Terex Corporation (NYSE: TEX) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Terex manufactures aerial work platforms and materials-processing equipment, reported in AWP and MP segments. Results exclude discontinued operations except where noted; Demag mobile cranes was sold in 2019.
Financial performance
- Third quarter: Net sales were $765.6 million, down 25.3% year over year. Gross profit was $146.3 million (19.1% margin, versus 20.5%); operating income was $36.5 million (4.8% margin, versus 8.4%). Net income was $5.8 million, or $0.08 per diluted share. Continuing-operations income was $22.0 million; a $16.1 million after-tax Demag disposition loss reduced reported net income.
- First nine months: Net sales were $2.290 billion, down 34.0%. Gross profit was $390.1 million (17.0% margin); operating income was $36.8 million (1.6% margin). The continuing-operations loss was $5.9 million; net loss was $28.3 million, or $0.41 per diluted share, including $21.1 million of after-tax disposition losses.
- Segments, Q3: AWP sales fell 29.2% to $445.0 million and operating margin fell to 3.0% from 7.3%. MP sales fell 18.7% to $311.3 million; operating margin was 12.9% versus 15.3%.
- Cash flow: Nine-month cash from operations was $88.9 million, compared with $78.4 million a year earlier. Free cash flow, a company-defined non-GAAP measure, was $54.4 million in Q3 and $12.7 million year to date. Inventory reductions supported cash generation; Terex also sold approximately $319 million of trade receivables without recourse during the nine-month period.
- Liquidity and debt: September 30 cash and cash equivalents were $512.6 million, including $4.3 million held for sale, and the company reported $600 million of undrawn revolver availability—about $1.1 billion total liquidity. Debt was approximately $1.175 billion, with no revolver borrowings and no significant debt maturities until 2023. The company reported compliance with credit covenants.
- Balance sheet: Inventory was $635.5 million, down from $847.7 million at year-end 2019; total liabilities were $2.063 billion and stockholders’ equity was $852.7 million.
Changes, outlook and management commentary
- COVID-19 materially reduced customer demand and contributed to temporary manufacturing shutdowns, lower sales and earnings. Q3 sales improved sequentially nearly 11% from Q2; management said global activity had stabilized and was gradually recovering but remained below pre-pandemic levels.
- Management expected second-half 2020 sales to be similar to first-half sales, while warning that pandemic effects would continue and their duration and severity were uncertain. It expected positive free cash flow in Q4.
- Cost actions reduced nine-month SG&A by $53.8 million year over year. Terex targeted SG&A at 12.5% of sales for 2021 and anticipated at least $15 million of Q4 2020 severance and restructuring charges following workforce reductions.
- April 2020 credit-agreement amendments extended the revolver to January 2023 and replaced certain financial tests through 2020 with minimum-liquidity requirements. The amendment also restricted dividends and share repurchases through year-end 2020. Terex suspended further dividends and repurchases for the remainder of 2020.
- Key risks include the pandemic and cyclical end markets, customer financing and credit conditions, supply-chain disruption, trade tariffs and Brexit, foreign-exchange and interest-rate changes, and restrictive debt covenants. A Brazilian ICMS tax dispute involves an assessment of approximately BRL 101 million (about $18 million); Terex contests the claim. Credit guarantees had maximum exposure determined at inception of $104.8 million, though actual potential liability was not reasonably estimable.
Most important facts for investors to verify
- Whether demand, bookings and backlogs continued to recover after Q3, particularly in AWP and major markets outside Asia-Pacific.
- Whether the company delivered forecast Q4 positive free cash flow and how much was attributable to working-capital reductions, receivables factoring and other temporary measures.
- Actual Q4 restructuring charges and progress toward the 2021 SG&A target.
- Liquidity, covenant headroom and debt terms, including the restrictions under the amended credit agreement.
- Subsequent developments in the Demag settlement, Brazilian ICMS proceedings and customer-finance credit losses.