Terex Corporation Gets More Profitable as Demand Shrinks

This hasn't been a great year for lifting and material handling specialist Terex Corporation . Three months ago, management lowered its 2015 outlook after challenging market conditions pinched sales. On Wednesday, the company reiterated that downbeat full-year forecast as part of Terex's third-quarter earnings results.

Terex results: The raw numbers

Data source: Yahoo! Finance.

What happened with Terex this quarter?The overall results showed more strain across Terex's product divisions as its customers remained cautious in their buying habits. But there were also a few bright spots for the business:

  • Sales fell in five out of six product lines. The worst performer was port solutions, while aerial work platforms and materials processing did relatively well.
  • Geographically, sales were flat in the U.S. as oil and gas customers held back equipment orders. European markets were mixed, but down overall. And growth in China slowed while the Brazilian and Australian markets shrunk slightly.
  • Operating margin rose significantly, improving from 7% of sales to 7.7%, thanks to falling commodity prices and disciplined cost cuts.
  • Order backlog fell 6% (compared to last quarter's 7% slip), as weakening demand in the mining and construction industries offset strong growth in Terex's profitable aerial work platforms business.
  • Gross margin rose from 20.3% to 20.9%.
  • SG&A expenses fell slightly, from 13.3% to 13.2%.
  • Return on invested capital ticked lower, to 9.7%.

What management had to say"Our marketplace remains challenging," CEO Ron DeFeo said in a press release. Chief among those challenges was weakness in many of the industries that make up Terex's customer base. The oil and gas market, and the crane and construction industries, for example, experienced soft conditions this quarter.

And that led to "customers remaining cautious with their equipment purchasing patterns," DeFeo explained. Compounding that challenge was increased pricing pressure from rivals, which forced Terex to hold down its own prices to stay competitive.

Operating margin across Terex's divisions and companywide. Data source: Terex investor presentation.

Yet management was encouraged by its success at holding costs down and protecting overall profitability. Operating margin expanded to 7.7% of sales even as revenue shrunk this quarter. The standout performer was an aerial work platforms business that booked a company-leading 14% margin. "We continue to execute very well against [our] cost saving initiatives," DeFeo said.

Looking forwardYet while the company has control over many of its expenses, it can't do anything about global weakness in its customers' industries. Terex's latest outlook sees these soft conditions continuing at least into next quarter. Management on Wednesday said that it believes it will likely hit the low end of its 2015 sales and profit forecasts.

Meanwhile, investors can expect the company to continue to focus on cost cuts and on other financial initiatives like reducing working capital as a percentage of sales. These moves should boost efficiency metrics like return on invested capital and free cash flow, ideally putting the company in a strong position to capitalize on a market rebound -- when it eventually comes.

The article Terex Corporation Gets More Profitable as Demand Shrinks originally appeared on Fool.com.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Terex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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