Terex Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial figures are in millions except per-share data. The filing presents Demag mobile cranes and certain other operations as discontinued operations.
Business context and reporting period
Terex manufactures aerial work platforms and materials processing equipment worldwide. Beginning in 2019, it reports two segments: Aerial Work Platforms (AWP) and Materials Processing (MP); certain crane businesses are in Corporate and Other. Prior-period segment figures were reclassified to match the new structure.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,136.6 | $1,116.6 |
| Gross profit / margin | $237.8 / 20.9% | $228.6 / 20.5% |
| Operating income / margin | $99.7 / 8.8% | $94.3 / 8.4% |
| Continuing-operations income | $57.2 | $68.7 |
| Continuing-operations diluted EPS | $0.79 | $0.84 |
| Net income (loss) | $(66.6) | $50.3 |
| Net cash used in operating activities | $(265.4) | $(44.4) |
Net loss included a $124.4 million after-tax loss from discontinued operations, chiefly an approximately $86 million impairment charge on the mobile cranes disposal group. Cash and cash equivalents were $330.2 million including $25.6 million classified as held for sale; continuing-operations cash on the balance sheet was $304.6 million.
At March 31, 2019, total debt was $1,473.4 million, versus $1,214.7 million at year-end 2018. Terex reported $300.5 million of undrawn revolver availability and total liquidity of approximately $631 million. Shareholders’ equity was $782.3 million, down from $861.0 million at year-end. Working capital was $944.2 million, or 20.8% of trailing-three-month annualized sales.
Material changes versus the prior comparable period
- Sales grew 1.8% reported, although foreign exchange reduced sales by approximately $34 million. Gross profit rose 4.0% and operating income rose 5.7%.
- MP sales increased 9.6% to $346.2 million and operating income rose 23.3% to $49.2 million; operating margin improved to 14.2% from 12.6%.
- AWP sales declined 1.3% to $727.9 million and operating income fell 15.1% to $59.6 million; margin declined to 8.2% from 9.5%. Weather disruptions, lower production productivity, unfavorable mix, foreign exchange and material costs weighed on results.
- Interest expense, net of interest income, increased $8.7 million to $21.3 million, reflecting higher average borrowings at higher rates and lower interest income.
- Operating cash outflow increased to $265.4 million, primarily due to working-capital use. Free cash flow, as defined by Terex, was negative $256.7 million, including the reported change in TFS assets and capital expenditures.
- Terex issued a $200 million incremental term loan in March and used the net proceeds to reduce revolver borrowings. First-quarter financing cash flow was positive $236.4 million, including substantial debt issuance and repayment activity.
Outlook, management commentary and risks
- Management raised its expectation to the upper half of its previously announced 2019 adjusted EPS range of $3.60–$4.20, excluding restructuring, transformation investments and other unusual items. It expects net sales of approximately $4.7 billion and free cash flow of approximately $165 million. The filing says it cannot reconcile the forward-looking non-GAAP EPS measure to GAAP without unreasonable effort.
- Management described global markets for AWP, MP, and rough-terrain and tower cranes as generally stable at healthy levels. It cited AWP’s $1.1 billion backlog and MP backlog up 11% year over year, or 17% at constant currency.
- Terex agreed to sell its Demag mobile cranes business to Tadano for $215 million enterprise value, subject to customary conditions and post-closing adjustments, with closing targeted for mid-2019. It also planned to cease manufacturing mobile crane product lines in Oklahoma City; certain boom truck, truck crane and crossover lines were sold on April 24, 2019.
- Key exposures include cyclicality and economic conditions, tariffs and trade conflicts, elevated steel and other input costs, foreign-exchange volatility, Brexit-related uncertainty, customer and supplier credit conditions, and dependence on access to financing and cash generation. About 60% of debt was floating-rate; management estimated a 10% increase in average floating rates would add $1.0 million to quarterly interest expense. A 10% currency movement versus rates reflected in the quarter would have affected operating income by approximately $8 million.
- Terex said it was in compliance with credit-agreement financial covenants at quarter-end and considered liquidity adequate for at least the next 12 months. It nevertheless highlighted substantial working-capital cash use and reliance on receivables sales, credit facilities and expected asset-sale proceeds.
- The company reported pending securities and stockholder derivative lawsuit settlements subject to court approval; it stated the proposed amounts were not expected to materially affect results. Other litigation, guarantees, product liabilities and appraisal proceedings remain potential contingencies; outcomes cannot be assured.
Most important facts for investors to verify
- Whether the Tadano transaction closed on the expected timetable and the final cash proceeds after debt, cash and working-capital adjustments.
- Whether the mobile-crane impairment and discontinued-operations losses are fully reflected in subsequent results and any remaining disposal costs or liabilities.
- Whether the $3.60–$4.20 adjusted EPS and approximately $165 million free-cash-flow outlook were achieved, including the effects of non-GAAP exclusions.
- Whether operating cash flow, receivables factoring and working-capital requirements improved, and whether Terex maintained adequate revolver availability and covenant compliance.
- Whether AWP recovered margins after weather and productivity disruptions, and whether MP backlog converted to sales without further material-cost or tariff pressure.