UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-10702
TEREX CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 34-1531521
(State of incorporation) (I.R.S. Employer Identification No.)
500 POST ROAD EAST, SUITE 320, WESTPORT, CONNECTICUT 06880
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (203) 222-7170
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
NEW YORK STOCK EXCHANGE
(Name of Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES [ ] NO [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Act.
YES [ ] NO [X]
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 [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The aggregate market value of the voting and non-voting common equity stock held
by non-affiliates of the Registrant was approximately $1,606 million based on
the last sale price on June 30, 2004.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING WAS
50.1 MILLION AS OF JANUARY 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
TEREX CORPORATION AND SUBSIDIARIES
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2004
PAGE
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PART I
Item 1 Business 3
Item 2 Properties 23
Item 3 Legal Proceedings 25
Item 4 Submission of Matters to a Vote of Security Holders 25
PART II
Item 5 Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities 26
Item 6 Selected Financial Data 26
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 7A Quantitative and Qualitative Disclosure about Market Risk 58
Item 8 Financial Statements and Supplementary Data 59
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 60
Item 9A Controls and Procedures 60
Item 9B Other Information 64
PART III
Item 10 Directors and Executive Officers of the Registrant 65
Item 11 Executive Compensation 69
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 81
Item 13 Certain Relationships and Related Transactions 83
Item 14 Principal Accountant Fees and Services 84
PART IV
Item 15 Exhibits and Financial Statement Schedules 84
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As used in this Annual Report on Form 10-K, unless otherwise indicated, Terex
Corporation, together with its consolidated subsidiaries, is hereinafter
referred to as "Terex," the "Registrant," or the "Company." This Annual Report
on Form 10-K generally speaks as of December 31, 2004, unless specifically noted
otherwise.
PART I
ITEM 1. BUSINESS
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Terex has restated its financial statements for the years ended December 31,
2002 and 2003, in this Annual Report on Form 10-K. This Annual Report on Form
10-K also includes restated selected financial data for the years ended December
31, 2000 and 2001. In addition, Terex has restated each of the quarters in the
year ended December 31, 2003 and the quarters ended March 31, 2004 and June 30,
2004, and as a result has amended its filings for the interim periods ended
March 31, 2004 and June 30, 2004 in Amendments to Quarterly Reports on Form
10-Q/A that were previously filed with the Securities and Exchange Commission
("SEC"). All financial information contained in this Annual Report on Form 10-K
gives effect to this restatement.
The restatement principally pertains to errors identified by the Company in
accounting for, and reconciliation of, certain intercompany imbalances, as well
as in the failure of the Company to properly eliminate, in consolidation, all
intercompany accounts in accordance with generally accepted accounting
principles. Prior to the restatement, the intercompany imbalances were
eliminated by affecting the translation adjustment account within accumulated
other comprehensive income (loss) within stockholders' equity, rather than the
accounts giving rise to the imbalance. The Company's review of prior year
financial statements identified other errors in accounting which primarily
impacted net sales, cost of goods sold, goodwill, accumulated other
comprehensive income, additional paid-in capital and treasury stock, which are
also corrected in these restatements. The Company believes that its rapid growth
through acquisition, complex transactions and facility closures and
reorganizations during the periods in question, and their impacts on such issues
as staffing, training, oversight and systems, were factors that contributed to
the errors. The accompanying consolidated financial statements and notes thereto
set forth herein summarizes the nature of the adjustments recorded to correct
previously issued financial statements.
In addition, as a result of the impact of the restatement items on the pre-tax
income of the Company's U.S. business, the Company reassessed its need for a
valuation allowance and determined that a valuation allowance to reduce Terex's
U.S. deferred tax asset was required, as a result of a reassessment, to be
recorded at December 31, 2003 in the restated financial statements. The
valuation allowance was subsequently reversed in the quarter ended December 31,
2004, thereby increasing net income in that quarter. The reversal was based upon
improving operating results during 2004 and significant, profitable backlog
generated in early 2005. During the periods ended March 31, 2004 and June 30,
2004, the impact of this valuation allowance required a reversal of the tax
expense on the U.S. pre-tax income in the periods ended March 31, 2004 and June
30, 2004, requiring the Company to restate its financial statements for such
periods. Additionally, the Company adjusted its tax accounts for errors
identified for the periods ended June 30, 2004 and in all prior periods
presented in this Annual Report on Form 10-K.
For information concerning the background of these matters, the specific
adjustments made and management's discussion and analysis of results of
operations for periods giving effect to the restated results, see Item 6 -
"Selected Financial Data," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Item 8 - "Financial Statements
and Supplementary Data," Item 9A - "Controls and Procedures" and Note B -
"Restatement of Consolidated Financial Statements" in the Notes to Consolidated
Financial Statements. For additional information regarding the background of
these matters, see the Company's Current Reports on Form 8-K furnished to the
SEC from October 27, 2004 through the date of this Annual Report on Form 10-K
with respect to this matter.
All amounts referenced in this Annual Report on Form 10-K for prior periods and
prior period comparisons reflect the balances and amounts on a restated basis.
Terex has not amended its Annual Reports on Form 10-K for the year ended
December 31, 2003 or prior years or Quarterly Reports on Form 10-Q for the
periods affected by the restatement, except to reflect the adjustments from 2003
and 2004 and prior included in the Quarterly Reports on Form 10-Q for the
interim periods ended March 31, 2004 and June 30, 2004. The information that has
been previously filed or otherwise reported for the other periods prior to
January 1, 2004 is superseded by the information in (i) this Annual Report on
Form 10-K, (ii) the Quarterly Report on Form 10-Q for the period ended September
30, 2004 and (iii) the Quarterly Reports on Form 10-Q/A for the periods ended
March 31, 2004 and June 30, 2004, and the financial statements and related
financial information contained in such other reports should no longer be relied
upon.
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GENERAL
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
The Company was originally incorporated in Delaware in October 1986 as Terex
U.S.A., Inc. The Company operates in five business segments: (i) Terex
Construction, (ii) Terex Cranes, (iii) Terex Aerial Work Platforms, (iv) Terex
Materials Processing & Mining and (v) Terex Roadbuilding, Utility Products and
Other. The Company remains focused on its mission of delivering products that
are reliable and cost-effective and producing equipment that improves its
customers' return on invested capital. The Company's products are manufactured
at plants in the United States, Canada, Europe, Australia, Asia and South
America, and are sold primarily through a worldwide distribution network serving
the global construction, infrastructure and surface mining markets. The Company
is building a franchise under the Terex brand name. As part of that effort,
Terex is migrating the historic brand names for many of its products to the
Terex brand, including in some cases using the historic brand name in
conjunction with the Terex brand for a transitional period of time.
Historically, the Company has modeled its operational and strategic initiatives
around four key concepts designed to create a competitive advantage in the
markets in which the Company does business. These initiatives include: (i)
providing customers with products that increase their return on invested capital
through lower life cycle costs; (ii) implementing a variable cost structure;
(iii) reducing selling expense and eliminating non-value-added functions
throughout the organization; and (iv) increasing product and geographic
diversity through internal development and acquisitions.
In 2003, the Company announced an internal improvement process, known as the
"Terex Improvement Process" or "TIP," focusing on seven key areas that address
areas for improvement with all three of the Company's major constituents: its
customers, investors and employees. TIP was the core concentration for the
Company's internal improvement initiatives throughout 2004.
The Company has recently announced the next phase of its internal improvement
plan, the "Terex Business System" or "TBS." The Terex Business System is based
on lean principles and lean thinking as applied to every aspect of business. The
core applications of lean thinking involve the Company's promotion of a culture
of continuous improvement and the removal of waste (anything that does not add
value) at every organizational level of the Company. Additionally, the system
focuses on streamlining the Company's interface with its customers, and gaining
efficiencies with suppliers based on the Company's global purchasing power and
resources. The Company has established Terex learning centers with the purpose
of teaching these principles to key personnel throughout the Company. This is a
longer term project, but one that is intended to be the cornerstone of the
Company's activities for years to come. The metric which the Company is using to
measure the effectiveness of these initiatives is return on invested capital
("ROIC"), and Terex has established the goal of delivering an average of 20% or
greater returns on invested capital through an economic cycle. ROIC is defined
as operating profit excluding special items divided by the sum of average book
equity and average net debt.
For financial information about the Company's industry and geographic segments,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note U -- "Business Segment Information" in the Notes to the
Consolidated Financial Statements.
TEREX CONSTRUCTION
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, scrapers, hydraulic
excavators, large wheel loaders, loading machines and truck mounted articulated
hydraulic cranes); compact equipment (including loader backhoes, compaction
equipment, mini and midi excavators, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing systems, 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 Terex brand name and the following historic brand names,
including in some cases the use of the Terex name in conjunction with these
historic brand names: Amida, Atlas, Benford, Fermec, Finlay, Fuchs, Pegson,
Powerscreen, Schaeff and TerexLift.
Terex Construction has 15 significant manufacturing operations:
o Atlas Terex GmbH ("Atlas Terex"), located in Delmenhorst,
Ganderkasee and Vechta, Germany, at which excavators and truck
mounted articulated hydraulic cranes are manufactured;
o BL-Pegson Ltd., now known as Terex Pegson Limited ("B.L.
Pegson"), located in Coalville, England, which manufactures
crushers;
o Finlay Hydrascreens (Omagh) Limited ("Finlay"), located in
Omagh, Northern Ireland, at which crushers, washing systems,
screens and trommels are manufactured;
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o Fuchs-Bagger GmbH & Co. KG, now known as Fuchs-Bagger
Verwaltungs GmbH ("Fuchs"), located in Bad Schoenborn,
Germany, at which loading machines are manufactured;
o Powerscreen International Distribution Ltd. and Powerscreen
Limited ("Powerscreen"), located in Dungannon, Northern
Ireland, manufacture and sell washing systems, screens and
trommels;
o The Schaeff Group of Companies ("Schaeff"), located in
Langenburg, Gerabronn, Rothenburg, Crailsheim and Clausnitz,
Germany, at which small wheel loaders, mini excavators and
midi excavators are manufactured;
o Terex Compact Equipment, located in Coventry, England, at
which Benford Limited ("Benford") manufactures site dumpers,
compaction equipment and material handlers, and Fermec
Manufacturing Limited ("Fermec") manufactures loader backhoes;
o Terex Equipment Limited ("TEL"), located in Motherwell,
Scotland, which manufactures off-highway rigid haul trucks and
articulated haul trucks, having capacities ranging from 25 to
100 tons, and scrapers; and
o TerexLift S.r.l. ("TerexLift"), located near Perugia, Italy,
at which rough terrain telescopic material handlers (also
known as telehandlers) are manufactured.
TEREX CRANES
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 Terex brand
name and the following historic brand names, including in some cases the use of
the Terex name in conjunction with these historic brand names: American,
Bendini, Comedil, Demag, Franna, P&H, Peiner and PPM.
Terex Cranes has 11 significant manufacturing operations:
o The American Crane Corporation, now known as Terex Cranes
Wilmington, Inc. ("American Crane"), located in Wilmington,
North Carolina, at which lattice boom crawler cranes are
manufactured;
o Gru Comedil S.r.l. ("Comedil"), located in Fontanafredda and
Milan, Italy, at which tower cranes are manufactured;
o Terex Cranes France S.A.S. ("Terex Cranes France"), located in
Montceau-les-Mines, France, at which mobile telescopic cranes
and telescopic container stackers are manufactured;
o Terex Cranes - Waverly, located in Waverly, Iowa, at which
rough terrain hydraulic telescoping mobile cranes, truck
cranes and truck mounted cranes are manufactured;
o Terex-Demag GmbH & Co. KG ("Demag") located in Zweibrucken,
Wallerscheid and Bierbach, Germany, and Pecs, Hungary, at
which lattice boom crawler cranes and mobile telescopic cranes
are manufactured, and at which large tower cranes are
manufactured;
o Terex Italia S.r.l. ("Terex Italia"), located in Crespellano,
Italy, at which mobile telescopic cranes are manufactured; and
o Terex Lifting Australia Pty. Ltd. ("Terex Lifting Australia"),
located in Brisbane, Australia, at which lift and carry cranes
are manufactured.
TEREX AERIAL WORK PLATFORMS
The Terex Aerial Work Platforms segment was formed upon the completion of the
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, telehandlers, light construction
equipment and construction trailers. Products include material lifts, portable
aerial work platforms, trailer mounted booms, articulating booms, stick booms,
scissor lifts, telehandlers, light towers, concrete finishing equipment, power
buggies, generators, arrow boards, construction trailers, related components and
replacement parts, and other products. These products are used primarily by
customers in the construction and building maintenance industries to build
and/or maintain large physical assets and structures. Terex Aerial Work
Platforms products are currently marketed principally under the Terex and Genie
brand names and the following historic brand names, including in some cases the
use of the Terex name in conjunction with these historic brand names: Amida,
Bartell, Benford, Load King and Morrison.
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Terex Aerial Work Platforms has six significant manufacturing operations:
o Genie, located in Redmond and Moses Lake, Washington, at which
aerial work platform and telehandler equipment are
manufactured;
o Load King, located in Elk Point, South Dakota, at which
construction trailers are manufactured;
o Terex Handlers, located in Baraga, Michigan, at which rough
terrain telescopic boom material handlers (also known as
telehandlers) are manufactured; and
o Terex Light Construction, which includes Amida Industries,
Inc. ("Amida"), located in Rock Hill, South Carolina, and
Terex Bartell, Ltd. ("Bartell"), located in Brampton, Ontario,
Canada, manufactures and sells portable floodlighting systems,
concrete finishing equipment, power buggies, generators and
traffic control products.
TEREX MATERIALS PROCESSING & MINING
The Terex Materials Processing & Mining segment designs, manufactures and
markets fixed installation crushing and screening equipment (including crushers,
impactors, screens and feeders), hydraulic mining excavators, high capacity
surface mining trucks, drilling equipment, related components and replacement
parts, and other products. These products are used primarily by construction,
mining, quarrying and government customers in construction and commodity mining.
Currently, Terex Materials Processing & Mining products are marketed principally
under the Terex brand name and the following historic brand names, including in
some cases the use of the Terex name in conjunction with these historic brand
names: Canica, Cedarapids, ELJay, Jaques, O&K, Reedrill, Simplicity and Unit
Rig.
Terex Materials Processing & Mining has eight significant manufacturing
operations:
o Cedarapids, Inc. ("Cedarapids") located in Cedar Rapids, Iowa,
which manufactures crushing and screening equipment and high
capacity surface mining trucks, along with asphalt pavers for
the Terex Roadbuilding, Utility Products and Other segment;
o Jaques International ("Jaques"), located in Melbourne,
Australia, which assembles, sells and services crushing and
screening equipment;
o Jaques International Sdn Bhd ("Jaques Malaysia"), located in
Subang Jaya, Malaysia, which manufactures crushing and
screening equipment;
o Jaques (Thailand) Limited ("Jaques Thailand"), located in
Chomburi, Thailand, which manufactures crushing and screening
equipment;
o Simplicity Engineering ("Simplicity"), located in Durand,
Michigan, at which crushing and screening equipment is
manufactured;
o Terex Germany GmbH & Co. KG, now known as Terex|O&K GmbH
("Terex Germany"), located in Dortmund, Germany, which
manufactures hydraulic mining excavators;
o Terex Mexico, LLC ("Terex Mexico"), located in Acuna, Mexico,
which fabricates components for high capacity surface mining
trucks, along with fabricating components for other Terex
businesses; and
o Terex Reedrill, located in Sherman, Texas, which manufactures
drilling equipment.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets asphalt and concrete equipment (including pavers, plants, mixers,
reclaimers, stabilizers and profilers), utility equipment (including digger
derricks, aerial devices and cable placers) 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,
construct and maintain utility lines, trim trees, and for commercial and
military applications. Terex Roadbuilding, Utility Products and Other products
are currently marketed principally under the Terex brand name and the following
historic brand names, including in some cases the use of the Terex name in
conjunction with these historic brand names: Advance, American Truck Company,
ATC, Bid-Well, Cedarapids, Cedarapids/Standard Havens, CMI Johnson-Ross, CMI
Terex, CMI-Cifali, Hi-Ranger, Tatra and Telelect.
Terex also owns much of the North American distribution channel for the utility
products group through its Terex Utilities distribution network, located
primarily in the Southern and Western United States. Terex also owns 40% of
Intercontinental Equipment Company ("INECO"), another distributor of utility
products. These operations distribute and install the Company's utility aerial
devices and digger derricks 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.
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Terex is a majority shareholder of Tatra a.s. ("Tatra"), a company incorporated
under the laws of the Czech Republic. Tatra, which is located in Koprivnice,
Czech Republic, manufactures a range of 4x4 to 12x12 heavy-duty on and off-road
vehicles for military and commercial applications under the Tatra brand name.
Tatra, through its subsidiaries, also manufactures castings, forgings, stampings
and welded parts. The Company also owns a majority interest in the American
Truck Company LLC ("ATC"), which assembles vehicles based on the Tatra design
and technology incorporating U.S. components under the following brand names:
Terex, American Truck and ATC. ATC manufactures its products at the Company's
Terex Advance Mixer facility in Fort Wayne, Indiana.
The Company, through Terex Financial Services, Inc. ("TFS"), offers its
customers a variety of financial products to enable them to acquire products
manufactured by the Company and its subsidiaries. TFS operates primarily in
Europe and North America. In North America, TFS, the Company and the Company's
other domestic subsidiaries have entered into an arrangement with General
Electric Capital Corporation Vendor Financial Services ("GE Capital"), whereby
GE Capital acts as the preferred provider of all such loans and leases and
provides a dedicated team to work with TFS and the Company's customers. All such
loans and leases are originated by GE Capital on a non-recourse private label
basis under the licensed trade name "TFS Capital Funding" and GE Capital bears
all credit risk in connection with such loans and leases. Terex receives fee and
expense reimbursements from GE Capital, and TFS shares in the profitability of
the loan and lease portfolio originated by GE Capital to purchasers of Terex
products. As a result, TFS participates in the benefits associated with the
financing of the Company's products with marginal expense and without adding any
additional debt or credit risk to Terex. In Europe, TFS operates through a joint
venture, of which the Company is a 40% owner, with a leading financial
institution. See "Other Businesses" for more information regarding the TFS joint
venture in Europe.
The Company also leases and rents a variety of heavy equipment to third parties
under the Terex Re-Rentals, now known as Terex Asset Services, name.
Terex Roadbuilding, Utility Products and Other has seven significant
manufacturing operations:
o Bid-Well, located in Canton, South Dakota, at which concrete
pavers are manufactured;
o CMI-Cifali Equipamentos, Ltda., now known as Terex Cifali
Equipamentos, Ltda. ("CMI-Cifali"), located in Cachoeirinha,
Brazil, which manufactures asphalt pavers and asphalt plants;
o CMI Terex Corporation ("CMI"), located in Oklahoma City,
Oklahoma, at which pavement profilers, reclaimers/trimmers,
asphalt plants, concrete plants and concrete pavers are
manufactured;
o Tatra, located in Koprivnice, Czech Republic, at which a range
of 4x4 to 12x12 heavy duty on and off-road vehicles for
military and commercial applications are manufactured;
o Terex Advance Mixer, Inc. ("Terex Advance Mixer"), located in
Fort Wayne, Indiana, which manufactures and sells front and
rear discharge concrete mixer trucks and at which ATC
manufactures heavy-duty on and off-road vehicles for military
and commercial applications; and
o Terex-Telelect, Inc. ("Telelect"), located in Watertown and
Huron, South Dakota, at which utility aerial devices and
digger derricks are manufactured.
OTHER BUSINESSES
As discussed in Note K - "Investment in Joint Venture" in the Notes to the
Consolidated Financial Statements, the Company has a 40% ownership interest in a
joint venture, Terex Financial Services Holding B.V. ("TFSH B.V."). The other
60% of TFSH B.V. is owned by De Lage Landen International B.V. ("DLL"), a
wholly-owned subsidiary of Rabobank. TFSH B.V. was originally established to
facilitate the financing of Genie's products sold in Europe by offering loans
and leases to purchasers of Genie products and on January 1, 2004, as part of
the joint venture's reorganization, the scope of TFSH B.V.'s operations was
broadened, as it was granted the right to facilitate the financing of all of the
Company's products sold in Europe. TFSH B.V. is a direct lender and makes its
loans with funds obtained from equity contributions made by DLL and the Company
and a debt facility made available to TFSH B.V. by DLL and Rabobank.
The Company has an interest in a joint venture in India under the name Terex
Vectra Equipment Pvt. Ltd., which manufactures and markets compact construction
equipment.
Terex has a minority interest in Inner Mongolia North Hauler Joint Stock Company
Limited ("North Hauler"), a company incorporated under the laws of China, which
manufactures rigid and articulated haulers in China. Trucks manufactured by
North Hauler, which is located in Baotou, Inner Mongolia, are principally used
in the People's Republic of China under the Terex brand name. Terex also has a
minority interest in Atlas Construction Machinery Company Ltd., a company
incorporated under the laws of China, which manufactures excavators in China.
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Terex also participates in joint ventures in China under the names Wieland
International Trading (Shanghai) Co. Ltd. and Shanghai Wieland Engineering Co.
Ltd., which manufacture replacement and wear parts for crushing equipment.
The Company owns an interest in Duvalpilot Equipment Outfitters, LLC, a
distributor of the Company's products and other light construction equipment
located in Florida.
Subsequent Events
Effective January 1, 2006, Terex realigned certain operations in an effort to
strengthen its ability to service customers and to recognize certain
organizational efficiencies. The Mobile Crushing and Screening Group, consisting
of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the
Terex Construction Segment, now will be consolidated within the Terex Materials
Processing & Mining Segment. The European telehandlers business of TerexLift,
formerly part of the Terex Construction Segment, now will be part of the Terex
Aerial Work Platforms Segment. The segment discussions included herein do not
reflect this realignment. Terex will be presenting segment reporting effective
January 1, 2006 giving effect to this reorganization.
The Company acquired Halco Holdings Limited and its affiliates ("Halco") on
January 24, 2006, for approximately 8.4 million British Pounds in cash, plus
assumption of certain capitalized leases and pension liabilities. Halco is
headquartered in Halifax, United Kingdom, with operations also in the United
States, Ireland and Australia. Halco designs, manufactures and distributes
down-the-hole drill bits and hammers for drills. The results of Halco will be
included in the Terex Materials Processing & Mining Segment from its date of
acquisition.
BUSINESS STRATEGY
Historically, the Company has modeled its operational and strategic initiatives
around four key concepts designed to create a competitive advantage in the
markets in which the Company does business. These initiatives include: (i)
providing customers with products that increase their return on invested capital
through lower life cycle costs; (ii) implementing a variable cost structure;
(iii) reducing selling expense and eliminating non-value-added functions
throughout the organization; and (iv) increasing product and geographic
diversity through internal development and acquisitions.
Increase Sales and Market Share Through Best Value Strategy
Terex has increased its sales and gained market share by pursuing its best value
strategy of providing comparable or superior products at a lower total cost of
ownership and with higher returns on invested capital as compared to its
competitors. Terex typically prices its products aggressively relative to its
competition while providing the same level of functionality.
Reduce Costs and Improve Manufacturing Efficiency
The Company's best value strategy is supported by ongoing efforts to reduce
costs and improve manufacturing efficiency. Historically, it has initiated
several programs to consolidate manufacturing operations, minimize selling
costs, outsource non-critical manufacturing processes and rationalize product
lines in order to increase profitability and reduce fixed costs. The internal
improvement initiatives that are at the core of the Terex Business System will
continue this focus on reducing costs and improving manufacturing efficiency,
with the goal being for the Company to have significantly more efficient and
flexible operations than its competitors, as measured by the Company's ROIC,
comparatively low selling, general and administrative expense-to-sales ratio,
significantly higher sales per employee, and greater capital efficiency (based
on the ratio of capital expenditures to sales).
Focus on Geographic, Product and End-Market Diversification
Over the past several years, the Company has focused on growing and improving
the operations of its core business segments. The Company also has expanded the
size and scope of its core businesses both through acquisitions and through
development of new products in order to increase its market share. Management
believes that these initiatives have helped to reduce the effect of potential
cyclical changes in any one product category or geographic market. These
initiatives have also expanded the Company's product lines within its core
businesses, added new technology and improved its distribution network. As a
result, the Company has developed a geographically diverse revenue base with
approximately 60% of its revenues derived outside the United States and Canada,
and has built a diverse product portfolio addressing a range of end-markets. The
following table lists the Company's main product categories, their percentage of
the Company's total sales and the footnotes state which segments are principally
responsible for each product category.
-8-
PERCENTAGE OF SALES
--------------------------
2003 2002
PRODUCT CATEGORY 2004 RESTATED RESTATED
---------------------------------------------- ---- -------- --------
Compact Construction Equipment (1) (3) 17 17 17
Hydraulic Mobile Cranes (2) (5) 16 18 16
Aerial Work Platforms (3) 15 14 5
Crushing, Screening & Paving Equipment (1) (4) 14 15 21
Surface Mining Equipment (1) (4) 10 8 9
Off-Highway Construction Trucks (1) (4) 7 6 9
Utility Equipment (1) (5) 5 6 7
On/Off Road Heavy Duty Vehicles (1) (5) 5 2 --
Lattice Boom & Tower Cranes (2) (5) 4 7 6
Material Handlers & Container Stackers (2) (3) 3 3 5
Boom Trucks (1) (2) 2 3 2
Other (3) (5) 2 1 3
---- -------- --------
TOTAL 100% 100% 100%
==== ======== ========
(1) Terex Construction.
(2) Terex Cranes.
(3) Terex Aerial Work Platforms.
(4) Terex Materials Processing & Mining.
(5) Terex Roadbuilding, Utility Products and Other.
Internal Improvement Process
In 2003, Terex launched a series of initiatives intended to transform the
Company over the next several years. The Terex Improvement Process focused on
improving the Company's internal processes and helping the Company become more
customer-centric. The Company created several TIP teams of cross-functional and
operational managers to address leadership and talent development, the customer
experience, the Company's product value proposition and returns delivered to the
Company's investors. Some areas of concentration included improving the
workplace, better management of the Company's assets, improving operating
margins, making Terex an easier partner to do business with, and new branding
and marketing strategies, all with the goal of making Terex the most customer
responsive company in its industry and a preferred place to work.
In 2005, the Company announced the next phase of its internal improvement plan,
the Terex Business System. The Terex Business System is based on lean principles
and lean thinking as applied to every aspect of business. Additionally, the
system focuses on streamlining the Company's interface with its customers, and
gaining efficiencies with suppliers based on the Company's global purchasing
power and resources. The Company has established Terex learning centers with the
purpose of teaching these principles to key personnel throughout the Company.
This is a longer term project, but one that will be the cornerstone of the
Company's activities for years to come. The metric which the Company is using to
measure the effectiveness of these initiatives is ROIC, and Terex has
established the goal of delivering an average of 20% or greater returns on
invested capital through an economic cycle.
PRODUCTS
TEREX CONSTRUCTION
HEAVY CONSTRUCTION EQUIPMENT. Terex Construction manufactures and/or markets
off-highway trucks, scrapers, excavators and wheel loaders used in earthmoving
applications, loading machines and truck mounted articulated hydraulic cranes.
Articulated off-highway trucks are three-axle, six-wheel drive machines with a
capacity range of 25 to 40 tons. An oscillating connection between the cab and
body allows the cab and body to move independently, enabling all six tires to
maintain ground contact for traction on rough terrain. This allows the truck to
move effectively through extremely rough or muddy off-road conditions.
Articulated off-highway trucks are typically used together with an excavator or
wheel loader to move dirt in connection with road, tunnel or other
infrastructure construction and commercial, industrial or major residential
construction projects. Terex articulated off-highway trucks are manufactured in
Motherwell, Scotland, under the brand name TEREX.
Rigid off-highway trucks are two-axle machines which generally have larger
capacities than articulated off-highway trucks, but can operate only on improved
or graded surfaces. The capacities of rigid off-highway trucks range from 35 to
100 tons, and are used in large construction or infrastructure projects,
aggregates and smaller surface mines. Terex's rigid trucks are manufactured in
Motherwell, Scotland, under the TEREX brand name.
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Scrapers move dirt by elevating it from the ground to a bowl located between the
two axles of the machine. Scrapers are used most often in relatively dry, flat
terrains. Terex scrapers are manufactured in Motherwell, Scotland, under the
TEREX brand name.
Excavators are used for a wide variety of construction applications, including
non-residential construction (such as commercial sites and road construction)
and residential construction. These machines are crawler type excavators ranging
in size from 13 to 47 tons and wheeled type excavators ranging in size from 13.4
to 22.5 tons. Terex excavators are manufactured in Ganderkasee, Germany and sold
under the TEREX and ATLAS brand names in Europe and are also manufactured in
China and sold under the TEREX and ATLAS brand names in Asia. Terex also markets
excavators manufactured for Terex in South Korea that are sold under the TEREX
brand name in North America.
Wheel Loaders are used for loading and unloading materials. Applications include
mining and quarrying, non-residential construction, airport and industrial snow
removal, waste management and general construction. These machines range in size
from three to five cubic yards capacity, and are manufactured in Vechta, Germany
and are sold under the TEREX brand name in Europe. Terex also markets wheel
loaders manufactured for Terex in South Korea that are sold under the TEREX
brand name in North America.
Loading machines are designed for handling logs, scrap and other bulky materials
with clamshell, magnet or grapple attachments. There are stationary and mobile
models for loading barges and various operations in scrap, manufacturing and
materials handling. Terex produces loading machines ranging from 11 tons to 66
tons at its facilities in Bad Schoenborn and Ganderkasee, Germany, under the
TEREX, FUCHS and ATLAS brand names.
Truck mounted articulated hydraulic cranes are available in two product
categories, each with a maximum reach of approximately 100 feet. The "knuckle
boom" crane can be mounted either on the front or the rear of commercial trucks
which are folded within the width of the truck while in transport. The "V-boom"
crane is also mounted on the front or the rear of the truck and spans the length
of the truck while folded. These machines are manufactured in Delmenhorst,
Germany under the ATLAS and TEREX brand names.
COMPACT EQUIPMENT. Terex Construction manufactures a wide variety of compact
equipment used primarily in the construction and rental industries. Products
include loader backhoes, compaction equipment, excavators, loading machines,
site dumpers, European telehandlers and wheel loaders.
Loader backhoes incorporate a front-end loader and rear excavator arm. They are
used for loading, excavating and lifting in many construction and agricultural
related applications. Terex offers four models of loader backhoes, ranging from
69 to 90 horsepower. Terex loader backhoes are currently manufactured under the
TEREX and FERMEC brand names in Coventry, England.
Compaction equipment manufactured by Terex ranges from small portable plates to
heavy duty ride-on rollers. Single and reversible direction plates are used in
the compaction of trench backfill material, paths and driveways. A range of
tandem rollers from 1.5 to 10 tons covers larger applications, including road
formation, construction and asphalt surfacing. Self-propelled rollers from six
to 12 tons are used in landfill site construction and on soil and sub-base
materials. Included in the range are sophisticated infrared trench compactors
that enable the operator to use the machine at a distance. Terex compaction
equipment is currently manufactured in Coventry, England, under the TEREX and
BENFORD brand names.
Excavators in the compact equipment category include mini and midi excavators
used in the general construction, landscaping and rental businesses. Mini
excavators are crawler type excavators ranging in size from 1.6 tons to 5.5
tons. These machines are equipped with either rubber or steel tracks. Midi
excavators are manufactured in a mobile (wheeled) version in the six to 11 ton
sizes for the European market. These excavators are commonly used for excavation
and lifting in confined areas in communities and in rental businesses. Midi
excavators are also manufactured as crawler excavators in sizes between 5.5 tons
and 12.5 tons. In the six to eight ton sizes Terex offers standard steel tracks
and optional rubber tracks. These excavators are manufactured in Germany under
the TEREX, ATLAS and SCHAEFF brand names.
