UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________________
F O R M 10 - Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
---------------------------------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10702
Terex Corporation
(Exact name of registrant as specified in its charter)
Delaware 34-1531521
(State of Incorporation) (IRS Employer Identification No.)
500 Post Road East, Suite 320, Westport, Connecticut 06880
(Address of principal executive offices)
(203) 222-7170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b -2).
YES X NO
--- ----
Number of outstanding shares of common stock: 49.3 million as of May 4, 2004.
The Exhibit Index begins on page 47.
INDEX
TEREX CORPORATION AND SUBSIDIARIES
GENERAL
This Quarterly Report on Form 10-Q filed by Terex Corporation ("Terex" or the
"Company") includes financial information with respect to the following
subsidiaries of the Company (all of which are wholly-owned) which were
guarantors on March 31, 2004 (the "Guarantors") of the Company's $300 million
principal amount of 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8%
Notes"), $300 million principal amount of 10-3/8% Senior Subordinated Notes due
2011 (the "10-3/8% Notes"), and $200 million principal amount of 9-1/4% Senior
Subordinated Notes due 2011 (the "9-1/4% Notes"). See Note P to the Company's
March 31, 2004 Condensed Consolidated Financial Statements included in this
Quarterly Report.
State or other I.R.S.
jurisdiction of employer
incorporation identification
Guarantor or organization number
---------- --------------- ---------------
Amida Industries, Inc. South Carolina 57-0531390
Benford America, Inc. Delaware 76-0522879
BL-Pegson USA, Inc. Connecticut 31-1629830
Cedarapids, Inc. Iowa 42-0332910
CMI Dakota Company South Dakota 46-0440642
CMI Terex Corporation Oklahoma 73-0519810
CMIOIL Corporation Oklahoma 73-1125438
EarthKing, Inc. Delaware 06-1572433
Finlay Hydrascreen USA, Inc. New Jersey 22-2776883
Fuchs Terex, Inc. Delaware 06-1570294
Genie Access Services, Inc. Washington 91-2073567
Genie China, Inc. Washington 91-1973009
Genie Financial Services, Inc. Washington 91-1712115
Genie Holdings, Inc. Washington 91-1666966
Genie Industries, Inc. Washington 91-0815489
Genie International, Inc. Washington 91-1975116
Genie Manufacturing, Inc. Washington 91-1499412
GFS Commercial LLC Washington n/a
GFS National, Inc. Washington 91-1959375
Go Credit Corporation Washington 91-1563427
Koehring Cranes, Inc. Delaware 06-1423888
Lease Servicing & Funding Corp. Washington 91-1808180
O & K Orenstein & Koppel, Inc. Delaware 58-2084520
Payhauler Corp. Illinois 36-3195008
Powerscreen Holdings USA Inc. Delaware 61-1265609
Powerscreen International LLC Delaware 61-1340898
Powerscreen North America Inc. Delaware 61-1340891
Powerscreen USA, LLC Kentucky 31-1515625
PPM Cranes, Inc. Delaware 39-1611683
Product Support, Inc. Oklahoma 73-1488926
Royer Industries, Inc. Pennsylvania 24-0708630
Schaeff Incorporated Iowa 42-1097891
Spinnaker Insurance Company Vermont 03-0372517
Standard Havens, Inc. Delaware 43-0913249
Standard Havens Products, Inc. Delaware 43-1435208
Terex Advance Mixer, Inc. Delaware 06-1444818
Terex Bartell, Inc. Delaware 34-1325948
Terex Cranes, Inc. Delaware 06-1513089
Terex Financial Services, Inc. Delaware 45-0497096
Terex Mining Equipment, Inc. Delaware 06-1503634
Terex Utilities, Inc. Delaware 04-3711918
Terex Utilities South, Inc. Delaware 74-3075523
Terex-RO Corporation Kansas 44-0565380
Terex-Telelect, Inc. Delaware 41-1603748
The American Crane Corporation North Carolina 56-1570091
Utility Equipment, Inc. Oregon 93-0557703
1
Page No.
--------
PART I FINANCIAL INFORMATION
----------------------
Item 1 Condensed Consolidated Financial Statements
--------------------------------------------
TEREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations --
Three months ended March 31, 2004 and 2003..........................................................3
Condensed Consolidated Balance Sheet - March 31, 2004 and December 31, 2003.............................4
Condensed Consolidated Statement of Cash Flows --
Three months ended March 31, 2004 and 2003..........................................................5
Notes to Condensed Consolidated Financial Statements -- March 31, 2004..................................6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.....................28
Item 3 Quantitative and Qualitative Disclosures About Market Risk................................................42
Item 4 Controls and Procedures...................................................................................43
PART II OTHER INFORMATION
------------------
Item 1 Legal Proceedings.........................................................................................44
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities..........................44
Item 3 Defaults Upon Senior Securities...........................................................................44
Item 4 Submission of Matters to a Vote of Security Holders.......................................................44
Item 5 Other Information.........................................................................................44
Item 6 Exhibits and Reports on Form 8-K..........................................................................45
SIGNATURES........................................................................................................46
----------
EXHIBIT INDEX.....................................................................................................47
-------------
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in millions, except per share data)
For the Three Months
Ended March 31,
---------------------------------
2004 2003
----------------- --------------
Net sales.........................................................$ 1,043.8 $ 927.7
Cost of goods sold................................................ 883.5 798.0
----------------- --------------
Gross profit.................................................. 160.3 129.7
Selling, general and administrative expenses...................... 112.0 89.2
----------------- --------------
Income from operations...................................... 48.3 40.5
Other income (expense):
Interest income.............................................. 1.0 1.7
Interest expense............................................. (22.5) (25.9)
Other income (expense) - net................................. (2.4) 0.3
----------------- --------------
Income before income taxes................................... 24.4 16.6
Provision for income taxes........................................ (7.4) (4.6)
----------------- --------------
Net income .......................................................$ 17.0 $ 12.0
================= ==============
Per common share:
Basic.........................................................$ 0.35 $ 0.25
================= ==============
Diluted.......................................................$ 0.34 $ 0.24
================= ==============
Weighted average number of shares outstanding in per share
calculation:
Basic..................................................... 49.0 47.2
Diluted................................................... 50.6 49.0
The accompanying notes are an integral part of these financial statements.
3
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in millions, except par value)
March 31, December 31,
2004 2003
------------------ -----------------
Assets
Current assets
Cash and cash equivalents........................................................ $ 408.0 $ 467.5
Trade receivables (net of allowance of $40.1 at March 31, 2004
and $38.2 at December 31, 2003)................................................ 610.8 540.2
Inventories...................................................................... 1,101.1 1,009.7
Deferred taxes................................................................... 55.2 53.9
Other current assets............................................................. 117.7 122.7
------------------- -----------------
Total current assets......................................................... 2,292.8 2,194.0
Long-term assets
Property, plant and equipment.................................................... 359.4 370.1
Goodwill......................................................................... 606.8 603.5
Deferred taxes................................................................... 237.6 238.9
Other assets..................................................................... 323.8 317.3
------------------- -----------------
Total assets.......................................................................... $ 3,820.4 $ 3,723.8
=================== =================
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and current portion of long-term debt.............................. $ 96.8 $ 86.8
Trade accounts payable........................................................... 684.3 608.6
Accrued compensation and benefits................................................ 102.8 94.5
Accrued warranties and product liability......................................... 83.8 88.5
Other current liabilities........................................................ 272.6 281.0
------------------- -----------------
Total current liabilities.................................................... 1,240.3 1,159.4
Non-current liabilities
Long-term debt, less current portion............................................. 1,279.4 1,274.8
Other............................................................................ 418.1 412.9
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value - authorized 150.0 shares; issued 50.3 and 50.0
shares at March 31, 2004 and December 31, 2003, respectively................... 0.5 0.5
Additional paid-in capital....................................................... 800.2 795.1
Retained earnings................................................................ 58.9 41.9
Accumulated other comprehensive income .......................................... 40.8 57.0
Less cost of shares of common stock in treasury - 1.2 shares at March 31, 2004
and December 31, 2003.......................................................... (17.8) (17.8)
------------------- -----------------
Total stockholders' equity................................................... 882.6 876.7
------------------- -----------------
Total liabilities and stockholders' equity............................................ $ 3,820.4 $ 3,723.8
=================== =================
The accompanying notes are an integral part of these financial statements.
4
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in millions)
For the Three Months
Ended March 31,
---------------------------
2004 2003
---------------------------
Operating Activities
Net income.................................................................... $ 17.0 $ 12.0
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation............................................................. 14.3 12.9
Amortization............................................................. 4.0 2.7
Impairment charges and asset write downs................................. --- 1.7
Gain on sale of fixed assets............................................. (0.8) (0.5)
Changes in operating assets and liabilities (net of effects of
acquisitions):
Trade receivables...................................................... (71.2) (9.3)
Inventories............................................................ (94.1) 40.4
Trade accounts payable................................................. 76.2 59.1
Other, net............................................................. (9.8) (4.1)
-------------- -------------
Net cash provided by (used in) operating activities................. (64.4) 114.9
-------------- -------------
Investing Activities
Acquisition of businesses, net of cash acquired............................... (1.1) (8.5)
Capital expenditures.......................................................... (8.9) (8.6)
Proceeds from sale of assets.................................................. 0.8 2.6
-------------- -------------
Net cash used in investing activities............................... (9.2) (14.5)
-------------- -------------
Financing Activities
Principal repayments of long-term debt........................................ --- (1.5)
Proceeds from stock options exercised......................................... 4.1 ---
Net borrowings (repayments) under revolving line of credit agreements......... 14.0 (22.5)
Other, net.................................................................... (3.4) (11.6)
-------------- -------------
Net cash provided by (used in) financing activities................. 14.7 (35.6)
-------------- -------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents..................... (0.6) 2.9
-------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents............................. (59.5) 67.7
Cash and Cash Equivalents at Beginning of Period................................. 467.5 352.2
-------------- -------------
Cash and Cash Equivalents at End of Period....................................... $ 408.0 $ 419.9
============== =============
The accompanying notes are an integral part of these financial statements.
5
TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(dollar amounts in millions, unless otherwise noted, except per share amounts)
NOTE A -- BASIS OF PRESENTATION
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements of Terex Corporation and subsidiaries as of March 31, 2004
and for the three months ended March 31, 2004 and 2003 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America to be included in full year financial
statements. The accompanying condensed consolidated balance sheet as of December
31, 2003 has been derived from the audited consolidated balance sheet as of that
date.
The condensed consolidated financial statements include the accounts of Terex
Corporation and its majority owned subsidiaries ("Terex" or the "Company"). All
material intercompany balances, transactions and profits have been eliminated.
In the opinion of management, all adjustments considered necessary for a fair
statement have been made. Except as otherwise disclosed, all such adjustments
consist only of those of a normal recurring nature. Operating results for the
three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Cash and cash equivalents at March 31, 2004 and December 31, 2003 include $3.1
and $10.9, respectively, which was not immediately available for use. These
consist primarily of cash balances held in escrow to secure various obligations
of the Company.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
Recent Accounting Pronouncements. In January 2003, the Financial Accounting
Standards Board (the "FASB") issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities." A variable interest entity
("VIE") is a corporation, partnership, trust or other legal entity that does not
have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its own
activities. The interpretation requires a company to consolidate a VIE when the
company has a majority of the risk of loss from the VIE's activities or is
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB revised FIN 46 ("FIN 46R") and modified its effective
date. The Company adopted the provisions of FIN 46R, for special purpose
entities and VIEs created on or after February 1, 2003, effective December 31,
2003. As of March 31, 2004, there were no such entities that are required to be
consolidated by the Company. For all other entities, the Company has adopted the
provisions of FIN 46R effective March 31, 2004. The adoption of FIN 46R did not
have a material impact on the Company's consolidated financial position or
results of operations.
In January 2003, the Emerging Issues Task Force (the "EITF") released EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 clarifies the timing and recognition of revenue from certain transactions
that include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
impact on the Company's consolidated financial position or results of
operations.
During April 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends and clarifies financial accounting
and reporting for derivative instruments and hedging activities, resulting
primarily from decisions reached by the FASB Derivatives Implementation Group
subsequent to the original issuance of SFAS No. 133. This statement is generally
effective prospectively for contracts and hedging relationships entered into
after June 30, 2003. The adoption of SFAS No. 149 has not had a material impact
on the Company's consolidated financial position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
6
characteristics of both liabilities and equity. SFAS No. 150 must be applied
immediately to instruments entered into or modified after May 31, 2003 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The adoption of SFAS
No. 150 has not had a material impact on the Company's consolidated financial
position or results of operations.
Accrued Warranties. The Company records accruals for potential warranty claims
based on the Company's claim experience. The Company's products are typically
sold with a standard warranty covering defects that arise during a fixed period
of time. Each business provides a warranty specific to the products it offers.
The specific warranty offered by a business is a function of customer
expectations and competitive forces. The length of warranty is generally a fixed
period of time, a fixed number of operating hours, or both.
A liability for estimated warranty claims is accrued at the time of sale. The
non-current portion of the warranty accrual is included in Other Non-current
liabilities. The liability is established using a historical warranty claim
experience for each product sold. The historical claim experience may be
adjusted for known design improvements or for the impact of unusual product
quality issues. Warranty reserves are reviewed quarterly to ensure that critical
assumptions are updated for known events that may impact the potential warranty
liability.
The following table summarizes the changes in the aggregate product warranty
liability:
Three Months Ended
March 31, 2004
-------------------
Balance at beginning of period.............................$ 68.4
Accruals for warranties issued during the period............ 15.7
Changes in estimates........................................ (2.0)
Settlements during the period............................... (17.9)
Foreign exchange effect..................................... (0.3)
-------------------
Balance at end of period...................................$ 63.9
===================
Stock-Based Compensation. At March 31, 2004, the Company had stock-based
employee compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. No employee
compensation cost is reflected in net income for the granting of employee stock
options, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
For the Three Months
Ended March 31,
----------------------------
2004 2003
--------------- ------------
Reported net income ............................... $ 17.0 $ 12.0
Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of related
income tax effects................................ (1.3) (1.1)
------------- ------------
Pro forma net income .............................. $ 15.7 $ 10.9
============= ============
Per common share:
Basic:
Reported net income ........................... $ 0.35 $ 0.25
============= ============
Pro forma net income .......................... $ 0.32 $ 0.23
============= ============
Diluted:
Reported net income ........................... $ 0.34 $ 0.24
============= ============
Pro forma net income .......................... $ 0.31 $ 0.22
============= ============
7
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the Three Months
Ended March 31,
------------------------
2004 2003
------------ -----------
Dividend yields...................................... 0.0% 0.0%
Expected volatility.................................. 51.10% 51.24%
Risk-free interest rates............................. 4.04% 4.90%
Expected life (in years)............................. 10.0 9.7
Aggregate fair value of options granted.............. $ 6.0 $ 4.5
Weighted average fair value at date of grant for
options granted..................................... $ 22.61 $ 7.59
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE B -- ACQUISITIONS
On February 14, 2003, the Company completed the acquisition of Commercial Body
Corporation ("Commercial Body"). Commercial Body, headquartered in San Antonio,
Texas with locations in various states, distributes, assembles, rents and
provides service of products for the utility, telecommunications and municipal
markets. In connection with the acquisition, the Company issued approximately
600 thousand shares of Common Stock and paid $3.7 cash. In addition, the Company
may be required to pay cash or issue additional shares of Common Stock (at the
Company's option) if, on the second anniversary of the Commercial Body
acquisition, the Common Stock is not trading on the New York Stock Exchange at a
price at least 50% higher than it was at the time of the acquisition, up to a
maximum number of shares of Common Stock having a value of $3.4. At the time of
Terex's acquisition of Commercial Body, Commercial Body had a 50% equity
interest in Combatel Distribution, Inc. ("Combatel"). The remaining 50% of
Combatel was owned by Terex and prior to the Commercial Body acquisition had
been accounted for under the equity method of accounting. During the second
quarter of 2003, Commercial Body and Combatel merged to form Terex Utilities
South, Inc. ("Utilities South"). Utilities South is included in the Terex
Roadbuilding, Utility Products and Other segment.
The operating results of Commercial Body and Combatel are included in the
Company's consolidated results of operations since February 14, 2003 (date of
acquisition).
On August 28, 2003, the Company acquired an additional 51% of the outstanding
shares of TATRA a.s. ("Tatra") from SDC Prague s.r.o., a subsidiary of SDC
International, Inc. Tatra is located in the Czech Republic and is a manufacturer
of on/off road heavy-duty vehicles for commercial and military applications.
Consideration for the acquisition was comprised of debt forgiveness totaling
$8.1, cash of $0.2 and approximately 209 thousand shares of Terex common stock.
On April 22, 2004, the Company purchased an additional 10% of the outstanding
shares of Tatra for $1.2 in cash. These acquisitions bring Terex's total
ownership interest in Tatra to approximately 81%. Tatra's results have been
included in the Company's consolidated financial statements since August 28,
2003. Upon the initial consolidation of Tatra into the Company's consolidated
financial results, Tatra's debt totaled approximately $33. This debt primarily
consisted of notes payable to financial institutions. Tatra is part of the
Company's Roadbuilding, Utility Products and Other segment.
The Company owns an approximately 33% interest in American Truck Company
("ATC"). ATC is located in the United States and manufactures heavy-duty
off-road trucks for military and severe duty commercial applications. Tatra also
owns an approximately 33% interest in ATC. As a result of the Company's August
28, 2003 acquisition of additional ownership of Tatra, the results of ATC also
have been included in the Company's consolidated financials statements since
August 28, 2003.
8
The Company is in the process of completing certain valuations, appraisals and
other studies for purposes of determining the respective fair values of tangible
and intangible assets used in the allocation of purchase consideration for the
acquisition of Tatra. The Company does not anticipate that the final results of
these valuations will have a material impact on its financial position, results
of operations or cash flows.
On December 19, 2003, the Company completed the acquisition of substantially all
of the assets comprising the business of Compass Equipment Leasing ("CEL") and
Asplundh Canada. Both businesses rent digger derricks, aerial devices and other
related equipment to contractors and utility customers in the United States and
Canada, respectively. The purchase consideration was $0.1 plus the assumption of
CEL's and Asplundh Canada's operating lease obligations. Both businesses are
included in the Terex Roadbuilding, Utility Products and Other segment.
The Company is in the process of completing certain appraisals and other studies
for the purpose of determining the respective fair value of the tangible and
intangible assets acquired. This information will be used to allocate the
purchase consideration. The Company does not anticipate that the final results
of these studies will have a material impact on its financial position, results
of operations or cash flows.
