Terex Corporation — Q1 2020 Form 10-Q
Business context and period. Covers the three months ended March 31, 2020, compared with Q1 2019. Terex manufactures aerial work platforms and materials processing equipment, reported in AWP and MP segments. Results exclude discontinued operations, principally the Demag mobile-cranes business, sold in July 2019, and exited North American mobile-crane product lines. COVID-19 sharply curtailed activity in March after the first two months started broadly in line with expectations.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $833.6 million | $1,136.6 million |
| Gross profit / margin | $136.7 million / 16.4% | $237.8 million / 20.9% |
| Operating income (loss) / margin | ($7.1) million / (0.9)% | $99.7 million / 8.8% |
| Continuing-operations net income (loss) | ($24.7) million | $57.2 million |
| Net income (loss), including discontinued operations | ($24.9) million | ($66.6) million |
| Diluted EPS | ($0.35) | ($0.93) |
| Cash from operating activities | ($88.7) million | ($265.4) million |
- Free cash flow, a company-defined non-GAAP measure, was a use of $112.9 million, versus a use of approximately $257 million in Q1 2019. Management attributed the improvement mainly to better working-capital performance and prior-year cash use in discontinued operations.
- At March 31, cash and cash equivalents totaled $515.0 million, including $3.7 million classified as held for sale; cash for continuing operations was $511.3 million. The company reported $430 million of undrawn revolver availability and approximately $945 million of total liquidity.
- Total debt was $1,345.1 million, up from $1,175.7 million at December 31, 2019; this included $584.0 million of term loans and $170.0 million drawn on the revolver. Management reported no significant debt maturities until 2023.
- Total current assets were $1,965.6 million and current liabilities were $775.6 million. Working capital, as defined by Terex, was $754.4 million, or 22.6% of trailing three-month annualized sales.
- Q1 capital expenditures were $25.2 million. Terex sold approximately $141 million of trade receivables without recourse and approximately $33 million of finance receivables during the quarter.
Material changes and segment performance
- Consolidated sales fell 26.7% year over year; gross margin declined 4.5 percentage points and operating results moved from profit to loss. Lower sales volume and AWP overhead under-absorption drove much of the operating decline. SG&A rose $5.7 million, primarily due to a specific finance-receivable reserve for one customer.
- AWP sales decreased 29.7% to $511.7 million, and the segment recorded an operating loss of $5.9 million versus income of $59.6 million. Management cited lower aerial-platform and telehandler demand, COVID-19 effects, and order timing.
- MP sales decreased 23.1% to $315.6 million; operating income declined to $25.0 million from $59.5 million, with a 7.9% operating margin versus 14.5%. Management cited weaker demand for cranes and materials-processing equipment.
- Backlog at March 31 was $717 million for AWP, down 34% year over year, and $272 million for MP, down 52%. Management also noted increased cancellations and requests to delay deliveries in the second half of March.
- Q1 2019 net loss included a roughly $86 million after-tax impairment of the mobile-cranes disposal group. Thus, the improvement in total net loss versus 2019 does not reflect improved continuing-operations earnings.
Outlook, management commentary, risks and unusual items
- Terex withdrew its 2020 financial guidance on March 25, 2020 and said it would not issue revised guidance because the duration and severity of the economic disruption were uncertain. Management expected COVID-19 to continue to negatively affect operating results.
- Management identified safety and liquidity as priorities and described cost and cash-preservation actions: salary reductions, furloughs and layoffs, facility closures or shorter work weeks, lower production, supplier coordination, reduced capital spending plans, and suspended share repurchases and dividends for the remainder of 2020. It said liquidity was sufficient for its plans and expected to meet operating and debt-service requirements for at least 12 months.
- On April 23, 2020, after quarter-end, Terex amended its credit agreement, extending the revolver to January 2023 and replacing certain 2020 financial covenants with minimum-liquidity requirements: $100 million at June 30 and September 30, and $150 million at December 31. The amendment also prohibited share repurchases and dividends through December 31, 2020, included anti-cash-hoarding provisions, and increased revolver pricing temporarily. The company said the amendment addressed the risk of covenant noncompliance as early as Q2 without relief.
- Finance-receivable credit-loss allowance rose to $14.8 million from $11.0 million at year-end. Terex offered principal-payment relief to COVID-affected customers. Impaired finance receivables were $22.7 million, compared with $7.8 million at year-end.
- Other risks include cyclical demand, customer and supplier financial health, access to financing, variable-rate debt and LIBOR transition, foreign-exchange and commodity exposure, and global supply-chain disruption. A Brazil ICMS tax dispute involved an assessment of approximately BRL 101 million (about $19 million); Terex disputed the claim and said litigation was likely, while acknowledging the outcome was uncertain.
- Terex reported that it was in compliance with credit-agreement covenants at March 31 and that disclosure controls were effective. The filing stated there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How quickly demand, cancellations, delivery delays and segment backlogs recover, and whether the sharp Q1 margin decline persists.
- Whether reported liquidity and cash generation remain adequate under prolonged disruption; distinguish cash, revolver availability and the minimum-liquidity covenant thresholds.
- Compliance with amended debt covenants, borrowing capacity, interest costs and the effect of the temporary restrictions on dividends and repurchases.
- Further changes in finance-receivable delinquencies, customer payment relief, credit-loss reserves and exposure under customer guarantees.
- Developments and potential financial exposure in the Brazil ICMS proceedings and other contingencies.