Site dumpers are used to move smaller quantities of materials from one location
to another, and are primarily used for landscaping and concrete applications.
Terex offers a variety of two-wheel and four-wheel drive models. Site dumpers
are manufactured in Coventry, England, under the BENFORD, AMIDA and TEREX brand
names.
Telehandlers are used to move and place materials on new residential and
commercial job sites. Terex Construction manufactures telehandlers with load
capacities of up to 11,000 pounds and with a maximum extended reach of up to 62
feet and lift capabilities of up to 72 feet. The Terex Construction segment
manufactures and markets rough terrain telescopic boom material handlers (also
known as telehandlers) and 360-degree boom rotating telehandlers under the TEREX
and GENIE brand names at its facility in Perugia, Italy.
Wheel Loaders are used for loading and unloading materials. Due to the large
variety of attachments, these machines are also multi-equipment carriers used
not only in the field of construction but also in industrial, rental and
landscaping business. Terex wheel loaders are manufactured under the brand names
of SCHAEFF and TEREX at its facility in Crailsheim, Germany.
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CRUSHING AND SCREENING EQUIPMENT. Crushing and screening equipment offered by
Terex Construction is used in the quarry, demolition and recycling industries.
Crushing and screening plants can be either stationary or portable. Portable
crushing and screening plants are configured with a variety of components to
provide easy site-to-site mobility, application versatility, flexible on-demand
finished product and reduced set-up time.
Terex Construction manufactures crushing equipment under the PEGSON brand name
in Coalville, England.
Jaw crushers are primary crushers with reduction ratios of 6:1 for crushing
larger rock. Applications include hard rock, sand and gravel and recycled
materials. Models offered yield a range of production capacities: up to 265 tons
per hour for the smallest unit, and up to 1,700 tons per hour for the largest.
Cone crushers are used in secondary and tertiary applications to reduce a number
of materials, including quarry rock and riverbed gravel. High production, low
maintenance and enhanced final material cubicle shape are the principal features
of these compression-type roller bearing crushers.
Terex Construction manufactures screening equipment in Dungannon, Northern
Ireland and Omagh, Northern Ireland under the brand names POWERSCREEN and
FINLAY.
Dry screening is used to process materials such as sand, gravel, quarry rock,
coal, construction and demolition waste, soil, compost and wood chips.
Washing screens are used to separate, wash, scrub, dewater and stockpile sand
and gravel. Products manufactured by Terex Construction include a completely
mobile single chassis washing plant incorporating separation, washing,
dewatering and stockpiling, mobile and stationary screening rinsers,
bucket-wheel dewaterers, scrubbing devices for aggregate, a mobile cyclone for
maximum retention of sand particles, silt extraction systems, stockpiling
conveyors and a sand screw system as an alternative option to the bucket-wheel
dewaterers.
Trommels are used in the recycling of construction and demolition waste
materials, as well as soil, compost and wood chips. Trommels incorporate
conveyors and variable speed fingertip control of the belts and rotating drum to
separate the various materials. Terex Construction manufactures a range of
trommel and soil shredding equipment. Trommels are also used to process
construction and demolition waste, as well as decasing, segmenting and
processing empty bottles. The soil shredding units are mainly used by landscape
contractors and provide a high specification end product.
TEREX CRANES
Terex Cranes offers a wide variety of cranes, including mobile telescopic
cranes, tower cranes, lattice boom crawler cranes, boom trucks and telescopic
container stackers.
MOBILE TELESCOPIC CRANES. Mobile telescopic cranes are used primarily for
industrial applications, in commercial and public works construction and in
maintenance applications, to lift equipment or material to heights in excess of
490 feet. Terex Cranes offers a complete line of mobile telescopic cranes,
including rough terrain cranes, truck cranes, all terrain cranes, and lift and
carry cranes.
Rough terrain cranes move materials and equipment on rough or uneven terrain,
and are often located on a single construction or work site such as a building
site, a highway or a utility project for long periods of time. Rough terrain
cranes cannot be driven on highways and accordingly must be transported by truck
to the work site. Terex offers rough terrain cranes with lifting capacities
ranging from 20 to 100 tons and maximum tip heights of up to 195 feet. Terex
manufactures its rough terrain cranes at its facilities located in Waverly,
Iowa, and Crespellano, Italy, under the brand names TEREX and BENDINI.
Truck cranes have two cabs and can travel rapidly from job site to job site at
highway speeds. Truck cranes are often used for multiple local jobs, primarily
in urban or suburban areas. Truck cranes manufactured by Terex have maximum
lifting capacities of up to 90 tons and maximum tip heights of up to 202 feet.
Terex manufactures truck cranes at its Waverly, Iowa, facility under the brand
name TEREX.
All terrain cranes were developed in Europe as a cross between rough terrain and
truck cranes, and are designed to travel across both rough terrain and highways.
All terrain cranes manufactured by Terex have lifting capacities of up to 800
tons and maximum tip heights of up to 490 feet. Terex manufactures all terrain
cranes at its Montceau-les-Mines, France, and Zweibrucken and Wallerscheid,
Germany, facilities under the brand names TEREX, PPM and DEMAG.
Lift and carry cranes are designed primarily for site work, such as at mine
sites, big fabrication yards and building and construction sites. Terex offers
five models of lift and carry cranes with lifting capacities ranging from 11 to
22 tons. Lift and carry cranes are manufactured in Terex's Brisbane, Australia,
facility under the brand name FRANNA.
-11-
TOWER CRANES. Tower cranes are often used in urban areas where space is
constrained and in long-term or very high building sites. Tower cranes lift
construction material and place the material at the point where it is being
used. They include a vertical tower with a horizontal jib with a counterweight
at the top (except for self-erecting tower cranes where the counter weight is at
the bottom and the entire tower rotates). On the jib is a trolley through which
runs a load carrying cable and which moves the load along the jib length. On
larger cranes, the operator is located above the work site where the tower and
jib meet, providing superior visibility. The jib also rotates 360 degrees,
creating a large working area equal to twice the jib length. Tower cranes are
currently produced by Terex in Fontanafredda and Milan, Italy, under the COMEDIL
and TEREX brand names, and in Zweibrucken, Germany, under the PEINER and TEREX
brand names. Terex produces the following types of tower cranes:
Self-erecting tower cranes are trailer-mounted and unfold from four sections
(two for the tower and two for the jib); certain larger models have a telescopic
tower and folding jib. These cranes can be assembled on site in a few hours.
Applications include residential and small commercial construction. Crane
heights range from 58 feet to 106 feet and jib lengths from 52 feet to 131 feet.
Hammerhead tower cranes have a tower and a horizontal jib assembled from
sections. The tower extends above the jib to which suspension cables supporting
the jib are attached. These cranes are assembled on-site in one to three days
depending on height, and can increase in height with the project; they have a
maximum free-standing height of 250 feet to 300 feet and a maximum jib length of
240 feet.
Flat top tower cranes have a tower and a horizontal jib assembled from sections.
There is no A-frame above the jib, which reduces cost and facilities assembly;
the jib is self-supporting and consists of reinforced jib sections. These cranes
are assembled on site in one to two days, and can increase in height with the
project; they have a maximum freestanding height of 346 feet and a maximum jib
length of 279 feet.
Luffing jib tower cranes have a tower and an angled jib assembled from sections.
There is one A-frame above the jib to which suspension cables supporting the jib
are attached. Unlike other tower cranes, there is no trolley to control lateral
movement of the load, which is accomplished by changing the jib angle. These
cranes are assembled on site in two to three days, and can increase in height
with the project; they have a maximum freestanding height of 185 feet and a
maximum jib length of 200 feet. Luffing jib tower cranes operate like a
traditional lattice boom crane mounted on a tower.
LATTICE BOOM CRAWLER CRANES. Lattice boom crawler cranes are designed to lift
material on rough terrain and can maneuver while bearing a load. The boom is
made of tubular steel sections, which are transported to and erected, together
with the base unit, at a construction site.
Hydraulic lattice boom crawler cranes manufactured in Wilmington, North
Carolina, under the TEREX and AMERICAN brand names have lifting capacities from
50 to 275 tons. Larger crawler cranes manufactured in Zweibrucken, Germany,
under the DEMAG and TEREX brand names have lifting capacities ranging from 300
to 1750 tons.
TRUCK MOUNTED CRANES (BOOM TRUCKS). Terex Cranes manufactures telescopic boom
cranes for mounting on commercial truck chassis. Truck mounted cranes are used
primarily in the construction industry to lift equipment or materials to various
heights. Boom trucks are generally lighter and have less lifting capacity than
truck cranes, and are used for many of the same applications when lower lifting
capabilities are required. An advantage of a boom truck is that the equipment or
material to be lifted by the crane can be transported by the truck, which can
travel at highway speeds. Applications include the installation of air
conditioners and other roof equipment. Terex Cranes manufactures both telescopic
and articulated boom truck mounted cranes.
Telescopic boom truck mounted cranes enable an operator to reach heights of up
to 163 feet and have a maximum lifting capacity of up to 35 tons. Terex
manufactures its telescopic boom truck mounted cranes at its Waverly, Iowa
facility under the brand name TEREX.
TELESCOPIC CONTAINER STACKERS. Telescopic container stackers are used to pick up
and stack containers at dock and terminal facilities. At the end of a telescopic
container stacker's boom is a spreader which enables it to attach to containers
of varying lengths and weights and to rotate the container up to 280 (+95/-185)
degrees.
Telescopic container stackers manufactured by Terex have lifting capacities up
to 49.5 tons, can stack up to five full containers and are able to maneuver
through very narrow areas. Terex manufactures its telescopic container stackers
under the brand names PPM and TEREX at its Montceau-les-Mines, France, facility.
TEREX AERIAL WORK PLATFORMS
AERIAL WORK PLATFORMS. Aerial work platforms are pieces of equipment that
position workers and materials easily and quickly to elevated work areas. These
products have developed over the past twenty years as alternatives to
scaffolding and ladders.
-12-
Terex offers a variety of aerial lifts that are categorized into six product
families: material lifts; portable aerial work platforms; trailer mounted booms;
articulating booms; stick booms; and scissor lifts. All of these aerial lifts
are manufactured under the brand name GENIE in Redmond and Moses Lake,
Washington.
Material lifts are used primarily indoors in the construction, industrial and
home owner markets. They safely and easily lift up to 1,000 pounds from ground
level to heights of up to 26 feet.
Portable aerial work platforms are used primarily indoors in a variety of
markets to perform overhead maintenance. These aerial work platforms lift one or
two people to working heights of up to 46 feet. Most models will roll through a
standard doorway and can be transported in the back of a pick-up truck. Some
models are drivable when fully elevated.
Trailer mounted booms are used outdoors and provide the same versatile reach of
an articulating boom, plus the ability to be towed. Terex trailer mounted booms
have rated capacities of 500 pounds and a working height of up to 56 feet.
Articulating booms are primarily used in construction and industrial
applications, both indoors and out. They feature lifting versatility with up,
out and over position capabilities to access difficult to reach overhead areas
that typically cannot be reached with a scissor lift or straight boom. Many
options are available, including: two- and four-wheel drive; rough terrain
models; narrow access models that roll through standard double doorways;
gas/LPG, diesel, electric, and hybrid capabilities. Models have working heights
from 36 feet to 141 feet and horizontal reach up to 70 feet.
Stick booms are used outdoors in commercial and industrial new construction and
highway and bridge maintenance projects. Terex stick booms offer working heights
from 46 feet to 131 feet, articulated jibs on some models, and options including
two- and four-wheel drive, rough terrain packages and multi-power capabilities.
Scissor lifts are used in outdoor and indoor applications in a variety of
construction, industrial and commercial settings. Terex scissor lifts are
offered in slab or rough terrain models. Some of their features are narrow
access capability, slide-out platform extension, quiet electric drives, rough
terrain models, and working heights from 21 feet to 59 feet.
TELEHANDLERS. The Terex Aerial Work Platforms segment also markets rough terrain
telescopic boom material handlers (also known as telehandlers) under the TEREX
brand name manufactured at its facilities in Baraga, Michigan and Redmond,
Washington. The Terex Aerial Work Platforms segment also markets telehandlers
manufactured by TerexLift in Italy.
Telehandlers are used to move and place materials on new residential and
commercial job sites. Terex Aerial Work Platforms manufactures telehandlers with
load capacities of up to 10,000 pounds and lift capabilities of up to 56 feet.
LIGHT CONSTRUCTION EQUIPMENT. Light construction equipment produced by Terex
includes mobile and portable light towers, concrete finishing equipment, power
buggies, generators and traffic control products.
Light towers are used primarily to light work areas for night construction
activity. They are towed to the work-site where the telescopic tower is extended
and outriggers are deployed for stability. They are diesel powered and provide
adequate light for construction activity for a radius of approximately 300 feet
from the tower. Light towers are manufactured under the AMIDA, TEREX and GENIE
brand names in Rock Hill, South Carolina and Redmond, Washington.
Concrete finishing equipment, which includes power trowels, screeds and surface
grinders, are primarily used to provide a smooth finish on concrete surfaces.
Power trowels are used on soft cement as the concrete hardens and are
manufactured as walk-behind and ride-on models. Power trowels are typically used
in conjunction with other products manufactured by Terex, including light
towers, power buggies, screeds, and material spreaders. Concrete finishing
equipment is manufactured under the BARTELL and TEREX brand names in Brampton,
Ontario, Canada.
Power buggies are used primarily to transport concrete from the mixer to the
pouring site. Terex power buggies have dump capacities from 16 to 21 cubic feet.
Terex manufactures power buggies under the AMIDA, MORRISON and TEREX brand names
in Rock Hill, South Carolina.
Generators are used to provide electric power on construction sites and other
remote locations. Generators up to 225 kilowatt are manufactured under the TEREX
brand name in Rock Hill, South Carolina.
Arrow boards (or detour lights) are used to direct traffic around road
construction sites. They are primarily solar powered, with solar panels
continuously recharging batteries which provide power during night hours. Terex
arrow boards include 15 and 25 light configurations, and are manufactured under
the TEREX and AMIDA brand names in Rock Hill, South Carolina.
CONSTRUCTION TRAILERS. Terex produces construction trailers at its facility in
Elk Point, South Dakota under the LOAD KING brand name.
-13-
Construction trailers manufactured by Terex are used in the construction
industry to haul materials and equipment. Bottom dump material trailers are used
to transport raw aggregates, crushed aggregates and finished hot mix asphalt
paving material. Lowbed trailers have capacities from 25 tons to 100 tons and
are designed with several gooseneck systems and are used primarily to transport
construction equipment.
TEREX MATERIALS PROCESSING & MINING
MINING EQUIPMENT. Terex Materials Processing & Mining offers high capacity
surface mining trucks and hydraulic mining excavators used in the surface mining
industry.
Hydraulic mining excavators in shovel or backhoe versions are primarily used to
dig overburden and minerals and load them into trucks. These excavators are
utilized in surface mines, quarries and large construction sites around the
world. Terex excavators have operating weights ranging from 90 to 1100 tons and
bucket sizes ranging from eight to 60 cubic yards. They are manufactured under
the O&K and TEREX brand names in Dortmund, Germany.
High capacity surface mining trucks are off-road dump trucks with capacities in
excess of 120 tons. They are powered by a diesel engine driving an electric
alternator that provides power to individual electric motors in each of the rear
wheels. Terex's product line consists of a series of rear dump trucks with
payload capabilities ranging from 120 to 360 tons, and bottom dump trucks with
payload capacities ranging from 180 to 300 tons. Terex's high capacity surface
mining trucks are manufactured under the UNIT RIG and TEREX brand names in Cedar
Rapids, Iowa and Acuna, Mexico.
DRILLING EQUIPMENT. Terex Materials Processing & Mining offers a wide selection
of drilling equipment and tools for surface and underground mining, quarrying,
construction, and utility applications. Terex Materials Processing & Mining
manufactures drilling equipment under the REEDRILL brand name in Sherman, Texas.
Drilling equipment is used for underground hard rock mining, tunneling and
limestone quarrying, as well as, dirt, soft rock, medium hard rock and hard rock
surface applications in mining, construction and utilities. Drilling equipment
available from Terex includes jumbo drills, hydraulic track drills, rotary
drills and auger drills.
CRUSHING AND SCREENING EQUIPMENT. Crushing and screening equipment is used in
processing aggregate materials for roadbuilding materials. Typical crushing and
screening operations utilize a combination of components in reducing virgin
aggregate materials to required product sizes for final usage in road building
and related applications. Terex Materials Processing & Mining manufactures
crushing equipment under the CEDARAPIDS, ELJAY, CANICA and JAQUES brand names in
Cedar Rapids, Iowa; Durand, Michigan; Melbourne, Australia; and Subang Jaya,
Malaysia. Crushing equipment manufactured by Terex Materials Processing & Mining
includes jaw crushers, horizontal shaft impactors, vertical shaft impactors and
cone crushers.
Jaw crushers are primary crushers with reduction ratios of 6:1 for crushing
larger rock. Applications include hard rock, sand and gravel and recycled
materials. Models offered yield a range of production capacities: up to 265 tons
per hour for the smallest unit, and up to 1,700 tons per hour for the largest.
Horizontal shaft impactors are primary and secondary crushers which utilize
rotor impact bars and breaker plates to achieve high production tonnages and
improved aggregate particle shape. They are typically applied to reduce soft to
medium hard materials, as well as recycled materials.
Vertical shaft impactors are secondary and tertiary crushers which reduce
material utilizing various rotor configurations and are highly adaptable to any
application. Vertical shaft impactors can be customized to material conditions
and desired product size/shape. A full range of models provides customers with
increased tonnages, better circuit balance and screen efficiency.
Cone crushers are used in secondary and tertiary applications to reduce a number
of materials, including quarry rock and riverbed gravel. High production, low
maintenance and enhanced final material cubicle shape are the principal features
of these compression-type roller bearing crushers.
Terex Materials Processing & Mining manufactures screening equipment in Durand,
Michigan; Cedar Rapids, Iowa; Melbourne, Australia; Subang Jaya, Malaysia; and
Chomburi, Thailand, under the brand names SIMPLICITY, CEDARAPIDS, ELJAY and
JAQUES.
Heavy duty inclined screens and feeders are found in high tonnage applications.
These units are typically custom designed to meet the needs of each customer.
Although primarily found in stationary installations, Terex supplies a variety
of screens and feeders for use on heavy duty portable crushing and screening
spreads.
-14-
Inclined screens are used in all phases of plant design from handling quarried
material to fine screening. Capable of handling much larger capacity than a flat
screen, inclined screens are most commonly found in large stationary
installations where maximum output is required. This requires the ability to
custom design and manufacture units that meet both the engineering and
application requirements of the end user.
Feeders are generally situated at the primary end of the processing facility,
requiring rugged design in order to handle the impact of the material being fed
from front end loaders, excavators, etc. The feeder moves material to the
crushing and screening equipment in a controlled fashion.
Horizontal screens combine high efficiency with the capacity, bearing life and
low maintenance of an inclined screen. They are adaptable for heavy scalping,
standard duty and fine screening applications and are engineered for durability
and user friendliness.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Terex offers a diverse range of products for the roadbuilding, utility and
construction industries and governments. Products in this group include asphalt
and concrete equipment, utility equipment and on/off road heavy-duty vehicles.
ASPHALT AND CONCRETE EQUIPMENT. Terex Roadbuilding manufactures asphalt pavers,
asphalt mixing plants, concrete production plants, concrete mixers, concrete
pavers, pavement profilers, stabilizers and reclaimers at its facilities in
Oklahoma City, Oklahoma; Fort Wayne, Indiana; Canton, South Dakota; and
Cachoeirinha, Brazil and at Terex's facility in Cedar Rapids, Iowa.
Asphalt pavers are available in rubber tire and steel or rubber track designs.
Terex sells asphalt pavers with maximum widths from 18 feet to 30 feet. The
smaller units have a maximum paving width of 18 feet and are used for commercial
work such as parking lots, development streets and construction overlay
projects. Mid-sized pavers are used for mainline and commercial projects and
have maximum paving widths ranging from 24 to 28 feet. High production pavers
are engineered and built for heavy-duty, mainline paving and are capable of 30
foot maximum paving widths. All of the above feature direct hydrostatic drive
for maximum uptime, patented frame raise for maneuverability and three-point
suspension for smooth, uniform mats. Terex asphalt pavers are manufactured under
the CEDARAPIDS brand name in Cedar Rapids, Iowa, and under the CMI-CIFALI brand
name in Cachoeirinha, Brazil.
Asphalt mixing plants are used by road construction companies to produce hot mix
asphalt. The mixing plants are available in portable, relocatable and stationary
configurations. Associated plant components and control systems are manufactured
to offer customers a wide variety of equipment to meet individual production
requirements. Asphalt mixing plants are manufactured under the CMI and
CEDARAPIDS/STANDARD HAVENS brand names in Oklahoma City, Oklahoma, and under the
CMI-CIFALI brand name in Cachoeirinha, Brazil.
Concrete production plants are used in residential, commercial, highway, airport
and other markets. Terex products include a full range of portable and
stationary transit mix and central mix production facilities. They are
manufactured in Oklahoma City, Oklahoma, and sold worldwide under the CMI
JOHNSON-ROSS brand name.
Concrete mixers are machines with a large revolving drum in which cement is
mixed with other materials to make concrete. Terex offers models mounted on
trucks with three, four, five, six or seven axles and other front and rear
discharge models. They are manufactured in Fort Wayne, Indiana, under the brand
name TEREX ADVANCE MIXER.
Concrete pavers produced by Terex are used by paving contractors to place and
finish concrete streets, highways and airport surfaces. Terex manufactures
slipform pavers, which pave widths ranging from two feet to 35 feet in a single
pass. Terex also produces concrete pavers which require paving forms, usually
metal, to contain the paving material. These pavers are used on bridge decks,
elevated highways and for general conduction paving needs. Concrete pavers are
manufactured under the CMI TEREX and BID-WELL brand names in Oklahoma City,
Oklahoma, and Canton, South Dakota.
Pavement profilers mill and reclaim deteriorated asphalt pavement, leaving a
level, textured surface upon which new paving material is placed. The process is
less costly than complete removal, and produces a by-product, RAP (Recycled
Asphalt Product) that can be processed through Terex hot mix asphalt plants to
produce lower cost paving materials. Terex produces pavement profilers in
Oklahoma City, Oklahoma, under the CMI TEREX brand name.
Reclaimers/Stabilizers produced by Terex are used to add load-bearing strength
to the base structures of new highways and new building sites. They are also
used for in-place reclaiming of deteriorated asphalt pavement. Terex's
reclaimers/stabilizers are manufactured in Oklahoma City, Oklahoma, under the
CMI TEREX brand name.
UTILITY EQUIPMENT. Terex utility products include digger derricks, aerial
devices and cable placers. These products are used by electric utilities, tree
care companies, telecommunications companies, and the electric construction
industry as well as government organizations. The products are primarily mounted
on commercial truck chassis. Digger derricks and aerial devices are primarily
used for the construction and maintenance of electric utility lines.
-15-
Digger derricks are used to dig holes and set utility poles. They include a
telescopic boom with an auger mounted on the boom, which digs the hole, and a
winch and devices to lift, maneuver and set the pole. Digger derricks available
from Terex have sheave heights up to 95 feet and lifting capacities up to 48,000
pounds. Terex digger derricks are manufactured in Watertown, South Dakota, under
the brand name TEREX TELELECT.
Aerial devices are used to elevate workers and may handle material to work areas
at the top of utility poles or trimming trees away from electrical lines as well
as miscellaneous purposes such as sign maintenance. Aerial devices available
from Terex include telescopic, non-overcenter and overcenter models that range
in working heights from 34 to 105 feet and material handling capacity up to
2,000 pounds. Terex aerial devices are manufactured at the Watertown, South
Dakota, facility under the brand names TEREX TELELECT and HI-RANGER.
Cable placers are used to install fiber optic, copper and strand telephone and
cable lines. The cable placer includes a man basket with working height of 37
feet. They are manufactured in Watertown, South Dakota, under the brand name
TEREX TELELECT.
ON/OFF ROAD HEAVY DUTY VEHICLES. Terex produces, through its majority ownership
of Tatra, a range of 4x4 to 12x12 heavy duty on and off-road vehicles for
military and commercial applications at its facility in Koprivnice, Czech
Republic under the TATRA brand name. ATC manufactures vehicles based on the
Tatra design and technology incorporating U.S. components at the Company's Terex
Advance Mixer facility in Fort Wayne, Indiana.
On/off road heavy duty vehicles are produced for military and commercial use
with axle configurations of 4x4 up to 12x12. The main features of the vehicle
design include an air or water cooled diesel engine, manual or automatic
transmission, a sturdy central load-carrying tube and a swinging half axle
design that controls the independent movement of each wheel. The kinematics of
the axles, together with the backbone tube, provides a stable base to which a
military or commercial body can be mounted. This unique design permits heavy
payloads to be carried across rough terrain at high speeds.
BACKLOG
The Company's backlog as of December 31, 2004 and 2003 was as follows:
DECEMBER 31,
------------------------
2004 2003
---------- ----------
(in millions)
Terex Construction $ 267.0 $ 126.1
Terex Cranes 251.0 140.1
Terex Aerial Work Platforms 152.9 26.1
Terex Materials Processing & Mining 171.0 48.8
Terex Roadbuilding, Utility Products and Other 185.3 149.6
Eliminations (16.0) (5.7)
---------- ----------
Total $ 1,011.2 $ 485.0
========== ==========
Substantially all of the Company's backlog orders are expected to be filled
within one year, although there can be no assurance that all such backlog orders
will be filled within that time period. The Company's backlog orders represent
primarily new equipment orders. The increase in backlog reflects rapidly
improving end market conditions, mainly in the North American construction
market, the aerial work platform business (which mainly sells into the rental
channel), and the global surface mining industry. Parts orders are generally
filled on an as-ordered basis.
Terex Construction's backlog at December 31, 2004 increased $140.9 million to
$267.0 million, as compared to $126.1 million at December 31, 2003. The increase
was a result of enhanced order activity in all three of Terex Construction's
main business groups (heavy construction, compact construction and mobile
crushing and screening), most notably in the businesses based in the United
Kingdom.
The backlog at Terex Cranes increased $110.9 million to $251.0 million at
December 31, 2004 from $140.1 million at December 31, 2003. Terex Cranes
experienced meaningful improvement in backlog orders across most product
categories. Terex Cranes in North America posted an increase in order backlog of
approximately $38 million, or 133% greater than at December 31, 2003. The tower
crane business also posted a year over year backlog increase in excess of 100%.
The $126.8 million increase in the backlog of Terex Aerial Work Platforms to
$152.9 million at December 31, 2004 from $26.1 million at December 31, 2003 is a
reflection of the continued demand from this business's end markets and
customers, primarily the equipment rental business. In addition to orders for
the traditional aerial work platforms product, the Company is also experiencing
increased demand for the telescopic handler product offering.
Terex Materials Processing & Mining's backlog at December 31, 2004 increased
$122.2 million to $171.0 million compared to $48.8 million at December 31, 2003.
The approximate 250% increase in order backlog was principally due to heightened
market demand for
-16-
the Company's surface mining equipment, a direct reflection of substantially
improved customer profitability due to higher commodity prices.
The backlog at Terex Roadbuilding, Utility Products and Other increased $35.7
million to $185.3 million at December 31, 2004 from $149.6 million at December
31, 2003. The slight increase in backlog reflects the continued weakness in
demand for most of this segment's product categories. However, the Company
experienced order intake strength in the cement mixer product category, which
increased over 40% year over year.
DISTRIBUTION
Terex distributes its products through a global network of dealers, major
accounts and direct sales to customers.
TEREX CONSTRUCTION
Terex distributes heavy construction equipment (trucks, scrapers and replacement
parts) manufactured in the United Kingdom primarily through worldwide dealership
networks. Terex's truck dealers are independent businesses, which generally
serve the construction, mining, timber and/or scrap industries. Although these
dealers may carry products from a variety of manufacturers, they generally carry
only one manufacturer's "brand" of each particular type of product. Excavators
manufactured in Germany and China are sold in Europe and Asia through a network
of independent dealers and distributors. Wheel loaders manufactured in Germany
are sold in Europe through a network of independent dealers and distributors.
Excavators and wheel loaders manufactured for Terex in South Korea are only sold
in North America through Terex's existing heavy construction equipment dealer
network. Loading machines manufactured in Germany are sold worldwide through a
network of independent dealers and distributors.
Terex distributes compact equipment primarily through a network of independent
dealers and distributors throughout the world. Although some dealers represent
only one of the Terex brands (such as Schaeff, Atlas or Fermec), the Company has
recently focused on developing the dealer network to represent the full range of
compact equipment under the TEREX brand name in both Europe and North America.
In addition, Terex distributes its compact equipment in North America through
the Terex Aerial Work Platforms segment's sales staff.
Mobile crushing and screening equipment is distributed separately by
Powerscreen, B.L. Pegson and Finlay. Each business maintains a global network of
dealers, predominantly in Europe and the United States. All three brands are
supported in North America by a distribution center located in Louisville,
Kentucky.
TEREX CRANES
Terex Cranes markets its products globally, optimizing assorted channel
marketing systems including a distribution network and a direct sales force.
Direct sales, primarily to specialized crane rental companies, are done in
certain crane markets like the United States, United Kingdom, Germany, Spain,
Italy, France and Scandinavia to offer comprehensive service and support to
customers. Distribution via a dealer network is often utilized in other
geographic areas.
TEREX AERIAL WORK PLATFORMS
Terex aerial work platform and telehandler products are distributed under the
GENIE and TEREX brand names principally through a global network of rental
companies, independent dealers and to a lesser extent, national accounts. Terex
employs sales representatives who service these dealers from offices located
throughout the world.
Terex light construction products are distributed through a global network of
dealers, rental companies and national accounts. Terex employs sales
representatives who service these dealers throughout the world.
Construction trailers are distributed primarily through dealers in the United
States and are also sold directly to users when local dealers are not available.
TEREX MATERIALS PROCESSING & MINING
Terex Materials Processing & Mining distributes surface mining truck products
and services directly to customers through its own sales organization, as well
as through independent dealers. Terex hydraulic excavators and after-market
parts and services are sold through an export sales department in Dortmund,
Germany, through a global network of wholly-owned subsidiaries and through
dealership networks. In addition, Terex's excavators may be sold and serviced
through the Caterpillar dealer network.
Drilling equipment is distributed through a combination of regional sales and
support offices and a global network of independent distributors.
-17-
Crushing and screening equipment is distributed principally through a worldwide
network of independent distributors and dealers.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Terex sells asphalt pavers, reclaimers, stabilizers, profilers and concrete
pavers to end user customers principally through independent dealers and
distributors and to a lesser extent on a direct basis in areas where
distributors are not established. Terex sells asphalt and concrete plants
primarily direct to end user customers.
Terex sells utility equipment to the utility and municipal markets through a
network of primarily company-owned distributors in North America.
Terex sells concrete mixers primarily direct to customers, but concrete mixers
are also available through several dealers in the United States.
On/off-road heavy duty vehicles for commercial applications are sold in Eastern
Europe, the Middle East and Asia through a network of existing dealers and joint
venture partners. Vehicles sold for military purposes are sold directly to
governments and may include a lengthy direct negotiation process.