NOTE C - GOODWILL
On April 1, 2003 the Company changed the composition of its reporting units and
segments when it moved the North American operations of its telehandlers
business from the Terex Construction segment to the Terex Aerial Work Platforms
segment due to a change in the way the Company's operating decision makers view
the business.
An analysis of changes in the Company's goodwill by business segment is as
follows:
Terex
Terex Roadbuilding,
Aerial Utility
Terex Terex Work Terex Products and
Construction Cranes Platforms Mining Other Total
---------------- ----------- ------------- ---------- --------------- -------------
Balance at December 31, 2003..... $ 328.4 $ 89.7 $ 50.0 $ --- $ 135.4 $ 603.5
Acquisitions..................... --- --- --- --- 3.4 3.4
Impairment....................... --- --- --- --- --- ---
Foreign exchange effect.......... (0.1) --- --- --- --- (0.1)
---------------- ----------- ------------- ---------- --------------- -------------
Balance at March 31, 2004........ $ 328.3 $ 89.7 $ 50.0 $ --- $ 138.8 $ 606.8
================ =========== ============= ========== =============== =============
The goodwill recognized for the acquisitions of Tatra, CEL and Asplundh Canada
as of March 31, 2004 is not final as the Company has not yet completed its
valuations of the acquired tangible and intangible assets.
NOTE D - DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into two types of derivatives: hedges of fair value exposures
and hedges of cash flow exposures. Fair value exposures relate to recognized
assets or liabilities and firm commitments, while cash flow exposures relate to
the variability of future cash flows associated with recognized assets or
liabilities or forecasted transactions.
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world, and uses certain financial instruments to
manage its foreign currency, interest rate and fair value exposures. To qualify
a derivative as a hedge at inception and throughout the hedge period, the
Company formally documents the nature and relationships between the hedging
instruments and hedged items, as well as its risk-management objectives,
strategies for undertaking the various hedge transactions and method of
assessing hedge effectiveness. Additionally, for hedges of forecasted
transactions, the significant characteristics and expected terms of a forecasted
transaction must be specifically identified, and it must be probable that each
forecasted transaction will occur. If it were deemed probable that the
forecasted transaction will not occur, the gain or loss would be recognized in
earnings currently. Financial instruments qualifying for hedge accounting must
maintain a specified level of effectiveness between the hedging instrument and
the item being hedged, both at inception and throughout the hedged period. The
Company does not engage in trading or other speculative use of financial
instruments.
The Company uses forward contracts and options to mitigate its exposure to
changes in foreign currency exchange rates on third-party and intercompany
forecasted transactions. The primary currencies to which the Company is exposed
include the Euro, the British Pound, the Czech Koruna and the Australian Dollar.
9
When using options as a hedging instrument, the Company excludes the time value
from the assessment of effectiveness. The effective portion of unrealized gains
and losses associated with forward contracts and the intrinsic value of option
contracts are deferred as a component of accumulated other comprehensive income
(loss) until the underlying hedged transactions are reported on the Company's
consolidated statement of operations. The Company uses interest rate swaps to
mitigate its exposure to changes in interest rates related to existing issuances
of variable rate debt and to fair value changes of fixed rate debt. Primary
exposure includes movements in the London Interbank Offer Rate ("LIBOR").
Changes in the fair value of derivatives that are designated as fair value
hedges are recognized in earnings as offsets to the changes in fair value of
exposures being hedged. The change in fair value of derivatives that are
designated as cash flow hedges are deferred in accumulated other comprehensive
income (loss) and are recognized in earnings as the hedged transactions occur.
Any ineffectiveness is recognized in earnings immediately.
The Company records hedging activity related to debt instruments in interest
expense and hedging activity related to foreign currency and lease obligations
in operating profit. On the Consolidated Statement of Cash Flows, the Company
records cash flows from hedging activities in the same manner as it records the
underlying item being hedged.
The Company entered into interest rate swap agreements that effectively
converted variable rate interest payments into fixed rate interest payments. At
March 31, 2004, the Company had $100.0 notional amount of such interest rate
swap agreements outstanding, all of which mature in 2009. The fair market value
of these swaps at March 31, 2004 was a loss of $5.5, which is recorded in other
non-current liabilities. These swap agreements have been designated as, and are
effective as, cash flow hedges of outstanding debt instruments. During the three
months ended March 31, 2004 and 2003, the Company recorded the change in fair
value to accumulated other comprehensive income (loss) and reclassified to
earnings a portion of the deferred loss from accumulated other comprehensive
income (loss) as the hedged transactions occurred and were recognized in
earnings.
The Company has entered into a series of interest rate swap agreements that
converted fixed rated interest payments into variable rate interest payments. At
March 31, 2004, the Company had $279.0 notional amount of such interest rate
swap agreements outstanding, all of which mature in 2006 through 2014. The fair
market value of these swaps at March 31, 2004 was a gain of $11.7, which is
recorded in other non-current assets. These swap agreements have been designated
as, and are effective as, fair value hedges of outstanding debt instruments.
During December 2002, the Company exited an interest rate swap agreement in the
notional amount of $100.0 with a 2011 maturity that converted fixed rate
interest payments into variable rate interest payments. The Company received
$5.6 upon exiting this swap agreement. These gains are being amortized over the
original maturity and, combined with the market value of the swap agreements
held at March 31, 2004, are offset by a $16.5 addition in the carrying value of
the long-term obligations being hedged.
The Company is also a party to currency exchange forward contracts to manage its
exposure to changing currency exchange rates that mature within 18 months. At
March 31, 2004, the Company had $174.6 of notional amount of currency exchange
forward contracts outstanding, all of which mature on or before September 30,
2005. The fair market value of these swaps at March 31, 2004 was a gain of $9.4.
At March 31, 2004, $165.6 notional amount of these swap agreements have been
designated as, and are effective as, cash flow hedges of specifically identified
assets and liabilities.
During the three months ended March 31, 2004 and 2003, the Company recorded the
change in fair value to accumulated other comprehensive income (loss) and
reclassified to earnings a portion of the deferred loss from accumulated other
comprehensive income (loss) as the hedged transactions occurred and were
recognized in earnings.
At March 31, 2004, the fair value of all derivative instruments has been
recorded in the Condensed Consolidated Balance Sheet as a net asset of $14.4,
net of income taxes.
Counterparties to interest rate derivative contracts and currency exchange
forward contracts are major financial institutions with credit ratings of
investment grade or better and no collateral is required. There are no
significant risk concentrations. Management believes the risk of incurring
losses on derivative contracts related to credit risk is remote and any losses
would be immaterial.
10
Unrealized net gains (losses) included in Other Comprehensive Income (Loss) are
as follows:
Three Months Ended
March 31,
----------------------------------
2004 2003
- --------------------------------------------------------------------------
Balance at beginning of period..........$ 6.5 $ 2.1
Additional gains (losses)............... (0.5) (0.5)
Amounts reclassified to earnings........ (3.3) (0.8)
---------------- ----------------
Balance at end of period................$ 2.7 $ 0.8
================ ================
NOTE E -- RESTRUCTURING AND OTHER CHARGES
The Company continually evaluates its cost structure to ensure that it is
appropriately positioned to respond to changing market conditions. During 2003
and 2002, the Company experienced declines in several markets. In addition, the
Company's recent acquisitions have created product, production and selling and
administrative overlap with existing businesses. In response to changing market
demand and to optimize the impact of recently acquired businesses, the Company
has initiated the restructuring programs described below. For further
information on restructuring programs, refer to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.
There have been no material changes relative to the initial plans established by
the Company for the restructuring activities discussed below. The Company does
not believe that these restructuring activities by themselves will have an
adverse impact on the Company's ability to meet customer requirements for the
Company's products.
2003 Programs
In the first quarter of 2003, the Company recorded a charge of $0.7 related to
restructuring at its CMI Terex facility in Oklahoma City, Oklahoma. Due to the
continued poor performance in the Roadbuilding business, the Company reduced
employment by approximately 146 employees at its CMI Terex facility. As of June
30, 2003, all of the employees had ceased employment with the Company. The
program was substantially complete at June 30, 2003. CMI Terex is included in
the Terex Roadbuilding, Utility Products and Other segment.
Also in the first quarter of 2003, the Company recorded charges of $0.3 for
restructuring at its Terex-RO facility in Olathe, Kansas. As a result of weak
demand in the Company's North American crane business, the Terex-RO facility has
been closed and the production performed at that facility has been consolidated
into the Company's hydraulic crane production facility in Waverly, Iowa. The
program reduced employment by approximately 50 employees and was substantially
completed at September 30, 2003. Booms for the Terex-RO product were already
being produced in the Waverly facility; accordingly, no production problems are
anticipated in connection with this consolidation. Terex-RO is included in the
Terex Cranes segment.
The Company recorded a charge of $1.5 in the first quarter of 2003 for the exit
of all activities at its EarthKing e-commerce subsidiary. The $1.5 charge is for
non-cash closure costs and has been recorded in cost of goods sold. EarthKing is
included in the Terex Roadbuilding, Utility Products and Other segment. The
program was completed as of September 30, 2003. Additionally, during the first
quarter of 2003, the Company wrote down certain investments it held in
technology businesses related to its EarthKing subsidiary. These investments
were no longer economically viable, as these businesses were unsuccessful in
gaining customer acceptance and were generating revenue at levels insufficient
to warrant anticipated growth, and resulted in a write-down of $0.8. This
write-down was reported in "Other income (expense) - net."
During the second quarter of 2003, the Company recorded a severance charge of
$3.1 for future cash expenditures related to restructuring at its Terex Peiner
tower crane manufacturing facility in Trier, Germany. This charge is a result of
the Company's decision to consolidate its German tower crane manufacturing into
its German Demag facilities in an effort to lower fixed overhead and improve
manufacturing efficiencies and profitability. As a result of the restructuring,
the Company has accrued for a headcount reduction of 65 employees. As of March
31, 2004, 62 of the employees had ceased employment with the Company. The
program is expected to be completed in the second quarter of 2004. Terex Peiner
is included in the Terex Cranes segment. The Terex Peiner closing is expected to
reduce annual operating costs by $3.4 once the program is fully implemented.
The Company also recorded a restructuring charge in the second quarter of 2003
of $1.9 for future cash expenditures related to the closure of its Powerscreen
facility in Kilbeggan, Ireland. The $1.9 was comprised of $1.0 of severance
charges and $0.9 of accruable exit costs. This charge is a result of the
Company's decision to consolidate its European Powerscreen business at its
facility in Dungannon, Northern Ireland. This consolidation will lower the
11
Company's cost structure for this business and better utilize manufacturing
capacity. As a result of the restructuring, the Company has accrued for a
headcount reduction of 121 employees at the Kilbeggan facility. As of September
30, 2003, all of the employees had ceased employment with the Company. The
program was substantially complete at March 31, 2004, except for the disposal of
certain real property which is expected to be finalized in 2004. The Powerscreen
Kilbeggan facility is included in the Terex Construction segment. During the
three months ended June 30, 2003, $1.8 and $0.1 were recorded in cost of goods
sold and selling, general and administrative expenses, respectively. The
Kilbeggan facility closing is expected to generate annual cost savings of
approximately $3.
In addition, during the second quarter of 2003, the Company recorded
restructuring charges of $4.7 in the Terex Roadbuilding, Utility Products and
Other segment. These restructuring charges are the result of continued poor
performance in the Roadbuilding business and the Company's efforts to streamline
operations and improve profitability. The $4.7 restructuring charge is comprised
of the following components:
o A $2.8 charge related to exiting the bio-grind recycling business,
with $2.5 recorded in cost of goods sold and $0.3 recorded in selling,
general and administrative expenses.
o A charge of $1.8 related to the exiting of the screening and
shredder-mixer business operated at its Durand, Michigan facility,
with $1.7 recorded in cost of goods sold and $0.1 recorded in selling,
general and administrative expenses.
o A $0.1 charge was recorded in selling, general and administrative
expenses related to the headcount reduction of 17 employees at the
Company's Cedarapids facility.
During the third quarter of 2003, the Company recorded a severance charge of
$0.1 for future cash expenditures at its hydraulic crane production facility in
Waverly, Iowa. The Company has terminated six employees due to the integration
of the Terex-RO facility into Waverly. This charge has been recorded in cost of
goods sold.
All of the 2003 projects are expected to reduce annual operating costs by
approximately $15 in the aggregate when fully implemented.
2002 Programs
During 2002, the Company initiated a series of restructuring projects that
related to productivity and business rationalization. Restructuring programs
which began in 2002, but which were not completed prior to January 1, 2003,
include:
In the second quarter of 2002, the Company announced that its surface mining
truck production facility in Tulsa, Oklahoma would be closed and the production
activities outsourced to a third party supplier. The Company recorded a charge
of $4.2 related to the Tulsa closure. The closure was in response to continued
weakness in demand for the Company's mining trucks. Demand for mining trucks is
closely related to commodity prices, which have been declining in real terms
over recent years. Approximately $1.0 of this charge related to severance and
other employee related charges, while $2.2 of this charge relates to inventory
deemed uneconomical to relocate to other distribution facilities. The remaining
$1.0 of the cost accrued related to the Tulsa building closure costs and
occupancy costs expected to be incurred after production is ended. Approximately
93 positions have been eliminated as a result of this action. The transfer of
production activities to a third party was completed prior to December 31, 2002
and the Company is currently marketing the Tulsa property for sale.
Projects initiated in the fourth quarter of 2002 related to productivity and
business rationalization include the following:
o The closure of the Company's pressurized vessel container business.
This business, located in Clones, Ireland, provided pressurized
containers to the transportation industry. The business, acquired as
part of the Powerscreen acquisition in 1999, was part of the Company's
Construction segment and was not core to the Company's overall
strategy. The Company recorded a charge of $5.4, of which $1.2 was for
severance, $2.5 for the write down of inventory, and $1.2 for facility
closing costs. The remaining $0.5 relates to the repayment of a local
government work grant. The business had faced declining demand over
the past few years and was not integral to the Construction business.
This restructuring program reduced headcount by 137 positions and was
completed as of June 30, 2003.
o The consolidation of several Terex Construction segment facilities in
the United Kingdom. The Company has consolidated several compact
equipment production facilities into a single location in Coventry,
England. The Company moved the production of mini-dumpers, rollers,
soil compactors and loader backhoes into the new facility. The Company
recorded a charge of $7.2, of which $6.1 was for severance and $1.1
was for the costs associated with exiting the facilities. The
consolidation has reduced total employment by 269 and was
substantially complete as of September 30, 2003.
12
o The exit of certain heavy equipment businesses related to mining
products. During the fourth quarter of 2002, the Company conducted a
review of its rental equipment businesses in both its Mining and
Construction segments. The Company's review indicated that it was not
economical to continue its mining equipment rental business due to the
high cost of moving mining equipment between customers and given the
continued weak demand for mining products. In addition, the Company
decided to rationalize its large scraper offering in its Mining
segment given the weak demand for related mining products. The Company
recorded a charge of $6.9 associated with the write down of inventory.
The Company expects to complete this process during 2004.
o The exit of certain non-core tower cranes produced by the Terex Cranes
segment under the Peiner brand in Germany. The European tower crane
business has been negatively impacted by reduced demand from large
rental customers who are undergoing financial difficulties. This has
resulted in reduced demand and deterioration in margins recognized in
the tower crane business. The Company conducted a review of its
offering of tower cranes produced under the Peiner brand and
eliminated certain models that overlap with models produced at Gru
Comedil S.r.l., the Company's tower crane facility in Italy. The
Company recorded a charge of $3.9, of which $1.0 was for severance and
$2.9 for inventory write-downs on discontinued product lines. The
program has reduced employment by 47 and was complete at September 30,
2003.
o The severance costs incurred in re-aligning the Company's management
structure. The Company eliminated an executive position and recorded a
charge of $1.5. The Company paid $0.4 prior to December 31, 2002 and
an additional $0.8 in 2003. The Company expects to pay the remaining
balance during the first half of 2004.
During the first quarter of 2004, the Company recorded an additional $2.7 of
charges in cost of goods sold related to programs begun in 2003 and 2002. These
period charges related to inventory write-downs and the effect of changes in
foreign exchange and were consistent with the initial restructuring plans
established by the Company.
The following table sets forth the components and status of the restructuring
charges recorded in the first quarter of 2004 that related to productivity and
business rationalization:
Employee
Termination Asset Facility
Costs Disposals Exit Costs Other Total
--------------- ------------ ------------- --------------- --------------
Accrued restructuring charges
at December 31, 2003.......... $ 0.1 $ --- $ 1.4 $ 1.3 $ 2.8
Restructuring charges........... --- 2.7 --- --- 2.7
Cash expenditures............... --- --- (0.4) (0.2) (0.6)
Non-cash write-offs............. --- (2.7) --- --- (2.7)
--------------- ------------ ------------- --------------- --------------
Accrued restructuring charges
at March 31, 2004............. $ 0.1 $ --- $ 1.0 $ 1.1 $ 2.2
=============== ============ ============= =============== ==============
In the aggregate, the restructuring charges described above incurred during the
three months ended March 31, 2004 and 2003 were included in cost of goods sold
($2.7 and $2.8) and selling, general and administrative expenses ($0 and $0.3),
respectively.
Demag and Genie Acquisition Related Projects
During 2002, the Company also initiated a series of restructuring projects aimed
at addressing product, channel and production overlap created by the
acquisitions of Demag Mobile Cranes GmbH & Co. KG and its affiliates ("Demag")
and Genie Holdings, Inc. and its affiliates ("Genie") in 2002.
Projects initiated in the Terex Cranes segment in the fourth quarter of 2002,
but which were not completed prior to January 1, 2003, related to the
acquisition of Demag consist of:
o The elimination of certain PPM branded 3, 4 and 5 axle cranes produced
at the Company's Montceau, France facility. The Company determined
that the products produced under the PPM brand were similar to
products produced by Demag and has opted to eliminate these PPM models
in favor of the similar Demag products, which the Company believes
have superior capabilities. As a result, employment levels in Montceau
were reduced. As of June 30, 2003, 102 employees had ceased employment
with the Company. In addition, the Company also recognized a loss in
value on the affected PPM branded cranes inventory in France and
Spain. The Company recorded a charge of $15.3, of which $5.4 was for
13
severance, $9.6 was associated with the write down of inventory and
$0.3 was for claims related to exiting the sales function of the
discontinued products. This program was completed during the second
quarter of 2003.
o The closure of the Company's existing crane distribution center in
Germany. Prior to the acquisition of Demag, the Company distributed
mobile cranes under the PPM brand from a facility in Dortmund,
Germany. The acquisition of Demag provided an opportunity to
consolidate distribution and reduce the overall cost to serve
customers in Germany. The Company recorded a charge of $2.5, of which
$0.7 was for severance, $1.2 was for inventory write-downs, and $0.6
for lease termination costs. Eleven employees were terminated as a
result of these actions. As of June 30, 2003, all of the employees had
ceased employment with the Company. The Company expects this program
to be completed by June 30, 2004.
o The rationalization of certain crawler crane products sold under the
American Crane brand in the United States. The acquisition of Demag
created an overlap with certain large crawler cranes produced in the
Company's Wilmington, North Carolina facility. Certain cranes produced
in the North Carolina facility will be rated for reduced lifting
capacity and marketed to a different class of user. This change in
marketing strategy, triggered by the acquisition of Demag, negatively
impacted inventory values. The Company recorded a charge of $3.2
associated with the write down of inventory. The Company completed the
sale of such inventory during the fourth quarter of 2003.
