Terex Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Terex designs, manufactures and services lifting, material-handling, materials-processing and construction equipment across five reportable segments.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $1,426.9 million | $1,495.6 million; down 4.6% |
| Gross profit / margin | $223.5 million / 15.7% | $276.6 million / 18.5% |
| Operating income (loss) / margin | $(41.7) million / (2.9)% | $44.2 million / 3.0% |
| Net income (loss) attributable to Terex | $(70.8) million; $(0.65) per diluted share | $1.0 million; $0.01 per diluted share |
| Operating cash flow | $(129.2) million | $(110.7) million |
| Free cash flow (company-defined non-GAAP) | $(146.2) million | Not provided in the filing excerpt for comparison |
| Cash and cash equivalents | $323.6 million | $466.5 million at December 31, 2015 |
| Total debt | $1,830.9 million | $1,810.1 million at December 31, 2015 |
Q1 cash use reflected seasonal working-capital investment as production ramped for busier customer seasons. Inventory increased to $1,554.3 million from $1,445.7 million at year-end; working capital was $1,658.5 million, or 29.1% of trailing-three-month annualized sales. Terex reported $518.0 million available under its revolving credit facilities and said liquidity was sufficient for its business plans. Cash included $27.2 million not immediately available for use.
Interest expense was $25.2 million, down from $29.5 million, mainly following settlement of the 4% Convertible Notes in 2015. Gross margin declined 2.8 percentage points. No EBITDA figure is provided in the filing text.
Material changes and segment results
- AWP sales were $520.7 million, up 0.6%; operating income was $38.1 million versus $44.6 million. European replacement demand supported sales, while foreign exchange, pricing and lower refurbishment activity weighed on results.
- Cranes sales fell 13.0% to $307.3 million; operating results shifted to a $16.6 million loss from $2.4 million income. Lower North American mobile-crane demand, including oil, gas and commodity-market weakness, and the absence of prior-year high-tonnage Asia shipments contributed.
- MHPS sales declined 7.7% to $317.7 million; operating loss widened to $61.8 million from $4.4 million. Results included approximately $49 million of severance and restructuring charges, as well as adverse volume, mix and pricing.
- MP sales decreased 2.1% to $177.3 million, but rose slightly on a currency-neutral basis; operating income improved to $10.1 million from $9.3 million.
- Construction sales rose 16.6% to $142.5 million and operating results improved to $1.3 million income from a $3.6 million loss, helped by concrete mixer trucks and U.K. site dumpers.
Management attributed the consolidated operating decline mainly to weaker Cranes and MHPS performance, approximately $60 million of severance and restructuring charges (described elsewhere as approximately $62 million), and about $19 million of higher inventory and warranty reserve charges. Currency movements reduced reported consolidated sales by approximately $48 million.
Outlook, transactions and risks
- Management maintained its 2016 outlook: EPS of $1.30–$1.60 excluding restructuring and unusual items, and net sales approximately 10% below 2015. It expects full-year free cash flow of $200–$250 million, despite Q1 free cash flow of $(146.2) million.
- Terex said the large-capital-equipment market remained challenging and did not expect near-term improvement. It was pursuing approximately $60 million in cost reductions. Additional dividends remained subject to Board approval; Terex stated an intention to pay four quarterly dividends of $0.07 per share for 2016.
- The proposed Konecranes combination remained pending. Terex shareholders were to receive 0.8 Konecranes Terex ADS per Terex share; shareholder meetings were expected in mid-2016, with closing then anticipated in late Q3 or Q4 2016, later than originally planned due to regulatory-filing delays. Completion depends on shareholder and regulatory approvals and other conditions.
- On March 23, 2016, Terex received a revised, non-binding Zoomlion proposal of $31 per share in cash. Terex’s Board was negotiating definitive terms, but had not changed its recommendation in support of the Konecranes transaction; the existing agreement restricts entering into a Zoomlion agreement while it remains in effect.
- April 4, 2016 U.S. tax regulations, disclosed after quarter-end, were expected to eliminate substantially all of the merger’s anticipated financial and tax synergies and could create additional annual net tax costs. The filing states that the regulations may materially reduce anticipated merger benefits.
- Risks include cyclical and weak end markets, merger delays or failure, transaction-related disruption and costs, debt and covenant requirements, cash generation, foreign exchange and interest-rate exposure, supply constraints, product liability and litigation. A merger-related stockholder lawsuit sought to enjoin or rescind the transaction; Terex said it would defend the claims. The filing also disclosed credit guarantees with maximum exposure of $41.7 million and buyback guarantees of $7.1 million.
Important facts for investors to verify
- Whether sales, margins and cash generation improve as seasonal deliveries progress, and whether the $200–$250 million full-year free-cash-flow outlook remains achievable.
- How much of the reported operating loss reflects recurring trading conditions versus severance, restructuring, inventory and warranty charges; confirm the final cost and timing of planned reductions.
- Liquidity, working-capital needs, revolving-credit availability and planned repayment and termination of the securitization facility; assess debt-service capacity and covenant headroom.
- Developments in the Konecranes merger, the competing Zoomlion proposal, required approvals, transaction costs and potential tax consequences under the April 4 regulations.
- Performance and backlog trends in Cranes and MHPS, and the adequacy of warranty, inventory and guarantee reserves amid weak markets.