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Shares of Terex Corp. (TEX - Analyst Report) grew 4% since the company reported an improved third-quarter 2013 earnings on Oct 23. Adjusted earnings of 77 cents per share increased 24% year over year from 62 cents in the year ago quarter, mainly due to reduced interest expense and a lower effective tax rate.

The results also surpassed the Zacks Consensus Estimate of 58 cents. Including special items, Terex’s income from continuing operations surged three folds to 77 cents per share from 27 cents earned in the prior-year quarter.

Operational Update

Revenues in the quarter declined 0.6% year over year to $1.81 billion, missing the Zacks Consensus Estimate of $1.93 billion.

Cost of goods sold declined 1.4% to $1.42 billion versus $1.44 billion in the year-earlier quarter. Gross profit rose 2.2% year over year to $387.1 million. Gross margin expanded 70 basis points to 21%.

Selling, general and administrative expenses remained flat year over year at $246 million. The company reported an operating income of $140.9 million, up 7% from $131.9 million in the year-ago quarter.

Segment Performance

The Aerial Work Platforms (AWP) segment’s revenues improved 22% year over year to $533 million on the back of recovery in the North American rental channel, strong Latin American market, as well as early signs of European replacement cycle. Operating income saw a 39% increase to $80.7 million from $57.9 million in the prior-year quarter.

The Construction segment’s revenues declined 17% year over year to $241.7 million. Results deteriorated due to reduced demand for scrap-handling equipment and the decline in truck sales in the global market. The segment reported an operating loss of $4.3 million in the quarter compared with an operating profit of $8.3 million in the year-ago quarter.

Revenues from the Crane segment decreased 12% year over year to $453 million. Operating income declined to $28.9 million from $51.5 million in the year-earlier quarter. The segment’s performance was affected by softness in the global crane market and other select products.

In the Material Handling & Port Solutions (MHPS), revenues grew 4% year over year to $460.6 million. The segment reported an operating income of $18.5 million compared with $17.4 million in the year-ago quarter.

The Material Processing segment’s revenues were $147.7 million, down 1.5% year over year due to weak mineral markets in Australia and South America, and soft general construction in Europe, partly offset by a stronger North American market. The segment reported an operating income of $18.9 million, up 24% from $15.2 million in the year-ago quarter.

Financial Position

As of Sep 30, 2013, cash and cash equivalents amounted to $370.6 million versus $678 million as of Dec 31, 2012. Total debt of the company decreased to $1.8 billion as of Sep 30, 2013 from $2 billion as of Dec 31, 2012.

Cash flow from operating activities remained flat at $135 million for the nine-month period ended Sep 30, 2013 compared with the prior-year comparable period. The company generated free cash flow of $87 million in the quarter.
 
Backlog

Backlog for orders to be filled during the next twelve months was around $1.8 billion as of Sep 30, 2013, a 7% rise from $1.7 billion as of Sep 30, 2012. Strong demand for AWP products together with large port equipment orders for MHPS led to the increase. However, weak demand in the cranes segment offset the increase.

Outlook

Terex trimmed its 2013 earnings per share forecast from the band of $2.05-$2.25 to $1.90- $2.10. The company also lowered its sales guidance to $7.3 billion-$7.5 billion from $7.5 billion to $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 third 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 recovery in the construction sector. The company also remains focused on improving profit through continued attention on pricing and operating costs.

Westport, CT-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 #3 (Hold). Lonking Holdings Ltd. with a Zacks Rank #2 (Buy), is a better option for potential investors keen on the construction and machinery industry.
 
Peer Performance

Reflecting on the performance of Terex’s peers in the third quarter, Astec Industries Inc. (ASTE - Analyst Report) reported third-quarter 2013 earnings of 28 cents per share, a 3.4% decline from 29 cents in the year-earlier quarter. The results fell short of the Zacks Consensus Estimate of 37 cents.

Earnings of construction and mining equipment behemoth Caterpillar Inc. (CAT - Analyst Report) slumped 43% to $1.45 per share and fell short of the Zacks Consensus Estimate of $1.68.

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