During the first quarter of 2004, the Company recorded an additional $0.8 of
charges related to programs begun in 2002. These period charges related to
inventory write-downs and the effect of changes in foreign exchange and were
consistent with the initial restructuring plans established by the Company.
There were no charges during the first quarter of 2004 related to the Genie
programs.
The following table sets forth the components and status of the restructuring
charges recorded in the first quarter of 2004 that relate to addressing product,
channel and production overlaps created by the acquisition of the Demag and
Genie businesses:
Employee
Termination Asset Facility
Costs Disposals Exit Costs Other Total
--------------- ------------ ------------ ------------- -----------
Accrued restructuring charges at
December 31, 2003...............$ 1.0 $ --- $ 0.6 $ --- $ 1.6
Restructuring charges............. --- 0.8 --- --- 0.8
Cash expenditures................. --- --- --- --- ---
Non-cash write-offs............... --- (0.8) --- --- (0.8)
--------------- ------------ ------------ ------------- -----------
Accrued restructuring charges at
March 31, 2004.................$ 1.0 $ --- $ 0.6 $ --- $ 1.6
=============== ============ ============ ============= ===========
In the aggregate, the restructuring charges described above incurred during the
three months ended March 31, 2004 and 2003 were included in cost of goods sold
($0.8 and $0).
NOTE F -- INVENTORIES
Inventories consist of the following:
March 31, December 31,
2004 2003
----------------- ---------------
Finished equipment...................... $ 393.2 $ 365.7
Replacement parts....................... 266.2 251.3
Work-in-process......................... 222.8 187.4
Raw materials and supplies.............. 218.9 205.3
----------------- ---------------
Inventories............................. $ 1,101.1 $ 1,009.7
================= ===============
14
NOTE G -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, December 31,
2004 2003
----------------- -----------------
Property.................................. $ 51.1 $ 51.9
Plant..................................... 238.5 233.4
Equipment................................. 244.4 249.9
---------------- -----------------
534.0 535.2
Less: Accumulated depreciation........... (174.6) (165.1)
---------------- -----------------
Net property, plant and equipment......... $ 359.4 $ 370.1
================ =================
NOTE H -- INVESTMENT IN JOINT VENTURE
In April 2001, Genie entered into a joint venture arrangement with a European
financial institution, pursuant to which Genie maintained a forty-nine percent
(49%) ownership interest in the joint venture, Genie Financial Services Holding
B.V. ("GFSH"). GFSH was established to facilitate the financing of Genie's
products sold in Europe. Genie contributed $4.7 in cash in exchange for its
ownership interest in GFSH. During January 2003 and 2002, Genie contributed an
additional $0.8 and $0.6, respectively, in cash to GFSH.
On January 1, 2004, the Company and its joint venture partner revised the
co-operation agreement and operating relationship with respect to GFSH. As part
of the reorganization, the name of the joint venture was changed to Terex
Financial Services Holding B.V. ("TFSH"), Genie's ownership interest in TFSH was
reduced to forty percent (40%), and Genie transferred this interest to another
Company subsidiary. In addition, the scope of TFSH's operations was broadened,
as it was granted the right to facilitate the financing of all of the Company's
products sold in Europe.
As of March 31, 2004, TFSH had total assets of $160.8, consisting primarily of
financing receivables and lease related equipment, and total liabilities of
$144.5, consisting primarily of debt issued by the joint venture partner. The
Company has provided guarantees related to potential losses arising from
shortfalls in the residual values of financed equipment or credit defaults by
the joint venture's customers. Additionally, the Company is required to maintain
a capital account balance in TFSH, pursuant to the terms of the joint venture,
which could result in the reimbursement to TFSH by the Company of losses to the
extent of the Company's ownership percentage.
As defined by FIN 46R, TFSH is a VIE. For entities created prior to February 1,
2003, FIN 46R requires the application of its provisions effective the first
reporting period after March 15, 2004. Based on the legal and operating
structure of TFSH, the Company has concluded that it is not the primary
beneficiary of TFSH and that it does not control the operations of TFSH.
Accordingly, the Company will not consolidate the results of TFSH into its
consolidated financial results. The Company applies the equity method of
accounting for its investment in TFSH.
NOTE I -- EQUIPMENT SUBJECT TO OPERATING LEASES
Operating leases arise from the leasing of the Company's products to customers.
Initial noncancellable lease terms typically range up to 84 months. The net book
value of equipment subject to operating leases was approximately $119 at March
31, 2004 and is included in "Other Assets" on the Company's Condensed
Consolidated Balance Sheet. The equipment is depreciated on the straight-line
basis over the shorter of the estimated useful life or the estimated
amortization period of any borrowings secured by the asset to its estimated
salvage value.
NOTE J -- NET INVESTMENT IN SALES-TYPE LEASES
From time to time, the Company leases new and used products manufactured and
sold by the Company to domestic and foreign distributors, end users and rental
companies. The Company provides specialized financing alternatives that include
sales-type leases, operating leases, conditional sales contracts, and short-term
rental agreements.
At the time a sales-type lease is consummated, the Company records the gross
finance receivable, unearned finance income and the estimated residual value of
the leased equipment. Unearned finance income represents the excess of the gross
minimum lease payments receivable plus the estimated residual value over the
15
fair value of the equipment. Residual values represent the estimate of the
values of the equipment at the end of the lease contracts and are initially
recorded based on industry data and management's estimates. Realization of the
residual values is dependent on the Company's future ability to market the
equipment under then prevailing market conditions. Management reviews residual
values periodically to determine that recorded amounts are appropriate. Unearned
finance income is recognized as financing income using the interest method over
the term of the transaction. The allowance for future losses is established
through charges to the provision for credit losses.
Prior to its acquisition by the Company on September 18, 2002, Genie had a
number of domestic agreements with financial institutions to provide financing
of new and eligible products to distributors and rental companies. Under these
programs, Genie originated leases with distributors and rental companies and the
resulting lease receivables were either sold to a financial institution with
limited recourse to Genie or used as collateral for borrowings. The aggregate
unpaid sales-type lease payments previously transferred was $21.9 at March 31,
2004. Under these agreements, the Company's recourse obligation is limited to
credit losses up to the first 5%, in any given year, of the remaining discounted
rental payments due, subject to certain minimum and maximum recourse liability
amounts. The Company's maximum credit recourse exposure was $15.0 at March 31,
2004, representing a contingent liability under the limited recourse provisions.
During 2003, Genie entered into a number of arrangements with financial
institutions to provide financing of new and eligible Genie products to
distributors and rental companies. Under these programs, Genie originates leases
or leasing opportunities with distributors and rental companies. If Genie
originates the lease with a distributor or rental company, the financial
institution will purchase the equipment and take assignment of the lease
contract from Genie. If Genie originates a lease opportunity, the financial
institution will purchase the equipment from Genie and execute a lease contract
directly with the distributor or rental company. In some instances, the Company
retains certain credit and/or residual recourse in these transactions. The
Company's maximum exposure, representing a contingent liability, under these
transactions reflects a $40.5 credit risk and a $36.4 residual value risk at
March 31, 2004.
The Company's contingent liabilities previously referred to have not taken into
account various mitigating factors. These factors include the staggered timing
of maturity of lease transactions, resale value of the underlying equipment,
lessee return penalties and annual loss caps on credit loss pools. Further, the
credit risk contingent liability assumes that the individual leases were to all
default at the same time and that the repossessed equipment has no market value.
NOTE K-- EARNINGS PER SHARE
Three Months Ended March 31,
(in millions, except per share data)
------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------- ----------- ----------- ----------- --------- -----------
Basic earnings per share
Net Income.............................. $ 17.0 49.0 $ 0.35 $ 12.0 47.2 $ 0.25
Effect of dilutive securities:
Stock Options........................... --- 1.6 --- 0.5
Shares held by deferred
compensation plan................. --- --- --- 0.7
Contingently issuable shares for
acquisitions......................... --- --- --- 0.6
----------- ----------- ----------- ---------
Net Income................................. $ 17.0 50.6 $ 0.34 $ 12.0 49.0 $ 0.24
=========== =========== =========== =========== ========= ===========
Options to purchase 214 thousand and 2,169 thousand shares of Common Stock were
outstanding during the three months ended March 31, 2004 and 2003, respectively,
but were not included in the computation of diluted shares. These options were
excluded because the exercise price of these options was greater than the
average market price of the Common Stock during such periods and, therefore, the
effect would be anti-dilutive. As discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 and in Note B - "Acquisitions",
the Company has a contingent obligation to make additional payments in cash or
Common Stock based on provisions of certain acquisition agreements. The
Company's policy and past practice has been generally to settle such obligations
in cash. Accordingly, contingently issuable Common Stock under these
arrangements totaling 772 thousand shares for the three months ended March 31,
2003 are not included in the computation of diluted earnings per share. At March
31, 2004, due to the market price of the Company's Common Stock, there were no
16
contingently issuable shares under these arrangements included in the
computation of diluted earnings per share for the three months ended March 31,
2004.
NOTE L - STOCKHOLDERS' EQUITY
Total non-stockowner changes in equity (comprehensive income) include all
changes in equity during a period except those resulting from investments by,
and distributions to, stockowners. The specific components include: net income,
deferred gains and losses resulting from foreign currency translation, minimum
pension liability adjustments, deferred gains and losses resulting from
derivative hedging transactions and deferred gains and losses resulting from
debt and equity securities classified as available for sale. Total
non-stockowner changes in equity were as follows.
For the Three Months
Ended March 31,
-----------------------------------
2004 2003
------------------ ----------------
Net income .............................. $ 17.0 $ 12.0
Other comprehensive income (loss):
Translation adjustment.............. (12.4) 10.1
Derivative hedging adjustment....... (3.8) (1.3)
------------------ ----------------
Comprehensive income (loss).............. $ 0.8 $ 20.8
================== ================
As disclosed in "Note B - Acquisitions", the Company also issued approximately
0.2 million shares and 0.6 million shares of its Common Stock during the three
months ended September 30, 2003 and March 31, 2003 in connection with the
acquisitions of Tatra and Commercial Body, respectively.
NOTE M -- LITIGATION AND CONTINGENCIES
In the Company's lines of business numerous suits have been filed alleging
damages for accidents that have arisen in the normal course of operations
involving the Company's products. The Company is self-insured, up to certain
limits, for these product liability exposures, as well as for certain exposures
related to general, workers' compensation and automobile liability. Insurance
coverage is obtained for catastrophic losses as well as those risks required to
be insured by law or contract. The Company has recorded and maintains an
estimated liability in the amount of management's estimate of the Company's
aggregate exposure for such self-insured risks. For self-insured risks, the
Company determines its exposure based on probable loss estimations, which
requires such losses to be both probable and the amount or range of possible
loss to be estimable. Management does not believe that the final outcome of such
matters will have a material adverse effect on the Company's financial position.
The Company is involved in various other legal proceedings which have arisen in
the normal course of its operations. The Company has recorded provisions for
estimated losses in circumstances where a loss is probable and the amount or
range of possible amounts of the loss is estimable.
The Company's outstanding letters of credit totaled $84.3 at March 31, 2004. The
letters of credit generally serve as collateral for certain liabilities included
in the Condensed Consolidated Balance Sheet. Certain of the letters of credit
serve as collateral guaranteeing the Company's performance under contracts.
The Company has a letter of credit outstanding covering losses related to two
former subsidiaries' worker compensation obligations. The Company has recorded
liabilities for these contingent obligations representing management's estimate
of the potential losses which the Company might incur.
In the third quarter of 2002, the Company obtained a favorable court judgment on
appeal as the defendant in a patent infringement case brought against the Terex
Construction segment's Powerscreen business. This favorable court judgment
reversed a lower court decision for which the Company had previously recorded a
liability. During the first quarter of 2003, amounts previously paid for the
litigation were returned to the Company. As a result, the Company recorded $2.4
of income in "Other income (expense) - net" in the Condensed Consolidated
Statement of Operations during the first quarter of 2003.
Credit Guarantees
- -----------------
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
17
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of a
customer default, the Company is generally able to dispose of the equipment with
the Company realizing the benefits of any net proceeds in excess of the
remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4. The terms of these guarantees coincide with the financing arranged
by the customer and generally does not exceed five years. Given the Company's
position as the original equipment manufacturer and its knowledge of end
markets, the Company, when called upon to fulfill a guarantee, generally has
been able to liquidate the financed equipment at a minimal loss, if any, to the
Company.
Residual Value and Buyback Guarantees
- -------------------------------------
The Company, through its Genie subsidiary, issues residual value guarantees
under sales-type leases. A residual value guarantee involves a guarantee that a
piece of equipment will have a minimum fair market value at a future point in
time. As described in Note J - "Net Investment in Sales-Type Leases," the
Company's maximum exposure related to residual value guarantees under sales-type
leases is $36.4 at March 31, 2004. The Company is able to mitigate the risk
associated with these guarantees because the maturity of these guarantees is
staggered, which limits the amount of used equipment entering the marketplace at
any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. These conditions generally pertain to the functionality and state of
repair of the machine. Such guarantees are referred to as buyback guarantees. As
of March 31, 2004, the Company's maximum exposure to buyback guarantees is
$49.1. The Company is able to mitigate the risk of these guarantees by
staggering the timing of the buybacks and through leveraging its access to the
used equipment markets provided by the Company's original equipment manufacturer
status.
NOTE N -- RETIREMENT PLANS AND OTHER BENEFITS
Pension Plans
- -------------
US Plans - As of March 31, 2004, the Company maintained four defined benefit
pension plans covering certain domestic employees (the "Terex Plans"). The
benefits for the plans covering the salaried employees are based primarily on
years of service and employees' qualifying compensation during the final years
of employment. Participation in the plans for salaried employees was frozen on
or before October 15, 2000, and no participants will be credited with service
following such dates except that participants not fully vested were credited
with service for purposes of determining vesting only. The benefits for the
plans covering the hourly employees are based primarily on years of service and
a flat dollar amount per year of service. It is the Company's policy generally
to fund the Terex Plans based on the minimum requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Plan assets consist primarily
of common stocks, bonds, and short-term cash equivalent funds.
The Company adopted a Supplemental Executive Retirement Plan ("SERP") effective
October 1, 2002. The SERP provides retirement benefits to certain senior
executives of the Company. Generally, the SERP provides a benefit based on
average total compensation and years of service reduced by benefits earned under
other Company funded retirement programs, including Social Security. The SERP is
unfunded.
Other Postemployment Benefits
- -----------------------------
The Company has five nonpension postretirement benefit plans. The health care
plans are contributory with participants' contributions adjusted annually; the
life insurance plan is noncontributory. The Company provides postemployment
health and life insurance benefits to certain former salaried and hourly
employees of Terex Cranes - Waverly Operations (also known as Koehring Cranes,
Inc.), Cedarapids and Simplicity Engineering. The Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," on
January 1, 1993. This statement requires accrual of postretirement benefits
(such as health care benefits) during the years an employee provides service.
Terex adopted the provisions of SFAS No. 106 using the delayed recognition
method, whereby the amount of the unrecognized transition obligation at January
1, 1993 is recognized prospectively as a component of future years' net periodic
postretirement benefit expense. The unrecognized transition obligation at
January 1, 1993 was $4.5. Terex is amortizing this transition obligation over 12
years, the average remaining life expectancy of the participants.
18
Pension Benefits Other Benefits
---------------------------- --------------------------
Three Months Ended Three Months Ended
March 31, March 31,
---------------------------- --------------------------
2004 2003 2004 2003
-------------- ------------- ------------- ------------
Weighted-average assumptions:
Discount rate........................ 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets....... 8.00% 8.00% --- ---
Rate of compensation increase........ 4.00% 5.00% --- ---
Pension Benefits Other Benefits
---------------------------- --------------------------
Three Months Ended Three Months Ended
March 31, March 31,
-------------- ------------- ------------- ------------
2004 2003 2004 2003
-------------- ------------- ------------- ------------
Components of net periodic cost:
Service cost.......................... $ 0.3 $ 0.2 $ --- $ ---
Interest cost......................... 1.8 1.8 0.2 0.2
Expected return on plan assets........ (1.9) (1.7) --- ---
Amortization of prior service cost.... 0.2 0.1 --- ---
Amortization of transition obligation. --- --- 0.1 0.1
Recognized actuarial (gain) loss...... 0.6 0.6 0.1 0.1
------------- ------------- ------------- --------------
Net periodic cost (benefit)............ $ 1.0 $ 1.0 $ 0.4 $ 0.4
============= ============= ============= ==============
The Company plans to contribute approximately $2 to its U.S. defined benefit
pension plans in 2004. During the three months ended March 31, 2004, the Company
contributed $0.2 to its U.S. defined benefit pension plans.
International Plans - Terex Equipment Limited maintains a government-required
defined benefit plan (which includes certain defined contribution elements)
covering substantially all of its management employees. Terex Aerials Limited
(Ireland) maintains two voluntary defined benefit plans covering its employees.
PPM SAS maintains an unfunded noncontributory defined benefit plan covering
substantially all of its employees. O&K Mining maintains an unfunded
noncontributory defined benefit plan covering substantially all of its
employees. Fermec maintains a voluntary defined benefit pension plan covering
substantially all of its employees. Atlas maintains an unfunded noncontributory
defined benefit plan covering substantially all of its employees in Germany.
Additionally, Atlas maintains a government required defined benefit plan for its
employees in Scotland. Demag maintains two unfunded noncontributory defined
benefit plans covering substantially all of its employees in Germany.