RESEARCH AND DEVELOPMENT
The Company maintains engineering staffs at several of its locations who design
new products and improvements in existing product lines. The Company's
engineering expenses are primarily incurred in connection with the improvements
of existing products, efforts to reduce costs of existing products and, in
certain cases, the development of products which may have additional
applications or represent extensions of the existing product line. Such costs
incurred in the development of new products, cost reductions, or improvements to
existing products of continuing operations amounted to $46.3 million, $38.6
million and $24.7 million in 2004, 2003 and 2002, respectively. The increase
from 2002 to 2003 was mainly due to the inclusion of Demag and Genie for a full
twelve months in 2003. The increase from 2003 to 2004 was mainly due to the full
year inclusion of Tatra and ATC and costs related to new product introduction
efforts in the product areas of mobile telescopic and lattice boom crawler
cranes, wheeled excavators and articulated trucks.
MATERIALS
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 from extreme
movements in material pricing and from availability of these materials. In
particular, during 2004, the Company has been affected by increases in the cost
of steel. Steel is a major material component for many of the Company's
products, so as the cost of steel has increased, the cost to manufacture these
products has increased. The cost of steel has increased, and the availability of
steel has decreased, in response to higher demand caused by a recovering
end-market and higher consumption of steel by emerging economies such as China.
The Company experienced an increase in steel costs that negatively affected
operating results through cost of goods sold by approximately $70 million during
2004.
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 may employ various methods to limit risk
associated with commodity cost fluctuations and availability. With respect to
the recent increases in the cost of steel, for example, the Company continues to
design and implement plans to mitigate the impact, including the use of
alternate suppliers, leveraging the Company's overall purchase volumes to obtain
favorable costs, and increasing the price of the Company's products. Various of
the Company's operations have implemented price increases and/or surcharges
directly intended to offset increases in prices of steel and other components.
COMPETITION
The Company faces a competitive global manufacturing market for each of its
products. The Company competes with other manufacturers based on many factors,
in particular the price, performance and reliability of its products. The
Company operates under a best value strategy, where it generally attempts to
offer its customers lower cost products or products that have enhanced
performance characteristics to improve the customer's return on invested
capital. However, in some instances, customers may prefer the pricing,
performance or reliability aspects of a competitor's product despite the
Company's product pricing or performance. The following table shows the primary
competitors for the Company's products in the following categories:
-18-
BUSINESS SEGMENT PRODUCTS PRIMARY COMPETITORS
- --------------------------- --------------------------------------- ----------------------------------------------
Terex Construction Articulated off-highway trucks & Volvo, Caterpillar, Moxy, John Deere, Bell,
Rigid off-highway trucks CNH, Link-Belt (Sumitomo Corporation) and
Komatsu
Scrapers Caterpillar and Miskin
Excavators Caterpillar, Komatsu, Volvo, John Deere,
Hitachi, CNH, Link-Belt (Sumitomo
Corporation), Kobelco, Daewoo and Hyundai
Truck Mounted Articulated Hydraulic Palfinger, HIAB, HMF, Effer and Fassi
Cranes
Loading Machines Liebherr, Sennebogen and Caterpillar
Wheel Loaders Caterpillar, Volvo, Kubota, Kawasaki, John
Deere, Komatsu, Hitachi and CNH
Loader Backhoes Caterpillar, CNH (Case and New Holland
brands), JCB, Komatsu, Volvo and John Deere
Compaction Equipment Ingersoll-Rand, Caterpillar, Bomag, Amman,
Dynapac and Hamm
Mini Excavators Bobcat (Ingersoll-Rand), Yanmar, Volvo,
Takeuchi, IHI, CNH, Caterpillar, John Deere,
Neuson and Kubota
Midi Excavators Komatsu, Hitachi, Volvo and Yanmar
Site Dumpers Thwaites and AUSA
Telehandlers JCB, CNH, Caterpillar, Ingersoll-Rand, John
Deere, JLG and Manitou
Mobile Crushing and Screening Equipment Metso Corporation, Extec, McClusky Brothers,
Parker Plant and Viper International
Terex Cranes Mobile Telescopic Cranes Liebherr, Grove Worldwide (Manitowoc),
Tadano-Faun, Link-Belt (Sumitomo Corporation)
and Kato
Tower Cranes Liebherr, Potain (Manitowoc) and MAN Wolff
Lattice Boom Crawler Cranes Manitowoc, Link-Belt (Sumitomo Corporation),
Liebherr, Hitachi and Kobelco
Boom Trucks National Crane (Manitowoc), Palfinger, Hiab,
Altec, Fassi and PM
Telescopic Container Stackers Kalmar, SMV, CVS Ferrari, Fantuzzi, Liebherr
and Linde
-19-
BUSINESS SEGMENT PRODUCTS PRIMARY COMPETITORS
- --------------------------- --------------------------------------- ----------------------------------------------
Terex Aerial Work Platforms Boom Lifts JLG and Haulotte
Scissor Lifts JLG, Skyjack and Haulotte
Telehandlers Skytrak (JLG), Lull (JLG), Caterpillar,
Gradall (JLG), Bobcat (Ingersoll-Rand), JCB,
CNH, Merlo and Manitou
Light Towers Allmand Bros., Magnum and Ingersoll-Rand
Concrete Finishing Equipment Multiquip, Allen Engineering and Wacker
Power Buggies Multiquip, Allen Engineering and Wacker
Generators Ingersoll-Rand, Multiquip, Wacker and
Caterpillar
Arrow Boards (Detour Lights) Ingersoll-Rand and Multiquip
Construction Trailers Trail King, Talbert, Fontaine, Rogers, Etnyre,
Ranco, Clement, CPS, as well as regional
suppliers
Terex Materials Processing Hydraulic Mining Excavators Hitachi, Komatsu and Liebherr
& Mining
High Capacity Surface Mining Trucks Caterpillar, Komatsu, Liebherr and
Euclid/Hitachi
Drilling Equipment Sandvik, Atlas Copco (Ingersoll-Rand),
Furukawa, Altec
Crushing and Screening Equipment Metso Corporation, Astec Industries, Sandvik
and Deister Machine
Terex Roadbuilding, Utility Asphalt Pavers Blaw-Knox (Ingersoll-Rand), Caterpillar and
Products & Other Roadtec (Astec Industries)
Asphalt Mixing Plants Astec Industries, Gencor Corporation, All-Mix,
Dillman Equipment and ADM
Concrete Production Plants Con-E-Co, Erie Strayer, Helco,
Hagen and Stephens
Concrete Mixers McNeilus, Oshkosh, London and Continental
Manufacturing
Concrete Pavers Gomaco
Reclaimers/Stabilizers Caterpillar, Wirtgen and Bomag
Pavement Profilers Caterpillar, Wirtgen and Roadtec (Astec
Industries)
Utility Equipment Altec and Time Manufacturing
On/Off Road Heavy Duty Vehicles Oshkosh, Stewart and Stevenson, Mercedes, MAN
and Volvo
-20-
MAJOR CUSTOMERS
The Company has no customers which accounted for more than 10% of consolidated
sales in 2004. The Company is not dependent upon any single customer. The
Company's largest single customer is United Rentals, Inc. ("United Rentals").
The Company has had a long-standing relationship with United Rentals. The
Company's Chairman, President and Chief Executive Officer served as a director
of United Rentals until June 2005.
EMPLOYEES
As of December 31, 2004, the Company had approximately 16,800 employees. The
Company generally considers its relations with its employees to be good.
Approximately 48% of the Company's employees are represented by labor unions, or
similar employee organizations outside the United States, which have entered
into various separate collective bargaining agreements with the Company. The
Company experienced a labor strike at its Terex Cranes-Waverly manufacturing
facility beginning in February 2005 which was settled in March 2005. The Company
believes that the strike at Terex Cranes-Waverly did not have a material adverse
effect on the results of operations of the Terex Cranes segment or the Company
as a whole.
PATENTS, LICENSES AND TRADEMARKS
The Company makes use of proprietary materials such as patents, trademarks and
trade names in its operations and takes action to protect these rights.
The Company makes use of several significant trademarks and trade names,
including the TEREX, ADVANCE, AMERICAN TRUCK COMPANY, AMERICAN, AMIDA, ATLAS,
BARTELL, BENDINI, BENFORD, BID-WELL, CANICA, CEDARAPIDS, CMI, CMI-CIFALI,
COMEDIL, DEMAG, FERMEC, FINLAY, FRANNA, FUCHS, GENIE, GRAYHOUND, HI-RANGER,
JAQUES, JOHNSON-ROSS, LOAD KING, MORRISON, O&K, P&H, PEGSON, PEINER,
POWERSCREEN, PPM, RE-TECH, ROYER, SCHAEFF, SIMPLICITY, STANDARD HAVENS, TATRA,
TELELECT, and UNIT RIG trademarks. The P&H trademark is a registered trademark
of Joy Global, Inc. that a subsidiary of the Company has the right to use for
certain products until 2011 pursuant to a license agreement. The Company also
has the right to use the O&K and Orenstein & Koppel names (which are registered
trademarks of O&K Orenstein & Koppel AG) for most applications in the mining
business for an unlimited period of time. All other trademarks and trade names
of the Company referred to in this Annual Report are registered trademarks of
Terex Corporation or its subsidiaries.
The Company has many patents that it uses in connection with its operations, and
most of the Company's products contain some proprietary components. Many of
these patents and related proprietary technology are important to the production
of particular products of the Company; however, on the whole, the Company's
patents, individually and in the aggregate, are not material to the business of
the Company or its financial results nor does the Company's proprietary
technology provide it with a competitive advantage over its competitors.
The Company protects its patent, trademark and trade name proprietary rights
through registration, confidentiality agreements and litigation to the extent
the Company deems appropriate. The Company owns and maintains trademark
registrations and patents in countries where it conducts business, and monitors
the status of its trademark registrations and patents to maintain them in force
and renew them as required. The duration of these registrations is the maximum
permitted under the law and varies based upon the relevant statutes in the
applicable jurisdiction. The Company also takes further actions to protect its
trademark, trade name and patent rights when circumstances warrant, including
the initiation of legal proceedings if necessary.
Currently, the Company is engaged in various legal proceedings with respect to
intellectual property rights, both as a plaintiff and as a defendant. The
Company believes that the final outcome of such matters will not have a material
adverse effect, individually or in the aggregate, on the Company's business or
operating performance.
SAFETY AND ENVIRONMENTAL CONSIDERATIONS
The Company maintains a safety council to assist in auditing, monitoring and
training with respect to workplace safety and environmental matters. The council
consists of both dedicated safety and environmental professionals, as well as
other employees from legal, human resources and operations. All employees are
required to obey all applicable national, local or other health, safety and
environmental laws and regulations and must observe the proper safety rules and
environmental practices in work situations. The Company is committed to
compliance with these standards and monitors its workplaces to determine if
equipment, machinery and facilities meet specified safety standards and that
safety and health hazards are adequately addressed through appropriate work
practices, training and procedures.
The Company generates hazardous and non-hazardous wastes in the normal course of
its manufacturing operations. As a result, the Company is subject to a wide
range of federal, state, local and foreign environmental laws and regulations.
These laws and regulations
-21-
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 would 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.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, GEOGRAPHIC AREAS AND EXPORT SALES
Information regarding foreign and domestic operations, export sales and segment
information is included in Note U -- "Business Segment Information" in the Notes
to the Consolidated Financial Statements.
SEASONAL FACTORS
Traditionally, the Company's customers' peak buying periods are in the first
half of a calendar year as a result of their need to have new equipment
available for the spring, summer and fall construction season. Therefore,
historically, the Company's sales have tended to be seasonal, with more than
half of the Company's sales typically being generated in the first two quarters
of a calendar year. 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. However, in 2004, 47.6% of the
Company's sales occurred in the first half of the year and 52.4% of the
Company's sales were in the second half of the year. This was primarily a result
of an improvement in the economic cycle over the course of 2004 and the initial
impact of price increases that were instituted by certain of the Company's
businesses in the second half of 2004. For 2005, the Company expects sales to be
somewhat more in line with traditional trends, with sales in the first half of
the year being equal to or slightly greater than sales in the second half of the
year, as price increases for the Company's products increasingly take effect and
the more typical volume trends occur.
WORKING CAPITAL
The Company's businesses are working capital intensive and require funding for
purchases of production and replacement parts inventories, capital expenditures
for repair, replacement and upgrading of existing facilities, as well as trade
financing for receivables from customers and dealers. 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. Management believes that cash generated from operations,
together with availability under the Company's bank credit facilities and cash
on hand, provide the Company with adequate liquidity to meet the Company's
operating and debt service requirements. For more detail on working capital
matters, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
AVAILABLE INFORMATION
The Company maintains a website at www.terex.com. The Company makes available on
its website under "Investors" - "SEC Filings," free of charge, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports as soon as reasonably practicable after it
electronically files or furnishes such material with the Securities and Exchange
Commission. In addition, the Company makes available on its website under
"Investors" - "Corporate Governance," free of charge, its Audit Committee
Charter, Compensation Committee Charter, Governance and Nominating Committee
Charter, Corporate Governance Guidelines and Code of Ethics and Conduct. In
addition, the foregoing information is available in print, without charge, to
any stockholder who requests these materials from the Company.
NYSE AND SEC CERTIFICATIONS
The Company's Chief Executive Officer certified to the New York Stock Exchange
("NYSE") in 2004 that he was not aware of any violation by the Company of NYSE
corporate governance listing standards. Furthermore, the Company's Chief
Executive Officer and Chief Financial Officer filed with the SEC, as an exhibit
to this Annual Report on Form 10-K, the certification required under Section 302
of the Sarbanes Oxley Act. In addition, the Company's Chief Executive Officer
and Chief Financial Officer filed with the SEC, as an exhibit to the Company's
2003 Annual Report on Form 10-K, the certification required under Section 302 of
the Sarbanes Oxley Act.
-22-
Subsequent Event
Due to the Company's inability to file this Annual Report on Form 10-K in a
timely manner, the Company's Chief Executive Officer certified to the NYSE on
December 16, 2005 that the Company has not been able to comply with certain
disclosure requirements of the NYSE Listed Company Manual.
ITEM 2. PROPERTIES
The following table outlines the principal manufacturing, warehouse and office
facilities owned or leased (as indicated below) by the Company and its
subsidiaries as of December 31, 2004:
BUSINESS UNIT FACILITY LOCATION TYPE AND APPROXIMATE SIZE OF FACILITY
- ------------------------------- ------------------------------- -------------------------------------
Terex (Corporate Offices) Westport, Connecticut (1) Office; 24,000 sq. ft.
TEREX CONSTRUCTION
Atlas Terex Delmenhorst, Germany Office, manufacturing and warehouse;
224,000 sq. ft.
Atlas Terex Ganderkasee, Germany Office, manufacturing and warehouse;
362,000 sq. ft.
Atlas Terex Vechta, Germany Manufacturing and warehouse;
280,000 sq. ft.
B. L. Pegson Coalville, England Office, manufacturing and warehouse;
204,000 sq. ft.
Finlay Omagh, Northern Ireland (1) Office, manufacturing and warehouse;
153,000 sq. ft.
Fuchs Bad Schoenborn, Germany Office, manufacturing and warehouse;
238,000 sq. ft.
Powerscreen Dungannon, Northern Ireland (1) Office, manufacturing and warehouse;
330,000 sq. ft.
Schaeff Langenburg, Germany Office, manufacturing and warehouse;
102,000 sq. ft.
Schaeff Gerabronn, Germany Office, manufacturing and warehouse;
147,000 sq. ft.
Schaeff Rothenburg, Germany (2) Office, manufacturing and warehouse;
97,000 sq. ft.
Schaeff Crailsheim, Germany Office, manufacturing and warehouse;
185,000 sq. ft.
Schaeff Clausnitz, Germany Office, manufacturing and warehouse;
84,000 sq. ft.
TEL Motherwell, Scotland (1) Office, manufacturing and warehouse;
473,000 sq. ft.
Terex Compact Equipment Coventry, England (1) Office, manufacturing and warehouse;
326,000 sq. ft.
TerexLift Perugia, Italy Office, manufacturing and warehouse;
114,000 sq. ft.
Terex Parts Distribution Center Southaven, Mississippi (1) Office and warehouse;
505,000 sq. ft.
TEREX CRANES
American Crane Wilmington, North Carolina Office, manufacturing and warehouse;
559,000 sq. ft.
Comedil Fontanafredda, Italy Office, manufacturing and warehouse;
101,000 sq. ft.
Comedil Milan, Italy (1) Manufacturing and warehouse;
175,000 sq. ft.
Demag Bierbach, Germany (1) Warehouse and manufacturing;
198,000 sq. ft.
Demag Pecs, Hungary (1) Office and manufacturing;
82,000 sq. ft.
-23-
BUSINESS UNIT FACILITY LOCATION TYPE AND APPROXIMATE SIZE OF FACILITY
- ------------------------------- ------------------------------- -------------------------------------
Demag Wallerscheid, Germany (1) Office, warehouse and manufacturing;
336,000 sq. ft.
Demag Zweibrucken, Germany Office, manufacturing and warehouse;
483,000 sq. ft.
Terex Cranes France Montceau-les-Mines, France Office, manufacturing and warehouse;
418,000 sq. ft.
Terex Cranes - Waverly Waverly, Iowa Office, manufacturing and warehouse;
312,000 sq. ft.
Terex Italia Crespellano, Italy Office, manufacturing and warehouse;
66,000 sq. ft.
Terex Lifting Australia Brisbane, Australia (1) Office, manufacturing and warehouse;
42,000 sq. ft.
TEREX AERIAL WORK PLATFORMS
Amida Rock Hill, South Carolina Office, manufacturing and warehouse;
121,000 sq. ft.
Bartell Brampton, Ontario, Canada Office, manufacturing and warehouse;
33,000 sq. ft.
Genie Redmond, Washington (1) Office, manufacturing and warehouse;
750,000 sq. ft.
Genie Moses Lake, Washington (1), (3) Office, manufacturing and warehouse;
422,000 sq. ft.
Load King Elk Point, South Dakota Office, manufacturing and warehouse;
93,000 sq. ft.
Terex Handlers Baraga, Michigan Office, manufacturing and warehouse;
54,000 sq. ft.
TEREX MATERIALS PROCESSING & MINING
Cedarapids Cedar Rapids, Iowa Office, manufacturing and warehouse;
608,000 sq. ft.
Jaques Melbourne, Australia (1) Office, manufacturing and warehouse;
29,000 sq. ft.
Jaques Malaysia Subang Jaya, Malaysia (1) Manufacturing and warehouse;
111,000 sq. ft.
Jaques Thailand Chomburi, Thailand Manufacturing; 80,000 sq. ft.
Simplicity Durand, Michigan Office, manufacturing and warehouse;
114,000 sq. ft.
Terex Germany Dortmund, Germany (1) Office, manufacturing and warehouse;
775,000 sq. ft.
Terex Mexico Acuna, Mexico Office, manufacturing and warehouse;
225,000 sq. ft.
Terex Reedrill Sherman, Texas Office, manufacturing and warehouse;
244,000 sq. ft.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Bid-Well Canton, South Dakota Office, manufacturing and warehouse;
71,000 sq. ft.
CMI Oklahoma City, Oklahoma Office, manufacturing and warehouse;
635,000 sq. ft.
CMI--Cifali Cachoeirinha, Brazil Office, manufacturing and warehouse;
83,000 sq. ft.
Tatra Koprivnice, Czech Republic Office, manufacturing and warehouse;
4,653,000 sq. ft.
Telelect Watertown, South Dakota Office, manufacturing and warehouse;
219,000 sq. ft.
Telelect (Terex Manufacturing) Huron, South Dakota Manufacturing; 88,000 sq. ft.
Terex Advance Mixer & ATC Fort Wayne, Indiana Office, manufacturing and warehouse;
160,000 sq. ft.
-24-
(1) These facilities are either leased or subleased by the indicated
entity.
(2) Includes approximately 54,000 sq. ft. which are leased by the indicated
entity.
(3) Includes approximately 106,000 sq. ft. of warehouse space subleased to
others.
The Company also has numerous owned or leased locations for new machine and
parts sales and distribution and rebuilding of components located worldwide. In
2002 and 2003, the Company acquired the utility equipment distributors Pacific
Utility Equipment Company ("Pacific Utility") (now part of Terex Utilities
West), Telelect Southeast Distribution, Inc. ("Telelect Southeast") (now part of
Terex Utilities South), Commercial Body Corporation ("Commercial Body") (now
part of Terex Utilities South) and Combatel Distribution, Inc. (now part of
Terex Utilities South). These distributors have sales locations throughout the
United States.
Management believes that the properties listed above are suitable and adequate
for the Company's use. The Company has determined that certain of its properties
in the United States and elsewhere exceed its requirements. Such properties may
be sold, leased or utilized in another manner and have been excluded from the
above list. The Company is actively marketing a number of these properties.
The majority of the Company's U.S. properties are subject to mortgages in favor
of its bank lenders in connection with its bank credit facilities.
ITEM 3. LEGAL PROCEEDINGS
As described in Note S -- "Litigation and Contingencies" in the Notes to the
Consolidated Financial Statements, the Company is involved in various legal
proceedings, including product liability, workers' compensation liability and
intellectual property litigation, which have arisen in the normal course of its
operations. The Company is self-insured for up to $5.0 million per product
liability incident. In addition, the Company is self-insured for up to $250
thousand per workers' compensation liability incident in the U.S. and for up to
$500 thousand per employers liability incident in the U.K. Management believes
that the final outcome of such matters will not have a material adverse effect
on the Company's consolidated financial position.
For information concerning other contingencies and uncertainties, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Contingencies and Uncertainties."
Subsequent Events
The Company was advised verbally by the SEC that the SEC has commenced an
investigation of Terex's accounting. Subsequently, on February 1, 2006, the
Company received a copy of a written order of a private investigation from the
SEC. For additional information regarding the SEC investigation of Terex, see
the Company's Current Report on Form 8-K filed with the SEC on October 27, 2005.
In addition, the Company has periodically updated its website, www.terex.com,
regarding the status of the SEC investigation. Terex has been voluntarily
cooperating with the SEC and will continue to cooperate fully to furnish the SEC
staff with information needed to complete their review.
Terex has also received a subpoena from the SEC dated May 9, 2005, in a matter
entitled "In the Matter of United Rentals, Inc." The subpoena principally
requested information to assist the SEC in its investigation of four
transactions involving Terex and its subsidiaries, on the one hand, and United
Rentals, on the other, in 2000 and 2001. For information concerning the
Company's relationship with United Rentals, see Item 1 - "Business - Major
Customers." Terex is also cooperating fully with this investigation.
On September 14, 2005, in the Superior Court of the State of Connecticut, a
class action and derivative complaint was filed entitled Michael Morter,
derivately on behalf of nominal defendant Terex Corporation, v. G. Chris
Andersen, Ronald M. DeFeo, Don DeFosset, William H. Fike, Donald P. Jacobs,
David A. Sachs, J.C. Watts, Jr., Helge H. Wehmeier and Phillip C. Widman,
defendants, and Terex Corporation, nominal defendant. The complaint alleges
breach of fiduciary duty and breach of the Company's by-laws. The action is at
the very early stages and the Company has no information other than as set forth
in the complaint. Plaintiffs have filed a Motion for Summary Judgment requesting
that the court order the Company to hold an annual meeting of shareholders which
has not been held to date due to the inability of the Company to satisfy SEC and
NYSE rules. In connection therewith, the court has directed the Company to hold
an annual meeting of its shareholders on or before June 1, 2006. The Company
intends to vigorously defend the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-25-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) The Company's Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "TEX." The high and low stock prices for the Company's
Common Stock on the NYSE Composite Tape (for the last two completed years) are
as follows:
2004 2003
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- -------- -------- -------- -------- -------- -------- --------
High $ 48.23 $ 43.92 $ 39.20 $ 38.21 $ 29.63 $ 23.50 $ 21.25 $ 13.43
Low $ 32.70 $ 31.94 $ 28.02 $ 26.05 $ 18.65 $ 16.53 $ 12.34 $ 9.50
In addition, the high and low stock prices for the Company's Common Stock on the
NYSE Composite Tape for 2005 are as follows:
2005
-----------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
High $ 62.43 $ 52.25 $ 43.99 $ 49.01
Low $ 49.05 $ 39.13 $ 35.84 $ 37.64
No dividends were declared or paid in 2004 or in 2003. Certain of the Company's
debt agreements contain restrictions as to the payment of cash dividends. In
addition, payment of dividends is limited by Delaware law. The Company intends
generally to retain earnings, if any, to fund the development and growth of its
business and to pay down debt. The Company does not plan on paying dividends on
the Common Stock in the near term. Any future payments of cash dividends will
depend upon the financial condition, capital requirements and earnings of the
Company, as well as other factors that the Board of Directors may deem relevant.
As of January 31, 2006, there were 1,297 stockholders of record of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
The selected financial information as of and for the years ended December 31,
2004, 2003 and 2002 presented below was derived from the Audited Consolidated
Financial Statements, including the notes thereto, contained elsewhere herein.
The selected data as of and for the years ended December 31, 2001 and 2000
presented below has been restated from amounts previously reported, and also
reflects certain adjustments made in prior periods. The selected financial
information should be read in conjunction with the Audited Consolidated
Financial Statements and related notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations. For the years ended December
31, 2000, 2001, 2002 and 2003, the data in the table below has been restated
from amounts previously reported. For a detailed description of the restatement
adjustments, see "Summary Restated Financial Data," below, and Note B -
"Restatement of Consolidated Financial Statements" in the Notes to Consolidated
Financial Statements.
-26-
(in millions except per share amounts and employees)
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000
2004 RESTATED RESTATED RESTATED RESTATED
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales $ 5,019.8 $ 3,909.8 $ 2,816.5 $ 1,824.3 $ 2,000.1
Income from operations 214.6 58.0 38.2 87.3 181.6
Income (loss) from continuing operations before
cumulative effect of change in accounting principle
and discontinued operations 324.1 (226.6) (45.0) (5.7) 91.2
Income (loss) from discontinued operations -- -- -- -- (7.3)
Income (loss) before cumulative effect of change in
accounting principle 324.1 (226.6) (45.0) (5.7) 83.9
Net income (loss) 324.1 (226.6) (158.4) (5.7) 83.9
Per Common and Common Equivalent Share:
Basic
Income (loss) from continuing operations $ 6.60 $ (4.75) $ (1.04) $ (0.20) $ 3.35
Income (loss) from discontinued operations -- -- -- -- (0.27)
Income (loss) before cumulative effect of change
in accounting principle 6.60 (4.75) (1.04) (0.20) 3.08
Net income (loss) 6.60 (4.75) (3.67) (0.20) 3.08
Diluted
Income (loss) from continuing operations $ 6.34 $ (4.75) $ (1.04) $ (0.20) $ 3.27
Income (loss) from discontinued operations -- -- -- -- (0.26)
Income (loss) before cumulative effect of change
in accounting principle 6.34 (4.75) (1.04) (0.20) 3.01
Net income (loss) 6.34 (4.75) (3.67) (0.20) 3.01
CURRENT ASSETS AND LIABILITIES
Current assets $ 2,647.1 $ 2,219.5 $ 2,215.5 $ 1,396.1 $ 1,281.6
Current liabilities 1,529.5 1,168.6 1,102.1 655.1 627.9
PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment $ 362.6 $ 353.8 $ 308.0 $ 175.1 $ 154.8
Capital expenditures 35.5 27.1 29.2 13.5 24.2
Depreciation 51.3 55.2 35.9 22.5 23.0
TOTAL ASSETS $ 4,179.1 $ 3,554.2 $ 3,609.8 $ 2,395.1 $ 2,018.6
CAPITALIZATION
Long-term debt and notes payable (includes capital leases) $ 1,114.2 $ 1,274.8 $ 1,487.1 $ 1,020.7 $ 882.0
Stockholders' equity 1,135.2 674.6 726.9 554.5 430.2
Dividends per share of Common Stock -- -- -- -- --
Shares of Common Stock outstanding at year end 49.4 48.6 47.4 36.4 26.8
EMPLOYEES 16,800 15,050 11,975 7,363 6,150
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Notes to the Consolidated Financial Statements for a
discussion of "Acquisitions," "Accounting Changes - Business Combinations and
Goodwill," "Restructuring and Other Charges," "Long-Term Obligations" and
"Stockholders' Equity."
SUMMARY RESTATED FINANCIAL DATA
As noted above, the Company's financial statements for the years ended December
31, 2000, 2001, 2002 and 2003 have been restated. The following tables present
the impact of the restatements on a summary basis. For further description of
the restatement adjustments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Restatement of Consolidated
Financial Statements" and Note B - "Restatement of Consolidated Financial
Statements" in the Notes to Consolidated Financial Statements.
