KMTUY Komatsu Ltd (PK)

Terex Corp.’s (TEX) second-quarter 2013 adjusted earnings of 65 cents per share declined 13% from 75 cents earned in the year-ago quarter, but were ahead of the Zacks Consensus Estimate of 54 cents. Weak market conditions, decline in the Cranes, Construction and Material Handling & Port Solutions segment revenues impacted the earnings. Including special items, Terex reported income from continuing operations of 18 cents per share in the second quarter, a 76% plunge from 75 cents earned in the prior-year quarter.

Operational Update

Revenues in the quarter declined 5% year over year to $1.91 billion, missing the Zacks Consensus Estimate of $1.99 billion.

Cost of goods sold declined 2% to $1.55 billion versus $1.58 billion in the year-earlier quarter. Gross profit decreased 17% to $3567.5 million. Gross margin contracted 260 basis points to 18.7% in the quarter.

Selling, general and administrative expenses increased 7% to $271 million in the quarter. The company reported an operating income of $85.3 million, a 51% drop from $175 million in the year-ago quarter.

Segment Performance

Aerial Work Platforms revenues improved 17% year over year to $607 million in the reported quarter on the back of improvement in replacement demand, particularly in North America. Operating income saw a 30% increase to $101 million from $78 million in the prior-year quarter.

Construction segment revenues declined 29% to $275 million. Results deteriorated due to soft demand in the end markets, especially in Europe, as well as the decline in truck sales in global market. The segment reported an operating loss of $5 million in the quarter compared with operating profit of $9.6 million in the year-ago quarter.

Cranes segment revenues increased 3% to $521 million. Operating income declined to $23.4 million from $49.6 million in the year-earlier quarter.

Material Handling & Port Solutions revenues declined 16% to $370 million, driven by weak demand for port equipment across most product categories and a decline in industrial material handing cranes. The segment reported an operating loss of $57 million compared to an operating income of $10.8 million in the year-ago quarter.

Material Processing segment revenues were $176 million, down 7% year over year due to weak mineral markets in Australia and South America, and soft general construction in Europe, partly offset by stronger North American market and flat selling, general and administrative expenses. The segment reported an operating income of $24.5 million, down 14% from $28.6 million in the year-ago quarter.

Financial Position

As of Jun 30, 2013, cash and cash equivalents amounted to $5480 million versus $678 million as of Dec 31, 2012. Long-term debt was at $1.8 billion as of Jun 30, 2013 compared with $2 billion as of Dec 31, 2012. Cash flow from operating activities was $1308 million in the first half of 2013 compared with $18 million in the prior-year comparable period. The company generated free cash flow of $40 million in the quarter compared with $175 million in the second quarter of 2012.

Backlog

Backlog for orders to be filled during the next twelve months was around $2.18 billion as of Jun 30, 2013, in line with Mar 31, 2012 and a 5% rise from Jun 30, 2013. Strong demand for AWP products as well as existing large port equipment orders for MHPS led to the increase. However, weak demand witnessed in the cranes segment due to softness in Europe, Latin America and Australia offset the increase.

Outlook for 2013

Terex maintained its 2013 earnings per share forecast range of $1.90 and $2.10 and net sales between $7.5 billion and $7.7 billion. The company expects to generate more than $400 million in free cash flow during the year and remains committed to reducing its debt.

Our View

Terex will realize benefits starting in 2014 from its substantive actions undertaken in the second quarter to further adjust the cost structure of the MHPS, and Cranes and Construction segments. In the near term, strong backlog in the MHPS segment will aid results. The company will also benefit from the recovery in the construction sector. The company also remains focused on improving profit through continued attention on pricing and operating costs.

Westport, Conn-based Terex is a global equipment manufacturer, catering to the construction, infrastructure, and surface mining industries. The company’s manufacturing facilities are located in the U.S., Canada, Europe, Australia, Asia, and South America. It also offers a complete line of financial products and services to assist in the acquisition of equipment through Terex Financial Services.

Terex retains a short-term Zacks Rank #5 (Strong Sell). Komatsu Ltd. (KMTUY), with a Zacks Rank #2 (Buy), is a better option for investors who are keen on investing in the construction and machinery industry.
 
Peer Performance

Reflecting on the performance of Terex’s peers in the second quarter, Astec Industries Inc. (ASTE) fared better with a 17% year over year increase in earnings to 48 cents per share, but short of the Zacks Consensus Estimate of 55 cents.

On the other hand, earnings of construction and mining equipment behemoth Caterpillar Inc. (CAT) slumped 43% to $1.45 per share and fell well short of the Zacks Consensus Estimate of $1.70.

 
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