Pension Benefits
----------------------------------------
Three Months Ended March 31,
----------------------------------------
2004 2003
------------------ ---------------------
The range of assumptions:
Discount rate........................ 5.50%-6.00% 5.75%-6.00%
Expected return on plan assets....... 2.00%-6.50% 2.00%-7.00%
Rate of compensation increase........ 2.75%-4.00% 3.75%-4.25%
Pension Benefits
----------------------------
Three Months Ended March 31,
----------------------------
2004 2003
------------ --------------
Components of net periodic cost:
Service cost......................... $ 1.0 $ 0.9
Interest cost......................... 3.1 2.7
Expected return on plan assets........ (1.1) (0.9)
Recognized actuarial (gain) loss...... 0.1 0.2
------------ --------------
Net periodic cost...................... $ 3.1 $ 2.9
============ ==============
The Company plans to contribute approximately $13 to its international defined
benefit pension plans in 2004. During the three months ended March 31, 2004, the
Company contributed $3.5 to its international defined benefit pension plans.
19
NOTE O -- BUSINESS SEGMENT INFORMATION
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
The Company operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Mining; and (v)
Terex Roadbuilding, Utility Products and Other.
The Terex Construction segment designs, manufactures and markets three primary
categories of equipment and their related components and replacement parts:
heavy construction equipment (including off-highway trucks and scrapers),
compact equipment (including loader backhoes, compaction equipment, mini and
midi excavators, loading machines, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing screens and trommels). These products are primarily used
by construction, logging, mining, industrial and government customers in
construction and infrastructure projects and supplying coal, minerals, sand and
gravel. Terex Construction products are currently marketed principally under the
following brand names: Terex, Atlas, Finlay, Fuchs, Pegson, Powerscreen,
Benford, Fermec, Schaeff and TerexLift. The Company's strategy going forward is
to build the Terex brand. As part of that effort, Terex will, over time, be
migrating historic brand names to Terex and may include the use of the historic
brand name in conjunction with the Terex brand for a transitional period of
time.
The Terex Cranes segment designs, manufactures and markets mobile telescopic
cranes, tower cranes, lattice boom crawler cranes, truck mounted cranes (boom
trucks) and telescopic container stackers, as well as their related replacement
parts and components. These products are used primarily for construction, repair
and maintenance of infrastructure, building and manufacturing facilities.
Currently, Terex Cranes products are marketed principally under the following
brand names: Terex, American, Bendini, Comedil, Demag, Franna, Lorain, P&H,
Peiner, PPM and RO-Stinger. The Company's strategy going forward is to build the
Terex brand. As part of that effort, Terex will, over time, be migrating
historic brand names to Terex and may include the use of the historic brand name
in conjunction with the Terex brand for a transitional period of time.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie and its affiliates on September 18, 2002. The Terex
Aerial Work Platforms segment designs, manufactures and markets aerial work
platform equipment and telehandlers. Products include material lifts, portable
aerial work platforms, trailer mounted booms, articulating booms, stick booms,
scissor lifts, telehandlers, related components and replacement parts, and other
products. These products are used primarily by customers in the construction and
building maintenance industries to lift people and/or equipment as required to
build and/or maintain large physical assets and structures. Terex Aerial Work
Platforms products currently are marketed principally under the Genie and Terex
brand names.
The Terex Mining segment designs, manufactures and markets large hydraulic
excavators and high capacity surface mining trucks, related components and
replacement parts, and other products. These products are used primarily by
construction, mining, quarrying and government customers in construction,
excavation and supplying coal and minerals. Currently, Terex Mining products are
marketed principally under the following brand names: O&K, Payhauler, Terex and
Unit Rig. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex will, over time, be migrating historic brand names to
Terex and may include the use of the historic brand name in conjunction with the
Terex brand for a transitional period of time.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets fixed installation crushing and screening equipment (including
crushers, impactors, screens and feeders), asphalt and concrete equipment
(including pavers, plants, mixers, reclaimers, stabilizers and profilers),
utility equipment (including digger derricks, aerial devices and cable placers),
light construction equipment (including light towers, trowels, power buggies,
generators and arrow boards), construction trailers and on/off road heavy-duty
vehicles, as well as related components and replacement parts. These products
are used primarily by government, utility and construction customers to build
roads, maintain utility lines, trim trees and for commercial and military
applications. These products are currently marketed principally under the
following brand names: Terex, Advance, American Truck Company, Amida, ATC,
Bartell, Benford, Bid-Well, Canica, Cedarapids, Cedarapids/Standard Havens, CMI
Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Jaques, Load King,
Morrison, Re-Tech, Royer, Simplicity, Tatra, Terex Power, Terex Recycling and
Terex Telelect. The Company's strategy going forward is to build the Terex
brand. As part of that effort, Terex will, over time, be migrating historic
brand names to Terex and may include the use of the historic brand name in
conjunction with the Terex brand for a transitional period of time. Terex also
owns much of the North American distribution channel for the utility products
group through the distributors Terex Utilities South and Terex Utilities West.
These operations distribute and install the Company's utility aerial devices as
well as other products that service the utility industry. The Company also
operates a fleet of rental utility products under the name of Terex Utilities
Rental. The Company also leases and rents a variety of heavy equipment to third
parties under the Terex Re-Rentals brand name. The Company, through Terex
Financial Services, Inc., also offers customers loans and leases originated by
20
General Electric Capital Corporation Vendor Financial Services to assist in the
acquisition of the Company's products.
The results of businesses acquired during 2003 are included from the dates of
their respective acquisitions.
Included in Eliminations/Corporate are the eliminations among the five segments,
as well as general and corporate items for the three months ended March 31, 2004
and 2003. Business segment information is presented below:
For the Three Months
Ended March 31,
-------------------------
2004 2003
------------ ------------
Sales
Terex Construction................................. $ 389.7 $ 318.2
Terex Cranes....................................... 209.2 237.9
Terex Aerial Work Platforms........................ 168.0 147.2
Terex Mining...................................... 69.9 80.0
Terex Roadbuilding, Utility Products and Other .... 217.4 158.1
Eliminations/Corporate............................. (10.4) (13.7)
------------ ------------
Total............................................ $ 1,043.8 $ 927.7
============ ============
Income (Loss) from Operations
Terex Construction................................. $ 16.2 $ 14.2
Terex Cranes....................................... 6.4 6.8
Terex Aerial Work Platforms........................ 20.8 15.8
Terex Mining....................................... 2.0 4.6
Terex Roadbuilding, Utility Products and Other..... 5.2 1.4
Eliminations/Corporate............................. (2.3) (2.3)
------------ ------------
Total............................................ $ 48.3 $ 40.5
============ ============
March 31, December 31,
2004 2003
------------ -------------
Identifiable Assets
Terex Construction............................. $ 1,455.1 $ 1,394.1
Terex Cranes................................... 890.3 890.4
Terex Aerial Work Platforms.................... 470.2 456.4
Terex Mining................................... 445.9 443.0
Terex Roadbuilding, Utility Products and Other. 681.4 641.2
Corporate...................................... 1,995.4 1,971.7
Eliminations................................... (2,117.9) (2,073.0)
------------ --------------
Total........................................ $ 3,820.4 $ 3,723.8
============ ==============
NOTE P -- CONSOLIDATING FINANCIAL STATEMENTS
On November 25, 2003, the Company sold and issued $300 aggregate principal
amount of 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8% Notes"). On
March 29, 2001, the Company sold and issued $300 aggregate principal amount of
10-3/8% Senior Subordinated Notes due 2011 (the "10-3/8% Notes"). On December
17, 2001, the Company sold and issued $200 aggregate principal amount of 9-1/4%
Senior Subordinated Notes due 2011 (the "9-1/4% Notes"). As of March 31, 2004,
the 7-3/8% Notes, the 10-3/8% Notes and the 9-1/4% Notes were each jointly and
severally guaranteed by the following wholly-owned subsidiaries of the Company
(the "Wholly-owned Guarantors"): Amida Industries, Inc., Benford America, Inc.,
BL-Pegson USA, Inc., Cedarapids, Inc., CMI Dakota Company, CMI Terex
Corporation, CMIOIL Corporation, EarthKing, Inc., Finlay Hydrascreen USA, Inc.,
Fuchs Terex, Inc., Genie Access Services, Inc., Genie China, Inc., Genie
Financial Services, Inc., Genie Holdings, Inc., Genie Industries, Inc., Genie
International, Inc., Genie Manufacturing, Inc., GFS Commercial LLC, GFS
National, Inc., Go Credit Corporation, Koehring Cranes, Inc., Lease Servicing &
Funding Corp., O & K Orenstein & Koppel, Inc., Payhauler Corp., Powerscreen
Holdings USA Inc., Powerscreen International LLC, Powerscreen North America
Inc., Powerscreen USA, LLC, PPM Cranes, Inc., Product Support, Inc., Royer
Industries, Inc., Schaeff Incorporated, Spinnaker Insurance Company, Standard
Havens, Inc., Standard Havens Products, Inc., Terex Advance Mixer, Inc., Terex
Bartell, Inc., Terex Cranes, Inc., Terex Financial Services, Inc., Terex Mining
21
Equipment, Inc., Terex Utilities, Inc., Terex Utilities South, Inc., Terex-RO
Corporation, Terex-Telelect, Inc., The American Crane Corporation, and Utility
Equipment, Inc. All of the guarantees are full and unconditional.
No subsidiaries of the Company except the Wholly-owned Guarantors have provided
a guarantee of the 7-3/8% Notes, the 10-3/8% Notes and the 9-1/4% Notes.
The following summarized condensed consolidating financial information for the
Company segregates the financial information of Terex Corporation, the
Wholly-owned Guarantors and the Non-guarantor Subsidiaries. The results of
businesses acquired during 2003 are included from the dates of their respective
acquisitions.
Terex Corporation consists of parent company operations. Subsidiaries of the
parent company are reported on the equity basis.
Wholly-owned Guarantors combine the operations of the Wholly-owned Guarantor
subsidiaries. Subsidiaries of Wholly-owned Guarantors that are not themselves
guarantors are reported on the equity basis.
Non-guarantor Subsidiaries combine the operations of subsidiaries which have not
provided a guarantee of the obligations of Terex Corporation under the 7-3/8%
Notes, the 10-3/8% Notes and the 9-1/4% Notes.
Debt and goodwill allocated to subsidiaries is presented on an accounting
"push-down" basis.
22
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(in millions)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- ----------------
Net sales............................... $ 76.6 $ 380.9 $ 641.7 $ (55.4) $ 1,043.8
Cost of goods sold.................... 69.6 328.7 540.6 (55.4) 883.5
------------- ------------- ------------- ------------- ----------------
Gross profit............................ 7.0 52.2 101.1 --- 160.3
Selling, general & administrative
expenses............................. 7.7 33.1 71.2 --- 112.0
------------- ------------- ------------- ------------- ----------------
Income (loss) from operations........... (0.7) 19.1 29.9 --- 48.3
Interest income....................... 0.2 (0.5) 1.3 --- 1.0
Interest expense...................... 1.8 (12.9) (11.4) --- (22.5)
Income (loss) from equity investees... 15.8 --- --- (15.8) ---
Other income (expense) - net.......... 1.1 (0.8) (2.7) --- (2.4)
------------- ------------- ------------- ------------- ----------------
Income (loss) before income taxes ...... 18.2 4.9 17.1 (15.8) 24.4
Benefit from (provision for) income
taxes................................ (1.2) (0.4) (5.8) --- (7.4)
------------- ------------- ------------- ------------- ----------------
Net income (loss)....................... $ 17.0 $ 4.5 $ 11.3 $ (15.8) $ 17.0
============= ============= ============= ============= ================
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- ----------------
Net sales............................... $ 64.3 $ 342.1 $ 568.3 $ (47.0) $ 927.7
Cost of goods sold................... 60.9 296.5 487.6 (47.0) 798.0
------------- ------------- ------------- ------------- ----------------
Gross profit............................ 3.4 45.6 80.7 --- 129.7
Selling, general & administrative
expenses........................... 6.6 30.4 52.2 --- 89.2
------------- ------------- ------------- ------------- ----------------
Income (loss) from operations........... (3.2) 15.2 28.5 --- 40.5
Interest income....................... 0.3 0.2 1.2 --- 1.7
Interest expense...................... (6.9) (6.5) (12.5) --- (25.9)
Income (loss) from equity investees... 18.3 --- --- (18.3) ---
Other income (expense) - net.......... (1.8) (0.8) 2.9 --- 0.3
------------- ------------- ------------- ------------- ----------------
Income (loss) before income taxes ...... 6.7 8.1 20.1 (18.3) 16.6
Provision for income taxes............. 5.3 (3.2) (6.7) --- (4.6)
------------- ------------- ------------- ------------- ----------------
Net income (loss)....................... $ 12.0 $ 4.9 $ 13.4 $ (18.3) $ 12.0
============= ============= ============= ============= ================
23
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
(in millions)
Wholly- Non-
Terex Owned Guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------ ---------------
Assets
Current assets
Cash and cash equivalents.......... $ 139.6 $ 5.9 $ 262.5 $ --- $ 408.0
Trade receivables - net............ 23.2 142.1 445.5 --- 610.8
Intercompany receivables........... 17.4 17.4 30.1 (64.9) ---
Net inventories.................... 75.4 294.4 714.2 17.1 1,101.1
Other current assets............... 60.9 25.8 86.2 --- 172.9
------------- ------------- ------------- ------------ ---------------
Total current assets............. 316.5 485.6 1,538.5 (47.8) 2,292.8
Property, plant & equipment - net.... 0.2 98.9 260.3 --- 359.4
Investment in and advances to
(from) subsidiaries................ 912.1 (325.7) (281.9) (304.5) ---
Goodwill - net....................... (6.5) 222.5 390.8 --- 606.8
Other assets - net................... 133.5 208.7 219.2 --- 561.4
------------- ------------- ------------- ------------ ---------------
Total assets............................ $ 1,355.8 $ 690.0 $ 2,126.9 $ (352.3) $ 3,820.4
============= ============= ============= ============ ===============
Liabilities and stockholders' equity (deficit)
Current liabilities
Notes payable and current portion
of long-term debt................ $ 0.1 $ 30.9 $ 65.8 $ --- $ 96.8
Trade accounts payable............. 31.6 160.1 492.6 --- 684.3
Intercompany payables.............. 25.4 (85.0) 124.5 (64.9) ---
Accruals and other current
liabilities...................... 59.0 87.8 312.4 --- 459.2
------------- ------------- ------------- ------------ ---------------
Total current liabilities........ 116.1 193.8 995.3 (64.9) 1,240.3
Long-term debt less current portion.. 282.0 402.1 595.3 --- 1,279.4
Other long-term liabilities.......... 75.1 104.3 238.7 --- 418.1
Stockholders' equity (deficit)....... 882.6 (10.2) 297.6 (287.4) 882.6
------------- ------------- ------------- ------------ ---------------
Total liabilities and stockholders'
equity (deficit)..................... $ 1,355.8 $ 690.0 $ 2,126.9 $ (352.3) $ 3,820.4
============= ============= ============= ============ ===============
24
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(in millions)
Wholly- Non-
Terex Owned Guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Assets
Current assets
Cash and cash equivalents..........$ 148.7 $ 2.9 $ 315.9 $ --- $ 467.5
Trade receivables - net............ 32.1 119.9 388.2 --- 540.2
Intercompany receivables........... 11.7 14.0 18.0 (43.7) ---
Net inventories.................... 81.8 250.2 659.3 18.4 1,009.7
Current deferred tax assets........ 50.0 0.7 3.2 --- 53.9
Other current assets............... 17.1 25.2 80.4 --- 122.7
------------- ------------- ------------- ------------- -------------
Total current assets............. 341.4 412.9 1,465.0 (25.3) 2,194.0
Property, plant & equipment - net.... 7.3 101.6 261.2 --- 370.1
Investment in and advances to
(from) subsidiaries.............. 859.3 (209.4) (464.8) (185.1) ---
Goodwill - net....................... (9.8) 244.5 368.8 --- 603.5
Deferred taxes....................... 118.6 82.3 38.0 --- 238.9
Other assets - net................... 5.0 140.2 172.1 --- 317.3
------------- ------------- ------------- ------------- -------------
Total assets............................$ 1,321.8 $ 772.1 $ 1,840.3 $ (210.4) $ 3,723.8
============= ============= ============= ============= =============
Liabilities and stockholders' equity (deficit)
Current liabilities
Notes payable and current portion
of long-term debt................$ 0.1 $ 35.6 $ 51.1 $ --- $ 86.8
Trade accounts payable............. 31.3 124.2 453.1 --- 608.6
Intercompany payables.............. 20.6 21.3 1.8 (43.7) ---
Accruals and other current
liabilities...................... 42.8 101.8 319.4 --- 464.0
------------- ------------- ------------- ------------- -------------
Total current liabilities........ 94.8 282.9 825.4 (43.7) 1,159.4
Long-term debt less current portion.. 272.1 404.8 597.9 --- 1,274.8
Other long-term liabilities.......... 78.2 99.1 235.6 --- 412.9
Stockholders' equity (deficit)....... 876.7 (14.7) 181.4 (166.7) 876.7
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity (deficit).....................$ 1,321.8 $ 772.1 $ 1,840.3 $ (210.4) $ 3,723.8
============= ============= ============= ============= =============
25
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(in millions)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- -------------- ---------------
Net cash provided by (used in)
operating activities.................. $ (12.5) $ 9.5 $ (61.4) $ --- $ (64.4)
------------- ------------- ------------- -------------- ---------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired............................. (0.6) (0.5) --- --- (1.1)
Capital expenditures.................. (0.1) (3.2) (5.6) --- (8.9)
Proceeds from sale of assets.......... --- 0.3 0.5 --- 0.8
------------- ------------- ------------- -------------- ---------------
Net cash provided by (used in)
investing activities............... (0.7) (3.4) (5.1) --- (9.2)
------------- ------------- ------------- -------------- ---------------
Cash flows from financing activities:
Principal borrowings (repayments) of
long-term debt....................... --- --- --- --- ---
Proceeds from stock options exercised. 4.1 --- --- --- 4.1
Net borrowings (repayments) under
revolving line of credit agreements.. --- (0.5) 14.5 --- 14.0
Other................................. --- (2.6) (0.8) --- (3.4)
------------- ------------- ------------- -------------- ---------------
Net cash provided by (used in)
financing activities............... 4.1 (3.1) 13.7 --- 14.7
------------- ------------- ------------- -------------- ---------------
Effect of exchange rates on cash and --- --- (0.6) --- (0.6)
cash equivalents......................