-27-
STATEMENTS OF INCOME:
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
AS ORIGINALLY AS AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------- ------------- -------------
Net Sales $ 3,897.1 $ 3,909.8 $ 2,797.4 $ 2,816.5
Cost of goods sold $ 3,378.6 $ 3,410.8 $ 2,440.7 $ 2,487.2
Gross profit $ 518.5 $ 499.0 $ 356.7 $ 329.3
Selling, general and administrative expenses $ (393.7) $ (396.7) $ (288.1) $ (291.1)
Goodwill impairment $ (51.3) $ (44.3) -- --
Income from operations $ 73.5 $ 58.0 $ 68.6 $ 38.2
Interest expense $ (99.9) $ (99.9) $ (92.9) $ (92.6)
Other income (expense) - net $ 0.4 $ 0.5 $ (4.2) $ (6.7)
Income (loss) before income taxes and cumulative
effect of change in accounting principle $ (35.3) $ (50.7) $ (28.2) $ (60.8)
Benefit from (provision for) income taxes $ 9.8 $ (175.9) $ 9.1 $ 15.8
Income (loss) before cumulative effect of change
in accounting principle $ (25.5) $ (226.6) $ (19.1) $ (45.0)
Net income (loss) $ (25.5) $ (226.6) $ (132.5) $ (158.4)
Per common share:
Basic and diluted -
Income (loss) before cumulative effect
of change in accounting principle $ (0.53) $ (4.75) $ (0.44) $ (1.04)
Net income (loss) $ (0.53) $ (4.75) $ (3.07) $ (3.67)
BALANCE SHEETS:
AS OF AS OF
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
AS ORIGINALLY AS AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------- ------------- -------------
Trade receivables $ 540.2 $ 509.3 $ 578.6 $ 536.0
Inventories $ 1,009.7 $ 1,038.5 $ 1,106.3 $ 1,145.7
Deferred taxes $ 53.9 $ 78.6 $ 46.9 $ 46.9
Other current assets $ 122.7 $ 125.6 $ 137.1 $ 134.7
Total current assets $ 2,194.0 $ 2,219.5 $ 2,221.1 $ 2,215.5
Property, plant and equipment - net $ 370.1 $ 353.8 $ 309.4 $ 308.0
Goodwill $ 603.5 $ 616.7 $ 622.9 $ 572.7
Deferred taxes $ 238.9 $ 47.0 $ 153.5 $ 194.9
Other assets $ 317.3 $ 317.2 $ 318.8 $ 318.7
Total assets $ 3,723.8 $ 3,554.2 $ 3,625.7 $ 3,609.8
Trade accounts payable $ 608.6 $ 614.9 $ 542.9 $ 543.0
Accrued compensation and benefits $ 94.5 $ 89.7 $ 74.0 $ 68.3
Accrued warranty and product liability $ 88.5 $ 89.7 $ 86.0 $ 86.2
Other current liabilities $ 281.0 $ 287.5 $ 329.2 $ 330.6
Total current liabilities $ 1,159.4 $ 1,168.6 $ 1,106.2 $ 1,102.2
Other non-current liabilities $ 412.9 $ 436.2 $ 263.2 $ 293.6
Additional paid-in capital $ 795.1 $ 813.5 $ 772.7 $ 790.3
Retained earnings (accumulated deficit) $ 41.9 $ (205.2) $ 67.4 $ 21.4
Cumulative translation adjustment $ 79.6 $ 140.0 $ (25.3) $ (4.9)
Accumulated other comprehensive income (loss) $ 57.0 $ 110.4 $ (53.6) $ (43.9)
Cost of shares of common stock in treasury $ (17.8) $ (44.6) $ (17.8) $ (41.4)
Total stockholders' equity $ 876.7 $ 674.6 $ 769.2 $ 726.9
Total liabilities and stockholders' equity $ 3,723.8 $ 3,554.2 $ 3,625.7 $ 3,609.8
-28-
STATEMENTS OF INCOME:
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------------- -----------------------------
AS ORIGINALLY AS AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------- ------------- -------------
Net sales $ 1,812.5 $ 1,824.3 $ 2,068.7 $ 2,000.1
Cost of goods sold $ 1,540.1 $ 1,565.5 $ 1,715.0 $ 1,666.9
Gross profit $ 272.4 $ 258.8 $ 353.7 $ 333.3
Selling, general and administrative expenses $ (168.2) $ (171.5) $ (155.4) $ (151.6)
Income from operations $ 104.2 $ 87.3 $ 198.3 $ 181.6
Interest expense $ (86.7) $ (86.7) $ (99.8) $ (100.2)
Other income (expense) - net $ 3.2 $ (4.2) $ 1.9 $ 0.2
Income from continuing operations before income
taxes $ 18.9 $ 0.4 $ 157.4 $ 140.8
Provision for income taxes $ (6.1) $ (6.1) $ (55.0) $ (49.6)
Income (loss) from continuing operations $ 12.8 $ (5.7) $ 102.4 $ 91.2
Net income (loss) $ 12.8 $ (5.7) $ 95.1 $ 83.9
Per common share:
Basic:
Income from continuing operations $ 0.46 $ (0.20) $ 3.77 $ 3.35
Net income $ 0.46 $ (0.20) $ 3.50 $ 3.08
Diluted:
Income from continuing operations $ 0.44 $ (0.20) $ 3.67 $ 3.27
Net income $ 0.44 $ (0.20) $ 3.41 $ 3.01
BALANCE SHEETS:
AS OF AS OF
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------------- -----------------------------
AS ORIGINALLY AS AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------- ------------- -------------
Trade receivables $ 351.1 $ 309.5 $ 360.2 $ 331.5
Net inventories $ 704.8 $ 755.2 $ 598.1 $ 665.8
Other current assets $ 53.0 $ 57.3 $ 51.7 $ 51.9
Total current assets $ 1,383.0 $ 1,396.1 $ 1,242.4 $ 1,281.6
Property, plant and equipment - net $ 173.9 $ 175.1 $ 153.9 $ 154.8
Goodwill $ 620.1 $ 585.2 $ 491.4 $ 466.6
Deferred taxes $ 75.4 $ 102.5 $ 21.2 $ 38.9
Other assets $ 134.6 $ 136.2 $ 74.8 $ 76.7
Total assets $ 2,387.0 $ 2,395.1 $ 1,983.7 $ 2,018.6
Trade accounts payable $ 291.0 $ 292.4 $ 311.2 $ 315.4
Accrued compensation and benefits $ 37.4 $ 33.1 $ 25.9 $ 23.5
Accrued warranties and product liability $ 62.7 $ 68.4 $ 65.2 $ 69.4
Other current liabilities $ 201.3 $ 226.6 $ 152.8 $ 199.1
Total current liabilities $ 627.1 $ 655.2 $ 575.6 $ 627.9
Other non-current liabilities $ 143.8 $ 164.7 $ 74.6 $ 78.6
Additional paid-in capital $ 532.4 $ 536.6 $ 358.9 $ 360.9
Retained earnings $ 199.9 $ 179.8 $ 187.1 $ 185.5
Cumulative translation adjustment $ (115.9) $ (126.5) $ (78.2) $ (90.8)
Accumulated other comprehensive income (loss) $ (120.3) $ (134.2) $ (78.5) $ (91.1)
Cost of shares of common stock in treasury $ (17.5) $ (28.6) $ (17.0) $ (26.1)
Total stockholders' equity $ 595.4 $ 554.5 $ 451.5 $ 430.2
Total liabilities and stockholders' equity $ 2,387.0 $ 2,395.1 $ 1,983.7 $ 2,018.6
Net cash from operating activities, investing activities and financing
activities did not change during the years ended December 31, 2003, December 31,
2002, December 31, 2001 or December 31, 2000 from previously issued results. The
impact of the restatement on individual line items within operating activities
are reflected in the consolidated statement of cash flows.
The cumulative effect of the restatement of the Company's previously filed
financial statements was to increase (reduce) retained earnings as of December
31, 2003, 2002, 2001, 2000 and 1999 by ($247.1) million (of which $200.7 million
relates to the tax
-29-
valuation allowance discussed below), ($46.0) million, ($20.1) million, ($1.6)
million and $9.6 million, respectively, which includes tax benefits (expense) of
($185.7) million, $6.7 million, $0.0 million, $5.4 million and $12.0 million,
respectively. Total stockholders' equity as of December 31, 2003, 2002, 2001,
2000 and 1999 increased (decreased) by ($202.1) million (of which $200.7 million
relates to the tax valuation allowance discussed below), ($42.3) million,
($40.9) million, ($21.3) million and $12.0 million, respectively. The issues
giving rise to the restatement of the Company's previously filed financial
statements, and the pre-tax adjustments resulting therefrom, are summarized
below:
North American Cranes (Cranes Segment): Certain items, mainly related to
disputed charges, inventory shortages, warranty and third party payables
activity, were erroneously recorded to intercompany accounts that were not
timely reconciled, leading to costs totaling $7.4 million in the year ended
December 31, 2003, $6.9 million during the year ended December 31, 2002, $4.2
million in the year ended December 31, 2001, and $0.1 million during the year
ended December 31, 2000 not being recorded as expenses. During the period from
2001 through 2003, the Company initiated a series of facility consolidations in
its crane facilities in North America, which the Company believes was a
contributing factor to these errors.
North American Distribution (Construction Segment): The Company failed to timely
and accurately reconcile certain intercompany imbalances which resulted in costs
totaling $1.4 million in the year ended December 31, 2003, $11.6 million during
the year ended December 31, 2002 and $1.2 million in the year ended December 31,
2001 not being recorded as expenses. The Company believes that the consolidation
of its North American distribution for its construction products during 2002 was
a contributing factor to these errors.
Light Construction (Aerial Work Platforms Segment): The Company failed to timely
and accurately reconcile certain intercompany imbalances, which resulted in
errors in the recording of intercompany transactions and, as a result, costs
totaling $2.1 million in the year ended December 31, 2003, $4.8 million during
the year ended December 31, 2002, $1.3 million in the year ended December 31,
2001 and $0.2 million in the year ended December 31, 2000 were not recorded as
expenses. The Company believes that the integration of several operations in its
Light Construction business beginning in 2000 was a contributing factor to these
errors.
German Mining Business (Materials Processing & Mining Segment): As part of the
review and subsequent correction of an imbalance in intercompany notes, errors
in the accounting for costs associated with warranty and inventory charges were
identified as having been improperly offset against intercompany accounts at the
Company's German mining operations. This resulted in costs of $7.4 million in
the year ended December 31, 2001, and costs of $4.6 million in the year ended
December 31, 2000, not being recorded as expenses.
Compact and Heavy Equipment (Construction Segment): The Company failed to
reconcile the accrual for goods received not invoiced to underlying detailed
records for raw material and parts inventory in connection with assessing the
appropriateness of the accrued liability. As a result, costs were not recorded
as expenses totaling $5.7 million in the year ended December 31, 2003, $0.4
million during the year ended December 31, 2002, $0.2 million during the year
ended December 31, 2001, and $0.0 million in the year ended December 31, 2000.
Other Intercompany Imbalances and Other Items: The Company's various business
units buy and sell products and services from each other in the normal course of
operations. Errors were identified as a result of not reconciling intercompany
activity in a timely manner between certain business units. Other errors, not
specifically related to intercompany activity, were identified during the review
and were corrected in the restatement. These errors related mainly to the
reconciliation of certain accruals, foreign currency adjustments, and the
disposition of a foreign sales distribution business. As a result of these
aggregate errors, expenses were not recorded totaling $1.9 million in the year
ended December 31, 2003, $7.5 million in the year ended December 31, 2002, $3.0
million in the year ended December 31, 2001, and $0.8 million in the year ended
December 31, 2000. These errors occurred mainly in the Construction and Cranes
segments.
Schaeff Goodwill: On January 14, 2002, the Company completed the acquisition of
Schaeff, a German manufacturer of compact construction equipment and a full
range of scrap material handlers. An error in the recording of the Company's
investment led to an overstatement of goodwill and the cumulative translation
adjustment account within other comprehensive income within stockholders' equity
in the amount of $23.5 million, beginning in 2002.
Revenue Recognition: The Company has determined that there were errors in the
timing of revenue recognition with respect to three particular transactions in
2000 and 2001, two of which involved United Rentals and one of which involved a
third-party financial institution because the risks and rewards of ownership in
the equipment involved in such transactions had not passed from the Company to
its customers. The correction of these errors has resulted in an increase in
revenue in the year ended December 31, 2002 of $24.0 million and in the year
ended December 31, 2001 of $26.3 million, and a decrease in revenue in the year
ended December 31, 2000 of $50.3 million. As a result of these adjustments,
there was an increase in pre-tax income (loss) of $1.9 million in the year
ended December 31, 2002, $4.2 million in the year ended December 31, 2001, and
($6.1) million in the year ended December 31, 2000.
Additionally, other errors in the timing of revenue recognition where the risks
and rewards of ownership had not passed from the Company to its customers were
corrected, which increased revenue in the year ended December 31, 2003 by $12.7
million, and decreased revenue in the year ended December 31, 2002 by $4.9
million, in the year ended
-30-
December 31, 2001 by $14.5 million and in the year ended December 31, 2000 by
$18.3 million. As a result of these adjustments, there was an increase in
pre-tax income (loss) of $2.6 million in the year ended December 31, 2003,
($1.2) million in the year ended December 31, 2002, ($2.4) million in the year
ended December 31, 2001 and ($1.4) million in the year ended December 31, 2000.
Acquisition Accounting: During the Company's review of the accounting for
certain of its acquisitions, errors were identified related to excess accruals
for estimated future legal expenses and assumed product liabilities, as well as
asset valuation errors. These errors also resulted in an overstatement of
goodwill at the time of the acquisitions. As the goodwill was subsequently
impaired, such errors also resulted in an overstatement of the goodwill
impairment by $7.0 million during the year ended December 31, 2003. As a result
of these aggregate errors, $6.5 million of expenses were not recorded (which
were offset by $7.0 million of income relating to a reduction in goodwill
impairment from $51.3 million to $44.3 million) in the year ended December 31,
2003, $2.1 million in the year ended December 31, 2002, $3.0 million in the year
ended December 31, 2001 and $3.4 million in the year ended December 31, 2000.
Cumulative Translation Adjustment: Management has also determined that the
accounting treatment of certain of its goodwill related to foreign acquisitions
did not meet the requirements of Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation." At the time these foreign
acquisitions were completed, mainly in 1999 and 2002, the Company valued
goodwill at the historic exchange rate, and failed to translate this goodwill in
subsequent reporting periods at current exchange rates as required by SFAS No.
52. The cumulative impact of this correction has increased (decreased) the
Company's goodwill and the translation adjustment account within stockholders'
equity by $32.3 million as of December 31, 2003, ($0.6) million as of December
31, 2002, ($23.3) million as of December 31, 2001, ($18.6) million as of
December 31, 2000 and ($5.7) million as of December 31, 1999. In addition, the
reconciliation of intercompany imbalances described in the previous paragraphs
affected the translation adjustment within stockholders' equity.
Retirement and Other Benefit Plans: During the Company's review of its foreign
defined benefit plans in 2004, an error was identified in the application of
SFAS No. 87, "Employers' Accounting for Pensions." The Company did not record
the minimum pension liability adjustment for these plans to other comprehensive
income (net of taxes) within stockholders' equity and other non-current
liabilities. The net result of correcting this error was a reduction in other
comprehensive income (net of taxes) as of December 31, 2003, 2002, 2001, 2000
and 1999 totaling $6.9 million, $10.7 million, $3.3 million, $0.0 million and
$0.0 million, respectively. In addition, non-current liabilities increased as of
December 31, 2003, 2002, 2001, 2000 and 1999 by $9.8 million, $15.3 million,
$4.7 million, $0.0 million and $0.0 million, respectively. The Company also
determined that it was not properly accounting for its equity based compensation
in accordance with Emerging Issues Task Force Issue No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested" and Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" as permitted by SFAS No. 123 "Accounting for
Stock-Based Compensation." The net result of correcting these errors was a
decrease to current liabilities as of December 31, 2003, 2002, 2001, 2000 and
1999 totaling $5.2 million, $5.2 million, $3.7 million, $1.9 million and $1.8
million, respectively, an increase to non-current liabilities as of December 31,
2003, 2002, 2001, 2000 and 1999 totaling $14.4 million, $11.2 million, $10.6
million, $9.1 million and $7.4 million, respectively, and a reduction in
stockholders' equity of $9.1 million, $6.0 million, $6.9 million, $7.2 million
and $5.5 million as of December 31, 2003, 2002, 2001, 2000 and 1999,
respectively.
Taxes: As a result of the impact of the pre-tax income restatement items
previously discussed, and the reconciliation of tax accounts, the Company is
restating its tax accounts to decrease deferred taxes by $244.2 million and to
increase income taxes payable by $1.6 million at December 31, 2003, and to
increase (decrease) tax expense by $185.7 million and ($6.7) million for the
years ended December 31, 2003 and December 31, 2002, respectively.
Included in the restatement amounts discussed above are amounts related to the
reconciliation of the Company's tax accounts that increased deferred taxes by
$6.9 million and increased goodwill by $7.0 million at December 31, 2003, and
increased (decreased) tax expense by ($3.0) million and $6.2 million for the
years ended December 31, 2003 and December 31, 2002, respectively.
As a result of the pre-tax income restatement adjustments discussed above, a
reassessment was performed as to the likely realization of the Company's U.S.
deferred tax assets at each reporting date. The reassessment of the
realizability of the Company's deferred tax assets resulted in a valuation
allowance being recorded at December 31, 2003 in the restated financial
statements. This increased the Company's deferred tax valuation allowance and
corresponding tax expense in 2003 by $200.7 million. Based on the profitability
of the Company in 2004 and significant, profitable backlog generated in early
2005, the valuation allowance was reversed in the quarter ended December 31,
2004.
The Company's reassessment began with an analysis of the Company's cumulative
three-year historical U.S. pre-tax earnings. As of December 31, 2003, the
Company had a cumulative three-year historical U.S. pre-tax loss, which is
considered significant objective evidence that a valuation allowance may be
required, unless there existed objective evidence of a significant magnitude
that would indicate that it is more likely than not that the U.S. deferred tax
assets would be realized. It was determined that only the evidence that was
available as of the time of the filing of the original financial statements
could be used in this assessment. During the Company's evaluation of other
evidence available as of the original issuance date of the December 31, 2003
financial statements, several items were considered, including the cyclical
nature of the Company's industry, the impact of its restructuring activities,
the goodwill
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impairment in the Company's Roadbuilding, Utility Products and Other segment,
profitable U.S. acquisitions (mainly Genie Holdings, Inc. and its affiliates and
Advance Mixer, Inc.) made during the three-year period but not available for the
whole period, the timeframe of expiration of the Company's net operating loss
carry-forwards, the favorable impact of the Company's debt reduction activities,
and the indication of an industry recovery based on trends in non-residential
construction spending and rental channel capital expenditure projections. The
Company concluded that the weight of the objective negative evidence available
at the time of the original financial statement filing (without the benefit of
current hindsight) could not be overcome by these other factors, and therefore a
valuation allowance was recorded at December 31, 2003 in the restated financial
statements.
As a result of the issues identified during the Company's review which resulted
in the need to restate previously issued financial statements, the Company has
implemented changes to its internal control over financial reporting, and has
also launched further improvement initiatives in its financial reporting system.
See Item 9A - "Control and Procedures" of this Form 10-K for further information
on the Company's actions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its financial statements for the years ended December
31, 2002 and 2003 in this Annual Report on Form 10-K. This Annual Report on Form
10-K also includes restated selected financial data for the years ended December
31, 2000 and 2001. The restatement principally pertains to errors identified by
the Company in accounting for, and reconciliation of, certain intercompany
imbalances, as well as in the failure of the Company to properly eliminate, in
consolidation, all intercompany accounts in accordance with generally accepted
accounting principles. Prior to the restatement, the intercompany imbalances
were eliminated by affecting the translation adjustment account within
accumulated other comprehensive income (loss) within stockholders' equity,
rather than the accounts giving rise to the imbalance. The Company's review of
prior year financial statements identified other errors in accounting which
primarily impacted net sales, cost of goods sold, goodwill, accumulated other
comprehensive income, additional paid-in capital and treasury stock, which are
also corrected in these restatements. The Company believes that its rapid growth
through acquisition, complex transactions and facility closures and
reorganizations during the periods in question, and their impacts on such issues
as staffing, training, oversight and systems, were factors that contributed to
the errors.
In addition, as a result of the impact of the restatement items on the pre-tax
income of the Company's U.S. business, the Company reassessed its need for a
valuation allowance and determined that a valuation allowance to reduce Terex's
U.S. deferred tax asset was required, as a result of a reassessment, to be
recorded at December 31, 2003 in the restated financial statements. The
valuation allowance was subsequently reversed in the quarter ended December 31,
2004, thereby increasing net income in that quarter. The reversal was based upon
improving operating results during 2004 and significant, profitable backlog
generated in early 2005. During the periods ended March 31, 2004 and June 30,
2004, the impact of this valuation allowance required a reversal of the tax
expense on the U.S. pre-tax income in the periods ended March 31, 2004 and June
30, 2004, requiring the Company to restate its financial statements for such
periods. Additionally, the Company has adjusted its tax accounts for errors
identified for the periods ended June 30, 2004 and in all prior periods
presented in this Annual Report on Form 10-K.
As previously disclosed, in the third quarter of 2004, the Company commenced a
detailed examination of intercompany transactions in an effort to reconcile
imbalances in certain of the Company's accounts. Management of the Company
conducted this examination and kept the Board of Directors of the Company and
the Audit Committee of the Company's Board of Directors (the "Audit Committee")
informed of its progress on a regular basis. In addition, the Audit Committee
retained independent counsel to advise it with respect to this matter and
authorized such counsel to conduct an independent investigation into the
circumstances giving rise to the imbalances.
As a result of the Company's internal review, it identified several errors that
required a restatement of certain of the Company's financial statements, as
described in more detail below and in Item 6 - "Selected Financial Data" and
Note B - "Restatement of Consolidated Financial Statements" in the Notes to
Consolidated Financial Statements. Accordingly, on January 12, 2005, the
Company's management and the Audit Committee concluded that the financial
statements for the years ended December 31, 2001, 2002 and 2003 would require
restatement and should no longer be relied upon. In addition, on March 3, 2005,
the Company's management and the Audit Committee concluded that the financial
statements for the year ended December 31, 2000 would require restatement and
should no longer be relied upon and on September 8, 2005, the Company's
management and the Audit Committee concluded that the financial statements for
the quarters ended March 31, 2004 and June 30, 2004 would require restatement to
reflect an increase in net income and should no longer be relied upon. The
Company's management has since completed its review and completed the
restatement of its financial statements for the years ended December 31, 2000,
2001, 2002 and 2003 and the quarters ended March 31, 2004 and June 30, 2004.
The issues giving rise to the restatement of the Company's previously filed
financial statements included:
o Errors were made in the corporate quarterly and annual
consolidation of intercompany accounts as a result of failures
to properly resolve imbalances received from the Company's
various business units.
o As a result of the declining demand for mobile cranes in North
America, the Company initiated a series of facility
consolidations with the goal of reducing the overall cost of
production in North America. During the transition, as
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well as during other periods, there was a failure to properly
record certain items related to disputed charges, inventory
shortages, warranty and third party payables activity.
o During 2002, the Company consolidated North American
distribution for its articulated and rigid trucks, loader
backhoes, Schaeff mini excavators and Fuchs scrap handling
equipment into its Southaven, Mississippi distribution
facility. The increased level of activity and complexity
contributed to errors in the timely and accurate
reconciliation of certain intercompany imbalances, resulting
in costs not being recorded.
o Beginning in 2000, the Company began the integration of
several operations in its Light Construction business. During
the second half of 2002, the Company initiated facility
consolidations in its Light Construction business. During the
transition and related turnover of employees, as well as at
other times, there was a failure to complete intercompany
reconciliations in a timely manner, which led to errors in the
accounting for, and recording of, costs.
o As part of the review and subsequent correction of an
imbalance in intercompany notes, errors in the accounting for
costs associated with warranty and inventory charges were
identified as having been improperly offset against
intercompany amounts at the Company's German mining
operations.
o Errors were made in the timely reconciliation of transactions
between the Company's various business units, which buy and
sell products and services from each other in the normal
course of their operations. In addition, other errors, not
specifically related to intercompany activity, were identified
during the review and were corrected in the restatement. These
errors related mainly to the timely reconciliation of certain
accruals (including in the compact and heavy equipment
businesses in the Company's Construction segment), foreign
currency adjustments, and the disposition of a foreign sales
distribution business. These errors occurred mainly in the
Construction and Cranes segments.
o In connection with the January 14, 2002 acquisition by the
Company of the Schaeff Group of Companies, a German
manufacturer of compact construction equipment and a full
range of scrap material handlers, an error was made in the
recording of the Company's investment, which led to an
overstatement of goodwill and stockholders' equity.
o Management has also determined that the accounting treatment
of certain of its goodwill related to foreign acquisitions did
not meet the requirements of SFAS No. 52, "Foreign Currency
Translation." At the time these foreign acquisitions were
completed, mainly in 1999 and 2002, the Company valued
goodwill at the historic exchange rate, and the Company has
consistently applied this accounting treatment. The Company
has now determined that it should have translated goodwill
each period to reflect changes in the foreign currency
exchange rate.
o Management has also identified an error with respect to the
Company's foreign defined benefit plans. The Company did not
record the minimum pension liability adjustment for these
plans to other comprehensive income (net of taxes) within
stockholders' equity and other non-current liabilities.
Management also determined that it was not properly accounting
for its equity based compensation. The Company did not record
the Company's common stock held in a rabbi trust (at cost) as
treasury stock within stockholders' equity and a corresponding
liability within non-current liabilities. In addition, the
Company should have reclassified the non-current liability
established through December 31, 2003 to additional paid-in
capital within stockholders' equity and reclassified other
equity based compensation from current liabilities to
additional paid-in capital within stockholders' equity.
o Management has determined that adjustments to the timing of
revenue recognition of certain arrangements are required,
including in three particular transactions in 2000 and 2001,
two involving United Rentals and one with a third-party
financial institution, because the risks and rewards of
ownership in the equipment involved in such transactions had
not passed from the Company to its customers.
o Errors were identified in the accounting for goodwill in
certain acquisitions related to excess accruals for estimated
future legal expenses and assumed product liabilities, as well
as asset valuation errors. As a result of giving effect to
this restatement adjustment, the Company reduced its 2003
goodwill impairment.
o As a result of giving effect to the restatement adjustments,
the Company was required to reassess the restated deferred tax
assets as to their need for a deferred tax asset valuation
allowance in light of the objective evidence available prior
to the original issuance date of those financial statements.
The Company concluded that there was a need for a deferred tax
asset valuation allowance in the restated financials at
December 31, 2003 and a reversal of that valuation allowance
at December 31, 2004 based upon the favorable changes in the
objective evidence available prior to the issuance of the
December 31, 2004 financial statements.
o Errors were identified by the Company in its accounting for
income taxes related to goodwill and tax contingencies.
As a result of these issues identified during the Company's review which
resulted in the need to restate previously issued financial statements, the
Company has implemented changes to its internal control over financial
reporting, and has also launched further improvement initiatives in its
financial reporting system. See Part II, Item 9A, "Controls and Procedures," of
this Annual Report on Form 10-K for further information on the Company's
actions.
All amounts presented below have been adjusted to reflect the restatement.
-33-
RESULTS OF OPERATIONS
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
From July 1, 2001 through June 30, 2002, the Company operated in three business
segments: (i) Terex Americas; (ii) Terex Europe; and (iii) Terex Mining. From
July 1, 2002 through September 18, 2002, the Company operated in four business
segments: (i) Terex Construction; (ii) Terex Cranes; (iii) Terex Roadbuilding,
Utility Products and Other; and (iv) Terex Mining, and upon the acquisition of
Genie on September 18, 2002, the Company added the Terex Aerial Work Platforms
segment. On July 1, 2003, the Company announced an agreement in principle to
sell its worldwide electric drive mining truck business, and ceased reporting
Terex Mining as a separate financial reporting segment. On December 10, 2003,
Terex terminated the negotiation for the sale of the electric drive mining truck
business, and has reinstated reporting of the Terex Mining segment. On July 1,
2004, the Company realigned certain operations in an effort to strengthen its
ability to service customers and to recognize certain operational efficiencies.
The Company now operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Materials Processing
& Mining; and (v) Terex Roadbuilding, Utility Products and Other. All prior
periods have been restated to reflect results based on these five business
segments. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex is migrating historic brand names for many of its
products to the Terex brand, including in some cases using the historic brand
name in conjunction with the Terex brand name for a transitional period of time.
The Company plans to continue the use of the Genie, Powerscreen and Bid-Well
brand names as well.
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, scrapers, hydraulic
excavators, large wheel loaders, loading machines and truck mounted articulated
hydraulic cranes), compact equipment (including loader backhoes, compaction
equipment, mini and midi excavators, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing systems 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
Terex brand name and the following historic brand names, including in some cases
the use of the Terex name in conjunction with these historic brand names: Atlas,
Benford, Fermec, Finlay, Fuchs, Pegson, Powerscreen, Schaeff and TerexLift. The
Company acquired Schaeff, including Fuchs, on January 14, 2002. The results of
Schaeff are included in the Terex Construction segment since its date of
acquisition.
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 Terex brand
name and the following historic brand names, including in some cases the use of
the Terex name in conjunction with these historic brand names: American,
Bendini, Comedil, Demag, Franna, P&H, Peiner and PPM. The Company acquired Demag
and its affiliates on August 30, 2002. The results of Demag are included in the
Terex Cranes segment since its date of acquisition.
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, telehandlers, light construction equipment and construction
trailers. Products include material lifts, portable aerial work platforms,
trailer mounted booms, articulating booms, stick booms, scissor lifts,
telehandlers, light towers, concrete finishing equipment, power buggies,
generators, arrow boards, construction trailers, related components and
replacement parts, and other products. These products are used primarily by
customers in the construction and building maintenance industries to build
and/or maintain large physical assets and structures. Terex Aerial Work
Platforms products are currently marketed principally under the Terex and Genie
brand names and the following historic brand names, including in some cases the
use of the Terex name in conjunction with these historic brand names: Amida,
Bartell, Benford, Load King and Morrison.
The Terex Materials Processing & Mining segment designs, manufactures and
markets fixed installation crushing and screening equipment (including crushers,
impactors, screens and feeders), hydraulic mining excavators, high capacity
surface mining trucks, drilling equipment, related components and replacement
parts, and other products. These products are used primarily by construction,
mining, quarrying and government customers in construction and commodity mining.
Currently, Terex Materials Processing & Mining products are marketed principally
under the Terex brand name and the following historic brand names, including in
some cases the use of the Terex name in conjunction with these historic brand
names: Canica, Cedarapids, ELJay, Jaques, O&K, Reedrill, Simplicity and Unit
Rig. The Company acquired Terex Mexico and its affiliates on September 7, 2004
and certain assets and liabilities of Reedrill and its affiliates on December
31, 2004. The results of Terex Mexico and Reedrill are included in the Terex
Materials Processing & Mining segment since their respective dates of
acquisition.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets asphalt and concrete equipment (including pavers, plants, mixers,
reclaimers, stabilizers and profilers), utility equipment (including digger
derricks, aerial devices and cable placers) 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,
construct and maintain utility lines, trim trees and for commercial and military
operations. Terex Roadbuilding, Utility Products and Other products are
currently marketed principally under
-34-
the Terex brand name and the following historic brand names, including in some
cases the use of the Terex name in conjunction with these historic brand names:
Advance, American Truck Company, ATC, Bid-Well, Cedarapids, Cedarapids/Standard
Havens, CMI Johnson-Ross, CMI Terex, CMI-Cifali, Hi-Ranger, Tatra and Telelect.
Terex also owns much of the North American distribution channel for the utility
products group through its Terex Utilities distribution network, located
primarily in the Southern and Western United States. Terex also owns 40% of
INECO, another distributor of utility products. 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 to third parties under the Terex
Re-Rentals name. The Company, through TFS, also offers customers loans and
leases underwritten by TFS Capital Funding, an affiliate of the General Electric
Company. The Company acquired Pacific Utility on January 15, 2002, Telelect
Southeast on March 26, 2002 and certain assets and liabilities of Terex Advance
Mixer on April 11, 2002. On February 14, 2003, the Company acquired Commercial
Body and Combatel. On August 28, 2003 the Company acquired an additional 51% of
the outstanding shares of Tatra and acquired a controlling interest in ATC. On
April 22, 2004, the Company acquired an additional 10% of the outstanding shares
of Tatra for a total of 81% ownership. On June 14, 2004, the Company acquired
the one-third interest in ATC previously held by Tatra. The results of Pacific
Utility, Telelect Southeast, Terex Advance Mixer, 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 of intercompany activity
among the five segments, as well as general and corporate items.
Subsequent Events
Effective January 1, 2006, Terex realigned certain operations in an effort to
strengthen its ability to service customers and to recognize certain
organizational efficiencies. The Mobile Crushing and Screening Group, consisting
of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the
Terex Construction Segment, now will be consolidated within the Terex Materials
Processing & Mining Segment. The European telehandlers business of TerexLift,
formerly part of the Terex Construction Segment, now will be part of the Terex
Aerial Work Platforms Segment. The segment discussions included herein do not
reflect this realignment. Terex will be presenting segment reporting effective
January 1, 2006 giving effect to this reorganization.
The Company acquired Halco on January 24, 2006, for approximately 8.4 million
British Pounds in cash, plus assumption of certain capitalized leases and
pension liabilities. Halco is headquartered in Halifax, United Kingdom, with
operations in the United States, Ireland and Australia. Halco designs,
manufactures and distributes down-the-hole drill bits and hammers for drills.
The results of Halco will be included in the Terex Materials Processing & Mining
Segment from its date of acquisition.
OVERVIEW
The Company is a diversified global manufacturer of capital equipment serving
the construction, infrastructure, and surface mining markets. The Company has
grown extensively through acquisition over the past five years. Terex's strategy
is to, over time, integrate all of its products under the Terex brand name and
concentrate on streamlining the Company's processes and interfaces with the
customer, including sales, marketing, and accounting functions. Typically, the
Company's selling proposition versus the competition is that the Company's
equipment delivers equal or better returns on the customers' equipment
investment versus Terex's competitors.
In 2004, the Company experienced strong sales growth over the prior year, but
operational challenges, such as rising steel costs, component availability and
currency movement (particularly weakness of the U.S. dollar relative to the Euro
and British Pound Sterling), weighed on the Company's profit performance. With
regard to sales, a large factor in the Company's performance was the
significantly improving economic conditions of many of its end-markets and
customers. For example, the mining industry experienced increased demand
reflecting the higher commodity price environment that continued to materialize
throughout the year. Additionally, many global economies appeared to be emerging
from years of reduced economic activity. However, tight end-markets still
persist in a number of the Company's end-markets, particularly in the North
American Crane, Roadbuilding, Utility Product and Heavy Construction businesses.
