Terex Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Terex manufactures lifting and materials-processing equipment and reports three segments: Aerial Work Platforms (AWP), Cranes, and Materials Processing (MP). The results reflect the January 2017 sale of Material Handling and Port Solutions (MHPS); MHPS is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,111.2 million | $1,056.4 million | $3,299.8 million | $3,468.4 million |
| Gross profit / margin | $219.0 million / 19.7% | $183.9 million / 17.4% | $612.0 million / 18.5% | $607.7 million / 17.5% |
| Operating income / margin | $64.2 million / 5.8% | $39.6 million / 3.7% | $133.8 million / 4.1% | $124.3 million / 3.6% |
| Income from continuing operations | $56.6 million | $33.2 million | $91.7 million | $120.8 million |
| Net income attributable to Terex | $59.2 million | $96.8 million | $155.4 million | $91.1 million |
| Diluted EPS, continuing operations | $0.63 | $0.31 | $0.93 | $1.10 |
| Diluted EPS, total | $0.66 | $0.89 | $1.58 | $0.83 |
Q3 sales rose 5.2% year over year; nine-month sales fell 4.9%. Q3 profit improvement reflected higher volume, cost savings, and factory utilization. Nine-month net income included $63.7 million of after-tax disposition gains; Q3 net income included a $2.6 million after-tax disposition gain. Nine-month results also included a $52.6 million loss on early debt extinguishment and $52.2 million of net other income, including Konecranes share-sale gains and dividends.
Segment trends: In Q3, AWP sales increased 14.9% and operating income increased 18.3%; Cranes sales increased 6.8% and its operating loss narrowed to $1.3 million from $12.1 million; MP sales increased 13.9% and operating income increased 45.6%. For the nine months, AWP operating income declined 12.1%, Cranes’ operating loss narrowed to $19.6 million from $41.5 million, and MP operating income rose 39.7%.
Cash, debt, and working capital: At September 30, cash and cash equivalents totaled $595.7 million, including $3.0 million held for sale; the balance sheet reports $592.7 million of continuing-operations cash. Terex reported $450 million of undrawn revolver availability and total liquidity of $1,045.7 million. Debt was approximately $984.9 million, versus $1,575.8 million at December 31, 2016. Nine-month operating cash flow was negative $56.2 million; management’s non-GAAP free cash flow was negative $101.4 million. Working capital was $1,034.2 million, or 23.3% of trailing-three-month annualized sales.
Material changes and management commentary
- Terex completed the MHPS sale for approximately $835 million in cash plus 19.6 million Konecranes shares, then sold all those shares for approximately $770 million in proceeds during the first nine months.
- The company repurchased approximately 22.3 million Terex shares for $770.2 million in the first nine months. A new $225 million repurchase authorization was announced in September; approximately $153.6 million remained available at quarter-end.
- Management described improving momentum: backlog was up 44% and net bookings up 18% year over year, with backlog growth in each segment for a third consecutive quarter. Segment backlog increases were 41% for AWP, 57% for Cranes, and 28% for MP.
- Management cited strong North American and European AWP demand, a stabilizing but still challenging global crane market, and continued MP growth. Steel-related commodity inflation remained a headwind, particularly for AWP and Cranes.
Outlook, risks, and unusual items
- Terex raised its 2017 net-sales outlook from approximately 6% decline to approximately 3.5% decline, and raised adjusted EPS guidance to $1.20–$1.30. Adjusted EPS is a non-GAAP measure; the company said it could not reconcile the forward-looking measure to GAAP without unreasonable effort.
- Management forecast full-year 2017 free cash flow to be neutral, after deploying working capital to support expected growth, and said liquidity was sufficient for business plans and obligations for at least 12 months.
- Cranes restructuring programs are expected to cost approximately $84.4 million in total, reduce about 1,000 positions, and be completed in 2018. Terex reported $81.0 million of cumulative charges through September 30.
- Debt refinancing and redemptions generated a $52.6 million nine-month early-extinguishment loss. The new senior secured credit agreement provides a $450 million revolver and a $400 million term loan; the term-loan rate was reduced by 0.25 percentage point in August.
- Principal risks include cyclical demand and economic weakness, debt covenants and cash generation, customer and supplier financing access, competition, foreign-exchange and commodity movements, product and legal liabilities, and potential environmental or regulatory costs. The company said it had made adequate litigation reserves and considered a material loss beyond accruals remote, while noting litigation outcomes remain uncertain.
Key investor verification points
- Review the quality of earnings: separate continuing operating performance from MHPS/other divestiture gains, Konecranes investment gains and dividends, tax effects, and debt-extinguishment charges.
- Confirm the assumptions behind the $1.20–$1.30 adjusted EPS outlook and neutral full-year free-cash-flow forecast, including working-capital needs and the non-GAAP definitions.
- Track backlog conversion, order trends, and margins by segment, especially whether Cranes’ improvement persists and steel-cost pressure can be offset.
- Assess liquidity and leverage after large share repurchases, including revolver availability, debt covenants, and the sustainability of operating cash generation.
- Monitor restructuring execution and costs, customer-financing exposure, credit guarantees, and the status and potential impact of disclosed litigation and contingencies.