------------- ------------- ------------- -------------- ---------------
Net (decrease) increase in cash and cash
equivalents........................... (9.1) 3.0 (53.4) --- (59.5)
Cash and cash equivalents, beginning of
period................................ 148.7 2.9 315.9 --- 467.5
------------- ------------- ------------- -------------- ---------------
Cash and cash equivalents, end of period $ 139.6 $ 5.9 $ 262.5 $ --- $ 408.0
============= ============= ============= ============== ===============
26
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- --------------- --------------
Net cash provided by (used in)
operating activities.................. $ 18.6 $ 8.1 $ 88.2 $ --- $ 114.9
------------- ------------- ------------- --------------- --------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired............................. --- (8.5) --- --- (8.5)
Capital expenditures.................. (0.4) (1.2) (7.0) --- (8.6)
Proceeds from sale of assets.......... --- 0.9 1.7 --- 2.6
------------- ------------- ------------- --------------- --------------
Net cash provided by (used in)
investing activities............... (0.4) (8.8) (5.3) --- (14.5)
------------- ------------- ------------- --------------- --------------
Cash flows from financing activities:
Principal borrowings (repayments) of
long-term debt....................... --- (0.5) (1.0) --- (1.5)
Net borrowings (repayments) under
revolving line of credit agreements.. --- (1.1) (21.4) --- (22.5)
Other................................. --- --- (11.6) --- (11.6)
------------- ------------- ------------- --------------- --------------
Net cash provided by (used in)
financing activities............... --- (1.6) (34.0) --- (35.6)
------------- ------------- ------------- --------------- --------------
Effect of exchange rates on cash and
cash equivalents...................... --- --- 2.9 --- 2.9
------------- ------------- ------------- --------------- --------------
Net (decrease) increase in cash and
cash equivalents...................... 18.2 (2.3) 51.8 --- 67.7
Cash and cash equivalents, beginning of
period................................ 134.0 6.2 212.0 --- 352.2
------------- ------------- ------------- --------------- --------------
Cash and cash equivalents, end of period $ 152.2 $ 3.9 $ 263.8 $ --- $ 419.9
============= ============= ============= =============== ==============
27
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
The Company operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Mining; and (v)
Terex Roadbuilding, Utility Products and Other.
The Terex Construction segment designs, manufactures and markets three primary
categories of equipment and their related components and replacement parts:
heavy construction equipment (including off-highway trucks and scrapers),
compact equipment (including loader backhoes, compaction equipment, mini and
midi excavators, loading machines, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing screens and trommels). These products are primarily used
by construction, logging, mining, industrial and government customers in
construction and infrastructure projects and supplying coal, minerals, sand and
gravel. Terex Construction products are currently marketed principally under the
following brand names: Terex, Atlas, Finlay, Fuchs, Pegson, Powerscreen,
Benford, Fermec, Schaeff and TerexLift. The Company's strategy going forward is
to build the Terex brand. As part of that effort, Terex will, over time, be
migrating historic brand names to Terex and may include the use of the historic
brand name in conjunction with the Terex brand for a transitional period of
time.
The Terex Cranes segment designs, manufactures and markets mobile telescopic
cranes, tower cranes, lattice boom crawler cranes, truck mounted cranes (boom
trucks) and telescopic container stackers, as well as their related replacement
parts and components. These products are used primarily for construction, repair
and maintenance of infrastructure, building and manufacturing facilities.
Currently, Terex Cranes products are marketed principally under the following
brand names: Terex, American, Bendini, Comedil, Demag, Franna, Lorain, P&H,
Peiner, PPM and RO-Stinger. The Company's strategy going forward is to build the
Terex brand. As part of that effort, Terex will, over time, be migrating
historic brand names to Terex and may include the use of the historic brand name
in conjunction with the Terex brand for a transitional period of time.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie Holdings, Inc. and its affiliates ("Genie") on
September 18, 2002. The Terex Aerial Work Platforms segment designs,
manufactures and markets aerial work platform equipment and telehandlers.
Products include material lifts, portable aerial work platforms, trailer mounted
booms, articulating booms, stick booms, scissor lifts, telehandlers, related
components and replacement parts, and other products. These products are used
primarily by customers in the construction and building maintenance industries
to lift people and/or equipment as required to build and/or maintain large
physical assets and structures. Terex Aerial Work Platforms products currently
are marketed principally under the Genie and Terex brand names.
The Terex Mining segment designs, manufactures and markets large hydraulic
excavators and high capacity surface mining trucks, related components and
replacement parts, and other products. These products are used primarily by
construction, mining, quarrying and government customers in construction,
excavation and supplying coal and minerals. Currently, Terex Mining products are
marketed principally under the following brand names: O&K, Payhauler, Terex and
Unit Rig. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex will, over time, be migrating historic brand names to
Terex and may include the use of the historic brand name in conjunction with the
Terex brand for a transitional period of time.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets fixed installation crushing and screening equipment (including
crushers, impactors, screens and feeders), asphalt and concrete equipment
(including pavers, plants, mixers, reclaimers, stabilizers and profilers),
utility equipment (including digger derricks, aerial devices and cable placers),
light construction equipment (including light towers, trowels, power buggies,
generators and arrow boards), construction trailers and on/off road heavy-duty
vehicles, as well as related components and replacement parts. These products
are used primarily by government, utility and construction customers to build
roads, maintain utility lines, trim trees and for commercial and military
operations. These products are currently marketed principally under the
following brand names: Terex, Advance, American Truck Company, Amida, ATC,
Bartell, Benford, Bid-Well, Canica, Cedarapids, Cedarapids/Standard Havens, CMI
Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Jaques, Load King,
Morrison, Re-Tech, Royer, Simplicity, Tatra, Terex Power, Terex Recycling and
Terex Telelect. The Company's strategy going forward is to build the Terex
brand. As part of that effort, Terex will, over time, be migrating historic
brand names to Terex, and may include the use of the historic brand name in
conjunction with the Terex brand name for a transitional period of time. Terex
also owns much of the North American distribution channel for the utility
products group through the distributors Terex Utilities South and Terex
Utilities West. These operations distribute and install the Company's utility
aerial devices as well as other products that service the utility industry. The
Company also operates a fleet of rental utility products under the name Terex
Utilities Rental. The Company also leases and rents a variety of heavy equipment
28
to third parties under the Terex Re-Rentals brand name. The Company, through
Terex Financial Services, Inc. ("TFS"), also offers customers loans and leases
originated by General Electric Capital Corporation Vendor Services to assist in
the acquisition of all of the Company's products. On February 14, 2003, the
Company acquired Commercial Body Corporation ("Commercial Body") and Combatel
Distribution, Inc. ("Combatel"). On August 28, 2003 the Company acquired an
additional 51% of the outstanding shares of TATRA a.s. ("Tatra"), for a total of
71% ownership, and acquired a controlling interest in American Truck Company
("ATC"). The results of Commercial Body, Combatel, Tatra and ATC are included in
the results of the Terex Roadbuilding, Utility Products and Other segment from
their respective dates of acquisition.
Included in Eliminations/Corporate are the eliminations among the five segments,
as well as general and corporate items.
Overview
- --------
The Company is a diversified global manufacturer of capital equipment serving
the construction, infrastructure and surface mining markets. Terex's strategy is
to use its position as a low fixed and total cost manufacturer to provide its
customers with the best return on their capital investment.
In the first quarter of 2004, the Company noted improved economic conditions in
many end-markets as the Company's backlog increased in substantially all of its
businesses. Recent acquisitions, such as Genie and Demag Mobile Cranes GmbH &
Co. KG and affiliates ("Demag"), made positive contributions, while tight
end-markets and currency moves (particularly the weakness of the U.S. dollar
relative to other currencies in which the Company does business) negatively
impacted the Company's financial performance. Overall, during the first quarter
of 2004, the Company experienced a strengthened backlog and moderate revenue
growth. Backlog increased $335 million, or 73%, compared to the first quarter of
2003.
The Company anticipates a mix of end market conditions for the remainder of
2004, with certain products anticipating recovering markets and others expecting
continued sluggish markets. For example, the Company sees opportunities for
growth in the Construction and Aerial Work Platforms businesses resulting from
initial signs of economic recovery, and in the Mining business based on
recovering commodity prices; however, the Company envisions a continued weak
North American crane market and difficult end markets for the Roadbuilding
business. Overall, an economic recovery in the markets served by the Company's
businesses would have a beneficial impact on the Company's performance. A
significant area of uncertainty for 2004 remains the impact of currency moves,
particularly the relative strength of the U.S. dollar.
During 2004, the Company is continuing to focus on cash generation, debt
reduction and margin improvement initiatives. The Company experienced a net use
of cash in the first quarter of 2004, as the Company used cash for working
capital purposes in preparation for the second quarter selling season and as a
result of the increase in backlog. The Company recently initiated its Terex
Improvement Process ("TIP") program aimed at improving the Company's internal
processes and benefiting the Company's customers, investors and employees. As
part of the TIP objectives, Terex management will have a particular focus on
achieving a number of key objectives including revenue growth, through a
combination of expansion into markets not currently served and by increasing
market share in existing products, and improving the Company's return on
invested capital, through reducing working capital requirements as a percentage
of sales and by improving operating margins through reducing the total cost of
manufacturing products.
Restructuring
- -------------
Prior to 2004, the Company initiated numerous restructuring programs in response
to a slowing economy, to reduce duplicative operating facilities, including
those arising from the Company's acquisitions, and to respond to specific market
conditions. Restructuring programs were initiated within the Company's Terex
Construction, Terex Cranes, Terex Mining and Terex Roadbuilding, Utility
Products and Other segments. The Company's programs have been designed to
minimize the impact of any program on future operating results and the Company's
liquidity. To date, these restructuring programs have not had a material
negative impact on operating results or the Company's liquidity. These
initiatives are intended to generate a reduction in ongoing labor and factory
overhead expense as well as to reduce overall material costs by leveraging the
purchasing power of the consolidated facilities. See Note E - "Restructuring and
Other Charges" in the Company's Condensed Consolidated Financial Statements for
a detailed description of the Company's restructuring programs, including the
reasons, timing and costs associated with each such program.
29
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31,
- --------------------------------------------------------------------------------
2003
- ----
Terex Consolidated
Three Months Ended March 31,
------------------------------------------------------
2004 2003
--------------------------- -----------------------
% of % of % Change In
Sales Sales Reported Amounts
------------ ----------- ---------------------
($ amounts in millions)
Net Sales $ 1,043.8 $ 927.7 12.5%
Gross Profit 160.3 15.4% 129.7 14.0% 23.6%
SG&A 112.0 10.7% 89.2 9.6% 25.6%
Income from Operations 48.3 4.6% 40.5 4.4% 19.3%
Total net sales for the three months ended March 31, 2004 totaled $1,043.8
million, an increase of $116.1 million when compared to the same period in 2003.
The impact of a weaker dollar relative to the British Pound and the Euro
increased sales by approximately 8% when compared to the first quarter of 2003.
Sales fell relative to the first quarter of 2003 in the Cranes segment as a
result of continuing weak market conditions in North America, as well as lower
new and used machine sales in the European crane business. Mining sales declined
relative to the first quarter of 2003, in part because of the temporary
disruption in order activity due to the uncertainty surrounding the attempted
sale of the mining truck business in the second half of 2003. These declines
were offset by sales generated by the acquisition of Tatra, higher sales of
aerial work platform products driven by increased demand in the United States,
and increased sales of compact construction and crushing and screening equipment
in Europe and North America. During the first quarter of 2004, the Company's
backlog increased in substantially all of its businesses, reflecting improved
economic conditions in many end markets.
Total gross profit for the three months ended March 31, 2004 totaled $160.3
million, an increase of $30.6 million when compared to the same period in 2003.
During the first quarter of 2003, the Company recorded $5.6 million of charges
primarily related to the fair value of inventory acquired at Genie and Demag as
well as costs related to the closure of the Company's EarthKing Internet
business. The acquisition of the Tatra and ATC businesses increased gross profit
by approximately $7 million when compared to the first quarter of 2003. Gross
profit increased in all segments other than the Mining segment, where lower
sales in South Africa offset other gross profit improvements. The Company's
gross profit was also negatively impacted by the increased value of the Euro and
the British Pound in the first quarter of 2004. This negatively impacted the
gross profit recognized on products produced in Europe and sold in U.S. dollars.
The Company continues to address recent market increases in steel pricing and
potential availability concerns and has taken several actions to mitigate the
impact of these events on the Company.
Total selling, general and administrative costs ("SG&A") increased for the three
months ended March 31, 2004 by $22.8 million when compared to the same period in
2003. A weaker U.S. dollar relative to the British Pound and the Euro accounted
for approximately one-third of the increase, as costs reported in these
currencies translate into more U.S. dollars than reported in 2003. SG&A costs
also increased as a result of higher commissions and related costs due to
increased sales levels during the first quarter of 2004. The acquisitions of the
Tatra and ATC businesses accounted for approximately 20% of the increase in
SG&A. The majority of the remaining increases were experienced in the Aerial
Work Platforms and Construction segments, and were the result of higher sales
levels.
Income from operations increased by $7.8 million for the three months ended
March 31, 2004 when compared to the same period in 2003. The Company benefited
from sales increases in the Aerial Work Platforms and Construction segments as
well as from the acquisition of Tatra. These gains were partially offset by
lower operating profits earned in the Cranes segment as a result of weak demand
in the North American crane businesses, as well as lower sales realized in the
European crane businesses. Operating profit relative to the first quarter 2003
declined in the Mining segment, primarily due to lower sales of large mining
shovels. The Company continues to see improvements in the economic outlook for
many of the businesses in the Construction segment, as well as in the Aerial
Work Platforms segment. The Company has also begun to see increased demand for
its mining products as a result of recent improvements in commodity pricing.
30
Terex Construction
Three Months Ended March 31,
-----------------------------------------------------
2004 2003
-------------------- ----------------------------
% of % of % Change In
Sales Sales Reported Amounts
---------- ---------- ----------------------
($ amounts in millions)
Net Sales $ 389.7 $ 318.2 22.5%
Gross Profit 52.4 13.4% 41.7 13.1% 25.7%
SG&A 36.2 9.3% 27.5 8.6% 31.6%
Income from Operations 16.2 4.2% 14.2 4.5% 14.1%
Net sales in the Terex Construction segment increased by $71.5 million for the
three months ended March 31, 2004 when compared to the same period in 2003 and
totaled $389.7 million. A weaker U.S. dollar relative to the British Pound and
the Euro increased sales by approximately 12% when compared to the first quarter
of 2003. Excluding the effect of changes in foreign currency, sales in the
compact construction equipment, crushing and screening and scrap handling
businesses increased when compared to the comparable period in 2003, while sales
of heavy construction equipment fell, primarily as a result of lower sales of
off-highway trucks and of Atlas products. Sales of compact construction
equipment benefited in part from the Company's ability to leverage the Terex
brand in the United States and recovering end-market conditions. Sales in the
crushing and screening business increased, particularly in the United States,
when compared to the comparable period in 2003.
Gross profit increased to $52.4 million for the three months ended March 31,
2004, an increase of $10.7 million when compared to 2003 results for the same
period. Gross margins, defined as gross profit as a percentage of sales,
improved in the compact construction equipment and crushing and screening
businesses when compared to the first quarter of 2003 as a result of improved
pricing, cost reductions from consolidation of compact equipment manufacturing
facilities in 2003 and the benefit of higher production volumes. Gross margins
in the heavy equipment businesses fell when compared to the first quarter of
2003, as the weakening of the U.S. dollar relative to the British Pound
depressed margins earned on U.S. dollar denominated transactions in the
off-highway truck business. In addition, during the first quarter of 2004, the
percentage of orders sold in U.S. dollars was significantly higher than the
historical average, further depressing margins.
SG&A costs for the three months ended March 31, 2004 totaled $36.2 million, an
increase of $8.7 million when compared to the same period in 2003. A weaker U.S.
dollar relative to the British Pound and the Euro increased SG&A costs by
approximately $4 million when compared to the first quarter of 2003.
Approximately 74% of the segment's SG&A costs are incurred in either British
Pounds or Euro. The remaining increase in SG&A was due primarily to increased
spending for new product development, sales and marketing efforts and increased
administrative costs in the heavy and compact equipment businesses.
Income from operations for the three months ended March 31, 2004 totaled $16.2
million, an increase of $2.0 million when compared to $14.2 million for the same
period in 2003.
Terex Cranes
Three Months Ended March 31,
----------------------------------------------------------
2004 2003
----------------------- ------------------------------
% of % of % Change In
Sales Sales Reported Amounts
----------- ----------- -------------------
($ amounts in millions)
Net Sales $ 209.2 $ 237.9 (12.1%)
Gross Profit 29.8 14.2% 27.2 11.4% 9.6%
SG&A 23.4 11.2% 20.4 8.6% 14.7%
Income from Operations 6.4 3.1% 6.8 2.9% (5.9%)
Net sales for the Terex Cranes segment for the three months ended March 31, 2004
decreased by $28.7 million and totaled $209.2 million when compared to $237.9
million for the same period in 2003. The year-over-year decrease was due to a
decline in the number of used cranes sold during the first quarter of 2004, a
large one-time public works sale that occurred in 2003, a continuing soft
end-market in North America, and the sale of the Company's fork-lift business,
Schaeff Incorporated, and its Crane & Machinery, Inc. ("C&M") distribution
business in November 2003. Sales in the first quarter of 2003 were also
strengthened due to the order fulfillment of Demag's significant backlog that
existed at the time of its acquisition by Terex in August 2002. The decrease in
net sales was partially offset by the effect of a weaker U.S. dollar relative to
31
the Euro, an increase in sales volume of all terrain and rough terrain cranes in
Australia, as well as strong markets in Italy, the U.K. and the Asia/Pacific
region. The tower crane business also continued to show signs of growth.
Gross profit for the three months ended March 31, 2004 increased by $2.6 million
relative to the same period in 2003 and totaled $29.8 million. The sale of the
Schaeff Incorporated and C&M businesses reduced gross profit by $0.6 million in
the first quarter of 2004 when compared to the same period in 2003. Gross profit
fell in the North American cranes businesses primarily as a result of lower
production volumes when compared to the first quarter of 2003, and were
partially offset by improvements in the international mobile crane businesses as
well as in the tower crane businesses. Included in gross profit for the first
quarter of 2003 is a $2.1 million non-recurring reduction of gross profit
related to fair value accounting at Demag. The fair value adjustment related to
the acquired inventory of Demag. In addition, the cost reduction impact of past
restructuring activities related to the acquisition of Demag are positively
reflected in the year-over-year results.
SG&A costs for the three months ended March 31, 2004 totaled $23.4 million, an
increase of $3.0 million over the same period in 2003. The sale of Schaeff
Incorporated and C&M reduced SG&A costs in the first quarter of 2004 by $0.6
million relative to the first quarter of 2003. Cost reductions achieved in the
North American cranes businesses in response to continued weak market conditions
were offset by the impact of a weaker U.S. dollar relative to the Euro.
Approximately 71% of the segment's SG&A costs were incurred in Euro.
Income from operations for the three months ended March 31, 2004 totaled $6.4
million compared to $6.8 million for the same period in 2003.