The Company anticipates a continued mix of end market conditions in 2005, with
certain products continuing to participate in a strong recovery while others
expecting continued sluggish markets. For example, the Company expects
opportunities for continued growth in the Compact Construction, Aerial Work
Platforms and Materials Processing & Mining businesses, continuing to build on
the economic recovery that took shape in 2004. However, the Roadbuilding
business, and other products manufactured by the Company related to
infrastructure improvement, have lagged the recovery somewhat, as these products
rely heavily on U.S. federal and municipal funding for their revenue base. This
funding has been reduced and/or delayed substantially by the lack of a new
long-term highway spending bill at the federal level. The Company anticipates
that the funding bill passed in 2005 will pave the way for end-market
improvements in 2006. Additionally, North American Cranes performance remains
weak, reflecting weakness in the Company's customer base. As there are
indications of improvement in non-residential construction figures, the Company
anticipates that the Cranes segment will begin to show improved end-market
demand in the second half of 2005 and substantially better performance in 2006.
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During 2005, the Company will emphasize margin improvement initiatives, as well
as continue to focus on cash generation and debt reduction. The Company recently
announced the Terex Business System initiative, building on the Terex
Improvement Process, aimed at improving the Company's internal processes and
benefiting the Company's customers, investors and employees. The Terex Business
System is based on lean principles and lean thinking as applied to every aspect
of business. Additionally, the system focuses on streamlining the Company's
interface with its customers, and gaining efficiencies with suppliers based on
the Company's global purchasing power and resources. The Company has established
Terex learning centers with the purpose of teaching these principles to key
personnel throughout the Company. This is a longer term project, but one that
will be the cornerstone of the Company's activities for years to come. The
metric which the Company is using to measure the effectiveness of these
initiatives is ROIC, and Terex has established the goal of delivering an average
of 20% or greater returns on invested capital through an economic cycle.
RESTRUCTURING
The Company has initiated numerous restructuring programs since 2000. These
programs were initiated 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 Materials
Processing & 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 negatively impacted 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 G - "Restructuring and Other Charges" in the Company's Consolidated
Financial Statements for a detailed description of the Company's restructuring
programs, including the reasons, timing and costs associated with each such
program.
2004 COMPARED WITH 2003
TEREX CONSOLIDATED
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 5,019.8 $ 3,909.8 28.4%
Gross profit $ 703.1 14.0% $ 499.0 12.8% 40.9%
SG&A $ 488.5 9.7% $ 396.7 10.1% 23.1%
Goodwill impairment $ -- -- $ 44.3 1.1% (100.0)%
Income from operations $ 214.6 4.3% $ 58.0 1.5% 270.0%
During 2004, the Company continued to focus on external growth and on internal
process improvement actions. Increasing demand for the Company's products from
general economic recovery in several end markets, as well as increasing
penetration in new and existing markets, contributed to strong sales growth.
Growth in income from operations from the increased sales volume was dampened by
cost pressures experienced on many purchased commodities and components, mainly
steel. The Company also generated approximately $165 million of cash from
operations and reduced its net debt (defined as total debt less cash) by $114.1
million during 2004.
Net sales for 2004 were $5,019.8 million, an increase of $1,110.0 million when
compared to 2003. The growth was driven primarily by strength in the Aerial Work
Platforms, Construction and Materials Processing & Mining segments. These
product areas all experienced sharp end market recoveries during 2004.
Additionally, revenues were positively impacted by currency translation.
Approximately 59% of the Company's sales in 2004 were made by businesses that
operate primarily in currencies other than the U.S. dollar. During 2004, the
value of the U.S. dollar declined relative to many of these foreign currencies,
and as a result, when these sales denominated in foreign currencies were
translated into U.S. dollars, there was an increase in net sales of
approximately $238 million when compared to 2003 due solely to the variation of
the exchange rates.
Total gross profit for 2004 was $703.1 million, an increase of $204.1 million
when compared to 2003. However, gross margin did not reflect the full benefit of
the net sales growth, as commodity and purchased component cost increases
substantially offset the Company's operating efficiencies gained through fixed
cost absorption.
During 2004, the Company incurred approximately $10 million of restructuring and
other costs, a decrease of approximately $73 million over the prior year
(excluding a $44.3 million goodwill impairment charge taken in 2003), primarily
related to costs incurred in the Terex Cranes, Terex Construction and Terex
Materials Processing & Mining segments to complete projects initiated in 2002
-36-
and 2003, as well as costs to complete the exit of product lines and consolidate
manufacturing facilities at the Company's Germany and UK locations.
Total selling, general and administrative costs ("SG&A") in 2004 increased by
$91.8 million when compared to 2003. The impact of a weaker dollar relative to
the British Pound and Euro accounted for the majority of the increase in SG&A in
2004 when compared to 2003. The full year effect of the 2003 acquisitions of
Tatra and ATC increased SG&A by approximately $17.3 million in 2004.
Income from operations in 2004 increased to $214.6 million, an increase of
$156.6 million over 2003 levels, due mainly to increased volume. Income from
operations in 2003 also included a $44.3 million impairment charge for goodwill.
TEREX CONSTRUCTION
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 1,773.0 -- $ 1,350.4 -- 31.3%
Gross profit $ 211.4 11.9% $ 162.5 12.0% 30.1%
SG&A $ 154.7 8.7% $ 119.6 8.9% 29.3%
Income from operations $ 56.7 3.2% $ 42.9 3.2% 32.2%
Net sales in the Terex Construction segment increased by $422.6 million for 2004
when compared to 2003 and totaled $1,773 million. Approximately 28% of the
increase in sales over 2003 was due to the translation effect from a weaker U.S.
dollar relative to the British Pound and Euro. Excluding the impact of foreign
exchange translation, sales increased mainly in the compact construction
equipment product category, the scrap handler business and the Powerscreen
mobile crushing and screening product category when compared to 2003.
Specifically, the compact construction equipment businesses have benefited from
the early stages of a North American recovery and stronger end markets in
certain European countries, mainly the United Kingdom. Scrap handling machines,
sold primarily to metal scrap yards, have shown a sharp increase in demand
mainly due to the higher market prices for steel, leading customers to increase
their production capacity in order to benefit from these higher market prices.
The Company continues to focus on increasing sales in North America by expanding
its presence in the compact equipment market and by using Genie sales leadership
to penetrate the North American rental markets.
Gross profit in the Terex Construction segment increased by $48.9 million in
2004 when compared to 2003 and totaled $211.4 million. Gross margin has been
unfavorably impacted by the continued weakening of the U.S. dollar relative to
the Euro and British Pound in 2004 and remained basically flat at 11.9% in 2004
as compared to 12.0% in 2003. Gross margin improved significantly in the compact
construction product area in 2004, however, as sales expansion in both Europe
and North America overcame pressures from raw material costs and a weaker U.S.
dollar relative to the European currencies. Additionally, gross profit relative
to 2003 increased as a result of improved sales of Fuchs products in the United
States, benefiting from the increased demand of the scrap metal and recycling
business. Overall gross profit was negatively impacted by the impact of the weak
U. S. dollar on products exported from Europe into the United States.
SG&A costs totaled $154.7 million in 2004, an increase of 29.3% when compared to
2003. The increase in SG&A costs was due primarily to the impact of a weaker
U.S. dollar on SG&A costs reported in Euro and British Pounds and an increase in
costs associated with investments made in sales and marketing activities. In
2004, the Terex Construction segment incurred $0.2 million of restructuring and
other charges as compared to $1.3 million of such charges in 2003.
Income from operations in 2004 rose to $56.7 million or 3.2% of sales when
compared to income from operations of $42.9 million or 3.2% of sales in 2003.
TEREX CRANES
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 1,076.8 $ 1,029.0 4.6%
Gross profit $ 131.9 12.2% $ 96.7 9.4% 36.4%
SG&A $ 96.6 9.0% $ 86.8 8.4% 11.3%
Income from operations $ 35.3 3.3% $ 9.9 1.0% 256.6%
-37-
Net sales for the Terex Cranes segment in 2004 increased by $47.8 million and
totaled $1,076.8 million when compared to $1,029.0 million in 2003. The increase
was mainly due to a strong tower crane business, as well as good performance in
the Company's stacker product line. Sales in the Company's tower cranes business
increased by approximately 43% relative to 2003, reflecting increased global
activity for these cranes, especially in Asia where the demand had been weak for
many years. Sales of cranes and boom trucks in the United States remained flat
relative to 2003, a result of the continued weak demand for cranes in North
America in the construction, infrastructure improvement and crane rental
markets. The Company continues to focus on expanding sales by expanding its
market share and distribution throughout Europe and Asia. In North America, the
Company continues to focus on maintaining market share and positioning itself
for an anticipated market recovery in late 2005 or 2006.
Gross profit in 2004 increased by $35.2 million relative to 2003 and totaled
$131.9 million. Gross profit earned in 2004 increased relative to 2003 primarily
due to the improved performance of the tower crane business, as well as general
strength in international markets. These gains were partially offset by
continued pricing and cost pressure in the North American crane business. This
low level of margin performance was a result of continued weak demand for cranes
and boom trucks in the United States and the resulting impact on selling margins
and factory productivity.
Restructuring and other non-recurring items totaled a gain of $1.5 million in
2004. These were primarily related to the completion of the restructuring
program at the Peiner tower crane facility in Trier, Germany and the completion
of the restructuring program at the Cork, Ireland aerials facility.
Restructuring and other costs totaled $14.6 million in 2003. These costs related
primarily to the closure of the Peiner facility and rationalization of products
offered under the Peiner name, costs associated with the closure of the boom
truck facility in Olathe, Kansas and inventory value adjustments related to
discontinuance of products offered under the PPM brand that duplicated products
added through the acquisition of Demag.
SG&A costs in 2004 totaled $96.6 million, an increase of 11.3% over the same
period in 2003. Total currency impact on the Cranes group SG&A accounted for
approximately $7 million of the total $9.8 million increase.
Income from operations for the twelve months ended December 31, 2004 totaled
$35.3 million compared to $9.9 million for the same period in 2003.
TEREX AERIAL WORK PLATFORMS
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 915.0 $ 643.0 42.3%
Gross profit $ 180.8 19.8% $ 135.4 21.1% 33.5%
SG&A $ 75.1 8.2% $ 67.7 10.5% 10.9%
Income from operations $ 105.7 11.6% $ 67.7 10.5% 56.1%
Net sales for the Terex Aerial Work Platforms segment in 2004 totaled $915.0
million, an increase of $272.0 million when compared to 2003. The increase was a
result of stronger demand from the rental channel in the United States and, to a
lesser extent, the rental channels in Europe, Australia and Asia. Rental market
demand increased relative to 2003, primarily as customers continued to replace
aging equipment; however, customer fleet expansion activity also began to impact
sales. Notably, net sales of the segment's material handler business increased
by approximately 107% when compared to 2003, largely due to marketing the
product as part of the overall Genie offering to these same rental distribution
channels.
Gross profit for the Terex Aerial Work Platforms segment for 2004 totaled $180.8
million, an increase of $45.4 million when compared to 2003. Segment gross
margins were lower in 2004 than in the prior year as the benefit of increased
sales was more than offset by higher steel costs, especially during the last two
quarters of 2004. However, gross margin realized by the U.S. telehandler
business did improve relative to 2003, benefiting from improved factory
productivity and additional sales leverage through the Genie distribution
system.
Total SG&A costs for 2004 totaled $75.1 million, an increase of $7.4 million
from 2003, although SG&A costs as a percentage of sales decreased in 2004 when
compared to 2003. The aggregate increase was due primarily to higher
compensation and related costs, as well as increased sales and marketing
activities accompanying the higher sales levels.
Income from operations for the Terex Aerial Work Platforms segment for 2004 was
$105.7 million, an increase of $38.0 million from 2003, with a better operating
margin of 11.6% experienced in 2004 versus 10.5% in 2003. The aggregate increase
was due primarily to the significantly higher sales volumes, partially offset by
cost increases from many suppliers, particularly steel.
-38-
TEREX MATERIALS PROCESSING & MINING
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 541.4 $ 397.8 36.1%
Gross profit $ 87.1 16.1% $ 52.2 13.1% 66.9%
SG&A $ 56.3 10.4% $ 47.3 11.9% 19.0%
Goodwill impairment $ -- -- $ 23.2 5.8% (100.0)%
Income (loss) from
operations $ 30.8 5.7% $ (18.3) (4.6%) (268.3)%
Net sales in the Terex Materials Processing & Mining segment increased by $143.6
million to $541.4 million in 2004 compared to $397.8 million in 2003. This 36.1%
growth in net sales reflects a robust demand for surface mining equipment in
reaction to substantially higher metal and commodity prices versus a year ago.
Additionally, a distribution agreement entered into with Caterpillar for the
Company's hydraulic mining shovels has begun to positively impact the business.
Parts sales were also positively impacted as more equipment was in use at mine
sites. Mining equipment usage drives a strong parts business, as up to 50% of
this segment's net sales are derived from parts and service revenue. Demand for
the Terex Materials Processing & Mining segment's products is dependent on
expectations within the mining industry of future commodity prices, including
those for coal and iron ore.
Gross profit increased by $34.9 million relative to 2003 and totaled $87.1
million. Gross profit in 2004 benefited from increased order activity of higher
margin parts and hydraulic mining shovels, as well as improved manufacturing
efficiencies. In addition, there were no restructuring charges in 2004, while
there were $14.2 million of restructuring and other charges in 2003.
SG&A expense increased by $9.0 million in 2004 relative to 2003, to a total of
$56.3 million. This increase is primarily attributed to the weakening of the
U.S. Dollar relative to the Euro, South African Rand and the Australian Dollar
and the increase in sales costs resulting from the significant increase in sales
volume.
During the second quarter of 2003, the Company recognized a goodwill impairment
charge with respect to its Roadbuilding reporting unit, as described in more
detail below under "Terex Roadbuilding, Utility Products and Other." At that
time, the Materials Processing business was included in the Roadbuilding
reporting unit. Of the overall goodwill impairment of $44.3 million, $23.2
million related to the Materials Processing business. As a result of the
realignment of the Company's segments during the quarter ended September 30,
2004, the Materials Processing business is now consolidated in the Terex
Materials Processing & Mining segment, and, as a result, this $23.2 million
portion of the goodwill impairment charge is now included in this segment's
results.
Income from operations for the Terex Materials Processing & Mining segment was
$30.8 million in 2004 or 5.7% of sales, an increase of $49.1 million from an
operating loss of $18.3 million in 2003. This improvement in operating income is
a result of a substantially better equipment demand environment as a result of
the higher commodity prices, the elimination of the one-time impact of a
goodwill write-down in 2003, and foreign currency fluctuations.
-39-
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
2003
2004 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 801.7 $ 547.2 46.5%
Gross profit $ 88.4 11.0% $ 52.6 9.6% 68.1%
SG&A $ 87.5 10.9% $ 59.3 10.8% 47.6%
Goodwill impairment $ -- -- $ 21.1 3.9% (100.0)%
Income (loss) from
operations $ 0.9 0.1% $ (27.8) (5.1%) (103.2)%
Net sales for the Terex Roadbuilding, Utility Products and Other segment for
2004 were $801.7 million, an increase of $254.5 million when compared to 2003.
The acquisitions of Tatra and ATC in August 2003 increased sales relative to
2003 by approximately $170 million. Sales of roadbuilding products in 2004
increased modestly, but remained at a relatively low level reflecting the
continued reduced activity in infrastructure projects. The U.S. federal
government has yet to approve a new long-term infrastructure spending bill,
which is expected to result in the design and release of large infrastructure
improvement projects. This decline was partially offset by rental revenues
generated by Terex's rental business in the United States. The Utility business
experienced modest growth in 2004 compared to 2003.
Gross profit for 2004 totaled $88.4 million, an increase of $35.8 million when
compared to 2003. It should be noted that 2003 was impacted by restructuring and
other charges totaling $16.6 million, or 3.0% of sales, which related primarily
to inventory reductions to reflect a decrease in forecasted demand and to exit
certain economically unviable niche product lines. Gross profit for 2004 also
benefited from the inclusion of Tatra and ATC for a full fiscal year. These
gains were offset by lower margins realized in the Roadbuilding and Utility
businesses in 2004 when compared to 2003.
SG&A costs for the Terex Roadbuilding, Utility Products and Other segment for
2004 totaled $87.5 million, an increase of $28.2 million when compared to 2003.
Restructuring and other charges in 2003 totaled $0.6 million, primarily as a
result of the product line exits described above. Again, the inclusion of Tatra
and ATC for a full fiscal year in 2004 increased SG&A costs versus 2003.
During the second quarter of 2003, the Company determined that the business
performance during the first six months of 2003 in the Roadbuilding reporting
unit (which at the time included the Roadbuilding business and the Materials
Processing business) would not meet the Company's 2003 performance expectations
that were used when goodwill was last reviewed for impairment as of October 1,
2002. Funding for road projects had remained at historically low levels as
federal and state budgets had been negatively impacted by a weak economy and the
war in Iraq. In response to the revised business outlook, management initiated
several changes to address the expected market conditions, including a change in
business management, discontinuance of several non-core products, work force
furloughs and reductions, and an inventory write-down based on anticipated lower
sales volume. Based on the continued weakness in the reporting unit, the Company
initiated a review of the long-term outlook for the reporting unit. The revised
outlook for the reporting unit assumed that funding levels for domestic road
projects would not improve significantly in the short term. In addition, the
outlook assumed that the Company would continue to reduce working capital
invested in the reporting unit to better match revenue expectations.
Based on this review, the Company determined the fair value of the Roadbuilding
reporting unit using the present value of the cash flow expected to be generated
by the reporting unit. The cash flow was determined based on the expected
revenues, after tax profits, working capital levels and capital expenditures for
the reporting unit. The present value was calculated by discounting the cash
flow by the Company's weighted average cost of capital. The Company, with the
assistance of a third-party, also reviewed the market value of the Roadbuilding
reporting unit's tangible and intangible assets. These values were included in
the determination of the carrying value of the Roadbuilding reporting unit.
Based on the revised fair value of the reporting unit, a goodwill impairment of
$44.3 million was recognized during the second quarter of 2003. Of the overall
goodwill impairment, $21.1 million related to the Roadbuilding business and is
included in the Terex Roadbuilding, Utility Products and Other segment, while
$23.2 million related to the Materials Processing business and is now included
in the Terex Materials Processing & Mining segment.
Income from operations for the Terex Roadbuilding, Utility Products and Other
segment for 2004 improved to $0.9 million compared to a loss of $27.8 million
for 2003. The aforementioned goodwill impairment reduced operating profit in
2003 by $21.1 million, substantially all of the favorable comparison when
compared to 2004.
-40-
NET INTEREST EXPENSE
Net interest expense for 2004 totaled $87.0 million, a decrease of $5.8 million
when compared to $92.8 million in 2003. This decrease is primarily due to a
reduction in debt balances as the Company continued to reduce outstanding
obligations, partially offset by a reduction in the benefits recognized related
to interest rate hedges.
OTHER INCOME (EXPENSE) - NET
Other income (expense), including loss on retirement of debt, for 2004 was
income of $19.8 million compared to an expense of $15.9 million for 2003. This
change was primarily the result of the inclusion in 2004 of the income from the
sale of certain facilities recognized in the second quarter of 2004, namely, the
former Fermec facility in Manchester, England, the former aerial platform
facility in Cork, Ireland, the former tower crane facility in Trier, Germany and
the former boom truck facility in Olathe, Kansas, along with the impact in the
second quarter of 2004 of a favorable settlement reached related to the
acquisition of the O&K business.
LOSS ON RETIREMENT OF DEBT
The Company initiated three debt reductions during 2004. On June 30, 2004, the
Company prepaid $75.0 million aggregate principal amount of term debt under its
bank credit facility. In connection with this prepayment, the Company recorded a
related non-cash charge of $1.5 million. On July 21, 2004, the Company prepaid
$50.0 million aggregate principal amount of term debt under its bank credit
facility. In connection with this prepayment, the Company recorded a related
non-cash charge of $1.0 million. On December 29, 2004, the Company prepaid $22.0
million aggregate principal amount of term debt under its bank credit facility.
In connection with this prepayment, the Company recorded a related non-cash
charge of $0.4 million. The non-cash charges in 2004 related to the write-off of
unamortized debt acquisition costs.
The Company initiated two debt reductions during 2003. On June 30, 2003, the
Company redeemed $50.0 million aggregate principal amount of its 8-7/8% Senior
Subordinated Notes due 2008 (the "8-7/8% Notes"). In connection with this
redemption the Company recognized a loss of $1.9 million. The loss was comprised
of the payment of an early redemption premium ($2.2 million), the write-off of
unamortized original issuance discount ($1.6 million) and the write-off of
unamortized debt acquisition costs ($0.2 million), which were partially offset
by the recognition of deferred gains related to fair value interest rate swaps
previously closed on this debt ($2.1 million). On November 25, 2003, the Company
sold and issued $300 million principal amount of 7-3/8% Senior Subordinated
Notes due 2014 (the "7-3/8% Notes"). The net proceeds from the issuance of the
7-3/8% Notes, together with cash on hand of approximately $119 million, were
used to retire the remaining $200 million aggregate principal amount of the
8-7/8% Notes and prepay approximately $200 million of the Company's existing
bank term loans. In connection with these retirements of debt, the Company
recognized a loss of $9.0 million. The loss was comprised of the payment of an
early redemption premium ($11.1 million), the write-off of unamortized debt
acquisition costs ($3.4 million) and original issue discount ($1.7 million),
which were partially offset by gains related to fair value interest rate swaps
($7.2 million).
INCOME TAXES
During 2004, the Company recognized an income tax benefit of $176.7 million on
income before income taxes of $147.4 million, an effective rate of (119.9%), as
compared to an income tax expense of $175.9 million on a loss before income
taxes of $50.7 million, an effective rate of (346.9%), in the prior year. The
2004 effective tax rate is lower than statutory rates and higher than the prior
year due mainly to: (1) the release of the valuation allowance on the U.S.
deferred tax assets that was established in 2003, due to improved performance in
several U.S. businesses indicating that it was more likely than not that the
assets would be realized; (2) the release of the valuation allowance in the
Fermec business due to its strong financial performance indicating that it was
more likely than not that the Company would realize the benefits of certain
deferred tax assets; (3) the successful resolution of a tax audit covering
multiple reporting periods; (4) the favorable determination on interest
deductibility in a jurisdictional review; and (5) the favorable resolution of
certain state tax reviews. The 2003 effective tax rate includes the
establishment of a valuation allowance on the U.S. deferred tax assets, as it
was determined, based on available evidence, that more likely than not the U.S.
earnings would be insufficient to realize the assets, a goodwill impairment
charge recorded during the second quarter of 2003 that is partially
non-deductible for income tax purposes and the benefit from the release of
valuation allowances due to the profitability of the Company's German operations
indicating that it was more likely than not that the Company would realize the
benefit of certain tax assets. Excluding the impact of the establishment of the
valuation allowance on the U.S. deferred tax assets in 2003 of $200.7 million
and subsequent reversal in 2004, the effective tax rates for the periods would
have been 48.9% in 2003 and 16.3% in 2004.
-41-
2003 COMPARED WITH 2002
TEREX CONSOLIDATED
2002
2003 RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 3,909.8 $ 2,816.5 38.8%
Gross profit $ 499.0 12.8% $ 329.3 11.7% 51.5%
SG&A $ 396.7 10.1% $ 291.1 10.3% 36.3%
Goodwill impairment $ 44.3 1.1% $ -- -- --
Income from operations $ 58.0 1.5% $ 38.2 1.4% 51.8%
During 2003, the Company successfully completed the integration of both the
Demag and Genie acquisitions and successfully completed many of the
restructuring programs launched in 2002 to reduce production costs and
rationalize product offerings. The Company also generated approximately $381
million of cash from operations and reduced its net debt (defined as total debt
less cash) by $314.9 million during 2003. In addition, the Company acquired a
majority interest in Tatra, ATC, Commercial Body and Combatel, and launched TFS
to offer financial solutions to its customers in the United States and Europe.
Net sales for 2003 were $3,909.8 million, an increase of $1,093.3 million when
compared to 2002. The acquisitions of Demag, Genie, Commercial Body, Combatel,
Tatra, ATC and Terex Advance Mixer increased sales in 2003 by a total of
$1,024.2 million. Approximately 61% of the Company's sales in 2003 were made by
businesses that operate primarily in currencies other than the U.S. dollar.
During 2003, the value of the U.S. dollar declined relative to many of these
foreign currencies. As a result, when these sales denominated in foreign
currencies were translated into U.S. dollars, there was an increase in net sales
of $222 million when compared to 2002 due to the variation of the exchange
rates.
Total gross profit for 2003 was $499.0 million, an increase of $169.7 million
when compared to 2002. Gross profit increased by approximately $165 million as a
result of the Genie, Demag, Tatra, ATC, Commercial Body, Combatel and Terex
Advance Mixer acquisitions. Gross profit increases in the Mining business were
offset by lower margins earned during 2003 in the North American cranes business
as well as in the Utility and Roadbuilding businesses.
During 2003, the Company incurred approximately $83 million of restructuring and
other costs (excluding a $44.3 million goodwill impairment charge), an increase
of $7 million over the prior year, primarily related to:
o Efforts associated with restructuring the Roadbuilding
business to operate profitably in light of the continuing
weakness in demand for its products;
o Costs incurred in the Cranes segment to complete projects
initiated in 2002; and
o Costs to complete the exit of product lines and consolidate
manufacturing facilities in the Construction group.
During 2002, the Company incurred approximately $76 million of restructuring and
other costs, primarily as a result of:
o Eliminating duplicate production capacity, distribution and
products created by the acquisition of Genie and Demag;
o Costs incurred with rightsizing the Roadbuilding business;
o Facility consolidations in the Construction and Mining
businesses;
o Costs related to the extinguishment of debt; and
o Costs related to the Company's deferred compensation plan.
During the second quarter of 2003, the Company recorded a charge of $21.1
million for the impairment of goodwill in the Roadbuilding unit of the Terex
Roadbuilding, Utility Products and Other segment and $23.2 million in the
Materials Processing unit within the Terex Materials Processing & Mining
segment.
Total selling, general and administrative costs ("SG&A") increased by $105.6
million when compared to the same period in 2002. The acquisitions of Demag,
Genie, Commercial Body, Combatel, Terex Advance Mixer, Tatra and ATC increased
SG&A by approximately $84 million when compared to 2002. The impact of a weaker
dollar relative to the British Pound and Euro accounted for the majority of the
remaining increase in SG&A in 2003 when compared to 2002.
Income from operations increased by $19.8 million to $58.0 million in 2003. The
increase in restructuring costs and the impairment of goodwill partially offset
the improvement from volume and acquisition integration benefit.
-42-
TEREX CONSTRUCTION
2003 2002
RESTATED RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 1,350.4 $ 1,186.0 13.9%
Gross profit $ 162.5 12.0% $ 150.8 12.7% 7.8%
SG&A $ 119.6 8.9% $ 107.7 9.1% 11.0%
Income from operations $ 42.9 3.2% $ 43.1 3.6% (0.5)%
Net sales in the Terex Construction segment increased by $164.4 million for 2003
when compared to 2002 and totaled $1,350.4 million. Approximately 73% of the
increase in sales over 2002 was due to the translation effect from a weaker U.S.
dollar relative to the British Pound and Euro. Excluding the impact of foreign
exchange translation, sales increased in the heavy construction equipment
product category as well as in the Powerscreen mobile crushing and screening
product category when compared to 2002. In the heavy construction equipment
product category, sales increased relative to 2002 as a result of better
performance across all products in the United States as well as improved sales
of articulated trucks and Atlas and Fuchs products in Europe. These gains were
partially offset by lower sales relative to 2002 of compact construction
equipment. The Company continued to focus on increasing sales in North America
by expanding its presence in the compact equipment market and by using Genie
sales leadership to penetrate the North American rental markets.
Gross profit in the Terex Construction segment increased by $11.7 million in
2003 when compared to 2002 and totaled $162.5 million. Restructuring and other
charges decreased by $5.3 million for 2003 when compared to 2002 and totaled
$6.6 million. Included in gross profit for 2003 are charges related to the
closure of the Company's pressure vessel container business, consolidation of
its Powerscreen facilities and period costs related to the consolidation of its
compact construction equipment and loader backhoe facilities in the United
Kingdom. Gross profit as a percentage of sales was unfavorably impacted by the
continued weakening of the U.S. dollar relative to the Euro and British Pound in
2003.
Gross profit as a percentage of sales fell to 12.0% in 2003 as compared to 12.7%
in 2002. Restructuring and other costs fell to 0.5% of sales for 2003 when
compared to 1.0% for 2002, as the Company completed the majority of its facility
consolidations launched in 2002. Gross profit as a percentage of sales improved
in the Atlas business in 2003, as sales expanded in Europe and the business
realized improved selling margins relative to 2002 levels. Gross profit relative
to 2002 increased as a result of improved sales of Fuchs products in the United
States and from improved selling margins realized in Spain. Overall gross profit
was negatively impacted by the impact of the weak U. S. dollar on products
exported from Europe into the United States.
SG&A costs increased by 11.0% in 2003 when compared to 2002 and totaled $119.6
million. The increase in SG&A costs was due primarily to the impact of a weaker
U.S. dollar on SG&A costs reported in Euro and British Pounds and an increase in
bad debt charges. These costs, while relatively unchanged when expressed in Euro
and British Pounds, increased when translated to U.S. dollars. Lower
restructuring costs offset the unfavorable impact of a weaker U.S. dollar
relative to these currencies and other charges incurred in 2003 relative to
2002. In 2003, the Terex Construction segment incurred $1.3 million of
restructuring and other charges as compared to $4.2 million in 2002.
Income from operations in 2003 decreased to $42.9 million, or 3.2% of sales,
when compared to operating profit of $43.1 million or 3.6% of sales in 2002.
TEREX CRANES
2003 2002
RESTATED RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 1,029.0 $ 715.3 43.9%
Gross profit $ 96.7 9.4% $ 49.5 6.9% 95.4%
SG&A $ 86.8 8.4% $ 57.9 8.1% 49.9%
Income (loss) from
operations $ 9.9 1.0% $ (8.4) (1.2)% (217.9)%
Net sales for the Terex Cranes segment in 2003 increased by $313.7 million and
totaled $1,029.0 million when compared to $715.3 million in 2002. The increase
was due to the acquisition of Demag, acquired on August 30, 2002. Sales of tower
cranes increased by approximately 29% relative to 2002, primarily as a result of
a weaker U.S. dollar relative to the Euro. Sales of cranes and boom trucks
-43-
in the United States declined by approximately 16% relative to 2002 as a result
of continued weakness in the construction and rental equipment markets. The
Company continued to focus on expanding sales by expanding its market share and
distribution throughout Europe. In North America, the Company continued to focus
on maintaining market share while the overall market for its products remained
flat.
Gross profit in 2003 increased by $47.2 million relative to 2002 and totaled
$96.7 million. Restructuring charges and other non-recurring items totaled $14.6
million in 2003. These costs were primarily related to the closure of the Peiner
tower crane facility in Trier, Germany and rationalization of products offered
under the Peiner name, costs associated with the closure of the boom truck
facility in Olathe, Kansas and inventory value adjustments related to
discontinuance of products offered under the PPM brand that duplicated products
added through the acquisition of Demag. Restructuring and other costs totaled
$31.3 million in 2002. These costs related primarily to the elimination of
duplicate products created by the acquisition of Demag and Genie and from
facility consolidation and down sizing programs launched in response to current
and expected market demand.
