Terex Beats, but in Loss Territory – Analyst Blog

Terex Corp. (TEX) continued to incur losses delivering a loss per share of 12 cents in its second quarter ended June 30, 2010, which narrowed from the loss per share of $1 in the year-ago period. However, the second-quarter loss was an improvement from the Zacks Consensus Estimate of a loss per share of 29 cents. Improved order activity across most of its product categories, except cranes, and lower costs led to better-than-expected results.

 

Revenue in the quarter increased by a sharp 14% to $1.1 billion from $947.3 million in the year-ago period. However, excluding the impact of acquisitions, revenue yielded a 6% increase. Backlog was $1.1 billion as of June 30, 2010, a decline of 18% and 10% from June 30, 2009 and March 31, 2010 levels, respectively. The shortfall in backlog was exclusively due to weakness at Crane, which more than offset increased backlogs across the other segments.

 

Cost of sales, as a percentage of revenue, decreased 740 basis points (bps) to 85.7% while selling, general, administrative and engineering expenses dropped 380 bps to 15.3%. Gross margin surged 740 basis points to 14%. Terex Corp.’s operating loss in the quarter was $10.4 million, a milder loss than $115.1 million incurred in the year-ago quarter.

 

 

The Material Processing segment posted the highest year-over-year revenue growth of 50% to $135.5 million in the quarter. The outperformance was a result of improved demand for materials processing equipment as dealers ceased to downsize their inventory and growth in the mining and infrastructure applications markets in Australia and South America.

 

Operating income at the Material Processing segment improved to $9.2 million from a loss of $12.1 million in the prior year quarter. Factors such as increase in net sales, lower material costs and pricing actions led to the turnaround.

 

The Construction segment followed with a revenue growth of 45% to $279 million compared with the year earlier quarter, helped by improved demand across all of its product categories and regions. The segment’s operating loss came down to $16.8 million from $73.4 million in the year-ago quarter aided by capacity utilization, increased sales, lower material cost and selling general and administrative costs, as well as benefits from prior cost-reduction actions.

 

The Aerial Work Platforms segment’s revenue increased 12% (9% excluding the translation effect of foreign currency exchange rate) to $232.4 million. Surge in demand for large booms, light towers and telehandlers in the South American and South East Asian markets were instrumental for the increase.

 

 

The segment’s loss of $2.3 million was a considerable improvement over the loss of $32.4 million reported in the year-ago quarter. Benefits from heightened production activities and prior manufacturing cost reduction actions helped offset net foreign currency losses and a provision of approximately $7 million for expected historical foreign duty and related obligations for certain products.

 

Revenue at the Crane segment declined 5% to $449.1 million in the quarter. Excluding the effect of foreign currency exchange rate changes and acquisitions, revenues plummeted 21%. Soft commercial construction markets affected the demand for smaller capacity cranes. Tower crane and rough terrain crane demand, however, remained stable, although still at low levels.

 

Operating income at Crane was $17 million, a 32% drop from $25 million in the year-ago quarter. The segment margin contracted 150 bps year over year to 3.8% due to reduced revenues partially mitigated by lower materials costs and enhanced factory utilization.

 

Terex Corp. had cash and cash equivalents of $1.5 billion as of June 30, 2010, down from $1.8 billion as of March 31, 2010. The translation effect of foreign currency exchange rate changes had a negative impact on the cash balance.

 

The company used net cash of $155.7 million for operating activities in the quarter compared with an inflow of $53.9 million in the comparable period last year.

 

The debt-to-capitalization ratio was 51.0% as of June 30, 2010, up from 48.3% as of March 31, 2009 but down from 54.0% as of December 31, 2009.

 

 

Terex Corp. reaffirmed that its operating profit will break even in fiscal 2010 but the ‘per share’ figure will continue to run at a loss of $1. Fourth-quarter fiscal 2010 is expected to be the turnaround quarter with the company finally posting a profit after a gap of almost two years.

 

The company estimates fiscal 2010 revenue to be in the range of $4.5 billion to $4.6 billion, down from its previous guidance of $5 billion. Terex continues to see non-residential, end-market softness in North America and Europe, but strength in developing markets. The Crane segment is expected to suffer revenue and backlog declines but at moderate levels in the back half of the year. 

  

The company looks forward to 2011 as a profitable and growth year. Based on the assumption of a return to a more normalized economic environment, the company expects its revenue to double in 2011 and earnings per share to reach $6 by 2013.

 

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, even though these segments continued to suffer losses, there has been a considerable year-over-year improvement, holding a glimmer of hope.

 

Despite the moderating losses, we do not expect a striking recovery in any of the company’s end-markets in the near term. We, thus, maintain our Underperform rating over the next three to six months supported by a Zacks #4 Rank (Sell) on Terex Corp.

 

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.