Terex Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Terex manufactures aerial work platforms, cranes, and materials-processing equipment. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
- Third quarter: Net sales were $1,228.5 million, up 10.6% year over year. Gross profit was $232.8 million (18.9% margin, versus 19.7%); operating income was $71.9 million (5.9% margin, versus $65.9 million and 5.9%). Continuing-operations income was $38.4 million, or $0.51 diluted EPS; net income was $38.6 million.
- Nine months: Net sales were $3,891.9 million, up 17.9%. Gross profit was $743.0 million (19.1% margin, versus 18.5%); operating income was $246.6 million (6.3% margin, versus $138.9 million and 4.2%). Continuing-operations income was $141.9 million, or $1.82 diluted EPS; net income was $146.7 million, versus $155.4 million in 2017. Prior-year results included larger discontinued-operation gains and debt-extinguishment costs.
- Segment results, Q3: AWP sales rose 13.9% to $634.2 million and operating income rose to $72.8 million. MP sales rose 13.6% to $295.2 million and operating income rose to $38.5 million. Cranes sales were essentially flat at $301.2 million, while its operating loss widened to $14.1 million.
- Cash flow: Operating activities used $19.6 million over nine months, an improvement from $56.2 million used in 2017. Capital expenditures were $63.2 million. Free cash flow, as defined by Terex, was negative $94.5 million.
- Liquidity and debt: September 30 cash and cash equivalents were $326.0 million on the balance sheet ($329.5 million including cash held for sale). Total liquidity was approximately $779 million, including $449.7 million of undrawn revolving credit. Debt was $1,133.4 million, versus $984.8 million at year-end 2017; the company had $150.3 million drawn on its revolver. Current ratio was approximately 2.2.
- Capital returns: Terex repurchased 8.0 million shares for approximately $325 million in the first nine months and declared dividends of $0.10 per share in each quarter. A further $300 million repurchase authorization was announced in July.
Changes and management commentary
- Year-to-date sales and operating income increased, led by AWP and MP demand, higher production volume, and improved factory utilization. Currency effects added approximately $99 million to nine-month sales; currency reduced Q3 sales by approximately $6 million.
- AWP reported stronger demand, especially in North America. Management said AWP bookings grew 50% in Q3 and backlog was up 48% year over year. MP backlog was up 72%; total segment backlog rose 41% year over year, excluding Corporate and Other.
- Cranes continued to face supply-chain and production problems. Terex said it could not recognize approximately $30 million of planned Q3 revenue, with about $8 million of lost margin. It expected to reach breakeven or a small operating profit in Q4.
- Steel-price increases and U.S. and China-related tariffs raised input costs. Terex introduced surcharges on affected products and is seeking to mitigate costs through sourcing changes; recovery of some tariff-related cash costs is expected in later periods.
Outlook, risks, and contingencies
- Terex revised its 2018 outlook to adjusted EPS of $2.60–$2.70, excluding restructuring and other unusual items and any additional share repurchases, on approximately $5.1 billion of sales. It forecast approximately $50 million of 2018 free cash flow, citing updated earnings expectations and higher working capital, including tariff-related cash needs.
- Management said cash, operating cash generation, receivables sales, and credit facilities should provide adequate liquidity for at least the next 12 months. The company sold approximately $725 million of trade receivables without recourse in the first nine months and syndicated about $228 million of finance receivables.
- Key risks include cyclical demand, supplier shortages and cost inflation, tariffs and trade restrictions, foreign-exchange and interest-rate movements, debt covenants and cash generation, customer financing availability, product liability, and legal proceedings. Approximately 48% of debt was floating rate; Terex estimated a 10% increase in average floating rates would have raised nine-month interest expense by $1.8 million.
- Terex reported ongoing securities and stockholder derivative litigation; the securities case continued against Terex and one individual defendant after claims were narrowed. A Demag Cranes AG appraisal proceeding also remains open. Management stated that recorded reserves were appropriate and that a material loss beyond accrued amounts was considered remote, but outcomes are uncertain.
- Terex expects adoption of the new lease accounting standard in Q1 2019 to materially increase balance-sheet assets and liabilities. It reported effective disclosure controls as of September 30, 2018.
Most important facts for investors to verify
- Whether the revised adjusted EPS and free-cash-flow outlook is achievable, particularly given working-capital needs and tariff recovery timing.
- Whether Cranes supply-chain constraints ease enough to deliver the expected Q4 improvement and convert backlog into revenue.
- How steel, tariff, and broader supplier-cost increases affect margins, and how much can be passed through to customers.
- Whether cash generation and available borrowing capacity remain sufficient after substantial share repurchases; review debt levels, covenant terms, and liquidity needs.
- Potential financial exposure from the continuing lawsuits, guarantees, and other contingencies, for which outcomes or loss ranges are not fully predictable.