Terex Corporation — Q1 2017 Form 10-Q
Business context and period. Covers the three months ended March 31, 2017, compared with Q1 2016. Terex manufactures lifting and materials-processing equipment and reports Aerial Work Platforms (AWP), Cranes, and Materials Processing (MP). The MHPS business was sold to Konecranes in January 2017 and is reported as discontinued operations.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,006.9 million | $1,114.3 million |
| Gross profit / margin | $152.3 million / 15.1% | $181.7 million / 16.3% |
| Operating income (loss) / margin | $(6.3) million / (0.6)% | $11.3 million / 1.0% |
| Continuing-operations net income (loss) | $(60.3) million | $(22.0) million |
| Net income (loss) attributable to Terex | $(4.6) million; $(0.04) per diluted share | $(70.8) million; $(0.65) per diluted share |
| Cash from (used in) operations | $(196.1) million | $(120.7) million |
| Free cash flow (company-defined) | $(208.8) million | Not presented here |
Revenue fell 9.6%; foreign exchange reduced sales by approximately $21 million. Lower volume, commodity costs, and currency effects weighed on gross profit. SG&A declined 6.9% to $158.6 million, partly reflecting cost reductions, but did not offset the gross-profit decline.
Segments: AWP sales declined 9.3% to $472.4 million and operating income fell to $21.7 million (4.6% margin). Cranes sales declined 14.1% to $263.9 million, with an operating loss of $32.8 million. MP sales increased 11.3% to $249.1 million; operating income rose to $25.5 million (10.2% margin). Corporate and Other sales fell substantially, primarily due to construction product-line divestitures.
Balance sheet, debt and liquidity
- March 31 cash and cash equivalents were $816.4 million including $2.5 million classified as held for sale; continuing-operations cash on the balance sheet was $813.9 million. The filing notes some cash was not immediately available.
- Total debt was approximately $1,242.8 million; the company reported no borrowings under its new $450 million revolving facility. The new credit agreement also includes a $400 million term loan, with a reported 3.54% weighted-average rate.
- Terex reported negative operating cash flow, primarily reflecting working-capital use, including $130.7 million from receivables and $39.4 million from inventory. It sold $62.3 million of trade receivables without recourse during the quarter.
- Cash flow from investing activities was $1,048.3 million, including proceeds from MHPS and Konecranes-share sales. Financing activities used $544.7 million, including debt repayments and $178.2 million of cash share repurchases.
- Current assets were $2,597.7 million and current liabilities $1,277.7 million. The balance-sheet totals declined from year-end largely in connection with the MHPS disposition and reclassification of assets and liabilities.
Material changes and unusual items
- MHPS sale consideration included approximately $835 million in cash and 19.6 million Konecranes Class B shares. Terex sold approximately 7.5 million shares for about $272 million and held approximately 15.5% of Konecranes at quarter-end; the remaining investment was carried at $431.0 million fair value.
- Q1 included a $55.7 million after-tax gain on dispositions of discontinued operations, including $52.7 million from MHPS. It also included a $45.4 million loss on early extinguishment of debt. These items materially affect interpretation of the comparatively small consolidated net loss.
- Other income/expense included a $13.5 million Konecranes dividend, a $13.2 million loss on sale of Konecranes shares, and a $9.3 million fair-value loss on the remaining investment.
- Terex issued $600 million of 5.625% notes due 2025 and refinanced its credit agreement, using proceeds and cash to retire higher-cost debt. Management expected approximately $600 million of debt reduction and about $35 million of annualized interest savings from its financing and repayment actions.
- Terex repurchased approximately 6.5 million shares for about $201 million and declared a quarterly dividend of $0.08 per share.
Outlook, management commentary and risks
Management forecast 2017 adjusted EPS of $0.80–$0.95, excluding restructuring and other items, and full-year free cash flow of $0–$50 million. It said liquidity was adequate for business plans and operating and debt-service needs for at least 12 months. These are forward-looking statements, not guarantees; adjusted EPS is non-GAAP and the filing says it cannot be reconciled to GAAP without unreasonable effort.
Management described positive order-book momentum: overall backlog was up 10% year over year, AWP backlog up 21%, and MP backlog up 29%. It expected Cranes revenue to decline in the first half and stabilize in the second half. AWP faced softer North American rental demand and margin pressure; Cranes remained exposed to weak markets and lower production; MP benefited from stronger crushing, screening, and concrete demand. Terex continued footprint and cost reductions; its Cranes restructuring program was expected to cost about $80.8 million in total and be completed in 2018.
Key risks include cyclical end markets, customer financing and credit access, working-capital needs, foreign exchange and commodity costs, supplier availability, debt covenants and cash generation, litigation, and execution of restructuring and divestitures. The company reported no material quarterly change to the risk factors in its 2016 Form 10-K. It said disclosure controls were effective at March 31, 2017.
Contingencies include securities and stockholder derivative litigation for which Terex could not estimate a possible loss range, and German Demag appraisal proceedings that could result in additional payments; Terex said an adverse amount could be material. The company stated that it had recorded appropriate reserves for other contingencies and did not expect them to materially affect results, while cautioning that outcomes are uncertain.
Important facts for investors to verify
- How much of Q1 earnings and comprehensive income reflects recurring operations versus the MHPS disposal gain, debt-extinguishment charges, and Konecranes investment movements.
- Whether the projected $0–$50 million of 2017 free cash flow is achievable given Q1 operating cash use and working-capital requirements.
- Debt balances, refinancing savings, covenant headroom, and availability under the revolving facility, including the effect of letters of credit and other restrictions.
- Order-book conversion, regional demand, and margin recovery—especially in AWP and Cranes—and progress against the restructuring and cost-reduction plans.
- Final MHPS transaction adjustments, the value and disposition of the remaining Konecranes stake, and outcomes of the disclosed litigation and appraisal proceedings.