Terex Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless noted, financial results are for continuing operations. Terex reports two segments: Aerial Work Platforms (AWP) and Materials Processing (MP). Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $1,024.6M | $1,098.8M | $3,468.1M | $3,468.4M |
| Gross profit / margin | $209.6M / 20.5% | $240.1M / 21.9% | $719.2M / 20.7% | $747.3M / 21.5% |
| Operating income / margin | $86.4M / 8.4% | $104.2M / 9.5% | $312.1M / 9.0% | $330.9M / 9.5% |
| Continuing-operations income | $52.4M | $69.2M | $191.2M | $222.1M |
| Diluted continuing-operations EPS | $0.73 | $0.92 | $2.66 | $2.85 |
| Net income, including discontinued operations | $21.4M | $38.6M | $29.9M | $146.7M |
Q3 net sales fell 6.8% year over year; nine-month sales were essentially flat. Q3 net interest expense was $20.1M, up $3.4M. Nine-month net interest expense was $64.2M, up $18.7M, reflecting higher average borrowings and lower interest income. The effective tax rate was 22.8% for Q3 and 22.0% for the first nine months.
Segments and operating trends
- AWP: Q3 sales declined 13.9% to $628.2M and operating income fell 43.8% to $45.9M; operating margin was 7.3%, versus 11.2%. Nine-month sales decreased 4.0% to $2,226.5M and operating income decreased 27.2% to $191.8M. Lower demand, reduced production and factory under-absorption, sales mix, currency effects and lower-than-expected material savings weighed on results.
- MP: Q3 sales rose 8.0% to $338.6M and operating income rose 26.6% to $52.4M; operating margin expanded to 15.5% from 13.2%. Nine-month sales increased 8.8% to $1,050.0M and operating income rose 25.7% to $157.9M, supported by demand and price and cost management.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $78.4M, compared with cash use of $19.6M in 2018. Capital expenditures were $75.4M. Investing cash flow was positive $128.5M, including proceeds from dispositions; financing cash flow was negative $85.5M.
- Management-defined free cash flow was $15.4M for the first nine months and $103.7M for Q3. The filing’s free-cash-flow measure adjusts operating cash flow for TFS assets, capital expenditures and divested-business working capital.
- At September 30, cash was $470.6M on the balance sheet ($475.5M including $4.9M classified as held for sale). Debt was approximately $1,175.6M; net debt using adjusted cash was $700.1M. The $600M revolving facility was undrawn. Terex reported total liquidity of approximately $1.1B.
- Working capital was $774.2M, or 18.9% of trailing-three-month annualized sales. Inventories were $858.0M, down from $918.9M at year-end 2018.
- Terex was in compliance with credit-agreement covenants. Approximately 50% of debt was floating-rate; the weighted-average rate on all debt was 4.91%.
Material changes and unusual items
- Terex completed the sale of its Demag mobile cranes business to Tadano on July 31, 2019, for approximately $215M of consideration, subject to final adjustments. It also exited specified North American mobile-crane product lines. These operations are presented as discontinued operations, and the former Cranes segment was reorganized into the current reporting structure.
- Discontinued operations produced a net loss of $10.1M in Q3 and $151.8M in the first nine months. The nine-month loss included an approximately $82M write-down of the mobile-cranes disposal group. Terex also recorded a $20.9M Q3 after-tax loss on disposition and a $9.5M nine-month after-tax disposition loss.
- Terex received approximately $150M of additional cash from the Demag and ASV share sales, according to management. Nine-month cash flow included $172.4M of proceeds from dispositions of discontinued operations.
- The company adopted lease accounting in 2019, recognizing approximately $138M of operating lease liabilities at adoption. At September 30, operating lease liabilities totaled $127.1M.
- The finance-receivable allowance increased to $11.1M from $5.5M at year-end; $12.1M of commercial loans were on non-accrual status, versus $6.0M at year-end.
Outlook, commentary and risks
- Management forecast 2019 net sales of approximately $4.4B and adjusted EPS of $3.00–$3.20, excluding restructuring, transformation investments and other unusual items. It expected approximately $110M of 2019 free cash flow.
- For 2020, management was operationally planning for revenue approximately 10% below 2019, citing a softer macro environment for industrial equipment. Management reported lower bookings and backlog in both AWP and MP as markets softened in late Q3 and into Q4; some AWP rental customers delayed orders amid rental-rate pressure.
- Management cited continued execution of its portfolio simplification and operating strategy, investment in manufacturing capacity, and expected approximately $25M of strategic-sourcing savings for 2019, lower than previously expected because of reduced production.
- Key risks include cyclical demand, trade disputes and tariffs, foreign-exchange volatility, Brexit uncertainty affecting European operations (including Northern Ireland), customer and supplier credit conditions, supply interruptions, debt and liquidity requirements, and legal, tax and product-liability contingencies. A 10% currency movement relative to rates embedded in reported results would have affected nine-month operating income by approximately $25M, per the company’s sensitivity analysis.
- Terex disputed a Brazilian ICMS tax assessment of approximately BRL 102M and expected litigation. A Demag Cranes AG shareholder appraisal proceeding also remained unresolved. The company said it had appropriate reserves for contingencies and did not expect the matters to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether the AWP demand slowdown, lower production and weaker bookings persist, and how quickly MP’s performance responds to broader market softening.
- Whether Terex achieves its 2019 adjusted EPS and free-cash-flow outlook and its 2020 planning assumption of lower revenue.
- Final Demag sale consideration and any further disposition, separation or discontinued-operation costs.
- Cash generation, working-capital requirements, receivables factoring dependence, debt costs and covenant headroom as markets soften.
- Developments and potential exposure relating to the Brazilian ICMS dispute, the Demag appraisal proceeding, customer guarantees and finance-receivable credit quality.