Terex Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance sheet compared with December 31, 2014. Terex supplies lifting and material-handling equipment through Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP).
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,828.5 million | $2,055.1 million | $3,324.1 million | $3,709.7 million |
| Gross profit / margin | $384.2 million / 21.0% | $423.8 million / 20.6% | $660.8 million / 19.9% | $757.2 million / 20.4% |
| Operating income / margin | $148.3 million / 8.1% | $160.9 million / 7.8% | $192.5 million / 5.8% | $235.9 million / 6.4% |
| Income from continuing operations | $86.3 million | $88.4 million | $84.8 million | $119.9 million |
| Diluted continuing-operations EPS | $0.78 | $0.76 | $0.76 | $1.03 |
| Net income attributable to Terex | $84.8 million | $139.8 million | $85.8 million | $174.8 million |
- Q2 reported sales fell 11.0%; management said sales declined approximately 2% on a currency-neutral basis. Lower sales across segments, foreign exchange, and reduced MHPS port-automation deliveries contributed.
- Q2 operating margin improved to 8.1% from 7.8%, despite lower operating income. For the first half, operating margin declined to 5.8% from 6.4%.
- Q2 net income comparisons are affected by the 2014 after-tax gain of $51.5 million on the truck-business sale; Q2 2015 recorded a $0.4 million loss on disposition. First-half disposition gains were $2.7 million in 2015 versus $53.0 million in 2014.
- Segment Q2 operating income: AWP $103.9 million (15.3% margin); Construction $0.7 million; Cranes $22.6 million; MHPS $1.3 million; MP $22.0 million. AWP and MP margins returned to double digits, while Construction and MHPS remained near break-even.
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $84.8 million, versus positive $24.5 million a year earlier. The filing attributes the change mainly to lower net income and working-capital use, including $196.9 million used by receivables and $125.2 million by inventories.
- Capital expenditures were $48.7 million for the first half. Management-defined free cash flow was negative $18.8 million for the first half and positive $76.3 million in Q2.
- Cash was $332.7 million at June 30, 2015, down from $478.2 million at year-end. Management noted that $20.8 million was not immediately available, primarily due to escrow restrictions.
- Total debt was approximately $1.91 billion, versus $1.79 billion at year-end; cash-adjusted debt was approximately $1.57 billion. Terex had $485.2 million available under revolving credit facilities and $114.8 million drawn on the revolver.
- The $600 million revolving facility matures in August 2019; term loans mature in August 2021. The company also had $146.2 million outstanding under a new $350 million securitization facility, with a 1.25% weighted-average rate (2.20% including swaps).
- In June, Terex settled its 4% convertible notes with $131.1 million cash and 3.4 million shares. It repriced its euro term loan and entered the securitization facility. First-half share repurchases were approximately $50 million; quarterly dividends were $0.06 per share.
Outlook, commentary and risks
- Terex lowered its 2015 outlook to the low end of prior guidance: adjusted EPS of $1.90–$2.10, excluding restructuring and unusual items, on sales of $6.1–$6.4 billion. Management continued to expect full-year free cash flow of $200–$250 million despite first-half negative free cash flow.
- Management expects strong AWP margins and MP profitability for the rest of the year, and second-half margin improvement at MHPS. It described Cranes markets as challenging with no near-term improvement expected; Construction weakness in German and Indian compact-equipment businesses was expected to continue. AWP backlog was 4% above the prior-year level, but management cited uncertainty around fourth-quarter sales.
- Restructuring programs in MHPS, principally in Germany, had incurred $34.8 million cumulatively; the June 30 reserve was $34.1 million. The programs involve facility consolidation and workforce reductions and are expected to be completed by 2016.
- Management found no MP goodwill impairment at June 30; estimated fair value exceeded carrying value by approximately 20%. It warned that missed projected cash flows could lead to future impairment charges.
- Terex reported ongoing ERISA, securities and stockholder derivative litigation. An agreement in principle would settle the ERISA case for $2.5 million, funded primarily by insurance; the securities case remained pending, and the company said it could not estimate possible losses for these suits.
- Other exposures include customer credit and equipment buyback guarantees, foreign exchange and interest-rate movements, cyclical demand, customer access to financing, supplier availability, and debt covenant and refinancing risks. Maximum customer credit-guarantee exposure was $40.9 million; buyback-guarantee exposure was $18.7 million.
Important facts for investors to verify
- Whether the reduced 2015 sales and adjusted-EPS outlook and $200–$250 million free-cash-flow target were achieved, particularly given weak first-half cash flow and working-capital needs.
- Whether AWP and MP margin improvements persisted, and whether MHPS, Cranes, and Construction demand and profitability improved as management anticipated.
- How much of reported sales declines and segment performance reflected currency effects, divestitures, and underlying demand.
- Debt, revolver availability, securitization-facility use, covenant compliance, and the ability to reduce net debt while funding operations and shareholder returns.
- Developments in the ERISA and securities litigation, guarantee losses, and the MP goodwill impairment assessment.