BUCY Bucyrus International, Inc. (MM)

Terex Corp. (TEX) reversed its string of losses with a fiscal 2011 first quarter profit per share of 4 cents. Results were a stark improvement from the year-ago loss of 73 cents a share. The reported profit was also an improvement from the Zacks Consensus Estimate of a loss per share of 10 cents.

The profit in the quarter included an after-tax gain of 28 cents per share on the sale of approximately 1.8 million shares of Bucyrus International Inc. (BUCY), an after-tax expense of 4 cents per share for costs associated with the early retirement of the company’s 7-3/8% senior subordinated notes in the quarter and after-tax charges related to restructuring and a customer insolvency of 3 cents per share.

Revenue in the quarter increased by a sharp 34% year over year to $1,256.2 million, ahead of the Zacks Consensus Estimate of $1,129 million. Revenues increased across all of its segments, barring cranes. Backlog was $1,791.9 million as of March 31, 2011, up 38% from $1,298 million as of December 31, 2010 and up 46% from $1,223.6 million as of March 31, 2010.

Cost of sales, expressed as a percentage of revenue, decreased 280 basis points to 86.7% and selling, general, administrative and engineering expenses followed suit with a 350-basis point drop to 14.1%. Gross margin likewise surged 280 basis points to 13.3%. Terex’s operating loss in the quarter was $9.3 million; an improvement from an operating loss of $66.5 million in the year-ago quarter.

Segment Performance

The Aerial Work Platforms segment posted a revenue growth of 75% to reach $376.8 million. The increase was driven by recovery in the North American market and strong growth at other regions, especially in Western Europe.

The segment’s operating income was $6 million compared with the year-ago operating loss of $20.3 million. The turnaround was driven by a spur in sales volume and manufacturing cost absorption that resulted from increased production levels, slightly offset by increased material costs and weaker price realization due to early order discount and other incentives.

Revenues at the Construction segment grew 68% to $342.9 million in the quarter due to strong growth across all product categories, in particular material handler and trucks, especially for quarry applications in developing markets.

Further, strong demand for backhoe loaders in Western Europe and Russia, increased interest in compact equipment in rental outlets throughout the Americas and strong parts sales driven by aging fleet and higher utilization culminated in the sales increase.

The segment’s operating loss narrowed to $3.5 million from $22.8 million in the year-ago quarter aided by higher net sales and improved operating performance due to restructuring that has taken place over the past year. This was slightly offset by increased costs for certain raw materials and components as well as selling, general and administrative expenses in response to the growth.

The Material Processing segment posted a 41% year-over-year revenue growth climbing to $152.2 million in the quarter driven by strong worldwide machine sales particularly in Australia, South Africa and the Americas. The gains in sales were due to a stronger global economic picture and dealer restocking ahead of anticipated orders driven by early cycle demand. Northern and Eastern European markets have started to show signs of recovery, while demand in Southern European markets has remained weak.

Operating income at the segment clocked $12.3 million, up smartly from a loss of $0.3 million in the prior-year quarter, driven by better manufacturing utilization and product pricing, offset partially by the rising cost of components and raw materials.

Revenue at the Crane segment dipped 4% to $398.3 million in the quarter. Despite the miss, sales were favorably impacted by a recovery in demand throughout the Americas with shipments being driven predominantly by energy and commercial construction applications.

Demand remained slow for large crawler cranes worldwide, where the market tends to recover later in the business cycle. Also contributing to crawler crane demand weakness was the postponement or cancellation of certain wind projects in Germany and the UK due to reductions in government funding. Terex’s port equipment products have experienced delivery delays, with these deliveries now expected to take place in the second and third quarters of 2011.

Operating loss at Crane was $22.5 million, aggravating from a loss of $3.1 million in the year-ago quarter. Results were negatively impacted by material cost increases, competitive pricing, product mix and a $5 million charge taken for customer insolvency, but were slightly buttressed by improved cost absorption, especially in North America.

Larger-than-expected losses of approximately $16 million mainly due to delayed deliveries and a cost structure that currently remains on the higher side were reported in the port equipment business.

Financial Position

Terex Corp. had cash and cash equivalents of $723.7 million as of March 31, 2011, down from $894.2 million as of December 31, 2010. The company used net cash of $76.6 million for operating activities in the quarter compared with an outflow of $84.1 million in the year ago quarter.

The debt-to-capitalization ratio improved to 40% as of March 31, 2011, from 45% as of December 31, 2010.

Outlook

Terex raised its fiscal 2011 net sales guidance range to $5.2 billion to $5.5 billion from the previous range of $5 billion to $5.4 billion citing an improved demand environment. However, given increased pressures from component costs, Terex maintained its fiscal 2011 EPS in the range of 60 cents to 75 cents excluding the impact of restructuring and unusual items. The company expects to deliver profits in the ensuing quarters.

Our Take

Terex has been continuously posting losses since the first quarter of fiscal 2009, affected by the global economic slowdown. Particularly hurt 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.

Further, the Cranes segment remains in the loss territory. The company expects the segment to be challenged in the first half of 2011 as it works through the effects of inconsistent demand for many of its larger cranes during 2010. However, the long-term outlook for the segment looks good considering the significant increase in demand from North America, as well as a continued increase in activity in developing markets.

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. 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. Terex competes with the likes of Caterpillar Inc. (CAT), Deere & Company (DE) and Komatsu Ltd. (KMTUY).

 
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