Terex Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Terex designs and manufactures lifting, construction, crane, material-handling and materials-processing equipment across five reportable segments.
Financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $1,641.3 million | $1,809.8 million | $4,965.4 million | $5,519.5 million |
| Gross profit / margin | $336.6 million / 20.5% | $357.3 million / 19.7% | $997.4 million / 20.1% | $1,114.5 million / 20.2% |
| Operating income / margin | $111.9 million / 6.8% | $116.8 million / 6.5% | $304.4 million / 6.1% | $352.7 million / 6.4% |
| Income from continuing operations | $46.1 million | $58.7 million | $130.9 million | $178.6 million |
| Net income attributable to Terex | $43.6 million | $64.2 million | $129.4 million | $239.0 million |
| Diluted EPS attributable to Terex | $0.40 | $0.56 | $1.18 | $2.07 |
Q3 sales fell 9.3%; management attributed about $155 million of the decline to foreign exchange. For the first nine months, sales fell 10.0%, including an estimated $470 million adverse FX impact. Q3 gross and operating margins improved year over year, but nine-month operating margin declined.
- Segment performance, Q3: AWP operating income rose to $79.4 million from $68.4 million, and Materials Processing rose to $13.9 million from $8.7 million. Cranes fell to $12.4 million from $21.8 million; MHPS fell to $10.3 million from $17.6 million. Construction recorded $2.7 million versus $1.6 million.
- Q3 AWP benefited from lower material costs and manufacturing efficiencies, partly offset by lower pricing. MHPS was hurt by weak port automation deliveries, FX and product mix. Cranes faced FX losses, lower manufacturing-cost absorption, higher warranty charges and product-liability expense.
Cash flow, debt and liquidity
- Cash from operating activities was negative $56.6 million for 9M 2015, versus positive $116.6 million a year earlier. Working-capital use included $145.1 million from receivables and $139.8 million from inventories.
- Management-defined free cash flow was $61.5 million in Q3 and $42.7 million for 9M. The measure includes adjustments for TFS finance receivables and cash held for securitization settlements; it is not the same as operating cash flow less capital expenditures.
- Cash and equivalents were $301.1 million at September 30, down from $478.2 million at year-end 2014. Current assets were $3,349.2 million and current liabilities $1,592.4 million.
- Total reported debt was approximately $1,897.6 million, including $83.4 million current and $1,814.2 million long-term. Cash less debt implies net debt of approximately $1,596.5 million. Terex reported $527.7 million available under revolving credit facilities; $72.3 million was drawn.
- Debt included $179.9 million outstanding under a new $350 million securitization facility. The company also settled its 4% convertible notes in June with $131.1 million cash and 3.4 million shares.
- Terex reported total assets of $5,878.9 million and stockholders’ equity of $1,925.7 million. Nine-month capital expenditures were $73.4 million.
Material changes and unusual items
- Q3 net income included $8.6 million of merger-related costs in other expense; merger-related costs totaled $9.5 million for 9M. Other expense also reflected higher foreign-exchange losses.
- The effective tax rate was 40.1% in Q3 versus 32.1% in Q3 2014, primarily due to changes in reserves for uncertain tax positions. The 9M rate rose to 36.5% from 30.7%, largely because of losses for which no tax benefit was recognized.
- Prior-year comparisons include proceeds and gains from divestitures, notably the 2014 sale of the truck business. The 2015 quarter recorded a $1.2 million after-tax loss on disposition of discontinued operations, compared with a $5.5 million gain in Q3 2014.
- Accumulated other comprehensive loss increased to $620.2 million from $429.8 million at December 31, 2014, primarily reflecting currency translation losses.
Outlook, transaction and risks
- Terex maintained 2015 guidance of adjusted EPS of $1.90–$2.10 and net sales of $6.1–$6.4 billion, but expected results near the low end. Management forecast $200–$250 million of full-year free cash flow. These are company estimates, not guarantees.
- Management described challenging and mixed markets: North America remained relatively strong but was affected by weaker oil-and-gas activity; Brazil and Australia were soft; European markets were mixed. AWP backlog was 39% above the prior-year level, while management cautioned about Q4 sales uncertainty, particularly in North America.
- The proposed Konecranes merger, announced August 10, 2015, would exchange 0.8 Konecranes share for each Terex share; Terex shareholders would own about 60% of the combined company. Shareholder and regulatory approvals remained outstanding, with closing expected in the first half of 2016. The merger could disrupt operations and divert management attention; termination fees may reach $37 million, and noteholder consent payments totaling $18.7 million are due at closing.
- Other key risks include cyclical demand, FX exposure, customer and supplier financing conditions, debt covenants and cash generation, possible impairment of goodwill, product liability and litigation. Two stockholder lawsuits challenged the merger; the company said it would defend them. Terex also reported an agreement in principle to settle an ERISA action for $2.5 million, primarily funded by insurance.
- Credit guarantees had maximum exposure of $40.0 million; buyback guarantees had maximum exposure of $14.7 million. The recorded aggregate liability for guarantees was approximately $3 million.
Important facts for investors to verify
- Whether the merger obtained required shareholder and regulatory approvals, and the final transaction terms and financing arrangements.
- Whether operating cash flow and management-defined free cash flow improved, given significant working-capital investment and declining cash balances.
- Whether 2015 adjusted EPS, sales and free-cash-flow guidance was achieved, and how much results depended on FX, pricing and segment mix.
- Debt, covenant headroom, refinancing needs and any merger-related acceleration or consent costs.
- Progress in weaker segments and markets, and the status of merger litigation, other contingencies and guarantee exposures.