Gross profit earned in 2003 increased relative to 2002 primarily due to the
acquisition of Demag and reduced restructuring charges. Gross profits were also
favorably impacted in 2003 relative to 2002 from improved volumes and selling
margins in the European crane businesses. These gains were partially offset by
an 81% decline in gross profit in the North American crane businesses in 2003
from 2002. This decline was a result of weak demand for cranes and boom trucks
in the United States and the resulting impact on selling margins and factory
productivity.
SG&A costs in 2003 totaled $86.8 million, an increase of 49.9% over the same
period in 2002. Restructuring and other charges included in SG&A costs totaled
$1.1 million in 2003 compared to $2.5 million in 2002. The full year effect of
the Demag acquisition accounted for the majority of the increase in SG&A costs
in 2003 when compared to 2002.
Income from operations for the twelve months ending December 31, 2003 totaled
$9.9 million compared to a loss of $8.4 million for the same period in 2002.
TEREX AERIAL WORK PLATFORMS
2003 2002
RESTATED RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 643.0 $ 211.6 203.9%
Gross profit $ 135.4 21.1% $ 25.4 12.0% 433.1%
SG&A $ 67.7 10.5% $ 24.9 11.8% 171.9%
Income from operations $ 67.7 10.5% $ 0.5 0.2% 13,440.0%
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie and its affiliates on September 18, 2002. As a
result, the 2003 performance of this segment reflects twelve months of
operations, while the 2002 performance reflects less than four months of
operations for the majority of this segment's operations. Accordingly,
comparisons between the years must be reviewed in this context.
Net sales for the Terex Aerial Work Platforms segment in 2003 were $643.0
million, an increase of $431.4 million when compared to 2002. The increase is
due to the inclusion of Genie for the full year ending December 31, 2003. Genie
was acquired on September 18, 2002. When compared to 2002, Genie's sales were
positively impacted by increased demand from rental customers. In addition,
Genie's export business benefited from a weaker U.S. dollar relative to the Euro
and British Pound as Genie's manufacturing costs are primarily denominated in
U.S. dollars.
Total gross profit for the Terex Aerial Work Platforms segment for 2003 was
$135.4 million, an increase of $110.0 million when compared to 2002. The
increase is primarily due to the inclusion of Genie for the full year ending
December 31, 2003. Gross margin in the Genie business was positively impacted by
improvements in the North American rental markets as well as by the benefit of
the weaker U.S. dollar on Genie's export business. Gross profit realized by the
U.S. telehandler business also improved relative to 2002, as better selling
margins were realized. Gross profit earned by the Light Construction business
increased by 47%. This increase is attributable to higher sales volume relative
to 2002 as well as to savings realized during 2003 associated with the October
2002 closure of the group's former Memphis, Tennessee production facility.
Total SG&A costs for 2003 totaled $67.7 million, an increase of $42.8 million
from 2002. The increase was due primarily to the inclusion of Genie for the full
year ending December 31, 2003.
Income from operations for the Terex Aerial Work Platforms segment for 2003 was
$67.7 million, an increase of $67.2 million from 2002. The increase was due
primarily to the inclusion of Genie for the full year ending December 31, 2003.
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TEREX MATERIALS PROCESSING & MINING
2003 2002
RESTATED RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 397.8 $ 396.5 0.3%
Gross profit $ 52.2 13.1% $ 46.0 11.6% 13.5%
SG&A $ 47.3 11.9% $ 40.8 10.3% 15.9%
Goodwill impairment $ 23.2 5.8% $ -- -- --
Income (loss) from
operations $ (18.3) (4.6)% $ 5.2 1.3% (451.9)%
Net sales in the Terex Materials Processing & Mining segment increased by $1.3
million to $397.8 million in 2003 compared to $396.5 million in 2002. Parts
sales were positively impacted by foreign currency fluctuations in Europe,
Australia and South Africa as well as an increase in demand in the United
States. These gains were partially offset by continued weakness in demand for
mining trucks and a decrease in shovel sales in Canada. Demand for some of the
Terex Materials Processing & Mining segment's products is dependent on
expectations within the mining industry of future commodity prices, including
those for coal and iron ore.
Gross profit increased by $6.2 million relative to 2002 and totaled $52.2
million. Gross profit in 2003 benefited from reduced warranty expenses and
improved manufacturing efficiencies related to the closure of the Unit Rig
facility in Tulsa, Oklahoma, as well as improved sales margins in the Terex
Materials Processing & Mining segment's South Africa facility. The Materials
Processing group recorded $14.2 million in restructuring and other charges in
2003 related primarily to inventory reductions to reflect a decrease in
forecasted demand and to exit certain economically unviable niche product lines.
In addition, gross profit in 2002 included $10.6 million in restructuring
charges related to the closure of the Tulsa, Oklahoma mining truck production
facility and costs related to the exit of the rental of mining equipment and the
production of large scrapers as well as an inventory valuation adjustment at the
Unit Rig facility.
SG&A expense increased by $6.5 million in 2003 relative to 2002, to a total of
$47.3 million. This increase is primarily attributed to the weakening of the
U.S. Dollar relative to the Euro, South African Rand and the Australian Dollar.
During the second quarter of 2003, the Company recognized a goodwill impairment
charge with respect to its Roadbuilding reporting unit, as described in more
detail below under "Terex Roadbuilding, Utility Products and Other." At that
time, the Materials Processing business was included in the Roadbuilding
reporting unit. Of the overall goodwill impairment of $44.3 million, $23.2
million related to the Materials Processing business. As a result of the
realignment of the Company's segments during the quarter ended September 30,
2004, the Materials Processing business is now consolidated in the Terex
Materials Processing & Mining segment, and, as a result, this $23.2 million
portion of the goodwill impairment charge is now included in this segment's
results.
Loss from operations for the Terex Materials Processing & Mining segment was
($18.3) million in 2003 or (4.6%) of sales, a decrease of $23.5 million from an
operating profit of $5.2 million in 2002, due largely to the impact of the
goodwill impairment mentioned above.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
2003 2002
RESTATED RESTATED
---------------------- -----------------------
% OF SALES % OF SALES % CHANGE
---------- ---------- ----------
($ amounts in millions)
Net sales $ 547.2 $ 396.7 37.9%
Gross profit $ 52.6 9.6% $ 60.9 15.4% (13.6)%
SG&A $ 59.3 10.8% $ 51.9 13.1% 14.3 %
Goodwill impairment $ 21.1 3.9% $ -- -- --
Income (loss) from
operations $ (27.8) (5.1)% $ 9.0 2.3% (408.9)%
Net sales for the Terex Roadbuilding, Utility Products and Other segment for
2003 were $547.2 million, an increase of $150.5 million when compared to 2002.
The acquisitions of Tatra, ATC, Commercial Body, Combatel and Terex Advance
Mixer increased sales relative to 2002 by $156.7 million. Sales of roadbuilding
products in 2003 declined relative to 2002 levels due to continued uncertainty
regarding state and federal funding levels for road construction and repair
projects in the United States. This decline was partially offset by rental
revenues generated by Terex's rental business in the United States. With the
acquisition of Commercial Body and Combatel in 2003, the Company was positioned
to focus on expanding into the investor owned utility market. This provided an
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opportunity to sell both Terex Utility Products and Terex compact construction
equipment to a previously underserved market. In addition, the Company continued
to identify new market opportunities for its off-road trucks manufactured by
Tatra and ATC.
Gross profit for 2003 totaled $52.6 million, a decrease of $8.3 million when
compared to 2002. Total restructuring and other charges for 2003 totaled $16.6
million, or 3.0% of sales, and related primarily to inventory reductions to
reflect a decrease in forecasted demand and to exit certain economically
unviable niche product lines. Restructuring and other charges for the same
period in 2002 totaled $4.0 million or 1.0% of sales. Gross profit from the
acquisitions of Tatra, ATC, Commercial Body, Combatel and Terex Advance Mixer
increased 2003 gross profit by $14.6 million when compared to 2002. These gains
were offset by lower margins realized in the Roadbuilding businesses in 2003
when compared to 2002.
SG&A costs for the Terex Roadbuilding, Utility Products and Other segment for
2003 totaled $59.3 million, an increase of $7.4 million when compared to 2002.
Restructuring and other charges in 2003 totaled $0.6 million, primarily as a
result of the product line exits described above. The acquisitions of Tatra,
ATC, Commercial Body, Combatel and Terex Advance Mixer increased SG&A costs by
$12.7 million in 2003 relative to 2002. TFS, the Company's subsidiary that
arranges financing for customers, began operations on January 1, 2003 and
increased SG&A costs by $5.0 million compared to 2002. These increases were
partially offset by lower costs incurred in the Roadbuilding businesses, where
the Company has reduced costs in response to continued weak demand, and by lower
costs resulting from the Company's exit from the business of its EarthKing
Internet subsidiary in late 2002.
During the second quarter of 2003, the Company determined that the business
performance during the first six months of 2003 in the Roadbuilding reporting
unit would not meet the Company's 2003 performance expectations that were used
when goodwill was last reviewed for impairment as of October 1, 2002. Funding
for road projects remained at historically low levels as federal and state
budgets had been negatively impacted by a weak economy and costs related to the
U.S. efforts in Iraq. In response to the revised business outlook, management
initiated several changes to address the expected market conditions, including a
change in business management, discontinuance of several non-core products, work
force furloughs and reductions, and an inventory write-down based on anticipated
lower sales volume. Based on the continued weakness in the reporting unit, the
Company initiated a review of the long-term outlook for the reporting unit. The
revised outlook for the reporting unit assumed that funding levels for domestic
road projects would not improve significantly in the short term. In addition,
the outlook assumed that the Company would continue to reduce working capital
invested in the reporting unit to better match revenue expectations.
Based on this review, the Company determined the fair value of the Roadbuilding
reporting unit using the present value of the cash flow expected to be generated
by the reporting unit. The cash flow was determined based on the expected
revenues, after tax profits, working capital levels and capital expenditures for
the reporting unit. The present value was calculated by discounting the cash
flow by the Company's weighted average cost of capital. The Company, with the
assistance of a third-party, also reviewed the market value of the Roadbuilding
reporting unit's tangible and intangible assets. These values were included in
the determination of the carrying value of the Roadbuilding reporting unit.
Based on the revised fair value of the reporting unit, a goodwill impairment of
$21.1 million was recognized during the second quarter of 2003.
Income (loss) from operations for the Terex Roadbuilding, Utility Products and
Other segment for 2003 was a loss of ($27.8) million compared to an operating
profit of $9.0 million for 2002. The aforementioned goodwill impairment reduced
operating profit in 2003 by $21.1 million when compared to 2002. In addition,
restructuring and other charges totaled $16.6 million in 2003 and were related
primarily to product rationalization and a reduction of inventory in certain
niche product lines due to a decrease in demand. Restructuring and other
one-time charges totaled $4.0 million in 2002 or 1.0% of sales. Operating profit
from the acquisitions of Tatra, ATC, Commercial Body, Combatel and Terex Advance
Mixer increased operating profit in 2003 when compared to 2002 by $1.9 million.
This increase was offset by losses incurred by TFS during its first year of
operations and by operating losses generated by the Company's re-rental
business.
NET INTEREST EXPENSE
Net interest expense for 2003 totaled $92.8 million, an increase of $7.7 million
when compared to 2002. This increase was primarily due to higher average bank
debt balances related to the acquisitions of Demag and Genie in 2002 and a
reduction in the benefits recognized related to interest rate hedges.
OTHER INCOME (EXPENSE) - NET
Other income (expense), including loss on retirement of debt, for 2003 was an
expense of $15.9 million compared to an expense of $13.9 million for 2002. The
majority of the 2003 expense related to the early retirement of debt during that
year, as well as the amortization of debt issuance fees. During 2002, the
Company recorded a loss of $2.6 million related to its Internet commerce
investments, a loss of $1.7 million related to its equity investment in Tatra
(which reflects the Company's share of Tatra's operating loss) and a loss of
$12.4 million related to the divestiture of its Holland Lift and Brimont
businesses, which divested businesses were
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included in the Terex Cranes segment and manufactured and distributed products
the Company deemed to be non-strategic. Partially offsetting these expenses were
a $9.5 million cash benefit associated with a favorable judgment on appeal as
the defendant in a patent infringement case brought against the Terex
Construction segment's Powerscreen business and a $5.5 million gain on a foreign
currency hedge initiated in connection with the acquisition of Demag.
LOSS ON RETIREMENT OF DEBT
The Company initiated two debt reductions during 2003. On June 30, 2003, the
Company redeemed $50.0 million aggregate principal amount of its 8-7/8% Notes.
In connection with this redemption the Company recognized a loss of $1.9
million. The loss was comprised of the payment of an early redemption premium
($2.2 million), the write-off of unamortized original issuance discount ($1.6
million) and the write-off of unamortized debt acquisition costs ($0.2 million),
which were partially offset by the recognition of deferred gains related to fair
value interest rate swaps previously closed on this debt ($2.1 million). On
November 25, 2003, the Company sold and issued $300 million principal amount of
7-3/8% Notes. The net proceeds from the issuance of the 7-3/8% Notes, together
with cash on hand of approximately $119 million, were used to retire the
remaining $200 million aggregate principal amount of the 8-7/8% Notes and prepay
approximately $200 million of the Company's existing bank term loans. In
connection with these retirements of debt, the Company recognized a loss of $9.0
million. The loss was comprised of the payment of an early redemption premium
($11.1 million), the write-off of unamortized debt acquisition costs ($3.4
million) and original issue discount ($1.7 million), which were partially offset
by gains related to fair value interest rate swaps ($7.2 million).
INCOME TAXES
During 2003, the Company recognized income tax expense of $175.9 million on a
loss before income taxes of $50.7 million, an effective rate of (346.9%), as
compared to income tax benefit of $15.8 million on loss from continuing
operations before income taxes of $60.8 million, an effective rate of 26.0%, in
the prior year. The 2003 effective tax rate decreased from the prior period
primarily due to the establishment of a valuation allowance on the U.S. deferred
tax assets, as it was determined, based on available evidence, that more likely
than not the U.S. earnings would be insufficient to realize the assets, a
goodwill impairment charge recorded during the second quarter of 2003 that is
partially non-deductible for income tax purposes and a change in the source of
earnings among various jurisdictions with different tax rates, partially offset
by the release of valuation allowances due to the profitability of the Company's
German operations indicating that it was more likely than not that the Company
would realize the benefits of certain tax assets. The effective tax rate for
2003, excluding the impact of the valuation allowance established on the U.S.
deferred tax assets of $200.7 million, was 48.9%.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets," the Company recorded a charge for the cumulative
effect of change in accounting principle of $113.4 million in 2002. See
"Critical Accounting Policies," below, for additional information on these
charges. This charge represents the write-off of $132.2 million of goodwill
($124.1 million, net of income taxes) principally in the Mining Group (Terex
Materials Processing & Mining Segment) ($105.7 million, net of income taxes),
and the Light Construction Group (Terex Aerial Work Platforms Segment) ($26.2
million, or $18.1 million, net of income taxes). This charge was partially
offset by a one-time gain ($17.8 million, $10.7 million net of income taxes)
recognized on January 1, 2002 in the Fermec business. The purchase price paid by
the Company to acquire Fermec was less than the net assets acquired in the
transaction. Prior to January 1, 2002, the difference was recorded as a deferred
credit in goodwill. As required by SFAS No. 141, this credit balance was
recognized as a cumulative effect adjustment on January 1, 2002.
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 Note A - "Significant Accounting Policies" in the accompanying
consolidated financial statements 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 principally 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
-47-
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 December 31, 2004, reserves for excess and obsolete inventory
totaled $73.2 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 December 31, 2004, reserves for
potentially uncollectible accounts receivable totaled $52.3 million.
GUARANTEES - The Company has issued guarantees to financial institutions of
customer financing to purchase equipment as of December 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 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 December 31, 2004, the Company's maximum exposure to such credit
guarantees was $288.6 million, including total guarantees issued by Demag and
Genie of $212.6 million and $37.9 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 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 M -
"Net Investment in Sales-Type Leases" in the Notes to the Consolidated Financial
Statements, the Company's maximum exposure related to residual value guarantees
at December 31, 2004 was $55.9 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 December 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.9 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.
Beginning in 2003, upon implementation of the Financial Accounting Standards
Board (the "FASB") Interpretation No. ("FIN") 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of Statement of Financial Accounting
Standards Nos. 5, 57 and 107 and rescission of FIN 34", the Company recorded a
liability for the estimated fair value of guarantees issued. 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.
The Company has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" in the Condensed Consolidated
Balance Sheet of approximately $10 million for the estimated fair value of all
guarantees provided as of December 31, 2004.
REVENUE RECOGNITION -- Revenue and costs are generally recorded when products
are shipped and invoiced to either independently owned and operated dealers or
to customers.
-48-
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:
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.
Certain new units may be invoiced prior to the time customers take physical
possession. Revenue is recognized in such cases only when the customer has a
fixed commitment to purchase the units, the units have been completed, tested
and made available to the customer for pickup or delivery, and the customer has
requested that the Company hold the units for pickup or delivery at a time
specified by the customer. In such cases, the units are invoiced under the
Company's customary billing terms, title to the units and risks of ownership
pass to the customer upon invoicing, the units are segregated from the Company's
inventory and identified as belonging to the customer and the Company has no
further obligations under the order.
Revenue from sales-type leases is recognized at the inception of the lease.
Income from operating leases is recognized ratably over the term of the lease.
The Company routinely sells equipment subject to operating leases and the
related lease payments. If the Company does not retain a substantial risk of
ownership in the equipment, the transaction is recorded as a sale. If the
Company does retain a substantial risk of ownership, the transaction is recorded
as a borrowing, the operating lease payments are recognized as revenue over the
term of the lease and the debt is amortized over a similar period.
GOODWILL - 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. The Company is
required annually to review the value of its recorded goodwill to determine if
it is potentially impaired. The initial recognition of goodwill, as well as the
annual review of the carrying value of goodwill, 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 reporting units' 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
goodwill 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, including intangible 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
-49-
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 unasserted 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
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 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 8.0% for U.S.
plans and 2.0% to 6.5% for international plans at December 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 5.75% for U. S. plans and
4.75% to 5.50% for international plans at December 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
4.0% for U.S. plans and 1.5% to 4.5% for international plans at December 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 December 31, 2004, the Company had net deferred tax assets of
$221.2 million (net of valuation allowances of $222.6 million). Income tax
benefit was $176.7 million for the year ended December 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 losses ("NOLs") 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 $398.1 million as of December 31, 2004. During the fourth
quarter of 2004, the Company evaluated its ability to utilize its NOLs generated
in the United States. The Company included the following information in its
analysis:
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o The three year historical earnings of the U.S. businesses.
o The acquisitions of Genie and Terex Advance Mixer in 2002
added significantly to the Company's U.S. based income
generation. In addition, the Company has continued to see an
increase in demand for Genie products as rental markets have
demonstrated significant expansion since Genie was acquired in
2002. The acquisition of Reedrill at the end of 2004 in the
Materials Processing & Mining segment also will contribute to
United States based income generation.
o The actual results in 2004 and increasing backlog levels
evidencing improved performance.
o The Company continued to reduce its long-term debt through the
generation of operating cash flow, 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 that these businesses will
benefit from improving economic conditions and that their
respective end markets have stabilized.
o The Company has begun implementation of royalty agreements
with its foreign business units, consistent with the Terex
branding strategy.
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. Therefore, the valuation allowance of $200.7 million
established in 2003 was reversed in 2004.
In addition to its domestic NOLs, the Company has accumulated $816.6 million of
foreign NOLs at December 31, 2004. During the fourth quarter of 2004, 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
December 31, 2004, the total valuation allowance provided for foreign deferred
tax assets was $181.2 million. During the fourth quarter of 2004, the Company
received a favorable determination on interest deductibility in a jurisdictional
review. During the third quarter of 2004, the Company realized the successful
resolution of a tax audit covering multiple periods and release of valuation
allowances based on the profitability of our businesses in certain
jurisdictions. During the second quarter of 2004, the strong financial
performance of the Company's Fermec business indicated that it was more likely
than not that the Company would realize the benefits of certain tax assets, and,
therefore, the valuation allowance held for this business was released.
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
filing positions taken by the Company. 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 tax liabilities as appropriate and has
reasonably estimated its income tax liabilities and recoverable tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002," was issued in May
2002. SFAS No. 145 became effective for certain leasing transactions occurring
after May 15, 2002 and is being applied by the Company from January 1, 2003 with
respect to reporting gains and losses from extinguishments of debt. The adoption
of SFAS No. 145 has resulted in the Company reporting gains and losses from
extinguishments of debt as a component of income or loss from continuing
operations before income taxes and extraordinary items; there has been no effect
on the Company's net income or loss. Prior period amounts have been
reclassified.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare ("Medicare Part D") as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In January
2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." In May 2004, the FASB issued FSP No. 106-2,
which superceded FSP No. 106-1. FSP Nos. 106-1 and 106-2 became effective in
2004. FSP No. 106-2 provides guidance to employers that have determined that
prescription drug benefits available under their retiree health care benefit
plans are at least actuarially equivalent to Medicare Part D. The Company's U.S.
postretirement healthcare plans provide for prescription drug benefits for
certain participants. Due to the limited number of participants in the Company's
postretirement healthcare plans that are affected by the Act, the adoption of
FSP Nos. 106-1 and 106-2 did not have a material impact on the Company's
financial statements.
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In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of
ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to
the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on
allocating certain costs to inventory. SFAS No. 151 amends ARB 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges.
In addition, SFAS No. 151 requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of production
facilities. As required by SFAS No. 151, the Company will adopt this new
accounting standard on January 1, 2006. The adoption of SFAS No. 151 is not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- -- an amendment of APB Opinion No. 29." SFAS No. 153 addresses the measurement
of exchanges of nonmonetary assets. It eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and
replaces it with an exception for exchanges that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. As required by SFAS No. 153, the Company will adopt this new
accounting standard effective July 1, 2005. The adoption of SFAS No. 153 is not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment." SFAS No.
123R requires that the cost resulting from all share-based payment transactions
be recognized in the financial statements. SFAS No. 123R also establishes fair
value as the measurement method in accounting for share-based payments to
employees. As per SEC Release No. 33-8568 issued in April 2005, Terex will adopt
this new accounting standard effective January 1, 2006. Terex expects to
transition to the new guidance using the modified prospective method. The
adoption of SFAS No. 123R is not expected to have a material impact on the
Company's financial statements.
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 $418.8 million at December 31, 2004. In addition,
the Company had $217.3 million available for borrowing under its revolving
credit facilities at December 31, 2004.
Cash from operations depends on the Company's ability to generate net income
through the sales of the Company's products and to reduce 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 in 2004 introduced goals of improving operating earnings and net income
as a percentage of sales and 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.
The discontinuance of these facilities could negatively impact the Company's
liquidity. During the fourth quarter of 2004 and 2003, the Company sold, without
recourse, accounts receivable approximating 19% and 26% of its fourth 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 best practices and lean manufacturing processes that
various of its business units have used successfully. 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 based on the credit worthiness of the
customers and the expected residual value of the Company's
equipment. Changes in either the customers' credit profile 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 initiatives described above are intended to
reduce the relative increase in working capital.
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o As described above, the Company insures and sells a
significant portion of its accounts receivable to third party
finance companies. These third party finance companies are not
obligated to purchase accounts receivable from the Company,
and may choose to limit or discontinue further purchases from
the Company at any time. 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 can 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 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.
Traditionally, the Company's customers' peak buying periods are in the first
half of a calendar year as a result of their need to have new equipment
available for the spring, summer and fall construction season. Therefore,
historically, the Company's sales have tended to be seasonal, with more than
half of the Company's sales typically being generated in the first two quarters
of a calendar year. 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. However, in 2004, 47.6% of the
Company's sales occurred in the first half of the year and 52.4% of the
Company's sales were in the second half of the year. This was primarily a result
of an improvement in the economic cycle over the course of 2004 and the initial
impact of price increases that were first instituted by certain of the Company's
businesses in the second half of 2004. For 2005, the Company expects sales to be
somewhat more in line with traditional trends, with sales in the first half of
the year being equal to or slightly greater than sales in the second half of the
year, as price increases for the Company's products increasingly take effect and
the more typical volume trends occur.
To help fund its traditional 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 2004 and 2003, the Company prepaid $147 and $200 million
principal amount of its bank term loans, respectively.
The Company can borrow under its existing bank credit facilities if the Company
complies with a number of covenants. These covenants 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 became 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 financial
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 Company's bank credit facilities also have various
non-financial covenants, both requiring the Company to take certain actions,
such as keeping in good standing its corporate existence, maintaining insurance,
and providing its bank lending group with financial information on a timely
basis, and requiring the Company to refrain from taking certain actions, such as
incurring certain types of prohibited indebtedness and granting liens not
permitted under the facilities. The Company obtained a waiver from its bank
lending group allowing the Company until March 1, 2006 to provide its lenders
with its financial information for the year ended December 31, 2004, including
the information contained in the Consolidated Financial Statements included
herein, and for the quarterly periods ended March 31, 2005, June 30, 2005 and
September 30, 2005. The Company's future ability to provide its bank lending
group with financial information on a timely basis will depend on its ability to
file its periodic reports with the SEC in a timely manner.
The interest rates charged under the Company's bank credit facilities 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 4.19% at
December 31, 2004.
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 mix will produce lower interest cost than a
purely fixed rate mix without substantially increasing risk.
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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. The Company's
ability to access the capital markets is also subject to its timely filing of
its periodic reports with the SEC, and the Company's recent failure to file
certain of its periodic reports on a timely basis will limit the ability of the
Company to access the capital markets using short-form registration for a period
of twelve months from the date the Company becomes current with all of its SEC
filings. 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 FLOWS - 2004 VS. 2003
Cash from operations for the twelve months ended December 31, 2004 totaled
$164.6 million, net of approximately $61 million which related to an increase in
working capital, as compared to cash from operations of $381.3 million for 2003.
This use of cash for working capital was due to requirements arising from the
increased sales levels in 2004. Working capital as a percentage of sales at
December 31, 2004 decreased from the prior year. During 2003, the Company
reduced the working capital in the Construction, Cranes, Aerial Work Platforms
and Roadbuilding, Utility Products and Other segments. A significant portion of
the Cranes reduction 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 2004 was $61.8 million, $33.1 million more
than cash used in investing activities in 2003. The increase in cash usage is a
direct result of the size of acquisitions completed in 2004 when compared to
2003, primarily the acquisition of Terex Reedrill for $38.6 million, offset
partially by the increase in proceeds from the sale of assets.
The Company used cash for financing activities of $170.1 million in 2004,
compared to cash used for financing activities in 2003 of $266.8 million. During
2004, the Company utilized cash from operations to reduce its debt by
approximately $162 million. During 2003, the Company utilized cash from
operations to reduce its debt by approximately $229 million.
CONTRACTUAL OBLIGATIONS
The following table sets out specified contractual obligations of the Company at
December 31, 2004:
PAYMENTS DUE BY YEAR
TOTAL ---------------------------------------------------------------------------
COMMITTED 2005 2006 2007 2008 2009 THEREAFTER
---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt obligations $ 1,765.6 $ 164.1 $ 94.9 $ 131.7 $ 146.4 $ 261.1 $ 967.4
Capital lease obligations 24.2 8.5 7.2 3.1 3.7 0.5 1.2
Operating lease obligations 357.3 59.0 50.6 44.5 37.6 22.4 143.2
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 2,147.1 $ 231.6 $ 152.7 $ 179.3 $ 187.7 $ 284.0 $ 1,111.8
========== ========== ========== ========== ========== ========== ==========
Long-term debt obligations include expected interest expense. Interest expense
is calculated using fixed interest rates for indebtedness that has fixed rates
and the implied forward rates as of December 31, 2004 for indebtedness that has
floating interest rates.
Additionally, at December 31, 2004, the Company had outstanding letters of
credit that totaled $112.1 million and had issued $288.6 million in guarantees
of customer financing to purchase equipment, $55.9 million in residual value
guarantees and $49.9 million in buyback guarantees.
The Company maintains defined benefit pension plans for some of its operations
in the United States and Europe. It is the Company's policy to fund the pension
plans at the minimum level required by applicable regulations. In 2004, cash
contributions to the pension plans by the Company were $12.8 million, and the
Company estimates that its pension plan contributions will be approximately $13
million in 2005.
The Company participates in a joint venture arrangement with a European
financial institution as described below in "Off-Balance Sheet Arrangements
- -Variable Interest Entities."
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
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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 December 31, 2004, the Company's maximum exposure to such credit
guarantees was $288.6 million, including total credit guarantees issued by Demag
and Genie of $212.6 million and $37.9 million, respectively. The terms of these
guarantees coincide with the financing arranged by the customer and generally do
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 M - "Net Investment in Sales-Type Leases" in the Notes to the
Consolidated Financial Statements, the Company's maximum exposure related to
residual value guarantees under sales-type leases was $55.9 million at December
31, 2004, including total guarantees issued by Genie of $55.6 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 December 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.9 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 has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" in the Condensed Consolidated
Balance Sheet of approximately $10 million for the estimated fair value of all
guarantees provided as of December 31, 2004.
Variable Interest Entities
In April 2001, Genie entered into a joint venture arrangement with DLL, 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 million 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 DLL 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 TFSH B.V., Genie's ownership interest
in TFSH B.V. was reduced to forty percent (40%) in exchange for consideration of
$1.2 million from DLL, and Genie transferred its interest to Terex Financial
Services Europe Limited, another Company subsidiary. In addition, the scope of
TFSH B.V.'s operations was broadened, as it was granted the right to facilitate
the financing of all of the Company's products sold in Europe. TFSH B.V. is a
direct lender and makes its loans with funds obtained from equity contributions
made by DLL and the Company and a debt facility made available to TFSH B.V. by
DLL and DLL's parent, Rabobank.
As of December 31, 2004, TFSH B.V. had total assets of $303.0 million,
consisting primarily of financing receivables and lease related equipment, and
total liabilities of $278.3 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 defaults by the joint venture's customers. As of December 31, 2004, the
maximum exposure to loss under these guarantees was approximately $16 million.
Additionally, the Company is required to maintain a capital account balance in
TFSH B.V., pursuant to the terms of the joint venture, which could result in the
reimbursement to TFSH B.V. by the Company of losses to the extent of the
Company's ownership percentage. As a result of the capital account balance
requirements for TSFH B.V., in June 2004 the Company contributed an additional
$1.9 million in cash to TFSH B.V.
As defined by FASB Interpretation No. 46 ("FIN 46R"), TFSH B.V. 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 B.V.,
the Company has concluded that it is not the primary beneficiary of TFSH B.V.
and that it does not control the operations of TFSH B.V. Accordingly, the
Company will not consolidate the results of TFSH B.V. into its consolidated
financial results. The Company applies the equity method of accounting for its
investment in TFSH B.V.
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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 December 31, 2004,
the historical cost of equipment being leased back from the financing companies
was approximately $67 million and the minimum lease payment in 2005 will be
approximately $13 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 cash flows or forecasted cash flows in foreign currencies using
forward currency sale or purchase contracts. At December 31, 2004, the Company
had foreign exchange contracts with a notional value of $315 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. As of December 31,
2004, 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 rates ranging from 6.52% to 7.02%
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% Notes and approximately $79 million of leases. The floating rates are
based on a spread of 2.45% to 4.50% over London Interbank Offer Rate ("LIBOR").
At December 31, 2004, the floating rates ranged between 5.27% and 6.92%.
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.
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.
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TRANSACTIONS WITH FORMER EMPLOYEES
During 2002, the Company and Quantum Value Partners, L.P. ("Quantum"), a
partnership formed by David Langevin, a former executive officer of the Company,
and certain individuals affiliated with Mr. Langevin and/or GKM Value Partners
L.P. ("GKM"), of which Mr. Langevin is a general partner, formed GT
Distribution, LLC ("GT Distribution"), a limited liability company in which the
Company and such partnership were the only members. On April 10, 2002, GT
Distribution completed the acquisition of Crane & Machinery, Inc. ("C&M"), a
distributor of crane products, for an aggregate purchase price of $2.7 million.