Terex Aerial Work Platforms
Three Months Ended March 31,
----------------------------------------------------
2004 2003
----------------------- ------------------------
% of % of % Change In
Sales Sales Reported Amounts
----------- ----------- -----------------------
($ amounts in millions)
Net Sales $ 168.0 $ 147.2 14.1%
Gross Profit 36.7 21.8% 29.5 20.0% 24.4%
SG&A 15.9 9.5% 13.7 9.3% 16.1%
Income from Operations 20.8 12.4% 15.8 10.7% 31.6%
Total net sales for the Terex Aerial Work Platforms segment for the three months
ended March 31, 2004 were $168.0 million, an increase of $20.8 million when
compared to the same period in 2003. Sales increased when compared to the first
quarter of 2003 as a result of stronger demand from the rental channel in the
United States and improved parts sales. Rental market demand was positively
impacted as rental channel customers began to buy new equipment to reduce the
age of their fleets.
Total gross profit for the Aerial Work Platforms segment for the three months
ended March 31, 2004 was $36.7 million, an increase of $7.2 million when
compared to the same period in 2003. Gross profit for the first quarter of 2003
included a $0.7 million charge related to certain fair value adjustments to
Genie's inventory values recorded at the time of acquisition; no such charges
were included in 2004 results. Gross profit also improved relative to 2003, as
the Aerial Work Platforms segment benefited from the impact of higher volumes of
equipment sales.
Total SG&A costs for the three months ended March 31, 2004 totaled $15.9
million, an increase of $2.2 million from the same period in 2003. The increase
was due primarily to higher commissions and related costs arising from higher
sales levels, in addition to the decline in the U.S. dollar relative to the
British Pound and the Euro, as approximately 21% of the segment's SG&A costs are
denominated in those currencies.
Income from operations for the Aerial Work Platforms segment for the three
months ended March 31, 2004 was $20.8 million, an increase of $5.0 million from
the same period in 2003 due to the higher sales volume and improved margins.
32
Terex Mining
Three Months Ended March 31,
--------------------------------------------------
2004 2003
----------------------- ----------------------
% of % of % Change In
Sales Sales Reported Amounts
----------- ---------- --------------------------
($ amounts in millions)
Net Sales $ 69.9 $ 80.0 (12.6%)
Gross Profit 11.2 16.0% 11.9 14.9% (5.9%)
SG&A 9.2 13.2% 7.3 9.1% 26.0%
Income from Operations 2.0 2.9% 4.6 5.8% (56.5%)
Net sales in the Terex Mining segment decreased by $10.1 million to $69.9
million in the first quarter of 2004 compared to $80.0 million in the comparable
period in 2003. The decrease in sales was mainly attributable to the temporary
disruption in order activity due to the uncertainty surrounding the attempted
sale of the mining truck business in the second half of 2003. On December 10,
2003, the Company announced that it had terminated its discussions to sell the
mining truck business. Additionally, there was an unusually high level of new
mining shovel sales in the first quarter of 2003.
Gross profit decreased by $0.7 million in the three months ended March 31, 2004
when compared to the comparable period in 2003 and totaled $11.2 million. Gross
profit earned in South Africa decreased due to a change in the mix of products
sold in that region.
SG&A expense increased by $1.9 million in the first quarter of 2004 relative to
the comparable period in 2003, to a total of $9.2 million. The increase in SG&A
is mainly due to the effect of foreign currency exchange fluctuations.
Income from operations for the Terex Mining segment was $2.0 million in the
first quarter of 2004, or 2.9% of sales, a decrease of $2.6 million from $4.6
million in the comparable period in 2003. This reduction in operating income was
a result of lower sales volumes due to the uncertainty about the future of the
Company's mining business and a change in the mix of products sold in South
Africa.
Terex Roadbuilding, Utility Products and Other
Three Months Ended March 31,
-------------------------------------------------
2004 2003
----------------------- ---------------------
% of % of % Change In
Sales Sales Reported Amounts
---------- --------- -------------------------
($ amounts in millions)
Net Sales $ 217.4 $ 158.1 37.5%
Gross Profit 30.1 13.8% 19.7 12.5% 52.8%
SG&A 24.9 11.5% 18.3 11.6% 36.1%
Income from Operations 5.2 2.4% 1.4 0.9% 271.4%
Total net sales for the Terex Roadbuilding, Utility Products and Other segment
for the three months ended March 31, 2004 were $217.4 million, an increase of
$59.3 million when compared to the same period in 2003. The acquisition of Tatra
on August 28, 2003 increased sales in the first quarter of 2004 by approximately
$44 million when compared to the same period a year ago. Sales increased
relative to the first quarter of 2003 in all other businesses reported in the
segment. Sales of roadbuilding products increased marginally over the comparable
period in 2003, primarily as a result of increased demand for asphalt paving
products.
Gross profit for the three months ended March 31, 2004 totaled $30.1 million, an
increase of $10.4 million when compared to the same period in 2003. The majority
of the increase is due to the acquisition of Tatra, which was partially offset
by costs incurred by the ATC business. The Company acquired a majority interest
in ATC as a result of its acquisition of Tatra. Gross profit realized in the
Utility Products business fell relative to the first quarter of 2003, in part as
a result of increases in raw material prices as well as a result of investments
made to implement manufacturing process improvements. Gross profit improved in
the Roadbuilding businesses as a result of cost reductions implemented during
2003 and increased parts sales. During the first quarter of 2003, the Company
recorded a $1.5 million charge related to the closure of its EarthKing Internet
subsidiary.
SG&A costs for the segment for the three months ended March 31, 2004 totaled
$24.9 million, an increase of $6.6 million when compared to the same period in
2003. The majority of the increase was due to the acquisition of Tatra and ATC.
33
Income from operations for the Roadbuilding, Utility Products and Other segment
for the three months ended March 31, 2004 was $5.2 million, compared to $1.4
million for the same period in 2003.
Net Interest Expense
During the three months ended March 31, 2004, the Company's net interest expense
decreased $2.7 million to $21.5 million from $24.2 million for the prior year
period. The decrease was due to the overall decrease in debt during the first
quarter of 2004 as compared to the same period in 2003 and lower interest rates.
Other Income (Expense) - Net
Other income (expense) - net for the three months ended March 31, 2004 was an
expense of $2.4 million as compared to income of $0.3 million for the prior year
period. During the three months ended March 31, 2003, the Company recorded
income of $2.4 million related to a favorable court judgment on appeal as the
defendant in a patent infringement case. This income was partially offset by a
loss of $0.8 million related to its Internet e-commerce investments.
Income Taxes
During the three months ended March 31, 2004, the Company recognized income tax
expense of $7.4 million on income before income taxes of $24.4 million, an
effective rate of 30%, as compared to income tax expense of $4.6 million on
income before income taxes of $16.6 million, an effective rate of 28%, in the
prior year period. The effective tax rate for the first quarter of 2004 differs
from the prior period primarily due to changes in assumptions in foreign
valuation allowances, the mix of income by jurisdiction, and the impact of
statutory reviews concluded in the first quarter of 2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Changes in the estimates and assumptions used by management could have
significant impact on the Company's financial results. Actual results could
differ from those estimates.
The Company believes that the following are among its most significant
accounting polices which are important in determining the reporting of
transactions and events and which utilize estimates about the effect of matters
that are inherently uncertain and therefore are based on management judgment.
Please refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for a complete listing of the Company's accounting policies.
Inventories - Inventories are stated at the lower of cost or market value. Cost
is determined by the first-in, first-out ("FIFO") method. In valuing inventory,
management is required to make assumptions regarding the level of reserves
required to value potentially obsolete or over-valued items at the lower of cost
or market. The valuation of used equipment taken in trade from customers
requires the Company to use the best information available to determine the
value of the equipment to potential customers. This value is subject to change
based on numerous conditions. Inventory reserves are established taking into
account age, frequency of use, or sale, and in the case of repair parts, the
installed base of machines. While calculations are made involving these factors,
significant management judgment regarding expectations for future events is
involved. Future events which could significantly influence management's
judgment and related estimates include general economic conditions in markets
where the Company's products are sold, new equipment price fluctuations,
competitive actions including the introduction of new products and technological
advances, as well as new products and design changes introduced by the Company.
At March 31, 2004, reserves for excess and obsolete inventory totaled $59.6
million.
Accounts Receivable - Management is required to make judgments relative to the
Company's ability to collect accounts receivable from the Company's customers.
Valuation of receivables includes evaluating customer payment histories,
customer leverage, availability of third party financing, political and exchange
risks and other factors. Many of these factors, including the assessment of a
customer's ability to pay, are influenced by economic and market factors which
cannot be predicted with certainty. At March 31, 2004, reserves for potentially
uncollectible accounts receivable totaled $40.1 million.
Guarantees - The Company has issued guarantees of customer financing to purchase
equipment as of March 31, 2004. The Company must assess the probability of
losses or non-performance in ways similar to the evaluation of accounts
receivable, including consideration of a customer's payment history, leverage,
availability of third party finance, political and exchange risks and other
factors. Many of these factors, including the assessment of a customer's ability
34
to pay, are influenced by economic and market factors that cannot be predicted
with certainty. To date, losses related to guarantees have been negligible.
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of
customer default, the Company is generally able to dispose of the equipment with
the Company realizing the benefits of any net proceeds in excess of the
remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4 million. The terms of these guarantees coincide with the financing
arranged by the customer and generally does not exceed five years. Given the
Company's position as the original equipment manufacturer and its knowledge of
end markets, the Company, when called upon to fulfill a guarantee, generally has
been able to liquidate the financed equipment at a minimal loss, if any, to the
Company.
The Company, through its Genie subsidiary, issues residual value guarantees
under sales-type leases. A residual value guarantee involves a guarantee that a
piece of equipment will have a minimum fair market value at a future point in
time. As described in Note J - "Net Investment in Sales-Type Leases" in the
Notes to the Condensed Consolidated Financial Statements, the Company's maximum
exposure related to residual value guarantees at March 31, 2004 was $36.4
million. The Company is able to mitigate the risk associated with these
guarantees because the maturity of the guarantees is staggered, which limits the
amount of used equipment entering the marketplace at any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. Such guarantees are referred to as buyback guarantees. These
conditions generally pertain to the functionality and state of repair of the
machine. As of March 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.1 million. The Company is able to mitigate the risk
of these guarantees by staggering the timing of the buybacks and through
leveraging its access to the used equipment markets provided by the Company's
original equipment manufacturer status.
The Company recognizes a loss under a guarantee when the Company's obligation to
make payment under the guarantee is probable and the amount of the loss can be
estimated. A loss would be recognized if the Company's payment obligation under
the guarantee exceeds the value the Company can expect to recover to offset such
payment, primarily through the sale of the equipment underlying the guarantee.
Revenue Recognition -- Revenue and costs are generally recorded when products
are shipped and invoiced to either independently owned and operated dealers or
to customers.
Revenue generated in the United States is recognized when title and risk of loss
pass from the Company to its customers which occurs upon shipment when terms are
FOB shipping point (which is customary for the Company) and upon delivery when
terms are FOB destination. The Company also has a policy requiring it to meet
certain criteria in order to recognize revenue, including satisfaction of the
following requirements:
a) Persuasive evidence that an arrangement exists;
b) The price to the buyer is fixed or determinable;
c) Collectibility is reasonably assured; and
d) The Company has no significant obligations for future performance.
In the United States, the Company has the ability to enter into a security
agreement and receive a security interest in the product by filing an
appropriate Uniform Commercial Code ("UCC") financing statement. However, a
significant portion of the Company's revenue is generated outside of the United
States. In many countries outside of the United States, as a matter of statutory
law, a seller retains title to a product until payment is made. The laws do not
provide for a seller's retention of a security interest in goods in the same
manner as established in the UCC. In these countries, the Company retains title
to goods delivered to a customer until the customer makes payment so that the
Company can recover the goods in the event of customer default on payment. In
these circumstances, where the Company only retains title to secure its recovery
in the event of customer default, the Company also has a policy which requires
it to meet certain criteria in order to recognize revenue, including
satisfaction of the following requirements:
35
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable;
d) Collectibility is reasonably assured;
e) The Company has no significant obligations for future performance; and
f) The Company is not entitled to direct the disposition of the goods,
cannot rescind the transaction, cannot prohibit the customer from
moving, selling, or otherwise using the goods in the ordinary course
of business and has no other rights of holding title that rest with a
titleholder of property that is subject to a lien under the UCC.
In circumstances where the sales transaction requires acceptance by the customer
for items such as testing on site, installation, trial period or performance
criteria, revenue is not recognized unless the following criteria have been met:
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable;
d) Collectibility is reasonably assured; and
e) The customer has given their acceptance, the time period for
acceptance has elapsed or the Company has otherwise objectively
demonstrated that the criteria specified in the acceptance provisions
have been satisfied.
In addition to performance commitments, the Company analyzes factors such as the
reason for the purchase to determine if revenue should be recognized. This
analysis is done before the product is shipped and includes the evaluation of
factors that may affect the conclusion related to the revenue recognition
criteria as follows:
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable; and
d) Collectibility is reasonably assured.
Goodwill & Acquired Intangible Assets - Goodwill represents the difference
between the total purchase price paid in the acquisition of a business and the
fair value of the assets, both tangible and intangible, and liabilities acquired
by the Company. Acquired intangible assets generally include trade names,
technology and customer relationships and are amortized over their estimated
useful lives. The Company is required annually to review the value of its
recorded goodwill and intangible assets to determine if either is potentially
impaired. The initial recognition of intangible assets, as well as the annual
review of the carrying value of goodwill and intangible assets, requires that
the Company develop estimates of future business performance. These estimates
are used to derive expected cash flow and include assumptions regarding future
sales levels, the impact of cost reduction programs, and the level of working
capital needed to support a given business. The Company relies on data developed
by business segment management as well as macroeconomic data in making these
calculations. The estimate also includes a determination of the Company's
weighted average cost of capital. The cost of capital is based on assumptions
about interest rates, as well as a risk-adjusted rate of return required by the
Company's equity investors. Changes in these estimates can impact the present
value of the expected cash flow that is used in determining the fair value of
acquired intangible assets, as well as the overall expected value of a given
business.
Impairment of Long Lived Assets - The Company's policy is to assess its ability
to realize on its long lived assets and to evaluate such assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets (or group of assets) may not be recoverable. Impairment is
determined to exist if the estimated future undiscounted cash flows is less than
its carrying value. Future cash flow projections include assumptions regarding
future sales levels, the impact of cost reduction programs, and the level of
working capital needed to support each business. The Company relies on data
developed by business segment management as well as macroeconomic data in making
these calculations. There are no assurances that future cash flow assumptions
will be achieved. The amount of any impairment then recognized would be
calculated as the difference between estimated fair value and the carrying value
of the asset.
Accrued Warranties - The Company records accruals for potential warranty claims
based on the Company's prior claim experience. Warranty costs are accrued at the
time revenue is recognized. However, adjustments to the initial warranty accrual
are recorded if actual claim experience indicates that adjustments are
necessary. These warranty costs are based upon management's assessment of past
claims and current experience. However, actual claims could be higher or lower
than amounts estimated, as the amount and value of warranty claims are subject
36
to variation as a result of many factors that cannot be predicted with
certainty, including the performance of new products, models and technology,
changes in weather conditions for product operation, different uses for products
and other similar factors.
Accrued Product Liability - The Company records accruals for potential product
liability claims based on the Company's prior claim experience. Accruals for
product liability claims are valued based upon the Company's prior claims
experience, including consideration of the jurisdiction, circumstances of the
accident, type of loss or injury, identity of plaintiff, other potential
responsible parties, analysis of outside legal counsel, analysis of internal
product liability counsel and the experience of the Company's director of
product safety. The Company provides accruals for estimated product liability
experience on known claims. Actual product liability costs could be different
due to a number of variables such as the decisions of juries or judges.
Pension Benefits - Pension benefits represent financial obligations that will be
ultimately settled in the future with employees who meet eligibility
requirements. Because of the uncertainties involved in estimating the timing and
amount of future payments, significant estimates are required to calculate
pension expense and liabilities related to the Company's plans. The Company
utilizes the services of several independent actuaries, whose models are used to
facilitate these calculations.
Several key assumptions are used in actuarial models to calculate pension
expense and liability amounts recorded in the financial statements. Management
believes the three most significant variables in the models are expected
long-term rate of return on plan assets, the discount rate, and the expected
rate of compensation increase. The actuarial models also use assumptions for
various other factors including employee turnover, retirement age and mortality.
The Company's management believes the assumptions used in the actuarial
calculations are reasonable and are within accepted practices in each of the
respective geographic locations in which the Company operates.
The expected long-term rates of return on pension plan assets were 8.00% for
U.S. plans and 2.00% to 6.50% for international plans at March 31, 2004. These
rates are determined annually by management based on a weighted average of
current and historical market trends, historical portfolio performance and the
portfolio mix of investments.
The discount rates for pension plan liabilities were 6.00% for U. S. plans and
5.50% to 6.00% for international plans at March 31, 2004. These rates are used
to calculate the present value of plan liabilities and are determined annually
by management based on market yields for high-quality fixed income investments
on the measurement date.
The expected rates of compensation increase for the Company's pension plans were
4.00% for U.S. plans and 2.75% to 4.00% for international plans at March 31,
2004. These estimated annual compensation increases are determined by management
every year and are based on historical trends and market indices.
Income Taxes - At March 31, 2004, the Company had deferred tax assets of $292.8
million, net of valuation allowances. The income tax expense was $7.4 million
for the three months ended March 31, 2004. The Company estimates income taxes
based on diverse and complex regulations that exist in various jurisdictions
where it conducts business. Deferred income tax assets and liabilities represent
tax benefits or obligations that arise from temporary timing differences due to
differing treatment of certain items for accounting and income tax purposes.
The Company evaluates deferred tax assets each period to ensure that estimated
future taxable income will be sufficient in character, amount and timing to
result in the utilization of its deferred tax assets. "Character" refers to the
type (capital gain vs. ordinary income) as well as the source (foreign vs.
domestic) of the income generated by the Company. "Timing" refers to the period
in which future income is expected to be generated and is important because
certain of the Company's net operating losses expire if not used within an
established time frame based on the jurisdiction in which they were generated.
