Terex Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Terex manufactures aerial work platforms, cranes, and materials-processing equipment; its reportable segments are AWP, Cranes, and MP. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,402.5M | $1,181.7M | $2,663.4M | $2,188.6M |
| Gross profit / margin | $279.3M / 19.9% | $240.7M / 20.4% | $510.2M / 19.2% | $393.0M / 18.0% |
| Operating income / margin | $103.4M / 7.4% | $77.7M / 6.6% | $174.7M / 6.6% | $73.0M / 3.3% |
| Continuing-operations income | $55.9M | $95.4M | $103.5M | $35.1M |
| Net income | $57.8M | $100.8M | $108.1M | $96.2M |
| Diluted EPS | $0.75 | $1.04 | $1.36 | $0.94 |
Q2 sales increased 18.7% year over year, including about $40M of favorable currency translation. Operating income rose 33.1%; gross margin declined 0.5 percentage points. Q2 net income was lower than the prior year despite stronger operations, principally because Q2 2017 included a $61.1M gain on Konecranes share sales in other income. First-half comparisons also reflect prior-year debt-extinguishment costs and discontinued-operation gains.
- Segments, Q2: AWP sales were $751.1M, up 26.7%, with operating income of $101.7M (13.5% margin). Cranes sales were $335.3M, up 10.4%, but reported a $12.3M operating loss. MP sales were $318.7M, up 13.6%, with operating income of $42.4M (13.3% margin).
- Cash flow: First-half operating cash flow was $35.6M, versus cash used of $123.1M in 2017. Capital expenditures were $50.7M. Company-defined free cash flow was negative $21.8M for the first half and positive $65.8M in Q2.
- Liquidity and debt: June 30 cash and cash equivalents were $373.6M on the balance sheet ($377.1M including held-for-sale cash). Reported total liquidity was approximately $867M, including $489.5M of undrawn revolver availability. Balance-sheet debt was $1,094.2M, compared with $984.8M at year-end 2017.
- Other: First-half share repurchases totaled $323M for 8.0M shares; dividends declared were $0.20 per share. Working capital was $1,020M, or 18.2% of trailing-three-month annualized sales, versus 22.0% a year earlier.
Changes, outlook, and key commentary
- Growth was broad-based in sales, but profitability diverged: AWP and MP improved substantially while Cranes remained loss-making. AWP and MP continued to benefit from higher volume and factory utilization; Cranes faced mobile-crane supplier constraints after a period of lower production.
- Management reported backlog up 31% year over year across segments, excluding Corporate and Other, and described this as the sixth consecutive quarter of year-over-year growth in each segment. MP backlog was up 75%; AWP backlog was up 11%.
- Management raised full-year 2018 guidance to approximately $5.1B in sales and adjusted EPS of $2.80–$3.00, excluding restructuring and other unusual items and any additional share repurchases. It maintained free-cash-flow guidance of approximately $100M while increasing planned capital expenditures to $90M.
- Management expected Cranes to improve in the second half, but forecast a Q3 operating loss in line with or slightly better than Q2, followed by a return to profitability in Q4. It expected full-year AWP and MP margins to improve versus 2017, with higher input costs a potential headwind.
- Steel and certain China-related tariffs were identified as cost and demand risks. Terex had implemented steel surcharges and said it assumed tariffs would have minimal impact on 2018 results. Management also cited supplier constraints, foreign-exchange volatility, cyclical markets, and potential limits on customer financing.
- Terex reported ongoing securities and stockholder derivative litigation; certain securities claims were dismissed in March 2018, but claims against Terex and an individual defendant continue. A Demag Cranes appraisal proceeding also remains unresolved. Management said it had recorded appropriate reserves and did not expect current contingencies to materially affect the financial statements, while noting adverse outcomes could be significant.
- Adoption of the new lease accounting standard was planned for Q1 2019 and expected to materially increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities.
Investor verification points
- Reconcile adjusted EPS and free-cash-flow guidance to reported GAAP results, including exclusions and assumptions for further repurchases and tariffs.
- Track whether Cranes supply-chain recovery supports the stated Q3 and Q4 operating expectations, and whether AWP and MP growth converts to sustained margins.
- Assess cash generation, working-capital needs, receivables factoring and syndications, and liquidity after substantial repurchases; confirm revolver availability and debt covenant headroom.
- Monitor steel and other input costs, surcharge recovery, tariffs, and foreign-exchange effects on margins and guidance.
- Follow the remaining securities and Demag Cranes proceedings, guarantee exposure, and the balance-sheet impact of lease-standard adoption.