Terex Corporation — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. Terex manufactures lifting and materials-processing equipment and reported continuing operations in Aerial Work Platforms (AWP), Cranes, and Materials Processing (MP). MHPS was classified as discontinued operations; its sale closed on January 4, 2017.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4,443.1 million | $5,021.7 million |
| Gross profit / margin | $712.4 million / 16.0% | $971.2 million / 19.3% |
| Operating income (loss) / margin | $(147.8) million / (3.3)% | $323.7 million / 6.4% |
| Continuing-operations income (loss), attributable to common stockholders | $(193.0) million; $(1.79) per diluted share | $128.4 million; $1.17 per diluted share |
| Net income (loss) attributable to Terex | $(176.1) million; $(1.63) per diluted share | $145.9 million; $1.33 per diluted share |
| Net cash from operating activities | $367.0 million | $212.9 million |
| Free cash flow, company-defined | $189.3 million | Not stated in the supplied comparative table |
| Cash and cash equivalents, including held-for-sale balances | $501.9 million | $466.5 million |
| Total debt at year-end | $1,575.8 million | $1,796.2 million |
2016 cash generation benefited from working-capital improvements, including a $97.3 million inventory reduction. Terex sold approximately $620 million of trade receivables without recourse and $290.5 million of finance receivables during the year. Working capital was $810.6 million, or 20.8% of trailing-three-month annualized sales. Management said cash, operating cash flow, and credit facilities were adequate for operating and debt-service needs for at least 12 months.
Material changes and segment results
- Sales declined 11.5% year over year; foreign exchange reduced consolidated sales by approximately $80 million. Gross margin fell 3.3 percentage points. Lower volume and pricing, severance, and higher inventory and warranty reserves weighed on results.
- AWP sales fell 11.9% to $1,977.8 million; operating income fell 34.3% to $177.4 million. Softer North American and South American demand, pricing pressure, and foreign exchange were partly offset by cost reductions and product mix.
- Cranes sales fell 18.6% to $1,274.5 million and the segment recorded a $321.7 million operating loss, versus $56.3 million operating income in 2015. Results included a $176.0 million non-cash goodwill impairment and substantial restructuring, severance, asset impairment, and warranty/inventory charges.
- MP sales were broadly flat at $944.5 million, while operating income rose 25.8% to $86.3 million, reflecting volume, pricing, a supplier settlement, and cost improvements.
- Year-end backlog was $1,072.5 million, down 8.9% from $1,177.2 million. AWP backlog decreased 11%, Cranes 21%, while MP backlog increased 45%.
- Fourth-quarter 2016 sales were $974.7 million versus $1,167.6 million a year earlier. Gross profit was $104.7 million versus $215.3 million; the quarter’s continuing-operations loss attributable to common stockholders was $313.9 million versus income of $23.8 million.
Outlook, transactions, and notable items
- Management forecast 2017 sales of approximately $3.9 billion and adjusted EPS of $0.60–$0.80, excluding restructuring and other unusual items. The outlook assumed share repurchases to cover equity compensation and no earnings contribution from Terex’s Konecranes stake.
- Management expected challenging markets to continue, with no improvement anticipated in Cranes markets in 2017. AWP demand was expected to be affected by the North American replacement cycle; MP anticipated stable crushing and screening activity and growth in concrete products.
- The January 2017 MHPS sale consideration included approximately $832 million in cash and 19.6 million newly issued Konecranes Class B shares, subject to post-closing adjustments. Terex sold approximately 7.5 million shares in February for net proceeds of approximately $268 million and retained about 15.5% of Konecranes.
- In January 2017, Terex issued $600 million of 5.625% notes due 2025 and entered a new credit agreement with a $450 million revolver and a $400 million term loan. Debt repayments were expected to reduce debt by approximately $600 million and lower annual interest run-rate by approximately $35 million. The company expected about $44 million of debt-extinguishment losses in 2017, plus approximately $8 million related to the credit-agreement termination.
- Restructuring charges were $81.1 million in 2016; programs were expected to total $85.1 million and reduce headcount by approximately 1,300, primarily in Cranes and Corporate. Further facility exits and consolidations were underway.
Risks and contingencies
Key exposures include cyclical demand, weak construction and commodity-linked markets, pricing competition, customer and dealer financing availability, receivable collection and used-equipment residual values, supplier and input-cost risk, foreign-exchange movements, and debt covenants and refinancing. Terex reported $45.4 million of uncertain-tax-position liabilities in its contractual-obligations discussion and separately disclosed $59.8 million of unrecognized tax benefits; the filing states up to $12.2 million of tax-audit payments might be made in 2017. Litigation includes securities and derivative actions and Demag Cranes AG appraisal proceedings, where an adverse outcome could require a material additional payment. The company also remains subject to SEC injunction and cease-and-desist obligations. Management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Confirm final MHPS sale consideration and adjustments, and the value, restrictions, and subsequent disposition of the retained Konecranes shares.
- Track execution of debt repayments, new financing terms, covenant headroom, and the expected interest-cost reduction.
- Assess whether the 2017 sales and adjusted-EPS outlook is achieved, including the excluded restructuring and other items.
- Evaluate Cranes recovery and restructuring progress, AWP replacement demand, and whether MP backlog converts to sales and profit.
- Review cash-flow quality, including working-capital movements and continued use of receivables sales and other financing programs.
- Monitor tax-audit outcomes, litigation exposure, and any additional impairment or restructuring charges.