A significant portion of the Company's deferred tax assets are comprised of net
operating loss ("NOL") generated in the United States by the Company. The
Company has had a history of generating tax losses in the United States and has
accumulated NOLs of $332.0 million as of December 31, 2003. During the fourth
quarter of 2003, the Company evaluated its ability to utilize its NOLs generated
in the United States. The Company included the following information in its
analysis:
o The acquisitions of Genie and Terex Advance Mixer in 2002 add
significantly to the Company's U.S. based income generation. In
addition, the Company had begun to see an increase in demand for Genie
products in the United States relative to 2002.
o The Company continues to reduce its long-term debt through the
generation of operating cash flow, thereby reducing interest expense
in the United States relative to prior periods.
o The Company has undergone significant restructuring in the United
States to address market conditions in its North American crane
business as well as its Roadbuilding businesses. The Company believes
37
that these businesses are now properly sized for current business
volumes and that their respective end markets have stabilized.
o The Company has not yet taken advantage of several tax strategies that
would allow it to accelerate the utilization of accumulated NOLs.
Based on these facts, the Company has determined that it is more likely than not
that expected future U.S. earnings are sufficient to fully utilize the Company's
U.S. deferred tax assets.
In addition to its domestic NOLs, the Company has accumulated $645.8 million of
foreign NOLs at December 31, 2003. During the fourth quarter of 2003, the
Company also evaluated its ability to utilize these NOLs on a country-by-country
and entity-by-entity basis. In performing this analysis, the Company reviewed
the past and anticipated future earnings for each foreign entity, and, where
necessary, a valuation allowance was provided for foreign NOLs which the Company
believed were not more likely than not to be realized in the future. As of March
31, 2004, the total valuation allowance provided for foreign deferred tax assets
was $152.3 million.
Considerable judgments are required in establishing deferred tax valuation
allowances and in assessing possible exposures related to tax matters. Tax
returns are subject to audit and local taxing authorities could challenge tax
positions. The Company's practice is to review tax-filing positions by
jurisdiction and to record provisions for probable tax assessments, including
interest and penalties, if applicable. The Company believes it records and/or
discloses such potential tax liabilities as appropriate and has reasonably
estimated its income tax liabilities and recoverable tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of funding are cash generated from operations, use of
the Company's bank credit facilities and access to capital markets. Management
believes that cash generated from operations, together with the Company's bank
credit facilities and cash on hand, provides the Company with adequate liquidity
to meet the Company's operating and debt service requirements. The Company had
cash and cash equivalents of $408.0 million at March 31, 2004. In addition, the
Company had $225.8 million available for borrowing under its revolving credit
facilities at March 31, 2004.
Cash from operations is dependent on the Company's ability to generate net
income through the sales of the Company's products and by reducing its
investment in working capital. During 2003, the Company's focus shifted from a
largely acquisition oriented growth approach to improving its operating
performance. The Company recently initiated a series of programs, collectively
known as TIP, aimed at improving operating earnings and net income as a
percentage of sales and at reducing the relative level of working capital needed
to operate the business. The Company is improving its liquidity through the
collection of receivables in a more timely manner. Consistent with past
practice, each quarter the Company sells receivables to various third party
financial institutions through a series of established pre-arranged facilities.
During the first quarter of 2004 and 2003, the Company sold, without recourse,
accounts receivable approximating 23% and 25% of its first quarter revenue in
2004 and 2003, respectively, to provide additional liquidity. The Company is
reducing inventory requirements by sharing, throughout the Company, many of the
lean manufacturing processes that Genie has successfully utilized. These
initiatives are expected to reduce the levels of raw materials and work in
process needed to support the business and enable the Company to reduce its
manufacturing lead times, thereby reducing the Company's working capital
requirements.
The Company's ability to generate cash from operations is subject to the
following factors:
o A substantial number of the Company's customers fund their purchases
through third party finance companies. Finance companies extend credit
to customers based on the credit worthiness of the customers and the
expected residual value of the Company's equipment. Changes in either
the customers' credit rating or in used equipment values may impact
the ability of customers to purchase equipment.
o As the Company's sales levels increase, the absolute amount of working
capital needed to support the business may increase with a
corresponding reduction in cash generated by operations. The TIP
initiatives described above are intended to reduce the relative
increase in working capital.
o As described above, the Company insures and sells a portion of its
accounts receivable to third party finance companies. Changes in
customers' credit worthiness, in the market for credit insurance or in
the willingness of third party finance companies to purchase accounts
receivable from the Company may impact the Company's cash flow from
operations.
o The Company purchases material and services from its suppliers on
terms extended based on the Company's overall credit rating. Changes
in the Company's credit rating may impact suppliers' willingness to
extend terms and increase the cash requirements of the business.
o Sales of the Company's products are subject to general economic
conditions, weather, competition and foreign currency fluctuations,
and other such factors that in many cases are outside the Company's
38
direct control. For example, during periods of economic uncertainty,
many of the Company's customers have tended to delay purchasing
decisions, which has had a negative impact on cash generated from
operations.
The Company's sales are seasonal, with more than half of the Company's sales
being generated in the first two quarters of a calendar year. This seasonality
is a result of the needs of the Company's customers to have new equipment
available for the spring, summer and fall construction season. As a result, the
Company tends to use cash to fund its operations during the first half of a
calendar year and generate cash from operations during the second half of the
year. For example, during the first quarter of 2004, the Company used $64.4
million of cash for operations.
To help fund this seasonal cash pattern, the Company maintains a significant
cash balance and a revolving line of credit in addition to term borrowings from
its bank group. The Company maintains a bank credit facility that originally
provided for $375 million of term debt maturing in July 2009 and a revolving
credit facility of $300 million that is available through July 2007. The
facility also includes provisions for an additional $250 million of term
borrowing by the Company on terms similar to the current term loan debt under
the facility, of which the Company has utilized $210 million of additional term
borrowings. During 2003, the Company prepaid $200 million principal amount of
its bank term loans. The Company's ability to borrow under its existing bank
credit facilities is subject to the Company's ability to comply with a number of
covenants. The Company's bank credit facilities include covenants that require
the Company to meet certain financial tests, including a pro forma consolidated
leverage ratio test, a consolidated interest ratio test, a consolidated fixed
charge ratio test, a pro forma consolidated senior secured debt leverage ratio
test and a capital expenditures test. These covenants require quarterly
compliance and become more restrictive through the third quarter of 2005. The
Company has significant debt service requirements, including semi-annual
interest payments on its senior subordinated notes and monthly interest payments
on its bank credit facilities. Other than a default under the terms of the
Company's debt instruments, there are no other events that would accelerate the
repayment of the Company's debt. In the event of a default, these borrowings
would become payable on demand.
The Company is currently in compliance with all of its financial covenants under
its bank credit facilities. The Company's future compliance with its covenants
will depend on its ability to generate earnings, cash flow from working capital
reductions, other asset sales and cost reductions from its restructuring
programs. The interest rates charged are subject to adjustment based on the
Company's consolidated pro forma leverage ratio. The weighted average interest
rate on the outstanding portion of the revolving credit component of the
Company's bank credit facility was 4.41% at March 31, 2004.
During 2003, the Company changed its debt profile by using cash generated from
operations to reduce its debt, extending the maturities of its term debt and
thereby reducing the rate of interest on its debt. On June 30, 2003, the Company
redeemed $50 million of its 8-7/8% Senior Subordinated Notes due 2008 (the
"8-7/8% Notes"). On November 25, 2003, the Company sold and issued $300 million
of its 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8% Notes") using the
proceeds plus $119 million of available cash to prepay the remaining $200
million outstanding principal amount of its 8-7/8% Notes and $200 million plus
accrued interest of its bank term loans.
The Company manages its interest rate risk by maintaining a balance between
fixed and floating rate debt through interest rate derivatives. Over the long
term, the Company believes this balance will produce lower interest cost than a
purely fixed rate mix without substantially increasing risk.
At the same time that it issued its 7-3/8% Notes, the Company negotiated an
amendment to certain of the financial covenants under its bank credit
facilities, described above, to extend the rate at which the pro forma
consolidated leverage ratio and the pro forma consolidated senior secured debt
leverage ratio are reduced in 2004 and 2005.
The Company continues to review its alternatives to improve its capital
structure and to reduce debt service costs through a combination of debt
refinancing, issuing equity, asset sales and the sale of non-strategic
businesses. The Company's ability to access the capital markets to raise funds,
through the sale of equity or debt securities, is subject to various factors,
some specific to the Company and some impacted by general economic and/or
financial market conditions. These include results of operations, projected
operating results for future periods and debt to equity leverage. In addition,
the terms of the Company's bank credit facility and senior subordinated notes
restrict the Company's ability to make further borrowings and to sell
substantial portions of its assets.
Cash From Operations
- --------------------
Cash flow from operations for the three months ended March 31, 2004 was a net
use of $64.4 million. Approximately $89 million of cash was used for working
capital purposes in preparation for the second quarter selling season. The
Company defines working capital as the sum of accounts receivable and inventory
less accounts payable. Cash flow from operations decreased by $179.3 million in
the first quarter of 2004 when compared to the same period in 2003. During the
first quarter of 2003, the Company generated $90.2 million from the reduction of
39
working capital. A significant portion of the working capital reduction in the
first quarter of 2003 was due to improvements realized at Demag, which was
acquired in August 2002 with a high level of working capital.
Cash used in investing activities in the first quarter of 2004 was $9.2 million,
$5.3 million less than cash used in investing activities in the first quarter of
2003. The reduction in cash usage is a direct result of the lower number and
size of acquisitions completed in the first quarter of 2004 when compared to the
same period in 2003.
Cash provided by financing activities was $14.7 million in the first quarter of
2004, compared to cash used in financing activities in the first quarter of 2003
of $35.6 million. During the first quarter of 2004, the Company generated $4.1
million from the exercise of stock options and $14.0 from net borrowings under
its revolving line of credit. In the first quarter of 2003, the Company utilized
cash from operations to reduce its debt by approximately $24 million.
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of
customer default, the Company is generally able to dispose of the equipment with
the Company realizing the benefits of any net proceeds in excess of the
remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4 million, including total credit guarantees issued by Demag and Genie
of $207.0 million and $55.5 million, respectively. The terms of these guarantees
coincide with the financing arranged by the customer and generally does not
exceed five years. Given the Company's position as the original equipment
manufacturer and its knowledge of end markets, the Company, when called upon to
fulfill a guarantee, generally has been able to liquidate the financed equipment
at a minimal loss, if any, to the Company.
The Company, from time to time, issues residual value guarantees under
sales-type leases. A residual value guarantee involves a guarantee that a piece
of equipment will have a minimum fair market value at a future point in time. As
described in Note J - "Net Investment in Sales-Type Leases" in the Notes to the
Condensed Consolidated Financial Statements, the Company's maximum exposure
related to residual value guarantees under sales-type leases was $36.4 million
at March 31, 2004. Given the Company's position as the original equipment
manufacturer and its knowledge of end markets, the Company is able to mitigate
the risk associated with these guarantees because the maturity of the guarantees
is staggered, which limits the amount of used equipment entering the marketplace
at any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. Such guarantees are referred to as buyback guarantees. These
conditions generally pertain to the functionality and state of repair of the
machine. As of March 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.1 million. The Company is able to mitigate the risk
of these guarantees by staggering the timing of the buybacks and through
leveraging its access to the used equipment markets provided by the Company's
original equipment manufacturer status.
Variable Interest Entities
In April 2001, Genie entered into a joint venture arrangement with a European
financial institution, pursuant to which Genie maintained a forty-nine percent
(49%) ownership interest in the joint venture, Genie Financial Services Holding
B.V. ("GFSH"). GFSH was established to facilitate the financing of Genie's
products sold in Europe. Genie contributed $4.7 in cash in exchange for its
ownership interest in GFSH. During January 2003 and 2002, Genie contributed an
additional $0.8 million and $0.6 million, respectively, in cash to GFSH.
On January 1, 2004, the Company and its joint venture partner revised the
co-operation agreement and operating relationship with respect to GFSH. As part
of the reorganization, the name of the joint venture was changed to Terex
Financial Services Holding B.V. ("TFSH"), Genie's ownership interest in TFSH was
reduced to forty percent (40%), and Genie transferred this interest to another
Company subsidiary. In addition, the scope of TFSH's operations was broadened,
as it was granted the right to facilitate the financing of all of the Company's
products sold in Europe.
As of March 31, 2004, TFSH had total assets of $160.8 million, consisting
primarily of financing receivables and lease related equipment, and total
liabilities of $144.5 million, consisting primarily of debt issued by the joint
venture partner. The Company has provided guarantees related to potential losses
arising from shortfalls in the residual values of financed equipment or credit
40
defaults by the joint venture's customers. Additionally, the Company is required
to maintain a capital account balance in TFSH, pursuant to the terms of the
joint venture, which could result in the reimbursement to TFSH by the Company of
losses to the extent of the Company's ownership percentage.
As defined by FASB Interpretation No. 46 ("FIN 46R"), TFSH is a Variable
Interest Entity ("VIE"). For entities created prior to February 1, 2003, FIN 46R
requires the application of its provisions effective the first reporting period
after March 15, 2004. Based on the legal and operating structure of TFSH, the
Company has concluded that it is not the primary beneficiary of TFSH and that it
does not control the operations of TFSH. Accordingly, the Company will not
consolidate the results of TFSH into its consolidated financial results. The
Company applies the equity method of accounting for its investment in TFSH.
Sale-Leaseback Transactions
The Company's rental business typically rents equipment to customers for periods
of no less than three months. To better match cash outflows in the rental
business to cash inflows from customers, the Company finances the equipment
through a series of sale-leasebacks which are classified as operating leases.
The leaseback period is typically 60 months in duration. At March 31, 2004, the
historical cost of equipment being leased back from the financing companies was
approximately $100 million and the minimum lease payment for the remainder of
2004 will be approximately $14 million.
CONTINGENCIES AND UNCERTAINTIES
Foreign Currencies and Interest Rate Risk
The Company's products are sold in over 100 countries around the world and,
accordingly, revenues of the Company are generated in foreign currencies, while
the costs associated with those revenues are only partly incurred in the same
currencies. The major foreign currencies, among others, in which the Company
does business, are the Euro, the British Pound, the Australian Dollar and the
Czech Koruna. The Company may, from time to time, hedge specifically identified
committed and forecasted cash flows in foreign currencies using forward currency
sale or purchase contracts. At March 31, 2004, the Company had foreign exchange
contracts with a notional value of $174.6 million.
The Company manages exposure to fluctuating interest rates with interest
protection arrangements. Certain of the Company's obligations, including
indebtedness under the Company's bank credit facility, bear interest at floating
rates, and as a result an increase in interest rates could adversely affect,
among other things, the results of operations of the Company. The Company has
entered into interest protection arrangements with respect to approximately $100
million of the principal amount of its indebtedness under its bank credit
facility, fixing interest at 6.51% for the period from July 1, 2004 through June
30, 2009.
Certain of the Company's obligations, including its senior subordinated notes,
bear interest at a fixed interest rate. The Company has entered into interest
rate agreements to convert these fixed rates to floating rates with respect to
approximately $200 million of the principal amount of its indebtedness under its
7-3/8% Senior Subordinated Notes and approximately $79 million of operating
leases. The floating rates are based on a spread of 2.45% to 4.50% over the
London Interbank Offer Rate ("LIBOR"). At March 31, 2004, the floating rates
ranged between 3.61% and 5.59%.
All derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Other
The Company is subject to a number of contingencies and uncertainties including,
without limitation, product liability claims, self-insurance obligations, tax
examinations and guarantees. Many of the exposures are unasserted or proceedings
are at a preliminary stage, and it is not presently possible to estimate the
amount or timing of any cost to the Company. However, the Company does not
believe that these contingencies and uncertainties will, in the aggregate, have
a material adverse effect on the Company. When it is probable that a loss has
been incurred and possible to make reasonable estimates of the Company's
liability with respect to such matters, a provision is recorded for the amount
of such estimate or for the minimum amount of a range of estimates when it is
not possible to estimate the amount within the range that is most likely to
occur.
41
The Company generates hazardous and non-hazardous wastes in the normal course of
its manufacturing operations. As a result, Terex is subject to a wide range of
federal, state, local and foreign environmental laws and regulations. These laws
and regulations govern actions that may have adverse environmental effects, such
as discharges to air and water, and also require compliance with certain
practices when handling and disposing of hazardous and non-hazardous wastes.
These laws and regulations also impose liability for the costs of, and damages
resulting from, cleaning up sites, past spills, disposals and other releases of
hazardous substances, should any of such events occur. No such incidents have
occurred which required the Company to pay material amounts to comply with such
laws and regulations. Compliance with such laws and regulations has required,
and will continue to require, the Company to make expenditures. The Company does
not expect that these expenditures will have a material adverse effect on its
business or profitability.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (the "FASB") issued
FIN 46, "Consolidation of Variable Interest Entities." A variable interest
entity ("VIE") is a corporation, partnership, trust or other legal entity that
does not have equity investors with voting rights or has equity investors that
do not provide sufficient financial resources for the entity to support its own
activities. The interpretation requires a company to consolidate a VIE when the
company has a majority of the risk of loss from the VIE's activities or is
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB revised FIN 46 ("FIN 46R") and modified its effective
date. The Company is required to adopt the provisions of FIN 46R, for special
purpose entities and VIEs created on or after February 1, 2003, effective
December 31, 2003. As of March 31, 2004, there were no such entities that are
required to be consolidated by the Company. For all other entities, the Company
has adopted the provisions of FIN 46R on March 31, 2004. The application of FIN
46R has not had a material impact on the Company's consolidated financial
position or results of operations.
In January 2003, the Emerging Issues Task Force (the "EITF") released EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 clarifies the timing and recognition of revenue from certain transactions
that include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
impact on the Company's consolidated financial position or results of
operations.
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions reached by the FASB
Derivatives Implementation Group subsequent to the original issuance of SFAS No.
133. This statement is generally effective prospectively for contracts and
hedging relationships entered into after June 30, 2003. The adoption of SFAS No.
149 has not had a material impact on the Company's consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 must be applied
immediately to instruments entered into or modified after May 31, 2003 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The adoption of SFAS
No. 150 has not had a material impact on the Company's financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The Company is exposed to certain market risks which exist as part of its
ongoing business operations and the Company uses derivative financial
instruments, where appropriate, to manage these risks. The Company, as a matter
of policy, does not engage in trading or speculative transactions. For further
information on accounting policies related to derivative financial instruments,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
Foreign Exchange Risk
The Company is exposed to fluctuations in foreign currency cash flows related to
third party purchases and sales, intercompany product shipments and intercompany
loans. The Company is also exposed to fluctuations in the value of foreign
currency investments in subsidiaries and cash flows related to repatriation of
these investments. Additionally, the Company is exposed to volatility in the
translation of foreign currency earnings to U.S. Dollars. Primary exposures
include the U.S. Dollars versus functional currencies of the Company's major
markets which include the Euro, the British Pound, the Czech Koruna and the
Australian Dollar. The Company assesses foreign currency risk based on
transactional cash flows and identifies naturally offsetting positions and
purchases hedging instruments to protect anticipated exposures. At March 31,
2004, the Company had foreign currency contracts with a notional value of $174.6
42
million. The fair market value of these arrangements, which represents the cost
to settle these contracts, was an asset of approximately $9.4 million at March
31, 2004.
