billion and adjusted EPS of $2.00–$2.30, excluding restructuring and other unusual items. It expected currency effects and the A.S.V. disposition to reduce sales by $650–$750 million and EPS by $0.15–$0.20.
- Management expected 2015 free cash flow of $200–$250 million and approximately $50 million of 2015 profit improvement from initiatives targeting $202 million of incremental operating profit over the next few years. It cited oil-price uncertainty and currency volatility and expected no material overall market growth.
- Liquidity increased by approximately $342 million during 2014. At year-end, the company reported $478.2 million of cash and $600 million available under its revolving facility, with no revolver borrowings. The new 2014 credit agreement extended the revolver to 2019 and term loans to 2021 and reduced borrowing costs.
- Debt remains material; $125 million of 4% convertible notes were due June 2015. The filing reports $1,788.8 million of total debt and $2,358.5 million of contractual long-term debt obligations including expected interest. Debt covenants, cash generation and refinancing access remain important risks.
- The truck business was sold to Volvo in May 2014 for approximately $160 million; the company recorded a $57.1 million gain on the sale. Terex also sold 51% of A.S.V. and certain other businesses, and recorded a net loss of approximately $16 million on specified 2014 dispositions.
- MHPS announced restructuring actions expected to cost $35.5 million, reduce headcount by 199 and be completed in 2015. Total restructuring charges recorded in 2014 were $30.3 million.
- Key risks include cyclical end markets, competition, foreign-exchange and commodity exposure, supplier and customer financing risks, receivable collectability, goodwill impairment, pension funding, product liability and litigation. The company disclosed pending securities, ERISA and shareholder derivative lawsuits for which it could not estimate possible losses, and ongoing obligations under SEC injunction and cease-and-desist orders.
Most important facts for investors to verify
- Reconcile reported net income and EPS to continuing operations, particularly the truck-sale gain and other disposition items.
- Assess whether 2015 sales, adjusted EPS and free-cash-flow guidance incorporated the stated currency and A.S.V. impacts and the assumed market conditions.
- Review debt maturities and covenant headroom, including repayment or refinancing of the convertible notes due June 2015 and the availability of the revolving facility.
- Monitor AWP margin recovery, Cranes demand, MHPS project backlog and restructuring execution, and MP performance against goodwill-test assumptions.
- Evaluate cash conversion and working-capital movements, customer financing guarantees, tax valuation allowances, pension liabilities and material litigation developments.