Terex Corporation — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2019. Terex manufactures aerial work platforms (AWP), materials processing equipment (MP) and cranes. Results are presented with two reportable segments, AWP and MP; the Demag mobile cranes business and certain Oklahoma City crane product lines are reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,306.9 million | $1,253.0 million | $2,443.5 million | $2,369.6 million |
| Gross profit / margin | $271.8 million / 20.8% | $278.6 million / 22.2% | $509.6 million / 20.9% | $507.2 million / 21.4% |
| Operating income / margin | $126.0 million / 9.6% | $132.4 million / 10.6% | $225.7 million / 9.2% | $226.7 million / 9.6% |
| Income from continuing operations | $81.6 million | $84.2 million | $138.8 million | $152.9 million |
| Net income | $75.1 million | $57.8 million | $8.5 million | $108.1 million |
| Diluted EPS, continuing operations | $1.14 | $1.10 | $1.93 | $1.93 |
- Segment results: Q2 AWP sales were $870.4 million, up 2.1%, while operating income fell 22.7% to $86.3 million (9.9% margin versus 13.1%). MP sales increased 8.9% to $365.2 million and operating income rose 27.1% to $56.3 million (15.4% margin versus 13.2%).
- Cash flow: Continuing-operations operating cash flow was $217.1 million in Q2, but cash used in operations was $48.3 million for the first half, versus $35.6 million provided in the prior-year half. Company-defined free cash flow was $168.4 million for Q2 and negative $88.3 million year to date.
- Liquidity and debt: At June 30, cash and cash equivalents were $394.6 million, including $27.1 million classified as held for sale; balance-sheet cash for continuing operations was $367.5 million. Undrawn revolver availability was $425.5 million, for reported total liquidity of approximately $820 million. Debt was $1,347.7 million for continuing operations, plus $4.2 million classified as held for sale. The company reported compliance with credit agreement financial covenants.
- Other measures: Working capital was $869.5 million, or 16.6% of trailing-three-month annualized sales. Adjusted ROIC, a company-defined non-GAAP measure, was 20.6%.
Material changes versus prior period
- Q2 sales rose 4.3%, but operating income declined 4.8%; gross and operating margins compressed. Foreign-exchange movements reduced Q2 sales by about $33 million and gross profit by about $27 million.
- For the first half, sales increased 3.1%, while operating income was nearly flat. Foreign exchange reduced sales by about $71 million and gross profit by about $61 million.
- AWP faced currency pressure, lower factory overhead absorption as production was reduced, higher material costs and a shift toward lower-margin telehandlers. MP growth and margins benefited from higher volume, pricing and cost management.
- First-half net income fell sharply, largely reflecting an approximately $82 million after-tax impairment charge to write down the mobile cranes disposal group. Discontinued-operations losses were $141.7 million, compared with $49.4 million in the prior-year half.
- Net interest expense increased: Q2 was $22.8 million, up $6.6 million year over year; first-half net interest expense was $44.1 million, up $15.3 million. The company cited higher average borrowings and lower interest income.
Outlook, commentary and risks
- Management forecast 2019 adjusted EPS of $3.40–$3.80, excluding restructuring, transformation investments and other unusual items, on net sales of approximately $4.6 billion. It expected approximately $165 million of full-year free cash flow.
- Management said AWP sales growth and production volume would be lower than previously expected; a strong U.S. dollar and unfavorable product mix were additional headwinds. Management expected the telehandler mix trend to continue through year-end. MP markets were described as stable; AWP markets were moderating but remained healthy.
- The company expected the sale of Demag mobile cranes to Tadano, for an enterprise value of $215 million subject to closing adjustments, to close in Q3 2019. It also expected the sale of its ASV shares in Q3; together, the transactions were expected to generate approximately $150 million of additional cash. A separate sale of Oklahoma City boom truck, truck crane and crossover product lines generated a $12.8 million after-tax gain.
- Management cited strategic sourcing savings of approximately $30 million expected in 2019, ongoing manufacturing investments, and continued portfolio simplification. It said liquidity was sufficient for business plans and expected needs for at least the next 12 months.
- Key risks include cyclical demand, foreign-exchange volatility, tariffs and trade conflicts, Brexit-related disruption, input-cost and supply risks, customer financing and credit exposure, debt service and access to capital. A 10% currency movement relative to rates reflected in first-half results was estimated to affect operating income by about $17 million; a 10% increase in average floating rates was estimated to increase first-half interest expense by $1.8 million.
- Credit guarantees had maximum exposure determined at inception of $77.4 million, including $20.5 million related to discontinued operations. The allowance for finance-receivable credit losses increased to $12.1 million from $5.5 million at year-end; commercial loans more than 90 days past due were $8.3 million at June 30.
- The filing describes securities and derivative lawsuits with proposed settlements subject to court approval; the securities settlement was expected to be covered by insurance, and management said the proposed settlements would not materially affect results. Demag Cranes AG squeeze-out appraisal proceedings remain ongoing; the company cannot assure the outcome.
Important facts for investors to verify
- Whether the Demag and ASV sales closed on the expected timetable and at proceeds consistent with management’s cash expectations.
- Whether AWP margins stabilize despite currency, production-absorption and product-mix headwinds, and whether MP demand and backlog hold up.
- Actual full-year adjusted EPS and free cash flow versus guidance, including the effects of working capital and receivables factoring.
- Debt, interest costs, covenant headroom and available liquidity; distinguish continuing-operations cash from cash classified as held for sale.
- Changes in finance-receivable delinquencies, credit-loss allowances, guarantees and legal contingencies.