Business context and reporting period
Terex Corporation’s Form 10-K covers the fiscal year ended December 31, 2020. Terex manufactures aerial work platforms and materials processing and specialty equipment, reported in Aerial Work Platforms (AWP) and Materials Processing (MP). Results exclude discontinued mobile crane operations, principally Demag, sold in 2019.
Financial performance and liquidity
| Metric (USD millions except per-share data) | 2020 | 2019 |
|---|---|---|
| Net sales | $3,076.4 | $4,353.1 |
| Gross profit / margin | $539.3 / 17.5% | $887.8 / 20.4% |
| Operating income / margin | $68.4 / 2.2% | $335.0 / 7.7% |
| Continuing-operations income | $9.0 | $209.7 |
| Net income (loss) / diluted EPS | $(10.6) / $(0.15) | $54.4 / $0.76 |
| Cash from operations | $225.4 | $173.4 |
| Free cash flow (company-defined) | $141.3 | Not provided here |
Revenue fell 29.3%; lower volume and temporary AWP manufacturing inefficiencies contributed to gross-margin compression. SG&A declined 14.8% to $470.9 million, reflecting cost controls partly offset by severance and restructuring. Interest expense, net of interest income, was $62.3 million, down $19.1 million year over year. The effective tax rate on continuing operations was 18.2%, versus 15.3%.
- AWP: Sales of $1,782.9 million, down 34.6%; operating income was $0.5 million, versus $196.2 million. Management cited weaker demand across major regions and lower factory absorption.
- MP: Sales of $1,256.8 million, down 21.6%; operating income was $143.4 million, or an 11.4% margin, versus $227.9 million and 14.2%.
- Orders: Year-end backlog was $1,349.0 million, up $267.8 million from 2019. AWP backlog rose about 10%; MP rose about 59%.
- Cash and debt: Cash was $665.0 million in continuing operations ($670.1 million including held-for-sale cash). Total debt was $1,173.8 million; no revolver borrowings were outstanding. Management reported approximately $1.1 billion of available liquidity and compliance with debt covenants at year-end.
- Working capital: Inventories declined to $610.4 million from $847.7 million; working capital was $603.9 million, or 19.2% of trailing three-month annualized sales. Operating cash flow benefited from working-capital management.
Material changes, outlook and risks
The COVID-19 pandemic drove a sharp demand decline, factory disruption and cost-reduction measures. Sales stabilized and improved in the second half; fourth-quarter sales were down 11% year over year. Management reported reducing 2021 SG&A structure by more than $100 million versus 2019. The company shifted its strategy to “Execute, Innovate, Grow.”
For 2021, management forecast sales of approximately $3.45 billion and adjusted EPS of $1.95–$2.35; it stated that this non-GAAP EPS outlook could not be reconciled to GAAP without unreasonable effort. Segment expectations were AWP sales of about $2.0 billion and a 6.5% operating margin, and MP sales of about $1.4 billion and a 12% margin. Net capital spending was expected to be about $90 million; free cash flow was expected to be approximately $100 million. Management expected second-quarter sales to be highest seasonally and second-half earnings to be slightly higher than first-half earnings, while emphasizing pandemic and supply-chain uncertainty.
- Demag-related settlement and other disposition adjustments produced a 2020 discontinued-operations disposition loss of $19.2 million after tax; discontinued-operations loss itself was $0.4 million.
- Terex suspended dividends and repurchases for the remainder of 2020, then reinstated a quarterly dividend of $0.12 per share in February 2021. It initiated prepayment of the 2019 term loan in February 2021.
- Key risks include renewed COVID-19 effects, cyclical demand, supply constraints and rising steel costs, tariffs, foreign exchange exposure, customer credit and residual-value risk, and debt-service and covenant requirements. The company also cited LIBOR transition uncertainty and Brexit-related exposure, particularly in MP’s Northern Ireland operations.
- Terex disclosed $143.8 million of maximum exposure at inception under customer credit guarantees. A Brazilian ICMS tax dispute involved an assessment of approximately BRL 102 million ($19 million); the company contested the claim. Management believed recorded reserves were appropriate, but litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether backlog converts to sales and whether the 2021 sales, margin, EPS and free-cash-flow outlook is achieved.
- Whether AWP profitability recovers from near break-even and MP sustains its comparatively stronger margin.
- Cash generation quality, including working-capital movements and the extent of receivables factoring and financing-asset sales.
- Debt reduction progress, liquidity availability and compliance with covenant requirements as pandemic-era relief terms change.
- Potential cash or earnings effects from customer guarantees, the Brazil ICMS proceeding, and the Demag settlement.
- Inventory valuation, customer credit-loss reserves and other estimates given the uncertain demand environment.