Terex Corporation — Q2 2014 Form 10-Q
Business context and reporting period
Terex designs and manufactures lifting, construction, crane, 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 three and six months ended June 30, 2014; amounts below are in millions of dollars unless noted. The truck business was sold to Volvo Construction Equipment on May 30, 2014, and is presented as discontinued operations.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $2,055.1 | $1,861.5 | $3,709.7 | $3,515.2 |
| Gross profit / margin | $423.8 / 20.6% | $351.2 / 18.9% | $757.2 / 20.4% | $672.4 / 19.1% |
| Operating income / margin | $160.9 / 7.8% | $83.5 / 4.5% | $235.9 / 6.4% | $149.1 / 4.2% |
| Income from continuing operations | $88.4 | $18.7 | $119.9 | $36.4 |
| Net income attributable to Terex | $139.8 | $21.3 | $174.8 | $45.2 |
| Diluted EPS attributable to Terex | $1.21 | $0.18 | $1.50 | $0.39 |
Q2 sales increased 10.4% and operating income rose 92.7% year over year. First-half sales increased 5.5% and operating income 58.2%. Net income includes an after-tax $51.5 gain on the truck-business sale in Q2 ($53.0 for the first half); continuing-operations diluted EPS was $0.76 for Q2 and $1.03 for the first half.
| Q2 segment | Sales 2014 (2013) | Operating income (loss) 2014 (2013) |
|---|---|---|
| AWP | $717.9 ($606.6) | $113.5 ($101.2) |
| Construction | $227.2 ($228.1) | $4.0 (($5.2)) |
| Cranes | $503.5 ($521.2) | $29.7 ($23.4) |
| MHPS | $431.4 ($369.8) | $2.7 (($57.2)) |
| MP | $183.1 ($176.3) | $22.8 ($24.5) |
At June 30, cash was $364.3, versus $408.1 at year-end 2013. Operating cash flow for the first half was $24.5, capital expenditures were $37.3, and free cash flow was negative $12.8 (approximately negative $13). Cash from operations fell from $129.9 in the prior-year half, primarily due to higher working-capital use, including receivables and inventory. Investing activities provided $120.1, including $162.2 of proceeds from the truck-business disposal. Financing activities used $189.1.
Total debt was approximately $1,922.5 ($190.7 current and $1,731.8 long-term), compared with approximately $1,976.7 at December 31, 2013. Cash less debt therefore implied net debt of about $1,558.2. The company reported $415.2 available under its revolving facilities and $80.5 outstanding on the revolver; cash plus reported revolver availability was approximately $779.5. Total assets were $6,704.6 and stockholders’ equity $2,362.5. Working capital, as defined by Terex, was $2,012.1, or 24.5% of trailing-three-month annualized sales.
Material changes and management commentary
- AWP led growth, with stronger rental-channel demand in North America and Europe; operating income rose to $113.5, although margin declined to 15.8% from 16.7% amid mix, product-development investment and manufacturing start-up costs.
- Construction returned to quarterly profitability, chiefly through cost reductions and portfolio rationalization. Cranes improved sequentially but first-half sales and operating income remained below the prior year. MHPS returned to a small Q2 operating profit, helped by port demand and lower restructuring and inventory charges. MP remained profitable, with slightly lower operating income.
- Management cited North American sales growth of 15% and Western European growth of 35% versus Q2 2013; other, mainly developing, markets declined. It described first-half performance as mixed.
- The truck sale generated approximately $160 in proceeds and a $51.5 after-tax gain in Q2. Proceeds were used in part to repay revolving borrowings; reported liquidity increased approximately $148 from March 31.
- Terex bought the remaining TMHPS minority interest in January for approximately $71 and now owns 100%. First-half share repurchases totaled approximately $54; cumulative repurchases under the program were approximately $84. The company paid $0.05 per share in each of Q1 and Q2.
Outlook, risks and contingencies
Management maintained its 2014 outlook: adjusted EPS of $2.50–$2.80, excluding restructuring and other unusual items, on net sales of $7.3–$7.5 billion; expected free cash flow was $200–$250. It anticipated stronger AWP performance and improvement in Cranes and MHPS in the second half. Management acknowledged a slightly weaker end-market outlook than previously expected, partly offset by a lower effective tax rate and anticipated share count. The forecast is forward-looking and not guaranteed.
Key risks include cyclical demand, customer access to financing, working-capital requirements, foreign-exchange and interest-rate movements, supplier availability and costs, competition, and the ability to generate cash and comply with debt covenants. The credit agreement requires minimum interest coverage of 2.5:1 and maximum senior secured leverage of 2.5:1. The $120.7 carrying amount of 4% convertible notes is due in June 2015; revolver and term-loan maturities are in 2016 and 2017. Outstanding customer credit guarantees were $53.5; maximum buyback guarantees were $33.9 and residual-value guarantees $2.4.
Terex reported pending ERISA, securities and shareholder derivative lawsuits and said it could not estimate a possible loss or range for those matters. Management stated that reserves for other contingencies were considered adequate and that material adverse effects were not expected, while cautioning that adverse litigation outcomes could be significant. The company also noted foreign-currency and commodity exposure. Disclosure controls were assessed as effective at June 30; enterprise software implementation continued, with related process and control changes reviewed.
Most important facts for investors to verify
- How much of reported earnings growth reflects continuing operations versus the truck-sale gain, and how adjusted EPS reconciles to GAAP results.
- Whether second-half demand and segment improvements support the $2.50–$2.80 adjusted EPS, $7.3–$7.5 billion sales and $200–$250 free-cash-flow targets.
- Whether receivables and inventory convert to cash after first-half negative free cash flow, and how working capital evolves.
- Liquidity availability, covenant headroom and plans to address the June 2015 convertible-note maturity.
- Developments in the pending lawsuits, customer equipment guarantees, and controls affected by the ongoing enterprise-software implementation.