Interest Rate Risk
The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt.
Primary exposure includes movements in the U.S. Prime Rate and LIBOR. The
Company uses interest rate swaps to manage its interest rate risk. At March 31,
2004, approximately 50% of the Company's debt was floating rate debt and the
weighted average interest rate for all debt was approximately 6.4%.
At March 31, 2004, the Company had approximately $100 million of interest rate
swaps fixing interest rates at 6.51% for the period from July 1, 2004 through
June 30, 2009. The fair market value of these arrangements, which represents the
cost to settle these contracts, was a liability of approximately $5 million at
March 31, 2004.
At March 31, 2004, the Company had approximately $279 million of interest rate
swaps that converted fixed rates to floating rates. The floating rates ranged
between 3.61% and 5.59% at March 31, 2004. The fair market value of these
arrangements, which represent the cost to settle these contracts, was an asset
of approximately $11.7 million.
At March 31, 2004, the Company performed a sensitivity analysis for the
Company's derivatives and other financial instruments that have interest rate
risk. The Company calculated the pretax earnings effect on its interest
sensitive instruments. Based on this sensitivity analysis, the Company has
determined that an increase of 10% in the Company's weighted average interest
rates at March 31, 2004 would have increased interest expense by approximately
$1 million in the three months ended March 31, 2004.
Commodities Risk
Principal materials used by the Company in its various manufacturing processes
include steel, castings, engines, tires, hydraulic cylinders, drive trains,
electric controls and motors, and a variety of other commodities and fabricated
or manufactured items. The Company's performance may be impacted by extreme
movements in material pricing and from availability of these materials. For
example, steel prices have increased and steel availability has decreased in
response to higher demand caused from a recovering end-market and higher
consumption of emerging market countries, such as China. In the absence of labor
strikes or other unusual circumstances, substantially all materials are normally
available from multiple suppliers. Current and potential suppliers are evaluated
on a regular basis on their ability to meet the Company's requirements and
standards. The Company actively manages its material supply sourcing and prices,
and may employ various methods to limit risk associated with commodity pricing
and availability.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
The Company carried out an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures as of the end of the fiscal
quarter covered by this Quarterly Report on Form 10-Q pursuant to the
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), under
the supervision and with the participation of the Company's Chief Executive
Officer and Chief Financial Officer.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2004 to ensure that information
required to be disclosed in the Company's reports filed or submitted pursuant to
the Exchange Act is recorded, processed, summarized and reported within the
appropriate time periods.
In connection with their audit of the Company's financial statements for the
fiscal year ended December 31, 2003, PricewaterhouseCoopers LLP ("PwC"), the
Company's independent auditors, did not report any material weaknesses related
to the Company's internal controls. PwC did, however, advise management and the
Audit Committee of the Board of Directors of two conditions with respect to the
Company's design or operations of internal controls that needed improvement.
The first condition identified by PwC related to the Company's process for
collecting, reconciling and analyzing information to support the valuation of
its foreign deferred tax assets and liabilities. In addition, PwC identified a
need to enhance the process used to estimate future taxable income, as this
information is used in determining the appropriateness of valuation allowances.
The second condition related to accounting controls at a Cranes segment
location, as well as the associated monitoring controls used by the Cranes
segment's management team.
43
As a result, the Company has implemented changes to its internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's fiscal quarter ended March 31, 2004, to
enhance its internal control over financial reporting in these areas.
To address the tax matters, during the first quarter of 2004, the Company
enhanced certain processes used to determine future taxable income by statutory
entity, related to the calculation of valuation allowances, and reserves related
to specific statutory issues. To address the conditions identified in the Cranes
segment, during the first quarter of 2004, the Company increased corporate
oversight within the Cranes segment. The Company has also launched a process to
increase the level of supervision and review within the accounting function of
the Cranes segment.
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
The Company is involved in certain claims and litigation arising in the ordinary
course of business, which are not considered material to the financial
operations or cash flow of the Company. For information concerning litigation
and other contingencies see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Contingencies and Uncertainties."
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
------------------------------------------------------------------------
Securities
--------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Recent Developments
- -------------------
On April 16, 2004, the Company commenced an offer to exchange up to $300 million
aggregate principal amount of its new 7-3/8% Senior Subordinated Notes due 2014,
which have been registered under the Securities Act of 1933, for a like amount
of its outstanding 7-3/8% Senior Subordinated Notes due 2014, which the Company
issued on November 25, 2003 in a private offering. The exchange offer will
expire at 5:00 p.m., New York City time, on May 17, 2004, unless extended by the
Company.
Forward-Looking Information
- ---------------------------
Certain information in this Quarterly Report includes forward-looking statements
regarding future events or the future financial performance of the Company that
involve certain contingencies and uncertainties, including those discussed above
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Contingencies and Uncertainties." In
addition, when included in this Quarterly Report or in documents incorporated
herein by reference, the words "may," "expects," "intends," "anticipates,"
"plans," "projects," "estimates" and the negatives thereof and analogous or
similar expressions are intended to identify forward-looking statements.
However, the absence of these words does not mean that the statement is not
forward-looking. The Company has based these forward-looking statements on
current expectations and projections about future events. These statements are
not guarantees of future performance. Such statements are inherently subject to
a variety of risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Such risks
and uncertainties, many of which are beyond the Company's control, include,
among others:
o the Company's business is highly cyclical and weak general economic
conditions may affect the sales of its products and its financial results;
o the sensitivity of construction, infrastructure and mining activity and
products produced for the military to interest rates and government
spending;
44
o the ability to successfully integrate acquired businesses;
o the retention of key management personnel;
o the Company's businesses are very competitive and may be affected by
pricing, product initiatives and other actions taken by competitors;
o the effects of changes in laws and regulations;
o the Company's business is international in nature and is subject to changes
in exchange rates between currencies, as well as international politics;
o the ability of suppliers to timely supply the Company parts and components
at competitive prices;
o the financial condition of suppliers and customers, and their continued
access to capital;
o the Company's ability to timely manufacture and deliver products to
customers;
o the Company's significant amount of debt and its need to comply with
restrictive covenants contained in the Company's debt agreements;
o compliance with applicable environmental laws and regulations; and
o other factors.
Actual events or the actual future results of the Company may differ materially
from any forward looking statement due to these and other risks, uncertainties
and significant factors. The forward-looking statements contained herein speak
only as of the date of this Quarterly Report and the forward-looking statements
contained in documents incorporated herein by reference speak only as of the
date of the respective documents. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statement contained or incorporated by reference in this
Quarterly Report to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The exhibits set forth on the accompanying Exhibit Index
have been filed as part of this Form 10-Q.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2004, the Company filed or
furnished the following Current Reports on Form 8-K:
- A report on Form 8-K was filed on January 23, 2004,
announcing that Rick Nichols was named to the position of
President of Terex Material Processing and Mining.
- A report on Form 8-K was filed on February 4, 2004,
announcing the intention of the Company to make
presentations at a number of conferences and the departure
of Thys de Beer from the Company.
- A report on Form 8-K was filed on February 9, 2004,
announcing a conference call to be held to review the
Company's year-end 2003 financial results and 2004 outlook.
- A report on Form 8-K was filed on February 18, 2004,
announcing the intention of the Company to amend its
financial statements for the first three quarters of 2003 to
revise the accounting for its deferred compensation plan.
- A report on Form 8-K was furnished on February 18, 2004,
providing the Company's press release reviewing the
Company's financial results for the year-ended December 31,
2003 and its 2004 outlook.
- A report on Form 8-K/A was furnished on February 19, 2004,
providing corrected information with respect to the
Company's financial results for the year-ended December 31,
2003.
- A report on Form 8-K was filed on February 26, 2004,
announcing the Company's hosting of a meeting with analysts
on February 26, 2004.
- A report on Form 8-K was filed on March 1, 2004, announcing
that a transcript of the February 26, 2004 meeting with
analysts was posted on the Company's website.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEREX CORPORATION
(Registrant)
Date: May 7, 2004 /s/ Phillip C. Widman
Phillip C. Widman
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 7, 2004 /s/ Mark T. Cohen
Mark T. Cohen
Vice President and Controller
(Principal Accounting Officer)
46
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Terex Corporation
(incorporated by reference to Exhibit 3.1 to the Form S-1 Registration
Statement of Terex Corporation, Registration No. 33-52297).
3.2 Certificate of Elimination with respect to the Series B Preferred Stock
(incorporated by reference to Exhibit 4.3 to the Form 10-K for the year
ended December 31, 1998 of Terex Corporation, Commission File No.
1-10702).
3.3 Certificate of Amendment to Certificate of Incorporation of Terex
Corporation dated September 5, 1998 (incorporated by reference to
Exhibit 3.3 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
3.4 Amended and Restated Bylaws of Terex Corporation (incorporated by
reference to Exhibit 3.2 to the Form 10-K for the year ended December
31, 1998 of Terex Corporation, Commission File No. 1-10702).
4.1 Indenture, dated as of March 29, 2001, between Terex Corporation and
United States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.12 to the Form 10-Q for the quarter ended March
31, 2001 of Terex Corporation, Commission File No. 1-10702).
4.2 First Supplemental Indenture, dated as of October 1, 2001, between
Terex Corporation and United States Trust Company of New York, as
Trustee (to Indenture dated as of March 29, 2001) (incorporated by
reference to Exhibit 4.15 to the Form 10-Q for the quarter ended
September 30, 2001 of Terex Corporation, Commission File No. 1-10702).
4.3 Second Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
March 29, 2001) (incorporated by reference to Exhibit 4.18 to the Form
10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.4 Third Supplemental Indenture, dated as of March 31, 2003, between Terex
Corporation and Bank of New York (as successor to United States Trust
Company of New York), as Trustee (to Indenture dated as of March 29,
2001) (incorporated by reference to Exhibit 4.21 to the Form 10-Q for
the quarter ended March 31, 2003 of Terex Corporation, Commission File
No. 1-10702).
4.5 Fourth Supplemental Indenture, dated as of November 25, 2003, among
Terex Corporation, the Subsidiary Guarantors named therein and The Bank
of New York (as successor to United States Trust Company of New York),
as Trustee (to Indenture dated as of March 29, 2001) (incorporated by
reference to Exhibit 4.5 to the Form 10-K for the year ended December
31, 2003 of Terex Corporation, Commission File No. 1-10702).
4.6 Indenture, dated as of December 17, 2001, between Terex Corporation,
the Guarantors named therein and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.16 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-75700).
4.7 First Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
December 17, 2001) (incorporated by reference to Exhibit 4.20 to the
Form 10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.8 Second Supplemental Indenture, dated as of March 31, 2003, between
Terex Corporation and Bank of New York (as successor to United States
Trust Company of New York), as Trustee (to Indenture dated as of
December 17, 2001) (incorporated by reference to Exhibit 4.24 to the
Form 10-Q for the quarter ended March 31, 2003 of Terex Corporation,
Commission File No. 1-10702).
4.9 Third Supplemental Indenture, dated as of November 25, 2003, among
Terex Corporation, the Subsidiary Guarantors named therein and The Bank
of New York (as successor to United States Trust Company of New York),
as Trustee (to Indenture dated as of December 17, 2001) (incorporated
by reference to Exhibit 4.9 to the Form 10-K for the year ended
December 31, 2003 of Terex Corporation, Commission File No. 1-10702).
4.10 Indenture, dated as of November 25, 2003, between Terex Corporation,
the Guarantors named therein and HSBC Bank USA, as Trustee
(incorporated by reference to Exhibit 4.10 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.1 Terex Corporation Incentive Stock Option Plan, as amended (incorporated
by reference to Exhibit 4.1 to the Form S-8 Registration Statement of
Terex Corporation, Registration No. 33-21483).
47
10.2 1994 Terex Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Form 10-K for the year ended December
31, 1994 of Terex Corporation, Commission File No. 1-10702).
10.3 Terex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Form 10-K for the
year ended December 31, 2003 of Terex Corporation, Commission File No.
1-10702).
10.4 1996 Terex Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to Form S-8 Registration Statement of Terex
Corporation, Registration No. 333-03983).
10.5 Amendment No. 1 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.5 to the Form 10-K for the
year ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.6 Amendment No. 2 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Form 10-K for the
year ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.7 Terex Corporation 1999 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.7 to the Form 10-Q for the quarter ended March
31, 2000 of Terex Corporation, Commission File No. 1-10702).
10.8 Terex Corporation 2000 Incentive Plan, as amended (incorporated by
reference to Exhibit 10.8 to the Form 10-Q for the quarter ended June
30, 2002 of Terex Corporation, Commission File No. 1-10702).
10.9 Terex Corporation Supplemental Executive Retirement Plan, effective
October 1, 2002 (incorporated by reference to Exhibit 10.9 to the Form
10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
10.10 Terex Corporation 2004 Annual Incentive Compensation Plan.*
10.11 Amended and Restated Credit Agreement, dated as of July 3, 2002, among
Terex Corporation, certain of its Subsidiaries, the Lenders named
therein, and Credit Suisse First Boston, as Administrative Agent
(incorporated by reference to Exhibit 10.9 to the Form 10-Q for the
quarter ended June 30, 2002 of Terex Corporation, Commission File No.
1-10702).
10.12 Incremental Term Loan Assumption Agreement, dated as of September 13,
2002, relating to the Amended and Restated Credit Agreement dated as of
July 3, 2002, among Terex Corporation, certain of its subsidiaries, the
lenders party thereto and Credit Suisse First Boston, as administrative
agent (incorporated by reference to Exhibit 2 of the Form 8-K Current
Report, Commission File No. 1-10702, dated September 13, 2002 and filed
with the Commission on September 20, 2002).
10.13 Amendment No. 1 and Agreement, dated as of November 25, 2003, to the
Amended and Restated Credit Agreement, dated as of July 3, 2002, among
Terex Corporation, certain of its Subsidiaries, the Lenders named
therein, and Credit Suisse First Boston, as Administrative Agent
(incorporated by reference to Exhibit 10.12 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.14 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation and
Credit Suisse First Boston, as Collateral Agent (incorporated by
reference to Exhibit 10.14 to the Form 10-K for the year ended December
31, 1998 of Terex Corporation, Commission File No. 1-10702).
10.15 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation,
each of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.15 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.16 Security Agreement dated as of March 6, 1998 of Terex Corporation, each
of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.16 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.17 Pledge Agreement dated as of March 6, 1998 of Terex Corporation, each
of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.17 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.18 Form Mortgage, Leasehold Mortgage, Assignment of Leases and Rents,
Security Agreement and Financing entered into by Terex Corporation and
certain of the subsidiaries of Terex Corporation, as Mortgagor, and
Credit Suisse First Boston, as Mortgagee (incorporated by reference to
Exhibit 10.18 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.19 Sale and Purchase Agreement, dated May 16, 2002, among Terex
Corporation, Terex Germany GmbH & Co. KG and Demag Mobile Cranes GmbH
(incorporated by reference to Exhibit 1 of the Form 8-K Current Report,
48
Commission File No. 1-10702, dated May 16, 2002 and filed with the
Commission on May 17, 2002).
10.20 Agreement and Plan of Merger, dated July 19, 2002, among Terex
Corporation, Magic Acquisition Corp., Genie Holdings, Inc., Robert
Wilkerson, S. Ward Bushnell, F. Roger Brown, Wilkerson Limited
Partnership, Bushnell Limited Partnership and R. Brown Limited
Partnership (incorporated by reference to Exhibit 1 of the Form 8-K
Current Report, Commission File No. 1-10702, dated July 19, 2002 and
filed with the Commission on July 22, 2002).
10.21 First Amendment to Agreement and Plan of Merger, dated as of September
18, 2002, by and among Terex Corporation, Magic Acquisition Corp.,
Genie Holdings, Inc. and Robert Wilkerson, S. Ward Bushnell and F.
Roger Brown and certain limited partnerships (incorporated by reference
to Exhibit 1 of the Form 8-K Current Report, Commission File No.
1-10702, dated September 13, 2002 and filed with the Commission on
September 20, 2002).
10.22 Second Amendment to Agreement and Plan of Merger, dated as of April 14,
2004, by and among Terex Corporation, Robert Wilkerson, S. Ward
Bushnell and F. Roger Brown and certain limited partnerships.*
10.23 Purchase Agreement, dated as of November 10, 2003, among Terex
Corporation and the Initial Purchasers, as defined therein Agent
(incorporated by reference to Exhibit 10.22 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.24 Registration Rights Agreement, dated as of November 25, 2003, among
Terex Corporation and the Initial Purchasers, as defined therein
(incorporated by reference to Exhibit 10.23 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.25 Second Amended and Restated Employment and Compensation Agreement,
dated as of January 1, 2002, between Terex Corporation and Ronald M.
DeFeo (incorporated by reference to Exhibit 10.34 to the Form 10-K for
the year ended December 31, 2001 of Terex Corporation, Commission File
No. 1-10702).
10.26 Form of Amended and Restated Change in Control and Severance Agreement
between Terex Corporation and certain executive officers (incorporated
by reference to Exhibit 10.36 to the Form 10-Q for the quarter ended
March 31, 2002 of Terex Corporation, Commission File No. 1-10702).
10.27 Form of Change in Control and Severance Agreement between Terex
Corporation and certain executive officers (incorporated by reference
to Exhibit 10.35 to the Form 10-K for the year ended December 31, 2002
of Terex Corporation, Commission File No. 1-10702).
10.28 Retirement Agreement dated as of November 13, 2003 between Terex
Corporation and Filip Filipov (incorporated by reference to Exhibit
10.29 to Form S-4 Registration Statement of Terex Corporation,
Registration No. 333-112097).
10.29 Consulting Agreement dated as of November 13, 2003 between Terex
Corporation and Fiver S.A. (incorporated by reference to Exhibit 10.30
to Form S-4 Registration Statement of Terex Corporation, Registration
No. 333-112097).
10.30 Termination, Severance, General Release and Waiver Agreement between
Terex Corporation and Matthys de Beer dated as of February 1, 2004
(incorporated by reference to Exhibit 99.1 of the Form 8-K Current
Report, Commission File No. 1-10702, dated February 1, 2004 and filed
with the Commission on February 4, 2004).
12 Calculation of Ratio of Earnings to Fixed Charges.*
31.1 Chief Executive Officer Certification pursuant to Rule
13a-14(a)/15d-14(a).*
31.2 Chief Financial Officer Certification pursuant to Rule
13a-14(a)/15d-14(a).*
32 Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes -Oxley Act of 2002. *
* Exhibit filed with this document.
49