The string of losses continued at Terex Corp. (TEX) with its fourth quarter incurring a loss per share of 30 cents. However, the loss narrowed noticeably from the year-ago loss of 95 cents a share. The reported loss was, however, wider than the Zacks Consensus Estimate of a loss per share of 10 cents.
The loss in the quarter included severance costs and charges associated with restructuring and the accelerated depreciation of certain assets of $4.6 million, $4.5 million related to marking to market the derivative instruments intended to partially mitigate the risks associated with the common stock of Bucyrus International Inc. (BUCY) received in connection with the Mining business divestiture, $4.1 million for unusual legal expenses, and $4.0 million for debt retirement.
These items were partially offset by a pre-tax reduction of $1.7 million of the company’s provision for foreign duty and related obligations.
Revenue in the quarter increased by a sharp 31% year over year to $1,326.6 million, ahead of the Zacks Consensus Estimate of $1,172 million. Revenues increased across all of its segments. Backlog was $1,298 million as of December 31, 2010, an increase of 10% from September 30, 2010 and 5% from as of December 31, 2009. Mounting backlogs across the Aerial Work Platforms, Construction and Material Processing segments were offset by decline at the Cranes segment.
Cost of sales, expressed as a percentage of revenue, decreased 460 basis points to 86% and selling, general, administrative and engineering expenses followed suit with a 280 basis points drop to 14%. Gross margin surged 460 basis points to 14%. Terex’s operating income in the quarter was $0.5 million; an improvement from an operating loss of $75.3 million in the year-ago quarter.
Segment Performance
The Aerial Work Platforms segment posted a revenue growth of 66% to reach $340.6 million. The increase was driven by recovery in the North American market and strong growth in Latin America where sales in the region almost doubled driven by increased sales of booms and telehandlers to Brazil and other markets. The sale of a portion of the segment’s utility rental fleet was also instrumental to the increase.
The segment’s operating income was $11.7 million compared with the year-ago operating loss of $32.6 million. The turnaround was driven by enhanced sales volume, margin and manufacturing cost absorption that resulted from increased production levels, positive currency effect, and a reduction of $1.7 million in the provision for foreign duty and related obligations, which were slightly offset by increased material costs.
The Material Processing segment posted a robust 75% year-over-year revenue growth climbing to $145.8 million in the quarter driven by strong worldwide machine sales. Operating income at the segment clocked $5.3 million, up smartly from a loss of $8.5 million in the prior-year quarter, driven by better product mix and pricing though slightly offset by an increase in unusual legal expenses and inventory charges related to production relocation.
The Construction segment’s revenues grew 54% to $318.4 million in the quarter due to strong growth across all product categories, in particular material handler, truck, and compact equipment businesses in Europe and the Americas. The segment’s operating loss narrowed to $5 million from $51.7 million in the year-ago quarter aided by higher net sales and the related cost and manufacturing absorption that emanated from increased production levels and higher part sales.
Revenue at the Crane segment inched up 2% to $549.1 million in the quarter. The quarter benefited from a delayed shipment of cranes that was previously scheduled to ship in the third quarter of 2010. Order rates improved across the business, with the exception of small all-terrain and tower cranes.
Operating income at Crane was $15.7 million, a 48% drop from the year-ago quarter. Improved cost absorption as a result of operating the factories at higher levels of production were offset by material cost increases, competitive pricing and product mix.
Fiscal 2010 Performance
Terex reported a loss per share from continuing operations of $1.98 in fiscal 2010 compared with a loss of $3.97 in the prior year. The fiscal 2010 EPS fell short of the Zacks Consensus Estimate of a loss per share of $1.14. The year-over-year improvement was driven by higher net sales volume, increased production activity, the effect of prior cost reductions and lower SG&A costs.
The 2010 net loss was caused by tax expenses and provisions recorded in the third quarter of approximately $41 million, restructuring and impairment charges of approximately $27 million, expense related to marking to market the derivative instruments intended to partially mitigate the risks associated with the Bucyrus common stock of approximately $21 million, unusual legal expenses of approximately $4 million, and expense associated with debt retirement of approximately $4 million.
Revenues went up 15% to reach $4.4 billion in the year and were ahead of the Zacks Consensus Estimate of $4.29 billion.
Financial Position
Terex Corp. had cash and cash equivalents of $894.2 billion as of December 31, 2010, down from $929.5 million as of December 31, 2009. The company used net cash of $610.1 million for operating activities in the quarter compared with an outflow of $40.6 million last year.
The debt-to-capitalization ratio improved to 45% as of December 31, 2010, from 54% as of December 31, 2009.
Outlook
Terex estimates fiscal 2011 net sales to be within the range of $5.0 billion and $5.4 billion, indicating a 13% to 22% growth from 2009 levels. Terex expects to deliver income from operations in the band of $220 million to $250 million and EPS in the range of 60 cents to 75 cents. For the first quarter of fiscal 2011, Terex expects to incur a loss of approximately 10 cents to 15 cents per share, excluding the impact of restructuring and unusual items. Terex targets the second quarter to return to profitability.
Our Take
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. Even though the Aerial Work Platforms segment has delivered a turnaround the Construction segment continues to book losses. However, an increase in backlog and order quotation activity in the quarter looks promising.
We appreciate Terex’s initiatives to invest in developing markets, which make up approximately one-third of the company’s overall sales. A substantial improvement in demand in these markets could offset the weakness that the company is facing in its mature markets. It remains to be seen whether the company can deliver on its promise of a rebound to profitability in the second quarter of this fiscal. 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.
The companoperates through four business segments: Aerial Work Platforms, Construction, Cranes, and Materials Processing. Terex competes with the likes of Caterpillar Inc. (CAT), Deere & Company (DE) and Komatsu Ltd. (KMTUY).
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