Terex Corporation (TEREX) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Terex manufactures materials-processing machinery and aerial work platforms, utility equipment and telehandlers, reported in Materials Processing (MP) and Aerial Work Platforms (AWP). Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,403.1 | $1,077.1 | $2,638.8 | $2,079.6 |
| Gross profit | $342.9 | $212.9 | $621.6 | $398.7 |
| Gross margin | 24.4% | 19.8% | 23.6% | 19.2% |
| Operating income | $209.9 | $103.9 | $357.6 | $178.4 |
| Operating margin | 15.0% | 9.6% | 13.6% | 8.6% |
| Net income | $159.4 | $74.1 | $272.0 | $126.0 |
| Diluted EPS | $2.34 | $1.07 | $3.97 | $1.80 |
Q2 diluted EPS from continuing operations was $2.35. Revenue rose 30.3% year over year; operating income roughly doubled. Management attributed the improvement to higher sales volumes, price realization and better manufacturing efficiencies, partly offset by cost increases. SG&A was $133.0 million, or 9.5% of sales, versus $109.0 million, or 10.1%, a year earlier.
- Q2 segments: MP sales were $577.4 million, up 20.1%, with a 17.0% operating margin versus 16.5%. AWP sales were $824.9 million, up 38.0%, with a 16.2% operating margin versus 7.7%.
- Cash flow: Six-month operating cash flow was $129.8 million, compared with $19.3 million in 2022. Free cash flow was $124.2 million for the six months and $134.8 million for Q2, as defined by Terex. Six-month capital expenditures were $39.1 million; asset-sale proceeds were $33.5 million.
- Liquidity and debt: Cash was $297.7 million and undrawn revolver availability was $465 million, for reported total liquidity of about $763 million. Debt totaled $736.7 million, implying net debt of about $439 million. Revolver borrowings were $134.5 million at a 6.84% weighted-average rate; total debt’s weighted-average rate was 4.93%. Terex reported no significant debt maturities until 2026 and compliance with credit covenants.
- Balance sheet: Current assets were $2,217.8 million and current liabilities $1,073.6 million. Inventory was $1,122.0 million, up from $988.4 million at year-end 2022. Working capital as a share of trailing-three-month annualized sales was 19.2%.
Material changes and management commentary
- Six-month sales increased 26.9% year over year; operating income increased 100.4%. Foreign exchange reduced reported sales by about $52 million for the half-year and $10 million in Q2.
- Demand was described as strong across major geographies. North America accounted for about 60% of Q2 sales. MP backlog was $1.1 billion and AWP backlog $2.7 billion.
- Management cited improved supplier delivery but continuing supply constraints; $23 million of “hospital” inventory remained at quarter-end, down $25 million from Q1. Inflationary pressures were moderating, while costs continued to rise.
- Terex acquired MARCO, a conveyor manufacturer, on April 1 for about $6 million. It also completed the sale of an AWP facility in April, recognizing an approximately $2 million gain included in SG&A. A $2.3 million six-month gain on discontinued-operation dispositions primarily reflected post-closing adjustments related to former businesses.
- Six-month share repurchases were $33.8 million; approximately $159 million remained authorized. Terex declared a July dividend of $0.17 per share, payable September 19, following quarterly dividends of $0.15 per share earlier in 2023.
Outlook, risks and contingencies
- Guidance: Terex raised its full-year 2023 outlook to approximately $5.1 billion in sales and approximately $7.00 in EPS, excluding potential acquisitions, divestitures, restructuring and other unusual items. The company said it could not reconcile this forward-looking non-GAAP EPS measure to GAAP without unreasonable effort.
- Execution and market risks: Management expects supply-related material shortages and production delays to continue through the remainder of 2023. Production-line transfers and the new Monterrey facility are expected to create short-term manufacturing inefficiencies. Management also cited macroeconomic and geopolitical uncertainty, volatile credit and interest-rate markets, and possible customer financing constraints.
- Input and currency exposure: Steel-cost declines partly offset inflation in other components; tariffs on certain Chinese-origin goods continued to pressure input costs. A 10% currency movement relative to assumptions would have affected reported six-month operating income by approximately $29 million, based on the company’s sensitivity analysis.
- Legal and guarantee exposure: A Brazilian ICMS tax dispute involves an assessment of approximately BRL 111 million, or $23 million; Terex contests the claim and says the outcome is uncertain. Maximum exposure on customer credit guarantees was $103.3 million, with a $5.5 million allowance for credit losses.
- Terex said it believes reserves for contingencies are adequate and that other legal matters are not expected to have a material adverse effect, while noting adverse litigation outcomes could be significant. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether order demand and the $3.8 billion combined segment backlog convert to sales as expected, particularly amid some softness in European MP orders.
- Whether supply constraints, remaining “hospital” inventory and facility transitions affect production, delivery timing or margins.
- Whether the $5.1 billion sales and approximately $7.00 adjusted EPS outlook remains achievable, and how exclusions affect comparison with GAAP results.
- Cash conversion and working-capital needs, including the company’s sale of approximately $382 million of receivables without material recourse during the first half.
- Developments in the Brazilian ICMS proceeding, customer credit guarantees and other litigation or product-liability contingencies.
- Interest-rate and foreign-exchange exposure, and continued covenant compliance and access to revolver liquidity.