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Terex Lags Estimates

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Terex Corp.’s (TEX - Free Report) fourth-quarter 2012 adjusted earnings of 19 cents per share declined 24% from 25 cents earned in the year-ago quarter. The company’s earnings fell well short of the Zacks Consensus Estimate of 39 cents. Including special items, Terex reported loss per share of 28 cents in the quarter compared with earnings of 4 cents in the year-ago quarter.

Total revenue declined 13% year over year to $1.695 billion, missing the Zacks Consensus Estimate of $1.825 billion. 
Costs and Margins
Cost of goods sold declined 16% to $1.39 billion versus $1.65 billion in the year-earlier quarter. Gross profit increased 2% to $307.6 million. Gross margin expanded 260 basis points to 18.1% in the quarter.
Selling, general and administrative expenses rose 3% to $279.7 million in the quarter. The company reported an operating income of $27.9 million, a 10% decline from $31.1 million in the year-ago quarter.
Segment Performance
Total revenue at Aerial Work Platforms increased 5% year over year to $459.4 million. The improvement was mainly driven by increased fleet replenishment in North America, stronger price realization and increased service penetration in the aerials and utilities businesses.
However, these benefits were partially offset by lower sales of telehandlers as a result of a planned production shutdown. Operating income saw a 63% increase to $42.6 million from $26.2 million in the prior-year quarter, driven by price realization, customer mix, which helped offset increased inventory charges.
Total revenue at the Construction segment declined 35% to $266.4 million. Results deteriorated due to soft demand in the end markets, especially in Western Europe. Demand for material handlers remained weak on the back of low steel scrap prices and decreased utilization on existing equipment.
The segment reported an operating loss of $44.9 million versus a loss of $2.8 million in the year-earlier quarter, driven by reduced sales volumes, partially offset by improved price realization and cost savings initiatives taken in 2011 and 2012, 
Cranes segment’s total revenue dropped 9% to $394.9 million. Weak demand in Western Europe offset strong demand in North America, Australia and the Middle East. Sales in the Middle East were strong, particularly in Turkey and Saudi Arabia. Operating income went up to $45.7 million from $14 million in the year-earlier quarter, driven by price realization and cost cutting efforts and increase in aftermarket sales.
Total revenue at Material Handling & Port Solutions declined 15% to $439.6 million due to reduced sales of port equipment and lower volumes of standard material handling cranes and light crane systems.
The segment reported an operating loss of $21.9 million compared to a loss of $19.8 million in the year-ago quarter; affected by lower volumes, an unfavorable product mix and higher material costs.
Total revenue at the Material Processing segment were $152.1 million, down 11% year over year due to weak Western European markets for screening products. This was partially offset by strong demand in North America and Australia.
The segment reported an operating profit of $16.2 million, up 18% from $13.7 million in the prior-year quarter. Operating profit improved as a result of favorable manufacturing expense driven by supply chain savings as well as lower production and warranty costs.
Fiscal 2012 Performance
Terex reported adjusted earnings per share of $1.83 in 2012, increasing four fold from 46 cents in 2011. Adjusted earnings were below management guidance in the range of $1.95-$2.05 per share as well as the Zacks Consensus Estimate of $2.02. Including special items, reported earnings were 91 cents per share compared with 35 cents in 2011. 
Total revenue improved 13% year over year to $7.348 billion, missing the Zacks Consensus Estimate of $7.493 billion as well as management guidance of $7.5 billion.
Financial Position
As of Dec 31, 2012, cash and cash equivalents amounted to $678 million versus $774 million as of Dec 31, 2011. Cash from operating activities was $292 million in 2012 compared with $22.7 million in 2011. Debt to capitalization ratio was 51% as of Dec 31, 2012 compared with 55% as of Dec 31, 2011.
Outlook for 2013
Terex expects earnings per share in 2013 to lie between $2.40 and $2.70 and net sales between $7.9 billion and $8.3 billion. The company expects to generate more than $500 million in free cash flow during the year and remains committed to reducing its debt.
Our View
Terex aims at improving margins and its earnings and generating cash flow to help reduce the debt level. Entering 2013, the Aerial Work Platforms (AWP) segment continues to benefit from North American rental channel demand. Crane segment’s performance is also expected to remain strong in North America and in certain developing market regions. 
In the Construction segment, Terex is planning to divest majority of its roadbuilding product lines and exit a number of compact construction component manufacturing businesses in Germany. These businesses have not been performing as per expectations and these help improve overall operating results. Terex retains a short-term Zacks Rank #2 (Buy). 
Peer Performance
One of the major companies in the machinery – construction and mining industry, Caterpillar Inc. (CAT - Free Report) reported fourth quarter adjusted EPS of $1.91, down 18% from $2.32 in the prior-year quarter, but ahead of the Zacks Consensus Estimate of $1.70.
Joy Global Inc. reported adjusted earnings of $1.99 per share in the fourth quarter of fiscal 2012, compared with $1.83 per share in the fourth quarter of fiscal 2011 and ahead of the Zacks Consensus Estimate of $1.90.
Manitowoc Company, Inc. (MTW - Free Report) reported fourth-quarter 2012 adjusted earnings from continuing operations of 27 cents per share, beating the Zacks Consensus Estimate of 24 cents and exceeding the prior-year quarter’s earnings of 14 cents per share. 

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