Terex Corp. (TEX) reported another disappointing quarter with a loss per share of 82 cents in its third quarter ended September 30, 2010. However, the loss was narrower than the loss per share of 98 cents in the year-ago period.
The third-quarter loss was, however, wider than the Zacks Consensus Estimate of a loss per share of 15 cents. Solid results from its Aerial Work Platforms and Materials Processing segments were offset by a loss at the Construction segment and continued weakness in the Cranes segment.
The loss in the quarter included the negative impact of 48 cents per share consisting of a pre-tax expense of $21 million associated with mark-to-market derivative instruments, tax expense for increased valuation allowances on certain deferred tax assets ($21 million), increased provisions for uncertain tax positions ($12 million) and approximately $6 million related to the decision to carry back U.S. tax net operating losses.
Revenue in the quarter increased by a sharp 15% year-over-year rise to $1.076 billion, falling short of the Zacks Consensus Estimate of $1.110 billion. Revenues increased across all of its segments barring Cranes. Backlog was $1.175 billion as of September 30, 2010, an increase of 8% from June 30, 2010. Mounting backlogs across the Aerial Work Platforms and Construction segments were offset by decline at the Cranes and Material Processing segments.
Cost of sales, expressed as a percentage of revenue, decreased 780 basis points (bps) to 84.8%, while selling, general, administrative and engineering expenses dropped 330 bps to 14.9%. Gross margin surged 780 basis points to 15%. Terex Corp.’s operating income in the quarter was $3 million; in stark contrast to the loss of $100.3 million incurred in the year-ago quarter.
Segment Performance
The Material Processing segment posted the highest year-over-year revenue growth of 48% to $143.6 million in the quarter. The outperformance was a result of improved demand for materials processing equipment as dealers ceased to downsize their inventory and are now ordering in line with the market demand. Operating income at the segment improved to $10.3 million from a loss of $10.7 million in the prior year quarter, driven by an increase in net sales.
The Aerial Work Platforms segment followed with a revenue growth of 41% to $280.9 million. The increase was driven by recovery in the North American market and strong growth trends in South American and Australian markets. The segment’s operating income was $14.3 million compared with the year-ago operating loss of $49.5 million. Enhanced sales volume, margin and manufacturing cost absorption that resulted from increased production levels eventually led to the turnaround.
The Construction segment posted a revenue growth of 38% to $286 million compared with the year earlier quarter, helped by an increased demand for material handlers and trucks and for compact equipment in certain products and regions.
The segment’s operating loss narrowed to $8.1 million from $50.9 million in the year-ago quarter aided by higher net sales and the related cost and manufacturing absorption that emanated from increased production levels. However, these positives were partially offset by $5 million in charges related to the realignment of South African distribution and certain manufacturing activities.
Revenue at the Crane segment declined 15% to $368.7 million in the quarter, hurt by poor demand for Cranes, including the all-terrain and crawler crane product categories as commercial construction demand remained soft and larger projects neared completion. Operating income at Crane was $3.4 million, an 82% drop from the year-ago quarter. The segment margin contracted 340 bps year over year to 0.9%, affected by lower sales.
Financial Position
Terex Corp. had cash and cash equivalents of $1.35 billion as of September 30, 2010, down from $1.5 billion as of June 30, 2010. The company used net cash of $207.3 million for operating activities in the quarter compared with an inflow of $50.5 million in the comparable period last year.
The debt-to-capitalization ratio improved to 49% as of September 30, 2010 from 51.0% as of June 30, 2010.
Outlook
Terex expects the fourth quarter to reflect continued strengthening trends in the Aerial Work Platforms, Construction and Material Processing segments. The Cranes segment is, however, expected to remain weak. Net sales are projected to increase approximately 10% -15% sequentially in the quarter. Though the company projects a consolidated operating profit of approximately $15 million in the fourth quarter, it does not consider the amount adequate to generate net income in the quarter.
The company looks forward to 2011 as a profitable and growth year. With a positive outlook for Aerial Work Platforms, Construction and Material Processing segments, the Cranes business would probably reach its low point in 2011.
Our Take
In spite of its efforts to offset lower volumes by cutting down costs and managing inventories, Terex has been continuously posting losses since the first quarter of fiscal 2009, affected by the global economic slowdown. Particularly affected were the Aerial Work Platforms and Construction businesses. However, in the recent quarter, the Aerial Work Platforms segment returned to profitability but the Construction segment continued to suffer losses.
We do not expect Terex to return to profitability in 2010. We, however, appreciate Terex’s initiatives to invest in developing markets, which make up approximately one-third of Terex’s overall sales. A substantial improvement in demand in these markets could offset the weakness that the company is facing. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Westport, Connecticut-based Terex Corporation is a global manufacturer of a broad range of equipment for the construction, infrastructure, quarrying, mining, shipping, transportation, refining, energy and utility industries. The company’s manufacturing facilities are located in the U.S., Canada, Europe, Australia, Asia and South America. It operates through four business segments: Aerial Work Platforms, Construction, Cranes and Materials Processing.
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