Terex Corporation — Q3 2014 Form 10-Q Summary
Business context and reporting period
Terex designs and manufactures lifting, construction, material-handling and materials-processing equipment, operating through Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP). This filing covers the quarter and nine months ended September 30, 2014; amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,809.8 million | $1,757.0 million | $5,519.5 million | $5,272.2 million |
| Gross profit / margin | $357.3 million / 19.7% | $381.4 million / 21.7% | $1,114.5 million / 20.2% | $1,053.8 million / 20.0% |
| Operating income / margin | $116.8 million / 6.5% | $138.6 million / 7.9% | $352.7 million / 6.4% | $287.7 million / 5.5% |
| Income from continuing operations | $58.7 million | $83.8 million | $178.6 million | $120.2 million |
| Net income attributable to Terex | $64.2 million | $94.4 million | $239.0 million | $139.6 million |
| Diluted EPS from continuing operations | $0.51 | $0.73 | $1.55 | $1.07 |
- Q3 sales increased 3.0%, but gross profit fell 6.3% and operating income fell 15.7%. Nine-month sales rose 4.7% and operating income rose 22.6%.
- Q3 net income included a $5.5 million after-tax gain on disposal of discontinued operations. Nine-month net income included $58.5 million of such gains, substantially benefiting the year-over-year comparison.
- Cash from operations was $116.6 million for the nine months, versus $163.1 million a year earlier. Capital expenditures were $58.6 million; reported free cash flow was $58.0 million.
- Operating cash was pressured by working-capital investment, including a $164.7 million cash use from inventories. Working capital was $1,876.1 million, or 25.9% of trailing three-month annualized sales.
- At September 30, cash was $344.5 million, total debt was approximately $1,851.9 million, and total stockholders’ equity was $2,248.6 million. Cash was down from $408.1 million at year-end 2013; debt was down from approximately $1,976.7 million.
- Current assets were $3,537.7 million and current liabilities $1,768.2 million. The company reported $550 million available under its $600 million revolving facility, with $50 million drawn.
- Comprehensive loss was $106.6 million in Q3 despite net income, primarily reflecting a $176.3 million foreign-currency translation loss. Nine-month comprehensive income was $108.8 million.
Material changes versus the prior comparable period
- AWP led growth: Q3 sales increased 12.3%, while operating income declined 15.2%; the segment cited higher factory and commodity costs, start-up costs and Latin American currency losses.
- Construction returned to positive Q3 operating income of $1.6 million, compared with a $5.1 million loss. Management attributed improvement to sales, factory utilization, portfolio rationalization and cost control.
- Cranes weakened: Q3 sales fell 7.4% and operating income fell 24.6%, with lower mobile-crane demand and product mix contributing. Nine-month operating income declined 39.5%.
- MHPS Q3 sales rose 1.7%, but operating income slipped 4.9%, partly due to restructuring charges. For the nine months, operating income improved to $14.0 million from a $67.8 million loss, reflecting higher sales and lower restructuring and inventory charges.
- MP Q3 operating income fell 54.0%, amid unfavorable sales mix, lower productivity and higher engineering expense.
- Terex sold its truck business to Volvo Construction Equipment on May 30, 2014 for approximately $160 million; it is presented as discontinued operations. The company also completed its purchase of the remaining TMHPS shares and now owns 100% of that business.
Outlook, management commentary, risks and unusual items
- Management forecast full-year 2014 adjusted EPS of $2.35–$2.50, excluding restructuring and other unusual items, at or near the bottom of its prior range. Sales guidance was $7.3–$7.5 billion.
- Full-year free cash flow was expected at or near the low end of the previously announced $200–$250 million range. Management said it was assuming flat markets and improvements it could control; it cited cost reductions, lower interest expense and tax-rate improvements as potential earnings drivers over the next two years.
- Management described Western Europe as growing, with sales up 31% across segments year over year, and North America up 3%; most other markets, particularly developing markets, declined. It noted financing constraints among some Crane customers in developing markets.
- A new credit agreement signed in August provides a $600 million secured revolving facility through 2019 and U.S.-dollar and euro term loans maturing in 2021. The agreement extended maturities and reduced borrowing costs. It includes restrictive covenants and, under specified borrowing conditions, financial tests.
- The $122.9 million balance of 4% convertible notes matures in June 2015. The company recorded a $2.6 million charge for early extinguishment of debt related to refinancing.
- MHPS began a restructuring program to close a German facility and relocate production, expected to cost $10.7 million and reduce headcount by 84; completion was expected in 2015. Total restructuring charges for the nine months were $9.6 million.
- In October, Terex announced an agreement to sell 51% of A.S.V., Inc., with completion expected before year-end 2014.
- Contingencies include ordinary-course litigation and unresolved ERISA, securities and stockholder derivative lawsuits. The company could not estimate a possible loss range for those lawsuits. Customer credit guarantees had maximum exposure of $45.4 million; buyback guarantees had maximum exposure of $27.7 million.
- Key risks include cyclical and uncertain end markets, customer access to financing, working-capital needs, foreign exchange and interest-rate movements, supplier availability and costs, debt covenants, and potential losses on guarantees or litigation.
Important facts for investors to verify
- How much of reported earnings and EPS guidance depends on disposal gains or adjustments excluded from adjusted EPS; review the company’s non-GAAP reconciliations.
- Whether working-capital use, particularly inventory growth, converts into cash and whether full-year free cash flow reaches the stated range.
- Whether Crane order trends and customer financing improve, and whether AWP and MP margins recover from Q3 pressures.
- Available borrowing capacity, covenant headroom, refinancing terms and the plan for the June 2015 convertible-note maturity.
- The completion and financial effects of the proposed A.S.V. transaction, and the final accounting and proceeds associated with discontinued-operation disposals.
- Potential impact of foreign-currency movements on operating results and equity, and any material developments in the disclosed litigation or guarantees.