Falling Demand for Capital Equipment Pinches Terex's Quarterly Results

Image source: Terex.

Terex Corporation (TEX 0.80%) posted third-quarter results this week that described worsening selling conditions across many of its equipment markets. Reported income spiked, but only thanks to one-time gains from the sale of its compact construction business.

Here's a look at the top- and bottom-line results.

Data source: Terex financial filings.

What happened with Terex this quarter?

The pace of sales decline accelerated thanks to a surprisingly large drop in the crane business and an overall weak global capital equipment market. Terex protected profits by slimming down its portfolio and cutting costs, though.

Key highlights of the quarter include:

• The aerial work platform segment fell 17%, compared to a 14% drop last quarter. Operating margin plunged to 10% of sales from 14% as customers extended their equipment replacement plans across Terex's geographies.
• The crane segment slumped by 25% and produced an operating loss. Backlog fell by 21%, too, indicating further pain ahead for this division.
• Materials processing fell slightly but enjoyed an uptick in operating margin as demand improved in the concrete market. Backlog spiked 46%.
• Overall equipment sales dropped 10% over the first three quarters of the year as operating margin fell to 3.6% of sales from 5.3% in the year-ago period.

What management had to say

"The global capital equipment market remains challenging," CEO John Garrison said in a press release. "The market for mobile cranes weakened further than planned," he explained, and "aerial work platform equipment sales continued to soften globally, particularly in North America."

In response, the company is shaking up the management team in some parts of the business while aiming to aggressively cut costs and simplify the portfolio elsewhere. "We are taking actions to improve the cranes business including the recently announced leadership changes," Garrison said. "We are reviewing all aspects of our cost structure and have been taking actions throughout the entire company to reduce costs. These savings were critical to at least partially offsetting challenging conditions in our markets." 

Looking forward

A partial offset of challenging market conditions appears to be what investors can expect over at least the next few quarters. To account for the latest operating slowdown, Terex lowered its 2016 sales guidance to $4.3 billion from $4.4 billion. Earnings are now forecast to weigh in at $0.75 per share after Terex takes restructuring charges tied to the crane business, compared to the $0.95 per share that executives projected three months ago. Finally, Terex lowered its free cash flow guidance to $175 million from $225 million.

The company can't do much about the depth of the downturn in many of its industries, so management's focus in the coming quarters is on continuing to simplify its portfolio by selling its materials handling and processing segment in early 2017. At the same time, Garrison and his team hope to execute a turnaround in the crane segment powered by fresh leadership. Finally, Terex will be looking for ways to aggressively cut costs by reducing its manufacturing footprint and moving existing facilities to cheaper locations.

While earnings are likely to continue to be far below the levels Terex enjoys in boom times, the company has demonstrated its ability to stay profitable even under extremely challenging market conditions like these.