In connection with this transaction, the Company acquired from an unaffiliated
financial institution outstanding loans in the amount of approximately $5.9
million owed by C&M to that financial institution. On November 10, 2003, the
Company sold its entire interest in GT Distribution to Quantum. Also on November
10, 2003, C&M purchased substantially all of the assets of Schaeff Incorporated,
a subsidiary of the Company, in consideration of C&M assuming approximately $3.1
million of Schaeff Incorporated's indebtedness to other Terex subsidiaries. C&M
remains obligated to make payment to the Company pursuant to the terms of this
indebtedness and the remaining outstanding loans acquired by the Company, which
was valued at approximately $10 million at the date of the sale, in 2002, which
in the aggregate total approximately $8.6 million. This indebtedness is secured
by a pledge of the assets of C&M, which were valued at approximately $10 million
on November 10, 2003, and a guarantee by Quantum with respect to $5.5 million of
these obligations. The results of C&M were consolidated in the Company's
financial results from December 1, 2002 through November 10, 2003. The terms of
the transactions among the Company, Mr. Langevin, Quantum, GT Distribution and
C&M are similar to terms that the Company believes would have been agreed upon
in an arm's length transaction.
On September 7, 2004, the Company completed the acquisition of Noble CE, LLC and
its Mexican subsidiary ("Noble CE") from a subsidiary of Quantum for a purchase
price of $5.0 million cash, subject to post-closing adjustment based upon the
finalization of the closing date balance sheet. Noble CE, with its manufacturing
facility located in Mexico, designs, fabricates and assembles forklift products,
pull scrapers and water tanks, and performs fabrication work for other
businesses. The terms of the transactions between the Company and Quantum are
similar to terms that the Company believes would have been agreed upon in an
arm's length transaction. Noble CE now operates as Terex Mexico and its results
are included in the Terex Materials Processing & Mining segment since its date
of acquisition.
On November 13, 2003, the Company entered into an agreement with FILVER S.A.
("FILVER"), an entity affiliated with Fil Filipov, the President of the
Company's Terex Cranes segment until his retirement from the Company effective
January 1, 2004. Pursuant to this agreement, FILVER provides consulting services
to Terex as assigned by the Chief Executive Officer of Terex, including an
initial assignment to assist with the operations of Tatra. The term of the
agreement is for three years commencing January 1, 2004, with an initial base
consulting fee of $0.5 million per year, subject to adjustment based on usage of
FILVER's services and FILVER's performance (determined at the discretion of the
Company), plus reimbursement of certain expenses. The terms of the agreement
between the Company and FILVER are similar to terms that the Company believes
would have been agreed upon in an arm's length transaction. During 2004, the
Company incurred a total cost of $0.6 million under this contract, which
includes the consulting fee of $0.5 million.
During 2004, the Company leased equipment to Connecticut Aggregate Inc. ("Con
Ag"), an entity affiliated with Kerry O'Sullivan, a former executive officer of
the Company. The terms of the agreement between the Company and Con Ag are the
standard terms and conditions that the Company uses when it enters into leases
of its equipment. As of December 31, 2004, the Company was owed $0.1 million
from Con Ag.
FORWARD-LOOKING INFORMATION
Certain information in this Annual Report includes forward looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
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 "Contingencies and Uncertainties". In addition, when
included in this Annual 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;
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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 Company's continued access to capital and ability to
obtain parts and components from suppliers on a timely basis
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 the Company's ability to maintain adequate disclosure controls
and procedures, maintain adequate internal controls over
financial reporting and file its periodic reports with the SEC
on a timely basis;
o the investigation of the Company by the SEC;
o limitations on the Company's ability to access the capital
markets using short form SEC documents;
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 Annual 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 Annual
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 7A. 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. See Note F -
"Derivative Financial Instruments" to the Consolidated Financial Statements for
further information on accounting policies related to derivative financial
instruments.
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. Dollar versus functional currencies of the Company's major
markets which include the Euro, the British Pound, the Australian Dollar and the
Czech Koruna. 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 December 31, 2004, the Company
had foreign exchange contracts with a notional value of approximately $315
million. The fair market value of these arrangements, which represents the cost
to settle these contracts, was an asset of $6.9 million at December 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 December
31, 2004, approximately 37% of the Company's debt was floating rate debt and the
weighted average interest rate for all debt was 7.4%.
At December 31, 2004, the Company had approximately $100 million of interest
rate swaps fixing interest rates ranging from 6.52% to 7.02% through June 30,
2009. The fair market value of these arrangements, which represents the cost to
settle these contracts, was a liability of approximately $3 million at December
31, 2004.
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At December 31, 2004, the Company had approximately $279 million of interest
rate swaps that converted fixed rates to floating rates. The floating rates
ranged between 5.27% and 6.92% at December 31, 2004. The fair market value of
these arrangements, which represent the cost to settle these contracts, was an
asset of approximately $2 million.
At December 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 average floating interest
rates at December 31, 2004 would have increased interest expense by
approximately $2 million in 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 costs and from availability of these materials. In
particular, during 2004, the Company has been affected by increases in the cost
of steel. Steel is a major material component for many of the Company's
products, so as the cost of steel has increased, the cost to manufacture these
products has increased. The cost of steel has increased, and the availability of
steel has decreased, in response to higher demand caused by a recovering
end-market and higher consumption of steel by emerging economies such as China.
The Company experienced an increase in steel costs that negatively affected
operating results through cost of goods sold by approximately $70 million during
2004.
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 may employ various methods to limit risk
associated with commodity cost fluctuations and availability. With respect to
the recent increases in the cost of steel, for example, the Company continues to
design and implement plans to mitigate the impact, including the use of
alternate suppliers, leveraging the Company's overall purchase volumes to obtain
favorable costs, and increasing the price of the Company's products. Various of
the Company's operations are implementing price increases and/or surcharges
directly intended to offset increases in prices of steel and other components.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent registered public accounting firm and the Company's
consolidated financial statements and financial statement schedule are filed
pursuant to this Item 8 and are included later in this report. See Index to
Consolidated Financial Statements and Financial Statement Schedule on page F-1.
UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for 2004 and 2003 are as follows (in
millions, except per share amounts). The data in the table below reflects the
restatement of the financial statements for such periods. Terex amended its
filings for the interim periods ended March 31, 2004 and June 30, 2004 in
Amendments to Quarterly Reports on Form 10-Q/A that were filed with the SEC
substantially contemporaneously herewith.
2003
2004 RESTATED
------------------------------------------------- ---------------------------------------------------
RESTATED RESTATED
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 1,375.7 $ 1,252.2 $ 1,332.5 $ 1,059.4 $ 1,010.6 $ 914.7 $ 1,050.1 $ 934.4
Gross profit 163.8 186.2 192.7 160.4 130.7 125.9 115.6 126.8
Net income (loss) 198.0 44.7 63.3 18.7 (200.4) 9.8 (45.5) 9.5
Per share:
Basic
Net income (loss) $ 4.01 $ 0.91 $ 1.29 $ 0.38 $ (4.17) $ 0.21 $ (0.96) $ 0.20
Diluted
Net income (loss) $ 3.87 $ 0.87 $ 1.24 $ 0.37 $ (4.17) $ 0.20 $ (0.96) $ 0.19
The Company has restated its financial statements for each of the quarters in
the year ended December 31, 2003 and for each of the first two quarters in the
year ended December 31, 2004. These restatements are discussed in detail in Note
B - "Restatement of Consolidated Financial Statements" to the Company's
consolidated financial statements included in this Annual Report on Form 10-K.
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2004 2003
AS ORIGINALLY REPORTED AS ORIGINALLY REPORTED
----------------------- --------------------------------------------------
SECOND FIRST FOURTH THIRD SECOND FIRST
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 1,336.4 $ 1,043.8 $ 1,014.3 $ 906.3 $ 1,048.8 $ 927.7
Gross profit 195.0 160.3 138.6 133.5 116.7 129.7
Net income (loss) 59.1 17.0 (0.6) 14.9 (51.8) 12.0
Per share:
Basic
Net income (loss) $ 1.20 $ 0.35 $ (0.1) $ 0.31 $ (1.09) $ 0.25
Diluted
Net income (loss) $ 1.17 $ 0.34 $ (0.1) $ 0.30 $ (1.09) $ 0.24
The accompanying unaudited quarterly financial data of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Item 302 of Regulation S-K. In the opinion of
management, all adjustments considered necessary for a fair statement have been
made and were of a normal recurring nature except for those discussed below.
During the second quarter of 2003, the Company recorded restructuring and other
one-time charges of $30.3 million, as well as a charge of $44.3 million for the
impairment of goodwill. Originally the impairment of goodwill was reported as
$51.3 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports the Company
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required financial
disclosure. In connection with the preparation of this Annual Report on Form
10-K, the Company's management carried out an evaluation, under the supervision
and with the participation of the Company's management, including the CEO and
CFO, as of December 31, 2004, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, the
Company's CEO and CFO concluded that the Company's disclosure controls and
procedures were not effective as of December 31, 2004 because of the material
weaknesses discussed below and because the Company was unable to file this
Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q for the
interim periods ended September 30, 2004, March 31, 2005, June 30, 2005 and
September 30, 2005 within the time periods specified in the SEC's rules.
Notwithstanding the material weaknesses discussed below, the Company's
management has concluded that the consolidated financial statements included in
this Annual Report on Form 10-K fairly present in all material respects the
Company's financial condition, results of operations and cash flows for the
periods presented in conformity with generally accepted accounting principles.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with
generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that: pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on its financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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Management has conducted an assessment, including testing, of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004. In making its assessment of internal control over financial reporting,
management used the criteria in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, management identified the following
material weaknesses in its assessment of the effectiveness of the Company's
internal control over financial reporting:
o The Company did not maintain effective controls over its financial
reporting process due to an insufficient complement of personnel
with a level of accounting knowledge, experience and training in
the application of generally accepted accounting principles
commensurate with the Company's financial reporting requirements.
Specifically, this control deficiency directly contributed to the
material weaknesses described below, as well as resulting in
errors in the timing of revenue recognition of certain
transactions and not maintaining effective controls over the
Company's acquisition accounting, primarily resulting in errors in
accruing for estimated future legal expenses, assumed product
liabilities and certain asset valuations. This control deficiency
also resulted in errors in net sales, cost of goods sold,
goodwill, accounts receivable, accrued warranties and product
liability and other non-current liabilities resulting in
restatements of the 2000, 2001, 2002 and 2003 annual consolidated
financial statements, the consolidated financial statements for
the interim periods in 2003 and the first two quarters of 2004.
This control deficiency further resulted in audit adjustments at
two of the Company's operating locations to the cost of sales and
inventory accounts in the 2004 annual consolidated financial
statements due to the Company not maintaining effective controls
over its accounting for inventory; specifically, the
reconciliation of parts and finished goods inventory accounts and
the costing of internally transferred parts and work in process
inventory were not sufficient to ensure the completeness and
accuracy of those accounts.
o The Company did not maintain effective controls over the recording
and elimination of its intercompany accounts. As a result of an
internal investigation into the Company's intercompany accounting
practices, management determined that the Company did not maintain
effective controls over the proper accounting for and monitoring
of the recording of its intercompany transactions. This control
deficiency resulted in management's failure to detect the improper
recording of elimination entries related to intercompany
transactions, resulting in restatements of the 2000, 2001, 2002
and 2003 annual consolidated financial statements, the
consolidated financial statements for the interim periods in 2003
and the first two quarters of 2004. This control deficiency
primarily impacted cost of goods sold, accounts payable, goodwill
and cumulative translation adjustment.
o The Company did not maintain effective controls over its
accounting for income taxes, including income taxes payable,
deferred income tax assets and liabilities and the related income
tax provision. Specifically, the Company did not maintain
effective controls over the accuracy and completeness of the
components of the income tax provision calculations and related
deferred income taxes and income taxes payable, and over the
monitoring of the differences between the income tax basis and the
financial reporting basis of assets and liabilities to effectively
reconcile the differences to the reported deferred income tax
balances. This control deficiency resulted in restatements of the
2000, 2001, 2002 and 2003 annual consolidated financial
statements, the consolidated financial statements for the interim
periods in 2003 and the first two quarters of 2004 as well as
audit adjustments to the 2004 annual consolidated financial
statements.
o The Company did not maintain effective controls over its
accounting for goods received but not yet invoiced. The Company's
processes, procedures and controls at two of the Company's
operating locations, including reconciliation and review related
to the completeness and accuracy of its goods received not
invoiced liability, were ineffective. The goods received not
invoiced account at the two locations was not adequately
documented and differences were not adequately analyzed between
detailed account listings and amounts recorded in the general
ledger. This control deficiency resulted in restatement
adjustments to the 2003 annual consolidated financial statements,
as well as the consolidated financial statements for the interim
periods in 2003 and the first two quarters of 2004. In addition,
the control deficiency resulted in audit adjustments at one of
these locations to the cost of sales and goods received not
invoiced liability accounts in the 2004 annual consolidated
financial statements.
o The Company did not maintain effective controls over its
accounting for goodwill denominated in foreign currencies. The
Company's processes, procedures and controls related to certain
asset valuations, in addition to the translation of certain
goodwill accounts denominated in a currency other than U.S.
dollars, were not sufficient to ensure that goodwill was
accurately recorded in accordance with generally accepted
accounting principles. This control deficiency resulted in
restatements of the 2000, 2001, 2002 and 2003 annual consolidated
financial statements, the consolidated financial statements for
the interim periods in 2003 and the first two quarters of 2004, as
well as adjustments to the 2004
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annual consolidated financial statements. This control deficiency
primarily affected goodwill and accumulated other comprehensive
income.
o The Company did not maintain effective controls over its
accounting for certain of its retirement and other benefit plans.
Specifically, the Company's processes, procedures and controls
related to the use of actuarial information in the determination
of its minimum pension liability for foreign defined benefit plans
were not sufficient to ensure that such liability was accurately
recorded. In addition, the Company's processes, procedures and
controls related to the accounting for the Company's common stock
component of its deferred compensation plan were not effective.
This control deficiency resulted in restatements of the 2000,
2001, 2002 and 2003 annual consolidated financial statements, the
consolidated financial statements for the interim periods in 2003
and the first two quarters of 2004, as well as adjustments to the
2004 consolidated financial statements. This control deficiency
primarily impacted other long-term liability, accumulated other
comprehensive income, additional paid-in capital and treasury
stock.
Additionally, each of these control deficiencies could result in a misstatement
of the aforementioned account balances or disclosures that would result in a
material misstatement to the annual or interim consolidated financial statements
that would not be prevented or detected.
Management has determined that each of these control deficiencies constitutes a
material weakness in the Company's internal control over financial reporting as
of December 31, 2004.
Because of the material weaknesses described above, management has concluded
that the Company did not maintain effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the COSO.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears in this Annual Report on Form 10-K.
MANAGEMENT'S REMEDIATION INITIATIVES
As discussed above in Management's Annual Report on Internal Control over
Financial Reporting, management identified material weaknesses in the Company's
internal control over financial reporting as of December 31, 2004. In response
to the material weaknesses identified and upon instructions received from the
Audit Committee of the Company's Board of Directors, the Company has taken a
number of substantial actions and will continue to take further significant
steps to strengthen its control processes and procedures in order to remediate
the material weaknesses. The Company will continue to evaluate the effectiveness
of its internal controls and procedures on an ongoing basis and will take
further action as appropriate.
The following are among the specific actions taken by the Company in its
internal control over financial reporting processes during the quarter ended
December 31, 2004 and subsequently to address the material weaknesses described
above:
o The Company has changed the reporting relationship for
operating financial personnel, so that they now report
directly to the corporate finance group, and ultimately the
Company's Chief Financial Officer, rather than to operational
managers.
o The Company has taken disciplinary actions and/or made changes
with respect to certain personnel as a result of the errors in
accounting and failure to account in accordance with generally
accepted accounting principles.
o The Company now requires periodic activity balancing, so that
both parties recognize intercompany transactions at the same
time. In the event of a dispute, the receiving party is
required to recognize the transaction and escalate the dispute
within the corporate finance group, so that reconciling items
not resolved between the parties within a specified time frame
are promptly resolved by the Company.
o The Company has added additional personnel, including: hiring
a new Vice President of Information Technology and a new human
resources director dedicated to the Company's financial
organization, both reporting to the Company's Chief Financial
Officer; appointing a new Chief Accounting Officer and
Controller, reporting to the Company's Chief Financial
Officer; hiring a new Vice President of Internal Audit,
reporting directly to the Chairman of the Audit Committee and
for administrative purposes to the Company's Chief Financial
Officer; hiring an intercompany controller; and hiring other
financial personnel in the corporate accounting, field
location and internal audit areas.
o The Company engaged an outside service provider to review the
Company's existing set of internal controls and recommend
process improvements specifically related to the treatment of
intercompany activity.
o The Company's Chairman and Chief Executive Officer, Chief
Financial Officer, General Counsel, Senior Vice President of
Human Resources and several others conducted full day
mandatory meetings for approximately 350 of
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the Company's executives on a worldwide basis concerning
business practices, the Company's Code of Ethics and Conduct,
compliance, full disclosure and other matters.
o The Company has provided additional training in the
application of U.S. generally accepted accounting principles
to financial personnel in the U.S. and internationally.
The following are among the specific actions taken by the Company in its
internal control over financial reporting processes during the quarter ended
March 31, 2004 and subsequently to address the reportable condition, regarding
accounting for income taxes, previously disclosed in the Company's Quarterly
Report on Form 10-Q for the interim period ended March 31, 2004 and subsequently
identified above as a material weakness as of December 31, 2004:
o The Company, with the assistance of an outside service
provider, established procedures to more effectively and
accurately accumulate detailed support for approximately
eighty foreign tax basis balance sheets and related processes
to identify the deferred tax items.
o The Company conducted income tax training sessions with
financial personnel.
o The Company revised its tax provision processes (including a
redesign of U.S. federal and state tax provision processes) to
improve visibility, accuracy and support.
o The Company has increased staffing in the tax department.
The Company intends to take further actions to remediate the material weaknesses
noted above and improve controls overall which actions are intended to prevent
this type of situation from occurring in the future including:
o Providing enhanced and ongoing training for financial and tax
personnel.
o Adding additional personnel in key areas throughout the
Company's financial organization.
o Increasing internal audit capabilities and other oversight to
verify compliance with the Company's policies and procedures.
o Simplifying the Company's legal and reporting entity structure
to facilitate the processing of intercompany transactions and
simplify the tax reporting processes.
o Implementing a common information technology platform/business
management system worldwide for use throughout the Company to
facilitate the accounting for and reconciliation of
transactions as well as to provide other operational benefits.
o Developing an education program providing training to
employees on how to handle different types of business issues
to promote an open and transparent global business culture
where the Company's employees use responsible business
practices.
The effectiveness of any system of controls and procedures is subject to certain
limitations, and, as a result, there can be no assurance that the Company's
controls and procedures will detect all errors or fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system will be attained.
The Company will continue to develop new policies and procedures and educate and
train its employees on its existing policies and procedures in a continual
effort to improve its internal control over financial reporting, and will take
further actions as appropriate. The Company views this as an ongoing project to
which it will be devoting significant resources and which will need to be
maintained and updated over time.
The Company believes that the foregoing actions have improved and will continue
to improve its internal control over financial reporting, as well as its
disclosure controls and procedures. However, the Company expects to report in
its Annual Report on Form 10-K for the year ended December 31, 2005 that its
internal control over financial reporting and its disclosure controls and
procedures were not effective as of December 31, 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described above, there have been no changes in the Company's internal
control over financial reporting during the quarter ended December 31, 2004 and
subsequently that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
On January 12, 2005, the Company's management and the Audit Committee concluded
that the financial statements for the years ended December 31, 2001, 2002 and
2003 would require restatement and should no longer be relied upon. On March 3,
2005, the Company's management and the Audit Committee concluded that the
financial statements for the year ended December 31, 2000 would require
restatement and should no longer be relied upon. On September 8, 2005, the
Company's management and the Audit Committee concluded that the financial
statements for the quarters ended March 31, 2004 and June 30, 2004 would require
restatement and should no longer be relied upon. The Company's management has
since completed its review and the restatement of its financial statements for
the years ended December 31, 2000, 2001, 2002 and 2003. For more information
concerning the background of these matters, the specific adjustments made and
management's discussion and analysis of results of operations for periods giving
effect to the restated results, see Item 1 - "Business - Restatement of
Consolidated Financial Statements," Item 6 - "Selected Financial Data," Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restatement of Consolidated Financial Statements" and Note B -
"Restatement of Consolidated Financial Statements" to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
The Company was advised verbally by the SEC that the SEC has commenced an
investigation of Terex's accounting. Subsequently, on February 1, 2006, the
Company received a copy of a written order of a private investigation from the
SEC. For additional information regarding the SEC investigation of Terex, see
the Company's Current Report on Form 8-K filed with the SEC on October 27, 2005.
In addition, the Company has periodically updated its website, www.terex.com,
regarding the status of the SEC investigation. Terex has been voluntarily
cooperating with the SEC and will continue to cooperate fully to furnish the SEC
staff with information needed to complete their review.
Terex has also received a subpoena from the SEC dated May 9, 2005, in a matter
entitled "In the Matter of United Rentals, Inc." The subpoena principally
requested information to assist the SEC in its investigation of four
transactions involving Terex and its subsidiaries, on the one hand, and United
Rentals, on the other, in 2000 and 2001. For information concerning the
Company's relationship with United Rentals, see Item 1 - "Business - Major
Customers." Terex is also cooperating fully with this investigation.
On September 14, 2005, in the Superior Court of the State of Connecticut, a
class action and derivative complaint was filed entitled Michael Morter,
derivately on behalf of nominal defendant Terex Corporation, v. G. Chris
Andersen, Ronald M. DeFeo, Don DeFosset, William H. Fike, Donald P. Jacobs,
David A. Sachs, J.C. Watts, Jr., Helge H. Wehmeier and Phillip C. Widman,
defendants, and Terex Corporation, nominal defendant. The complaint alleges
breach of fiduciary duty and breach of the Company's by-laws. The action is at
the very early stages and the Company has no information other than as set forth
in the complaint. Plaintiffs have filed a Motion for Summary Judgment requesting
that the court order the Company to hold an annual meeting of shareholders which
has not been held to date due to the inability of the Company to satisfy SEC and
NYSE rules. In connection therewith, the court has directed the Company to hold
an annual meeting of its shareholders on or before June 1, 2006. The Company
intends to vigorously defend the matter.
Effective January 1, 2006, Terex realigned certain operations in an effort to
strengthen its ability to service customers and to recognize certain
organizational efficiencies. The Mobile Crushing and Screening Group, consisting
of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the
Terex Construction Segment, now will be consolidated within the Terex Materials
Processing & Mining Segment. The European telehandlers business of TerexLift,
formerly part of the Terex Construction Segment, now will be part of the Terex
Aerial Work Platforms Segment. The segment discussions included herein do not
reflect this realignment. Terex will be presenting segment reporting effective
January 1, 2006 giving effect to this reorganization.
The Company acquired Halco on January 24, 2006, for approximately 8.4 million
British Pounds in cash, plus assumption of certain capitalized leases and
pension liabilities. Halco is headquartered in Halifax, United Kingdom, with
operations also in the United States, Ireland and Australia. Halco designs,
manufactures and distributes down-the-hole drill bits and hammers for drills.
The results of Halco will be included in the Terex Materials Processing & Mining
Segment from its date of acquisition.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth, as of January 15, 2006, the respective names and
ages of the members of the Company's Board of Directors (the "Board"),
indicating all positions and offices held by each such person. Each director is
elected by the Company's stockholders to hold his or her directorship for one
year or until his or her successor is duly elected and qualified.
FIRST YEAR
POSITIONS AND AS COMPANY
NAME AGE OFFICES WITH COMPANY DIRECTOR
- ------------------------ --- ------------------------------------------------- ----------
Ronald M. DeFeo 53 Chairman of the Board, President, Chief Executive 1993
Officer, Chief Operating Officer and Director
G. Chris Andersen 67 Director 1992
Paula H. J. Cholmondeley 58 Director 2004
Don DeFosset 57 Director 1999
William H. Fike 69 Lead Director 1995
Dr. Donald P. Jacobs 78 Director 1998
David A. Sachs 46 Director 1992
J. C. Watts, Jr. 48 Director 2003
Helge H. Wehmeier 62 Director 2002
Ronald M. DeFeo was appointed President and Chief Operating Officer of the
Company on October 4, 1993, Chief Executive Officer of the Company on March 24,
1995 and Chairman of the Board on March 4, 1998. Mr. DeFeo joined the Company in
May 1992 as President of the Company's then Heavy Equipment Group. A year later,
he also assumed the responsibility of serving as the President of the Company's
former Clark Material Handling Company subsidiary. Prior to joining the Company
on May 1, 1992, Mr. DeFeo was a Senior Vice President of J.I. Case Company, the
former Tenneco farm and construction equipment division, and also served as a
Managing Director of Case Construction Equipment throughout Europe. While at
J.I. Case, Mr. DeFeo was also a Vice President of North American Construction
Equipment Sales and General Manager of Retail Operations. Mr. DeFeo serves as a
director of Kennametal Inc. (a supplier of the Company). Mr. DeFeo served as a
director of United Rentals. (a customer of the Company) until June 2005.
G. Chris Andersen was a Vice Chairman of PaineWebber Incorporated from March
1990 through 1995. Mr. Andersen has been a merchant banker since 1996 and is
currently a partner of G.C. Andersen Partners, LLC, a private merchant banking
and advisory firm, and also serves as the non-executive Chairman of the Board of
Directors of Millennium Cell Inc.
Paula H. J. Cholmondeley is currently a private consultant on strategic
planning. Ms. Cholmondeley served as Vice President and General Manager of Sappi
Fine Paper, North America from 2000 through 2004, where she was responsible for
their Specialty Products division. Ms. Cholmondeley held senior positions with
various other companies from 1980 through 1998, including Owens Corning, The
Faxon Company, Blue Cross of Greater Philadelphia, and Westinghouse Elevator
Company, and also served as a White House Fellow assisting the U.S. Trade
Representative during the Reagan administration. Ms. Cholmondeley, a certified
public accountant, is an alumnus of Howard University and received a Masters
Degree in Accounting from the University of Pennsylvania, Wharton School of
Finance. Ms. Cholmondeley is also a director of Dentsply International Inc.,
Ultralife Batteries, Inc., Albany International Corp. and Minerals Technologies
Inc., and is an independent trustee of Gartmore Capital.
Don DeFosset retired in November 2005 as Chairman, President and Chief Executive
Officer of Walter Industries, Inc., a diversified company with principal
operating businesses in homebuilding and home financing, water transmission
products and energy services. Mr. DeFosset had served since November 2000 as
President and CEO, and since March 2002 as Chairman, of Walter Industries.
Previously, he was Executive Vice President and Chief Operating Officer of Dura
Automotive Systems, Inc., a global supplier of engineered systems, from October
1999 through June 2000. Before joining Dura, Mr. DeFosset served as a Corporate
Executive Vice President, President of the Truck Group and a member of the
Office of Chief Executive Officer of Navistar International Corporation from
October 1996 to August 1999. Mr. DeFosset serves as a director of AmSouth
Bancorporation and Safelite Glass Corp.
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William H. Fike has been President of Fike & Associates, a consulting firm,
since January 2000. Mr. Fike retired as the Vice Chairman and Executive Vice
President of Magna International Inc., an automotive parts manufacturer based in
Ontario, Canada, in February 1999. Prior to joining Magna International in
August 1994, Mr. Fike was employed by Ford Motor Company from 1965 to 1994,
where he served most recently as a Corporate Vice President and as President of
Ford Europe. Mr. Fike currently serves as a director of Magna International.
Dr. Donald P. Jacobs is Dean Emeritus and the Gaylord Freeman Distinguished
Professor of Banking of the J.L. Kellogg Graduate School of Management at
Northwestern University, positions he has held since 2001. Prior to that, Dr.
Jacobs was Dean of the Kellogg School from 1975 through 2001. Dr. Jacobs also
serves as a director of ProLogis Trust and CDW Computer Centers, Inc. (Computer
Discount Warehouse).
David A. Sachs is a Managing Director, Head of the Capital Markets Group and
Co-Portfolio Manager of Ares Management Company, LLC, an investment management
firm of which he was a founder in 1997. Mr. Sachs has been an investment banker
and investment manager since 1981.
J. C. Watts, Jr. has been Chairman of the J. C. Watts Companies, LLC since
January 2003. He previously represented Oklahoma's 4th District in the U.S.
House of Representatives for eight years through January 7, 2003. Congressman
Watts served as Chairman of the House Republican Conference and served on a
number of key committees during his tenure in Congress, including the Armed
Services Committee, the Select Homeland Security Committee, the Military
Readiness Subcommittee and the Procurement Subcommittee. Prior to his 1994
election to Congress, Congressman Watts was Chairman of the Oklahoma State
Corporation Commission from 1990 to 1994. Congressman Watts also serves as a
director of Dillard's, Inc., Burlington Northern Santa Fe Corporation and Clear
Channel Communications, Inc.
Helge H. Wehmeier recently retired as Vice-Chairman of Bayer Corporation, a post
he held from July 1, 2002 until December 2004. Prior to that, Mr. Wehmeier
served as President and Chief Executive Officer of Bayer Corporation from 1991
through June 2002. Mr. Wehmeier spent more than 35 years with Bayer AG, a
diversified, international chemicals and health care group, in various positions
of increasing responsibility, including senior management positions in both
Europe and the United States. Mr. Wehmeier is an alumnus of the International
Management Development Institute, Lausanne, Switzerland and Institut European
d'Administration des Affaires, Fontainebleau, France. Mr. Wehmeier is also a
director of PNC Financial Services Group, Inc., a diversified banking and
financial services company, and Owens Illinois, Inc., a manufacturer of glass
containers.
There have been no material changes to the procedures by which security holders
may recommend nominees to the Company's Board of Directors since April 12, 2004,
the date of the Company's Proxy Statement for its 2004 Annual Meeting of
Stockholders.
EXECUTIVE OFFICERS
The following table sets forth, as of January 15, 2006, the respective names and
ages of the Company's executive officers, indicating all positions and offices
held by each such person. Each officer is elected by the Board to hold office
for one year or until his successor is duly elected and qualified.
NAME AGE POSITIONS AND OFFICES WITH COMPANY
- ------------------- --- -------------------------------------------------------
Ronald M. DeFeo 53 Chairman of the Board, President, Chief Executive
Officer, Chief Operating Officer and Director
Colin Robertson 41 Executive Vice President, Operations
Phillip C. Widman 51 Senior Vice President and Chief Financial Officer
Eric I Cohen 47 Senior Vice President, Secretary and General Counsel
Brian J. Henry 47 Senior Vice President, Finance and Business Development
Kevin A. Barr 46 Senior Vice President, Human Resources
Katia Facchetti 41 Senior Vice President and Chief Marketing Officer
Steve Filipov 37 President, Terex Cranes
Robert R. Wilkerson 56 Executive Vice President, Chief Change Officer and
President, Terex Aerial Work Platforms
Christian Ragot 47 President, Terex Utilities and Roadbuilding
Richard Nichols 43 President, Terex Materials Processing & Mining
-66-
For information regarding Mr. DeFeo, refer to the section above titled
"Directors."
