Terex Corporation: FY 2019 Form 10-K Summary
Business context and reporting period
Terex is a global manufacturer of aerial work platforms and materials-processing equipment, with continuing operations reported in AWP and MP segments. This annual report covers the fiscal year ended December 31, 2019; it also provides unaudited fourth-quarter comparisons. Unless noted, annual results below refer to continuing operations.
Terex completed the sale of its Demag mobile cranes business to Tadano on July 31, 2019, and exited North American mobile-crane product lines. These operations are reported as discontinued operations. The company reorganized into a two-segment structure.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Net sales | $4,353.1 million | $4,517.2 million | Down 3.6%; foreign exchange reduced sales by approximately $105 million |
| Gross profit / margin | $887.8 million / 20.4% | $961.9 million / 21.3% | Gross profit down 7.7% |
| Operating income / margin | $335.0 million / 7.7% | $412.5 million / 9.1% | Down 18.8% |
| Continuing-operations income | $209.7 million | $241.7 million | Diluted continuing EPS was $2.92 versus $3.14 |
| Net income attributable to common stockholders | $54.4 million | $113.7 million | Includes discontinued-operation losses |
| Cash from operating activities | $173.4 million | $94.2 million | Improved primarily from working-capital efficiency |
| Free cash flow (non-GAAP) | $86.4 million | Not stated here | Management-defined measure |
| Cash and liquidity at year-end | $535.1 million cash on balance sheet; approximately $1.1 billion total liquidity | $339.5 million cash | Total liquidity includes $600 million undrawn revolving capacity |
| Total debt | $1,175.7 million | $1,214.7 million | No revolver borrowings at year-end; debt covenants were met |
| Backlog | $1,081.2 million | $1,661.4 million | Down $580.2 million, or approximately 35% |
Segment results diverged: AWP sales fell 7.6% to $2,726.6 million and operating income fell 34.7% to $196.2 million, a 7.2% margin. MP sales rose 3.7% to $1,371.4 million and operating income increased 11.8% to $196.8 million, a 14.4% margin.
In Q4 2019, sales were $885.0 million versus $1,048.8 million in Q4 2018; gross profit was $168.6 million versus $214.6 million. Continuing-operations income was $18.5 million versus $19.6 million. Reported net income was $24.5 million versus a $33.0 million net loss, with discontinued-operation and disposition results affecting the comparison.
Material changes versus prior period
- Lower AWP demand, particularly in North America and Western Europe, reduced sales and production. Fourth-quarter AWP production was approximately 45% below the prior-year quarter.
- MP grew sales and operating income on demand for material handlers, crushing and screening equipment, pick-and-carry equipment and concrete mixer trucks; management also cited effective price and cost management.
- Operating profit declined due mainly to weaker AWP volume and factory overhead absorption, foreign-exchange effects and higher engineering and selling costs.
- Net interest expense increased to $81.4 million from $63.9 million, principally due to higher average borrowings, partly offset by lower rates. Other expense improved to $6.1 million from $60.6 million, largely because 2018 included a roughly $51 million pension-settlement loss.
- Discontinued operations recorded a $155.4 million after-tax loss, including an approximately $82 million after-tax write-down of the mobile-cranes disposal group and operating losses. Demag sale consideration was approximately $215 million, subject to adjustments.
Outlook, commentary, risks and contingencies
- For 2020, management forecast net sales of approximately $3.9 billion and adjusted EPS of $1.85–$2.35, excluding unusual items. The outlook assumed a 19% tax rate, renewal of existing U.S. tariff exclusions, no benefit from the share-repurchase program and no material Brexit impact.
- Management expected AWP sales to decline 7%–10%, with operating margins of 6%–7%; MP sales, including tower and rough-terrain cranes, were expected to decline 8%–11%, with margins of 12.3%–13%. It expected 2020 free cash flow of approximately $140 million.
- Management anticipated weaker first-quarter earnings due to lower AWP revenue and under-absorbed overhead. It did not expect a material full-year coronavirus impact as of the filing date, but expected lower first-half sales and earnings at the AWP China facility, anticipated to be recovered in the second half.
- Key exposures include cyclical demand, reduced backlog, tariffs and input costs, Brexit and Northern Ireland operations, foreign exchange, variable-rate debt and LIBOR transition, customer financing and receivable collectability, supplier constraints, and execution of the Execute to Win initiatives. Management estimated a 10% currency-rate change would have affected reported operating income by approximately $31 million; a 10% increase in average floating rates would have raised annual interest expense by approximately $2 million.
- Terex disclosed a Brazilian ICMS tax dispute assessed at approximately BRL 102 million (about $24 million), including interest. The company disputed the claim but stated that the ultimate outcome could not be assured. It also had $78.4 million of maximum-inception exposure under customer credit guarantees and $80.1 million of outstanding letters of credit.
Important facts for investors to verify
- Whether AWP demand, production levels, margins and the substantial backlog decline stabilize or deteriorate further.
- Whether MP demand and margins hold up, and whether 2020 sales and adjusted EPS guidance assumptions are achieved.
- Renewal of tariff exclusions, actual tariff and foreign-exchange impacts, and any operational or cost consequences from Brexit or China-related disruption.
- Cash generation, working capital, receivable factoring dependence, debt service capacity and continued compliance with debt covenants.
- Final Demag sale adjustments and remaining discontinued-operation or divestiture costs, as well as the outcome and potential exposure from the Brazil ICMS proceeding.
- Reconciliation of non-GAAP free-cash-flow and adjusted-EPS outlook to eventual reported results; the filing notes that a forward-looking GAAP reconciliation was unavailable without unreasonable effort.