Terex Corporation — Q2 2020 Form 10-Q
Business context and period. The unaudited report covers the three and six months ended June 30, 2020. Terex manufactures aerial work platforms and materials processing equipment, reported in its AWP and MP segments. Unless noted otherwise, operating results below are from continuing operations; discontinued operations primarily include the Demag mobile cranes business and exited North American mobile crane product lines.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $690.5 million | $1,306.9 million | $1,524.1 million | $2,443.5 million |
| Gross profit / margin | $107.1 million / 15.5% | $271.8 million / 20.8% | $243.8 million / 16.0% | $509.6 million / 20.9% |
| Operating income / margin | $7.4 million / 1.1% | $126.0 million / 9.6% | $0.3 million / approximately 0% | $225.7 million / 9.2% |
| Income (loss) from continuing operations | $(3.2) million | $81.6 million | $(27.9) million | $138.8 million |
| Net income (loss), including discontinued operations | $(9.2) million | $75.1 million | $(34.1) million | $8.5 million |
| Diluted EPS | $(0.13) | $1.05 | $(0.49) | $0.12 |
| Operating cash flow | $101.0 million | Not stated here | $12.3 million | $(48.3) million |
| Free cash flow | $71.2 million | Not stated here | $(41.7) million | Not stated here |
Q2 operating cash flow and free cash flow are reported in management’s discussion; free cash flow is a company-defined non-GAAP measure. Q2 revenue fell 47.2% year over year, while six-month revenue fell 37.6%. Lower sales and temporary factory shutdowns drove the decline in gross profit and operating income. SG&A fell 31.6% in Q2 to $99.7 million and 14.2% year to date to $243.5 million, reflecting cost actions.
- Segments, Q2: AWP sales were $413.9 million, down 52.4%, with an operating loss of $5.0 million. MP sales were $263.6 million, down 38.8%, with operating income of $23.4 million and an 8.9% margin.
- Liquidity and debt: June 30 cash and cash equivalents were $426.0 million in continuing operations; total cash including $3.9 million held for sale was $429.9 million. Terex reported approximately $1.03 billion of liquidity, including $600 million of undrawn revolver availability. Total debt was approximately $1.175 billion, including $582.7 million of term loans; no revolver borrowings were outstanding.
- Balance sheet and working capital: Current assets were $1.707 billion and current liabilities $675.6 million. Inventories were $699.8 million, down from $847.7 million at year-end 2019. Working capital was $690.1 million, or 25.0% of trailing-three-month annualized sales.
- Capital allocation: Six-month capital expenditures were $42.1 million. Terex repurchased 2.5 million shares for $54.6 million in the first half, then suspended further repurchases and dividend payments for the remainder of 2020; a $0.12-per-share dividend had been paid in Q1.
Material changes and unusual items
- COVID-19-related demand weakness affected both segments and all major geographies; sales fell double digits in every major geography. AWP was particularly pressured, while MP maintained a positive operating margin.
- Manufacturing was suspended at most facilities in March and resumed in phases beginning in late April. Management said production had resumed globally by June, with safety measures in place.
- Q2 SG&A savings of $46.1 million reflected furloughs, salary reductions, deferred merit increases and lower discretionary spending. The company also reduced staffing and cut planned 2020 capital spending by 35%.
- Net loss included a $5.0 million after-tax loss on disposition of discontinued operations, primarily related to the Demag sale. The comparable 2019 period included a $10.8 million after-tax gain on dispositions. Six-month 2019 discontinued results also included an approximately $82 million after-tax mobile-cranes impairment charge.
- Finance receivables, net, declined to $133.8 million from $155.2 million at year-end; the allowance for credit losses increased to $14.4 million from $11.0 million. Terex offered COVID-19-related principal payment relief to customers.
Outlook, risks and contingencies
- Management expected second-half 2020 sales to be similar to first-half sales and anticipated positive free cash flow in the second half, with working capital expected to be a source of cash. Management cautioned that the severity and duration of the pandemic remained uncertain and expected continued effects on operating results.
- AWP backlog was down 32% year over year, affected by approximately $100 million of customer booking changes; management expected most of those orders to be rebooked and shipped in the second half. MP bookings stabilized and increased during Q2.
- An April 2020 credit-agreement amendment extended the revolver to January 2023 and replaced certain financial tests through year-end 2020 with minimum liquidity requirements. It also prohibited share repurchases and dividends through December 31, 2020. The company reported covenant compliance at June 30 and said it expected adequate liquidity for at least the next 12 months.
- COVID-19, cyclical markets, customer financing and credit conditions, supply-chain disruption, foreign exchange, tariffs, debt covenants and access to capital markets are material risks. Management noted the possibility that the cash-flow coverage ratio could fall below 2.0 to 1.0 later in 2020.
- A Brazilian tax dispute concerns approximately BRL 101 million, or $19 million, of ICMS tax, penalties and interest. Terex contests the claim but said no assurance could be given about the outcome. Credit guarantees had maximum exposure determined at inception of $94.3 million at June 30, 2020; actual potential liability could not be reasonably estimated.
- Management stated that other legal matters were not expected to have a material adverse effect, while acknowledging adverse outcomes could result in significant liabilities. The company reported effective disclosure controls as of June 30, 2020.
Important facts for investors to verify
- Whether demand, AWP backlog and the expected rebooking of customer orders improved as projected in the second half of 2020.
- Whether working-capital reductions translated into sustained positive free cash flow, and how much cash generation depended on lower production or receivables factoring.
- Compliance with amended debt covenants, revolver availability, debt service capacity and the stated liquidity outlook.
- Changes in finance-receivable delinquencies, customer payment relief, credit-loss allowances and guarantee exposure.
- Resolution and potential financial impact of the Brazilian ICMS dispute and final adjustments to Demag disposal consideration.