Terex Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Terex supplies lifting and material-handling equipment through five segments: Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP).
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,495.6 million | $1,654.6 million |
| Gross profit / margin | $276.6 million / 18.5% | $333.4 million / 20.1% |
| Operating income / margin | $44.2 million / 3.0% | $75.0 million / 4.5% |
| Income from continuing operations | $(1.5) million | $31.5 million |
| Net income attributable to Terex | $1.0 million | $35.0 million |
| Diluted EPS attributable to Terex | $0.01 | $0.30 |
| Operating cash flow | $(110.7) million | $25.2 million |
Reported sales fell 9.6%; management said sales were essentially flat on a currency-neutral basis. Gross margin contracted 1.6 percentage points, and operating income declined 41.1%. Q1 2015 included a $3.1 million after-tax gain on disposition of discontinued operations; without that gain, Terex reported a loss attributable to common stockholders from continuing operations of $2.1 million, or $(0.02) per share.
Comprehensive loss was $198.2 million, including a $211.6 million adverse foreign-currency translation adjustment. Cash and cash equivalents were $351.3 million at March 31, down from $478.2 million at year-end; $12.6 million was not immediately available.
Segment results
| Segment | Sales | Operating income (loss) |
|---|---|---|
| AWP | $507.2 million, down 13.3% | $43.3 million, down from $82.2 million |
| Construction | $153.9 million, down 21.4% | $(4.5) million, versus $(5.0) million |
| Cranes | $386.9 million, down 1.7% | $3.6 million, versus $(0.2) million |
| MHPS | $321.9 million, down 12.6% | $(4.3) million, versus $(6.3) million |
| MP | $145.7 million, down 2.9% | $10.7 million, versus $10.9 million |
Liquidity, debt and capital allocation
Free cash flow, a company-defined non-GAAP measure, was negative $95.1 million: operating cash use of $110.7 million, plus a $41.8 million increase in Terex Financial Services assets, less $26.2 million of capital expenditures. Working capital was $1,689.4 million, or 28.2% of trailing three-month annualized sales. Management attributed the quarterly cash use largely to seasonal working-capital needs, including $132.7 million used in inventory and $101.4 million used in receivables.
Total debt was $1,872.9 million, compared with $1,788.8 million at December 31, 2014; debt less cash was $1,521.6 million. The $600 million revolving facility had $111.0 million drawn and $489.0 million available. The $439.8 million of credit-agreement term loans carried a 3.74% weighted-average rate. The 4% convertible notes, with $127.3 million carrying value, mature in June 2015; their accreted maturity balance was expected to be $128.8 million. The filing states management believes cash, operations and credit facilities are adequate to meet obligations, including that maturity.
Terex repurchased approximately 1.9 million shares for about $48 million under a new $200 million authorization and paid a $0.06-per-share dividend. Management intended to pay four quarterly dividends of $0.06 per share during 2015, subject to board approval.
Changes, outlook and management commentary
- Management said Q1 was generally in line with expectations for most businesses, but results were hurt by weaker AWP margins and an unusually high tax rate. The effective tax rate was 114.9%, versus 26.7%, mainly because of losses for which no tax benefit was recognized and lower pretax income.
- AWP was affected by severe U.S. weather, West Coast port labor issues, oil-and-gas uncertainty, weaker Latin American demand, product mix and lower factory utilization. Management cited a stronger exit margin run rate and backlog, and expected more normalized margins in Q2.
- Construction sales reflected the divestiture of the majority interest in its compact track loader business and currency effects. Cranes operating results improved, while MHPS and Construction remained loss-making. Management expected both to improve over the rest of 2015; it also expected MP performance to improve, while noting low commodity prices as a headwind.
- The truck business sold in May 2014 is presented as discontinued operations. The quarter’s $3.1 million after-tax disposition gain included contractually obligated earnings-based payments relating to previously sold businesses.
- Management maintained 2015 guidance of EPS of $2.00–$2.30, excluding restructuring and unusual items, on sales of $6.2–$6.6 billion. It also maintained expected full-year free cash flow of $200–$250 million.
Risks, contingencies and unusual items
- Debt agreements impose restrictions on borrowing, liens, investments, acquisitions, share repurchases and dividends. The convertible-note maturity and ongoing cash-generation needs are important liquidity considerations.
- Terex reported ordinary-course litigation, including ERISA, securities and stockholder derivative lawsuits. The company said it could not estimate possible losses for these lawsuits; it believes its reserves are appropriate and the matters will not materially affect results, but adverse outcomes could be significant.
- Maximum exposure under customer credit guarantees was $38.1 million and under buyback guarantees was $19.4 million; approximately $3 million was accrued for guarantees. Actual exposure may be affected by customer defaults and used-equipment market conditions.
- MP goodwill was $167.5 million; its reporting unit’s fair value exceeded carrying value by about 17% at March 31. The company found no impairment but warned that weaker projected cash flows could lead to future impairment charges.
- MHPS restructuring programs had $35.5 million of cumulative costs through March 31, with no Q1 charges and a $34.6 million reserve remaining. The programs involve facility closures, consolidation and workforce reductions.
- Currency, interest rates, commodity costs, supplier availability, cyclical demand, customer financing access, and global economic conditions may affect results. Terex reported no material change in disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether AWP margins and the Construction and MHPS businesses improved as management expected, and whether backlog and order trends translated into sales.
- Whether Terex met its 2015 EPS and free-cash-flow guidance, considering the seasonal working-capital build and currency impacts.
- How the June 2015 convertible-note maturity was funded and the resulting effect on cash, debt and available credit.
- Whether repurchases and planned dividends remained consistent with liquidity needs and credit-agreement covenants.
- Developments in the unquantified lawsuits, restructuring execution, and MP goodwill impairment assumptions.