Terex Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014. Terex is a global lifting and material-handling equipment company with five reportable segments: Aerial Work Platforms (AWP), Construction, Cranes, Material Handling & Port Solutions (MHPS), and Materials Processing (MP).
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $1,654.6 million | $1,653.7 million; up 0.1% |
| Gross profit / margin | $333.4 million / 20.1% | $321.2 million / 19.4% |
| Operating income / margin | $75.0 million / 4.5% | $65.6 million / 4.0% |
| Income from continuing operations | $31.5 million | $17.7 million |
| Net income attributable to Terex | $35.0 million; diluted EPS $0.30 | $23.9 million; diluted EPS $0.21 |
| Operating cash flow | $25.2 million | $58.8 million |
| Free cash flow | $6.2 million | Company’s 2014 definition: operating cash flow less capital expenditures |
| Cash and cash equivalents | $390.5 million | $408.1 million at December 31, 2013 |
| Total debt | $2,055.9 million | $1,976.7 million at December 31, 2013; debt less cash was $1,665.4 million |
Operating cash flow was pressured by working capital, particularly a $195.5 million inventory cash outflow; receivables provided $61.2 million. Capital expenditures were $19.0 million. Current assets were $3,743.6 million and current liabilities $1,838.6 million. Terex reported $241.3 million available under its revolving credit facilities, with $211.2 million outstanding under the revolver and $494.5 million in term loans. Approximately 38% of debt was floating-rate; weighted-average interest on all debt was 5.68%.
Material changes and segment performance
- AWP: Sales rose 14.9% to $584.9 million; operating income increased 13.5% to $82.2 million. Demand and rental-channel replenishment in North America and Europe supported results.
- Construction: Sales fell 7.0% to $195.7 million, primarily reflecting prior divestitures. Operating loss narrowed to $5.0 million from $14.5 million.
- Cranes: Sales declined 16.4% to $393.6 million. Operating results moved from $32.5 million income to a $0.2 million loss, reflecting weaker volumes, less favorable mix, lower production absorption and higher SG&A.
- MHPS: Sales increased 8.5% to $368.2 million, aided by port-solutions projects. Operating loss narrowed to $6.3 million from $29.1 million as gross profit improved and SG&A declined.
- MP: Sales decreased 2.8% to $150.0 million; operating income was $10.9 million versus $11.7 million.
Net sales were nearly flat overall as AWP and MHPS growth was offset by declines in Cranes and other segments. The effective tax rate fell to 26.7% from 45.2%, primarily due to a reduced impact from losses without tax benefits and greater release of uncertain-tax-position reserves. Comprehensive income attributable to Terex was $51.5 million, compared with a $55.0 million comprehensive loss in Q1 2013, largely reflecting the change in foreign-currency translation adjustments.
Outlook, management commentary and risks
- Management maintained 2014 guidance of diluted EPS of $2.50–$2.80, excluding restructuring and unusual items, on net sales of $7.3–$7.7 billion. It expected free cash flow of $200–$250 million.
- Management cited increasing backlog sequentially and year over year and expected improvement in Construction and MHPS for the rest of 2014. It anticipated continued strong AWP demand, while noting softer Latin American demand. Cranes bookings had improved, but long product lead times could defer revenue into later periods.
- Terex agreed to sell its truck business to Volvo Construction Equipment for approximately $160 million, subject to regulatory approval and customary conditions, with closing targeted for the first half of 2014. The business was classified as discontinued operations; Q1 discontinued-operations sales were $45.4 million.
- Terex paid $71.3 million to acquire the remaining minority interest in TMHPS and now owns 100%. It repurchased approximately $33 million of shares during the quarter under a $200 million authorization through 2015, and declared a $0.05-per-share dividend. Management stated an intention to pay four quarterly dividends of $0.05 in 2014, subject to Board approval.
- Key risks include cyclical end markets, economic and government-spending conditions, customer and supplier financing, working-capital needs, debt service and covenant compliance, foreign exchange and interest-rate movements, commodity and supplier availability, product liability, litigation and environmental or regulatory obligations. The company had $333.1 million of letters of credit outstanding. Credit guarantees had maximum exposure of $57.2 million; buyback guarantees $37.7 million; and residual-value guarantees $2.0 million.
- Terex reported pending ERISA, securities and shareholder derivative lawsuits for which it could not estimate a possible loss or range. Management stated it believed the allegations were without merit and that recorded reserves for contingencies were appropriate. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the truck-business sale closed on the expected timetable and at what final proceeds and gain or loss.
- Whether higher backlog converts into sales and margin improvement, particularly in Cranes, Construction and MHPS, and whether 2014 guidance is achieved.
- Whether inventory investment and working-capital levels normalize enough to support the $200–$250 million free-cash-flow outlook.
- Debt, revolver availability and covenant headroom, including the effect of floating-rate exposure and the June 2015 maturity of the 4% convertible notes.
- Developments in the pending lawsuits and customer, residual-value and buyback guarantees, including any changes in potential exposure or reserves.
- The cash and earnings effects of share repurchases, dividends, and the completed TMHPS minority-interest purchase.