Terex Corporation (NYSE: TEX) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing was signed February 25, 2019. Terex manufactures aerial work platforms (AWP), cranes, and materials-processing equipment (MP). The former Material Handling and Port Solutions business is reported as discontinued operations.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $5,125.0 million | $4,363.4 million |
| Gross profit / margin | $966.8 million / 18.9% | $816.0 million / 18.7% |
| Operating income / margin | $293.3 million / 5.7% | $179.9 million / 4.1% |
| Continuing-operations income | $111.3 million | $60.0 million |
| Net income attributable to Terex | $113.7 million | $128.7 million |
| Diluted EPS | $1.48 | $1.36 |
| Cash provided by operations | $94.2 million | $153.0 million |
| Free cash flow (company-defined) | $14.8 million | Not stated in the cited reconciliation |
| Capital expenditures | $103.8 million | $43.5 million |
Sales increased 17.5%, primarily on higher equipment demand across segments; currency translation contributed approximately $83 million. Gross margin improved slightly, while operating income rose 63.0%. Despite higher continuing-operations income, reported net income declined, reflecting chiefly a $67.0 million non-cash U.S. pension settlement loss in 2018 and a $68.7 million after-tax gain on discontinued-business dispositions in 2017.
Segments: AWP sales were $2,559.7 million and operating income $261.0 million (10.2% margin), up from $2,071.5 million and $170.3 million. Cranes sales rose to $1,315.0 million, but the segment recorded a $45.3 million operating loss versus a $14.1 million loss; supply-chain problems, higher material costs, and a non-cash impairment contributed. MP sales increased to $1,256.8 million and operating income to $167.5 million (13.3% margin), from $1,072.5 million and $125.1 million.
Fourth quarter: Sales were $1,233.1 million versus $1,063.6 million in Q4 2017. Continuing-operations net loss was $30.6 million versus $31.7 million; total net loss was $33.0 million versus $26.7 million.
Liquidity, debt, and capital allocation
- Year-end cash and cash equivalents were $372.1 million; undrawn revolving-credit availability was $363.0 million, for reported total liquidity of approximately $735 million. Liquidity decreased about $345 million during 2018, mainly due to repurchases and capital spending.
- Total debt was $1,219.4 million, up from $984.8 million. Cash-adjusted debt was approximately $847 million. The company reported compliance with debt covenants at year-end.
- Operating cash flow declined to $94.2 million from $153.0 million, mainly because of working-capital investment. Inventory increased to $1,212.0 million from $969.6 million. Working capital was 21.1% of trailing-three-month annualized sales, versus 21.7%.
- Terex repurchased 11.4 million shares for $425 million in 2018 and paid $30 million in dividends. The company reported $200 million remaining under its repurchase authorization at year-end.
- To support liquidity, Terex sold approximately $940 million of trade receivables without recourse and transferred approximately $291 million of finance receivables to third parties during 2018.
Changes, outlook, and material items
- Backlog increased to $1,941.7 million from $1,631.1 million, with growth in all segments; MP backlog rose approximately 54%, AWP 14%, and Cranes 6%.
- Steel-price increases and U.S. tariffs raised input costs and pressured margins. Terex applied surcharges and pursued tariff duty drawbacks; management expected elevated material-cost headwinds to continue in 2019.
- Management forecast 2019 continuing-operations sales of approximately $4.7 billion and adjusted EPS of $3.60–$4.20, excluding restructuring and other unusual items. It expected approximately $165 million of 2019 free cash flow. These are forward-looking, non-GAAP estimates; the filing says a GAAP EPS reconciliation was unavailable without unreasonable effort.
- Management expected AWP margins to improve on higher volume, MP sales to grow modestly with strong margins, and Cranes markets to be generally stable. It cited mobile-crane operating challenges in 2018 and improved manufacturing productivity and deliveries in Q4.
- On February 22, 2019, Terex agreed to sell its Demag mobile-crane business to Tadano for $215 million enterprise value, subject to adjustments and closing conditions, targeted for mid-2019. It also planned to exit North American mobile-crane product lines made in Oklahoma City. Terex expected a pre-tax charge of approximately $100 million in Q1 2019. Segment reporting would be realigned, with the future business managed in AWP and MP segments.
- Other notable items include termination of the U.S. qualified pension plan through a group annuity transaction, producing the $67 million settlement loss; and an expected material balance-sheet effect from adopting the new lease accounting standard in 2019.
Risks and contingencies
Key risks include cyclical demand and economic weakness; escalating trade disputes, tariffs, and steel costs; uncertainty around Brexit, particularly for Northern Ireland manufacturing; customer access to financing and equipment residual values; supplier interruptions; foreign-exchange and floating-rate debt exposure; and the ability to generate cash while meeting debt covenants. Terex also identified competition, government-spending dependence, facility disruptions, product-liability and other litigation, environmental and regulatory costs, cybersecurity, and execution risks for its transformation program.
At year-end, customer-financing credit guarantees had maximum exposure of $59.2 million and residual-value guarantees $2.7 million; recorded liabilities for all guarantees were $3.8 million. A securities class action had an agreement in principle to settle, subject to court approval; the proposed settlement was expected to be insurance-covered and immaterial. A related derivative action and Demag shareholder appraisal proceedings remained unresolved. Management stated that it did not expect the identified contingencies, individually or in aggregate, to have a material adverse effect, while noting outcomes cannot be predicted.
Important facts for investors to verify
- Whether the Tadano transaction closed on the anticipated terms and how the sale, exits, and expected charge affected 2019 results and segment comparability.
- Progress against 2019 adjusted EPS, sales, and free-cash-flow guidance, including the excluded items and any GAAP reconciliation subsequently provided.
- Whether higher tariffs, steel and other input costs, and working-capital requirements affected margins, cash generation, and liquidity.
- Debt balances, revolver availability, covenant headroom, and dependence on receivables sales as a liquidity source.
- Backlog conversion, especially MP’s elevated backlog, and whether demand and operational performance supported the forecast.
- Resolution of the securities and derivative lawsuits and the Demag appraisal proceeding.
Audit and controls: PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2018.