Terex Corporation (NYSE: TEX) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Terex manufactures aerial work platforms and materials processing equipment, reported in its AWP and MP segments. Comparisons are with the corresponding 2020 periods unless noted.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $993.8 million | $765.6 million | $2,896.7 million | $2,289.7 million |
| Gross profit | $178.5 million | $146.3 million | $585.5 million | $390.1 million |
| Gross margin | 18.0% | 19.1% | 20.2% | 17.0% |
| Operating income | $74.2 million | $36.5 million | $258.2 million | $36.8 million |
| Operating margin | 7.5% | 4.8% | 8.9% | 1.6% |
| Net income (loss) | $48.1 million | $5.8 million | $162.1 million | $(28.3) million |
| Diluted EPS | $0.68 | $0.08 | $2.29 | $(0.41) |
- Q3 sales increased 29.8%; operating income more than doubled. Higher volume and price realization lifted operating results, while material, labor and freight inflation and supply disruptions weighed on gross margin.
- Q3 AWP sales were $572.5 million, up 28.7%, with a 6.1% operating margin versus 3.0%. MP sales were $418.7 million, up 34.5%, with a 13.6% margin versus 12.9%.
- At September 30, cash and cash equivalents were $553.2 million in continuing operations; the cash-flow statement’s $558.2 million total also includes $5.0 million held for sale. Total debt was approximately $893.4 million, including $5.7 million current debt. No revolver borrowings were outstanding.
- Available liquidity was approximately $1.2 billion: $558.2 million cash, including held-for-sale cash, plus $600 million undrawn revolver availability. Working capital was $692.8 million, or 17.4% of trailing-three-month annualized sales.
- Nine-month operating cash flow was $324.1 million versus $88.9 million. Free cash flow, a company-defined non-GAAP measure, was $183.4 million for nine months and $42.5 million in Q3.
Material changes and notable items
- Nine-month revenue rose 26.5%; operating margin improved to 8.9% from 1.6%. Both segments reported higher sales and operating income, supported by demand, pricing, manufacturing efficiency and cost control.
- Cash flow benefited from stronger operating profitability and a $99.4 million cash sale of finance receivables, which generated a $5.6 million gain. The company also sold approximately $359 million of trade receivables during the first nine months.
- Terex refinanced its 5.625% notes due 2025 with $600 million of 5% notes due 2029 and prepaid term loans. It reported a $27.7 million nine-month loss on early debt extinguishment. Term loans were $298.4 million at quarter-end; a further $150 million prepayment occurred in October.
- Investing activity included approximately $19 million for the MDS acquisition in Ireland and $17 million for manufacturing assets in China. MDS results are included in MP from the acquisition date.
- Q3 net income included a $0.6 million after-tax gain on disposition of discontinued operations. The prior-year quarter included a $16.1 million after-tax disposition loss.
Outlook, commentary and risks
- Management forecast 2021 net sales of approximately $3.85 billion and adjusted EPS of $2.75–$2.85. EPS guidance excludes potential acquisitions, divestitures, restructuring and other unusual items; the filing says it cannot reconcile this forward-looking non-GAAP measure to GAAP without unreasonable effort.
- Management said Q3 revenue was approximately 9% below its expectations because supply constraints limited production, especially in AWP. Earnings were also below prior expectations due to the revenue shortfall, inflation and reduced manufacturing efficiency.
- Management described demand as robust and expected end-market strength through the rest of 2021 and into 2022. Backlog was up 257% year over year in AWP and 253% in MP. The company cautioned that supply constraints and inflation would continue to affect results into 2022; customer price increases were expected to provide more benefit in 2022.
- Key risks include component shortages, logistics and freight delays, rising input costs, tariffs and trade disputes, cyclical and COVID-related demand uncertainty, foreign-exchange and interest-rate movements, customer credit and financing exposure, and debt covenant or liquidity constraints. Management reported covenant compliance at September 30 and adequate liquidity for at least the next 12 months.
- A Brazilian state tax dispute concerns approximately BRL 103 million, or $19 million, of claimed ICMS tax, penalties and interest. Terex disputes the claim but cannot assure the outcome. Credit guarantees had $163.3 million maximum exposure determined at inception and a $10.2 million allowance. The company said it believes its legal reserves are adequate and that other matters are not expected to have a material adverse effect.
Investor verification points
- Track whether supplier availability, freight delays and production constraints improve, particularly in AWP, and whether the company delivers its 2021 revenue and EPS outlook.
- Assess the timing and sufficiency of price increases to offset material, labor and logistics inflation, and monitor segment margins against the Q3 levels.
- Reconcile cash generation with working-capital needs, including rising receivables and inventory, and evaluate the use of receivable sales in reported liquidity and cash flow.
- Verify the effect of the October $150 million term-loan prepayment on debt, interest expense and liquidity, and monitor covenants and refinancing requirements.
- Follow the Brazilian ICMS proceeding, customer credit-guarantee exposure and any other changes in legal or contingent liabilities.