Colin Robertson was named Executive Vice President, Operations on January 5,
2006. At that time, Mr. Robertson had been serving as President, Terex
Construction since September 11, 2002. Prior to that, Mr. Robertson had been
serving as President of Terex Europe since May 1, 2001. Mr. Robertson previously
held the position of Managing Director for both the Construction and Powerscreen
groups of the Company since July 2000 and before that was Managing Director for
the Construction group from September 1998. Prior to that, he was the General
Manager of the Company's crane operations in Waverly, Iowa, in 1998 and of the
Company's Terex Equipment Limited operation in 1996 and 1997. Before joining the
Company in October 1994, Mr. Robertson spent 12 years in positions of increasing
responsibility with J.I. Case Co. and Cummins Engine Company.
Phillip C. Widman was appointed Senior Vice President and Chief Financial
Officer of the Company on September 16, 2002. Prior to joining the Company, Mr.
Widman served as Executive Vice President, Chief Financial Officer of Philip
Services Corporation, an industrial outsourcing and metal services company, from
1998 to 2001, and as an independent consultant from 2001 to 2002. Prior to
joining Philip Services, Mr. Widman worked at Asea Brown Boveri Ltd. ("ABB") for
eleven years in various financial and operational capacities in the
transportation, power generation and power distribution businesses. During his
last two years at ABB, he served as Vice President, Chief Financial Officer and
Supply Management of its diverse businesses in the United States. Additionally,
Mr. Widman's experience includes twelve years with Unisys Corporation in a
variety of financial roles. In his role as an officer of Philip Services, Mr.
Widman was an executive officer of approximately 125 U.S. legal entities that
filed for federal bankruptcy protection as part of a restructuring of their
outstanding debt obligations.
Eric I Cohen became Senior Vice President, Secretary and General Counsel of the
Company on January 1, 1998. Prior to joining the Company, Mr. Cohen was a
partner with the New York City law firm of Robinson Silverman Pearce Aronsohn &
Berman LLP (which firm has since merged with Bryan Cave LLP) since January 1992
and was an associate attorney with that firm from 1983 to 1992.
Brian J. Henry was appointed Senior Vice President, Finance and Business
Development on October 18, 2002. Mr. Henry previously held the positions of Vice
President, Finance and Business Development, Vice President-Finance and
Treasurer, and Vice President-Corporate Development and Acquisitions. Mr. Henry
also served as the Company's Director of Investor Relations. Mr. Henry has been
employed by the Company since 1993. From 1990 to 1993, Mr. Henry was employed by
KCS Industries, L.P. and its predecessor, KCS Industries, Inc., an entity that
until December 31, 1993, provided administrative, financial, marketing,
technical, real estate and legal services to the Company and its subsidiaries.
Kevin A. Barr was named Senior Vice President, Human Resources of the Company on
January 3, 2006. Prior to that, Mr. Barr had been serving as Vice President,
Human Resources of the Company since September 25, 2000. Prior to joining the
Company, Mr. Barr served as Vice President-Human Resources at DBT Online since
1998. From 1995 to 1998, Mr. Barr was at Nabisco, Inc. as Vice President-Human
Resources, Asia/Pacific. Prior to that, Mr. Barr served as Vice President-Human
Resources, Asia/Pacific and Latin America with Dun and Bradstreet Corporation
from 1990 to 1995, and in various human resources executive positions at the
Chase Manhattan Bank, N.A. from 1981 to 1990.
Katia Facchetti was named Senior Vice President and Chief Marketing Officer of
the Company on January 3, 2006. Prior to joining the Company, Ms. Facchetti was
President of Fusion 5, a marketing innovation consultancy serving major
industrial and consumer clients. From 2000 to 2005, she held a number of
positions of increasing responsibility at Fusion 5, resulting in her appointment
as President in 2004. Prior to joining Fusion 5, Ms. Facchetti held senior
marketing positions with Nabisco and Kraft/General Foods in both consumer and
food service businesses from 1986 to 1999.
Steve Filipov was named President, Terex Cranes on January 1, 2004. At that
time, Mr. Filipov had been serving as President of the international operations
for Terex Cranes since July 1, 2002. Prior to that Mr. Filipov held various
other positions with a number of the Company's international cranes businesses.
Mr. Filipov started with the Company on September 1, 1995 as Export Manager for
PPM S.A. in France.
Robert R. Wilkerson became President, Terex Aerial Work Platforms upon the
completion of the Company's acquisition of Genie Holdings, Inc. ("Genie") on
September 18, 2002. Mr. Wilkerson had been serving as President of Genie since
January 1977. Mr. Wilkerson was also named Executive Vice President and Chief
Change Officer of the Company on May 13, 2004.
Christian Ragot was appointed President of Terex Utilities and Roadbuilding on
November 14, 2003. Previously, Mr. Ragot had served as President of Terex
Utilities since July 1, 2002. Prior to that, Mr. Ragot held the positions of
President of American Crane, Senior Vice-President - Sales and Aftermarket
Services, and President of EarthKing since joining the Company in 1999. Prior to
joining the Company, Mr. Ragot was Vice President and General Manager of
Ingersoll-Rand Company (Air Compressor Group - Europe) and Manager of Worldwide
Marketing for the Construction and Mining group.
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Richard Nichols was named President, Terex Materials Processing & Mining on
January 23, 2004. Prior to that, Mr. Nichols served as the Company's Vice
President and General Manager, Infrastructure since April 2003. Mr. Nichols
previously held the position of Vice President and General Manager of Terex
Mining Trucks since joining the Company in October 2000. Prior to joining the
Company, Mr. Nichols spent 15 years in the aerospace industry and at Honeywell
International Inc. in various senior management positions.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors consists of Messrs. Sachs
(chairperson), DeFosset, Jacobs and Wehmeier and Ms. Cholmondeley, each of whom
is independent as defined in the listing standards of the NYSE and under the
Exchange Act. The Board has determined that each of Mr. Sachs, Mr. DeFosset, Dr.
Jacobs and Ms. Cholmondeley is an "audit committee financial expert," as such
term is defined under the regulations of the SEC.
Each member of the Audit Committee is required to be financially literate or
must become financially literate within a reasonable time after appointment to
the Audit Committee, and at least one member of the Audit Committee must have
accounting or related financial management expertise. The Board, in its business
judgment, believes that each of the current members of the Audit Committee is
financially literate and that each of Mr. Sachs, Mr. DeFosset, Dr. Jacobs, Mr.
Wehmeier and Ms. Cholmondeley has accounting or financial management expertise:
Mr. Sachs through his extensive experience as an investment banker and
investment manager; Mr. DeFosset through his business experience as a corporate
executive, his involvement in preparing financial statements at various public
companies and particularly his experience as a Chief Executive Officer of a
public company; Dr. Jacobs through his years of experience teaching business,
finance, management and accounting at the graduate level, as well as serving as
a chairman of the public review board of a national accounting firm and as
Chairman of the Board of Amtrak; Mr. Wehmeier through his business experience as
a corporate executive and his involvement in preparing financial statements as a
senior executive of a large multinational company; and Ms. Cholmondeley through
her education, training and experience as a certified public accountant and her
involvement in preparing financial statements as the Chief Financial Officer of
a large insurance company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and each person who is the beneficial owner of more than 10% of the
Company's outstanding equity securities, to file with the SEC initial reports of
ownership and changes in ownership of equity securities of the Company. Specific
due dates for these reports have been established by the SEC and the Company is
required to disclose any failure to file such reports by the prescribed dates
during 2004. Officers, directors and greater than 10% beneficial owners are
required by SEC regulation to furnish the Company with copies of all reports
filed with the SEC pursuant to Section 16(a) of the Exchange Act.
To the Company's knowledge, based solely on review of the copies of reports
furnished to the Company and written representations that no other reports were
required, all filings required pursuant to Section 16(a) of the Exchange Act
applicable to the Company's officers, directors and greater than 10% beneficial
owners were complied with during the year ended December 31, 2004, except for a
Form 4 for Rick Nichols that was required to be filed by February 4, 2004 and
was filed on November 15, 2004 and a transaction for G. Chris Andersen that was
required to be filed by January 8, 2004 and was filed on December 28, 2004.
CODE OF ETHICS
The Company has adopted a code of ethics that applies to all of its employees,
including the Company's principal executive officer, principal financial officer
and principal accounting officer, among others. This code of ethics is a set of
written standards reasonably designed to deter wrongdoing and to promote: honest
and ethical conduct; full, fair, accurate, timely and understandable disclosure;
compliance with applicable governmental laws, rules and regulations; prompt
internal reporting of code violations; and accountability for adherence to the
code. The Company periodically reviews, updates and revises its code of ethics
when it considers appropriate. A copy of the current code of ethics is available
at the Company's website, www.terex.com, in the "Corporate Governance" section
of the "Investors" portion of the website. In addition, a copy of the code of
ethics is available in print, without charge, to any stockholder who requests
these materials from the Company.
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ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table below shows the compensation for the past three
fiscal years of the Company's Chief Executive Officer and its four other highest
paid executive officers who had 2004 earned qualifying compensation in excess of
$100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- -------------------------------------------------
AWARDS PAYOUTS
---------------------- -------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND BONUS COMPENSATION AWARDS OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(1) ($)(2) ($)(3) SARS (#) PAYOUTS ($) ($)(4)
- ---------------------------- ---- ----------- ----------- ------------ ---------- ---------- ----------- ------------
Ronald M. DeFeo 2004 $ 812,500 $ 1,000,000 $ 50,319 $ 634,400 40,000 -0- $ 37,254(5)
Chairman, President, 2003 700,000 1,400,000 40,376 881,250 50,000 $ 1,908,000 35,307
Chief Executive 2002 700,000 550,000 23,459 343,200 75,000 -0- 34,202
Officer and Chief
Operating Officer
Colin Robertson (6) 2004 458,175 300,563 35,242 262,875 5,000 -0- 45,048(7)
President, Terex 2003 381,282 351,525 23,925 111,100 15,000 -0- 37,589
Construction 2002 332,335 172,857 20,743 91,520 16,000 -0- 26,208
Robert Wilkerson (8) 2004 335,962 368,377 509 297,925 5,500 -0- 8,200
Executive Vice President, 2003 298,664 375,000 7,767 111,100 15,000 -0- 8,000
Chief Change Officer and 2002 77,652 50,000 2,214 -0- -0- -0- -0-
President Terex Aerial
Work Platforms
Phillip C. Widman (9) 2004 381,250 122,000 27,172 751,000 6,000 -0- 35,579(10)
Senior Vice President and 2003 356,250 255,000 7,337 111,100 15,000 -0- 38,824
Chief Financial Officer 2002 102,083 100,000 -0- 401,800 20,000 -0- 10,563
Eric I Cohen 2004 343,750 161,000 23,021 262,875 5,000 -0- 8,824
Senior Vice President, 2003 325,000 205,000 17,706 111,100 15,000 212,000 8,330
Secretary and General 2002 310,000 150,000 12,542 91,520 16,000 -0- 10,624
Counsel
- ----------
(1) Bonuses for the Company's 2004 fiscal year were delayed in being paid
to the Company's Named Executive Officers pending the completion of the
Company's financial restatement process. Mr. DeFeo, Mr. Widman and Mr.
Cohen have not yet received payment of their bonuses for the 2004
fiscal year, but it is anticipated that they will be paid their 2004
bonuses shortly after the filing of this Annual Report on Form 10-K.
Mr. Robertson and Mr. Wilkerson have received 90% of their bonuses for
the 2004 fiscal year and it is anticipated that they will be paid the
remaining portion of their 2004 bonuses shortly after the filing of
this Annual Report on Form 10-K.
(2) As part of its competitive compensation program, the Company provides
its Named Executive Officers with certain perquisites and other
personal benefits. As part of their compensation, each of the Named
Executive Officers has received one or more of the following benefits:
executive long term disability insurance, a company automobile, fuel
reimbursement, club memberships, reimbursement for financial planning,
and private use of Company aircraft. For Mr. DeFeo, such perquisites
and personal benefits in 2004 included $20,953 for reimbursement of
financial planning costs. Other Annual Compensation also includes any
matching contribution to the Company's deferred compensation plan,
which matching contribution is invested in Common Stock.
-69-
(3) On March 11, 2004, grants of Restricted Stock were made under the Terex
Corporation 2000 Long-Term Incentive Plan (the "2000 Plan") to Mr.
Robertson (7,500 shares), Mr. Wilkerson (8,500 shares), Mr. Widman
(10,000 shares) and Mr. Cohen (7,500 shares). The value of the
Restricted Stock granted to such Named Executive Officers set forth in
the table above for 2004 is based on the closing stock price on the
NYSE of the Common Stock of $35.05 per share on March 11, 2004. With
respect to each grant of Restricted Stock made to a Named Executive
Officer on March 11, 2004, the shares of Restricted Stock awarded vest
in equal increments on each of the first four anniversaries of March
11, 2004. Upon the earliest to occur of a change in control of the
Company or the death or disability of the recipient of the grant, any
unvested portion of such Restricted Stock grant shall vest immediately.
Dividends, if any, are paid on Restricted Stock awards at the same rate
as paid to all stockholders.
On May 7, 2004, a grant of Restricted Stock was made under the 1996
Plan to Mr. DeFeo (20,000 shares). The value of the Restricted Stock
granted to Mr. DeFeo set forth in the table above for 2004 is based on
the closing stock price on the NYSE of the Common Stock of $31.72 per
share on May 7, 2004. The shares of Restricted Stock awarded to Mr.
DeFeo vest in equal increments on each of the first four anniversaries
of May 7, 2004. Upon the earliest to occur of a change in control of
the Company or the death or disability of Mr. DeFeo, any unvested
portion of such Restricted Stock grant shall vest immediately.
Dividends, if any, are paid on Restricted Stock awards at the same rate
as paid to all stockholders.
On September 17, 2004, a grant of Restricted Stock was made under the
2000 Plan to Mr. Widman (10,000 shares). The value of the Restricted
Stock granted to Mr. Widman set forth in the table above for 2004 is
based on the closing stock price on the NYSE of the Common Stock of
$40.05 per share on September 17, 2004. The shares of Restricted Stock
awarded to Mr. Widman vest in equal increments on each of the first
four anniversaries of September 17, 2004. Upon the earliest to occur of
a change in control of the Company or the death or disability of Mr.
Widman, any unvested portion of such Restricted Stock grant shall vest
immediately. Dividends, if any, are paid on Restricted Stock awards at
the same rate as paid to all stockholders.
On February 7, 2003, grants of Restricted Stock were made under the
2000 Plan to Mr. Robertson (10,000 shares), Mr. Wilkerson (10,000
shares), Mr. Widman (10,000 shares) and Mr. Cohen (10,000 shares). The
value of the Restricted Stock granted to such Named Executive Officers
set forth in the table above for 2003 is based on the closing stock
price on the NYSE of the Common Stock of $11.11 per share on February
7, 2003. With respect to each grant of Restricted Stock made to a Named
Executive Officer on February 7, 2003, the shares of Restricted Stock
awarded vest in equal increments on each of the first four
anniversaries of February 7, 2003. Upon the earliest to occur of a
change in control of the Company or the death or disability of the
recipient of the grant, any unvested portion of such Restricted Stock
grant shall vest immediately. Dividends, if any, are paid on Restricted
Stock awards at the same rate as paid to all stockholders.
On March 13, 2003, a grant of Restricted Stock was made under the 2000
Plan to Mr. DeFeo (75,000 shares). The value of the Restricted Stock
granted to Mr. DeFeo set forth in the table above for 2003 is based on
the closing stock price on the NYSE of the Common Stock of $11.75 per
share on March 13, 2003. With respect to the grant of Restricted Stock
made to Mr. DeFeo on March 13, 2003, 50,000 of the shares of Restricted
Stock awarded, vest if and when the closing stock price on the NYSE
equals or exceeds $22.34 and 25,000 of the shares of Restricted Stock
awarded, vest if and when the closing stock price on the NYSE equals or
exceeds $25.13. The 50,000 and 25,000 shares of Restricted Stock vested
on August 18, 2003 and November 25, 2003, respectively. Dividends, if
any, are paid on Restricted Stock awards at the same rate as paid to
all stockholders.
On March 19, 2002, grants of Restricted Stock were made under the 2000
Plan to Mr. DeFeo (15,000 shares), Mr. Robertson (4,000 shares) and Mr.
Cohen (4,000 shares). The value of the Restricted Stock granted to such
Named Executive Officers set forth in the table above for 2002 is based
on the closing stock price on the NYSE of the Common Stock of $22.88
per share on March 19, 2002. With respect to each grant of Restricted
Stock made to a Named Executive Officer on March 19, 2002, the shares
of Restricted Stock awarded vest in equal increments on each of the
first four anniversaries of March 19, 2002. Upon the earliest to occur
of a change in control of the Company or the death or disability of the
recipient of the grant, any unvested portion of such Restricted Stock
grant shall vest immediately. Dividends, if any, are paid on Restricted
Stock awards at the same rate as paid to all stockholders.
On September 17, 2002, Mr. Widman received a grant of 20,000 shares of
Restricted Stock under the 2000 Plan. The value of the Restricted Stock
granted to Mr. Widman set forth in the table above for 2002 is based on
the closing stock price on the NYSE of the Common Stock of $20.09 per
share on September 17, 2002. The shares of Restricted Stock awarded to
Mr. Widman vest in equal increments on each of the first four
anniversaries of September 17, 2002. Upon the earliest to occur of a
change in control of the Company or the death or disability of Mr.
Widman, any unvested portion of such Restricted Stock grant shall vest
immediately. Dividends, if any, are paid on Restricted Stock awards at
the same rate as paid to all stockholders.
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The aggregate value of all unvested restricted stockholdings as of
December 31, 2004, based on a closing stock price on the NYSE of the
Common Stock of $47.65 per share on that date, was: $1,667,750 for Mr.
DeFeo, $875,569 for Mr. Robertson, $762,400 for Mr. Wilkerson,
$1,786,875 for Mr. Widman and $1,226,988 for Mr. Cohen.
(4) The amounts shown for 2004 include:
(a) Company matching contributions to a defined contribution plan
($8,200 for each of Mr. DeFeo, Mr. Wilkerson and Mr. Widman
and $6,500 for Mr. Cohen);
(b) Company contributions to an employee stock purchase plan
($1,916 for Mr. DeFeo and $1,878 for Mr. Widman); and
(c) Premiums paid by the Company with respect to life insurance
for the benefit of the Named Executive Officers ($6,903 for
Mr. DeFeo, $5,564 for Mr. Widman and $2,324 for Mr. Cohen).
(5) In addition to the amounts described in footnote (3), the amount shown
for 2004 for Mr. DeFeo includes $20,235 paid to Mr. DeFeo for
reimbursement of insurance premiums as part of Mr. DeFeo's compensation
package.
(6) Mr. Robertson was appointed Executive Vice President, Operations of the
Company on January 5, 2006. Mr. Robertson received his compensation in
British pounds. Amounts shown are converted into U.S. dollars at an
average rate of exchange for the applicable year (for 2004, one British
pound = $1.8327; for 2003, one British pound = $1.635; and for 2002,
one British pound = $1.5031).
(7) The amount shown for 2004 for Mr. Robertson includes a $45,048
contribution by the Company to an employee pension plan.
(8) Mr. Wilkerson joined the Company on September 18, 2002.
(9) Mr. Widman joined the Company on September 16, 2002.
(10) In addition to the amounts described in footnote (3), the amount shown
for 2004 for Mr. Widman includes $19,937 paid to Mr. Widman pursuant to
the Company's executive relocation program.
STOCK OPTION GRANTS IN 2004
The following table sets forth information on grants of stock options during
2004 to the Named Executive Officers. The number of stock options granted to the
Named Executive Officers during 2004 is also listed in the Summary Compensation
Table in the column entitled "Securities Underlying Options/SARs." The exercise
price of the options equaled or exceeded the fair market price of the Common
Stock at the time of the grant.
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STOCK OPTION/SAR GRANTS IN 2004
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------- ------------- --------------- ------------- ------------- ------------- -------------
Ronald M. DeFeo 40,000 12.0% $ 32.69 5/7/2014 $ 822,343 $ 2,083,978
Colin Robertson 5,000 1.5% $ 34.69 3/11/2014 $ 109,082 $ 276,435
Robert Wilkerson 5,500 1.7% $ 34.69 3/11/2014 $ 119,990 $ 304,078
Phillip C. Widman 6,000 1.8% $ 34.69 3/11/2014 $ 130,898 $ 331,722
Eric I Cohen 5,000 1.5% $ 34.69 3/11/2014 $ 109,082 $ 276,435
- ----------
(1) These options were granted under the 2000 Plan, except for Mr. DeFeo's
options, which were granted under the 1996 Terex Corporation Long Term
Incentive Plan. These options vest in equal one-quarter installments on
the anniversary date of the grant over a four-year period.
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTION VALUES
The table below summarizes options exercised during 2004 and year-end option
values of the Named Executive Officers listed in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END (#) AT YEAR-END ($)(1)
SHARES ACQUIRED VALUE REALIZED ------------------------- -------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------- --------------- -------------- ------------------------- -------------------------
Ronald M. DeFeo 12,000 $ 395,660 293,750/121,250 $ 7,478,125/$3,212,025
Colin Robertson 15,500 $ 331,515 39,750/29,250 $ 1,167,400/$830,163
Robert Wilkerson -0- $ 0 3,750/16,750 $ 136,238/$479,993
Phillip C. Widman -0- $ 0 13,750/27,250 $ 411,838/$762,073
Eric I Cohen 5,000 $ 79,900 53,000/33,000 $ 1,615,075/$945,850
- ----------
(1) Based on the closing price of the Company's Common Stock on the NYSE on
December 31, 2004 of $47.65.
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LONG-TERM INCENTIVE PLAN AWARDS IN 2004
The following table provides information concerning long-term compensation
awards made during 2004 under the Terex Corporation 1999 Long-Term Incentive
Plan ("LTIP") to the Named Executive Officers listed in the Summary Compensation
Table. In addition, long-term compensation awards were previously made in 2002
to each of Messrs. DeFeo, Robertson, Widman and Cohen, which awards vest fully
on December 31, 2006.
LONG-TERM INCENTIVE PLAN AWARDS IN 2004
ESTIMATED FUTURE
PAYOUTS UNDER
NON-STOCK PRICE-BASED
NUMBER OF PERFORMANCE PLANS
SHARES, UNITS OR OTHER PERIOD ---------------------
OR OTHER RIGHTS UNTIL MATURATION MAXIMUM
NAME (#)(1) OR PAYOUT ($)(2), (3)
- ----------------- --------------- ---------------- ---------------------
Ronald M. DeFeo -0- -- -0-
Colin Robertson -0- -- -0-
Robert Wilkerson 23,350 5 years $ 2,521,800
Phillip C. Widman -0- -- -0-
Eric I Cohen -0- -- -0-
- ----------
(1) Units of participation under the LTIP were granted as of January 1, 2004 and
vest fully on December 31, 2008, or earlier if they obtain their maximum
cumulative unit value before that date. A unit's incremental value is calculated
for the first three years of its term, and these incremental values are
cumulated to obtain the unit's cumulative value upon maturity, which is capped
at $108. Incremental unit value is determined annually by calculating the
product of (a) the closing price of a share of Common Stock at the close of the
year prior to the date of grant (for awards made in 2004, $28.48) multiplied by
(b) 85% of the percentage by which earnings per share for such year exceeds
earnings per share for the year prior to the date of grant. If earnings per
share for any year are not at least 105% of the prior year's earnings per share,
then no incremental unit value is accumulated for such year.
(2) The maximum cumulative value of a unit of participation under the LTIP is
$108.
(3) No amounts are shown as "target" or "threshold" future payments because no
such payment levels are set or contemplated under the LTIP.
PENSION PLANS
The Company adopted a Supplemental Executive Retirement Plan ("SERP") effective
October 1, 2002. The SERP is intended to provide certain senior executives of
the Company with retirement benefits in recognition of their contributions to
the long-term growth of the Company. The table below shows estimated annual
benefits payable upon retirement in specified compensation and years of service
classifications.
PENSION PLAN TABLE
YEARS OF SERVICE
COMPENSATION 15 20 25 30
-------------- ----------- ------------ ------------ ------------
$ 250,000 $ 75,000 $ 100,000 $ 100,000 $ 100,000
500,000 150,000 200,000 200,000 200,000
750,000 225,000 300,000 300,000 300,000
1,000,000 300,000 400,000 400,000 400,000
1,250,000 375,000 500,000 500,000 500,000
1,500,000 450,000 600,000 600,000 600,000
1,750,000 525,000 700,000 700,000 700,000
2,000,000 600,000 800,000 800,000 800,000
2,250,000 675,000 900,000 900,000 900,000
2,500,000 750,000 1,000,000 1,000,000 1,000,000
The compensation covered by the SERP is based on a participant's final five-year
average of annual salary and bonus. As of December 31, 2004, the Named Executive
Officers participating in the SERP had the following estimated credited years of
benefit service for purposes of the SERP: Ronald M. DeFeo - 13 years; Colin
Robertson - 10 years; Phillip C. Widman - 2 years and Eric I
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Cohen - 7 years. Benefits are computed assuming a normal retirement age ("NRA")
of 65 or when age plus years of service first equal 90. Benefits accrue at 2% of
average compensation per year of service, payable at the NRA, up to a maximum of
20 years of service. Benefits are payable monthly as a life annuity with 120
monthly payments guaranteed. Benefits are reduced by 50% for Social Security
payments and 100% for any other Company-paid retirement benefits.
The Company also maintains four defined benefit pension plans covering certain
domestic employees, including, as described below, certain officers of the
Company or its subsidiaries. Retirement 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. In addition,
certain of the Company's foreign subsidiaries maintain defined benefit pension
plans for their employees and/or executives.
Mr. DeFeo participates in the Terex Corporation Salaried Employees' Retirement
Plan, which was merged into the Terex Corporation Retirement Program for
Salaried Employees on June 30, 2000 (the "Retirement Plan"). None of the other
Named Executive Officers participate in the Retirement Plan. Participants in the
Retirement Plan with five or more years of eligible service are fully vested and
entitled to annual pension benefits beginning at age 65. Retirement benefits
under the Retirement Plan for Mr. DeFeo are equal to the product of (i) the
participant's years of service (as defined in the Retirement Plan) and (ii)
1.08% of final average earnings (as defined in the Retirement Plan) plus 0.65%
of such compensation in excess of amounts shown on the applicable Social
Security Integration Table. Service in excess of 25 years is not recognized.
There is no offset for primary Social Security. Participation in the Retirement
Plan was frozen as of May 7, 1993, and no participants, including Mr. DeFeo,
will be credited with service following such date. However, participants not
currently fully vested will be credited with service for purposes of determining
vesting only. The annual retirement benefits payable at normal retirement age
under the Retirement Plan will be $4,503 for Mr. DeFeo.
Mr. Robertson has participated since 1994 in the Terex Equipment Pension Scheme
maintained by Terex Equipment Limited, one of the Company's foreign
subsidiaries. Contributions to the pension plan are 10% of base salary from
Terex Equipment Limited and 5% of base salary from the employee. At the normal
retirement age of 65, Mr. Robertson's projected pension would be 2/3 of the
earnings cap on pensions, less any retained benefits. At December 31, 2004, the
annual earnings cap was approximately $195,700.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional compensation by
virtue of their being directors of the Company. For their service, outside
directors receive an annual retainer, as described below. All directors of the
Company are reimbursed for travel, lodging and related expenses incurred in
attending Board and committee meetings.
The compensation program for outside directors is designed primarily to
encourage outside directors to receive the annual retainer for Board service in
Common Stock or in options for Common Stock, or both, to enable directors to
defer receipt of their fees and to satisfy the Company's Common Stock ownership
objective for outside directors.
Under the program, outside directors receive annually the equivalent of $50,000
for service as a Board member (or a prorated amount if a director's service
begins other than on the first day of the year). Each director elects annually,
for the particular year, to receive this fee in (i) shares of Common Stock
currently, (ii) options to purchase shares of Common Stock currently, (iii) cash
to be contributed to the Company's Deferred Compensation Plan, or (iv) any
combination of the three preceding alternatives. The total for any year of the
(i) number of shares paid and (ii) the number of shares covered by options
granted may not exceed 7,500 (as such number may be adjusted to take into
account any change in the capital structure of the Company by reason of any
stock split, stock dividend or recapitalization). If a director elects to
receive shares of Common Stock currently, then 40% of this annual retainer (or
$20,000) is paid in cash to offset the tax liability related to such election.
If a director elects to receive cash, this cash must be contributed into the
Common Stock account of the Company's Deferred Compensation Plan, unless the
director has already satisfied the Company's Common Stock ownership objective
described below, in which case the funds may be invested in an interest-bearing
account in the Company's Deferred Compensation Plan.
For purposes of calculating the number of shares of Common Stock or number of
options into which the fixed sum translates, Common Stock is valued at its
closing price on the NYSE on the payment or grant date (the first trading day of
any year or any other applicable date). In respect of options that a director
elects to receive, the price of the Common Stock, determined as above, is
adjusted to reflect year-to-year volatility in the market price of the Common
Stock. This adjusted price is the value of the underlying option at the time of
grant. For 2004 the options were valued at 25% of fair market value of Common
Stock on the date of grant. Options vest immediately upon grant and have a
ten-year term.
Directors receive a fee of $1,000 for each Board or committee meeting attended
in person and $500 for each Board or committee meeting attended telephonically.
However, directors do not receive any fees for attending a committee meeting
when the committee meeting is held on the same day as a Board meeting. In
addition, each director who serves as chairperson of a committee of the Board
receives an annual retainer of $10,000, payable in cash, and each director who
serves as a member of a committee (including any committee that the director
chairs) receives an annual retainer of $5,000, payable in cash. For a director
whose service begins other
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than on the first day of the year, any retainer is prorated. Directors may elect
to defer receipt of retainers for committee service into the Company's Deferred
Compensation Plan.
Any Board or committee retainers or meeting fees that are deferred into the
Common Stock account receive a matching 25% contribution from the Company in
Common Stock. Board retainers, committee retainers and meeting fees (or portions
of either) may also be deferred to an interest-bearing account under the
Company's Deferred Compensation Plan and earn interest, which is compounded
annually. The rate of interest for 2004 was approximately 6.06% per annum.
Payment of any deferral (whether in Common Stock or cash) is deferred until the
director's termination of service or such earlier date as the director specifies
when electing the applicable deferral.
The Company's director compensation program also establishes a Common Stock
ownership objective for outside directors. Each director is expected to
accumulate, over the three-year period commencing January 1, 2000, or, if later,
the first three years of Board service beginning on or after January 1, 2000,
the number of shares of Common Stock that is equal in market value to three
times the annual retainer for Board service ($150,000). Once this ownership
objective is achieved, the director is expected to maintain such minimum
ownership level. The intent is to encourage acquisition and retention of Common
Stock by directors, evidencing the alignment of their interests with the
interests of stockholders. To this end, each new director will receive an award
of shares of Common Stock having a market value of $25,000 on the date of the
award. Each new director must defer receipt of this award under the Company's
Deferred Compensation Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company and Ronald M. DeFeo entered into an Employment and Compensation
Agreement dated as of July 1, 2005 (the "DeFeo Agreement"). The DeFeo Agreement
became effective upon the expiration of the previous employment agreement
between Terex and Mr. DeFeo, dated January 1, 2002, as amended, which expired by
its terms on June 30, 2005.
Pursuant to the DeFeo Agreement, Mr. DeFeo's term of employment with Terex as
Chief Executive Officer, reporting to the Board of Directors of Terex (the
"Board"), extends through December 31, 2012. In the event of a Change in Control
(as such term is defined in the DeFeo Agreement) on or prior to December 31,
2012, Mr. DeFeo's term of employment would continue until the later of December
31, 2012 or 36 months after such Change in Control.
Under the DeFeo Agreement, Mr. DeFeo is to receive an initial annual base salary
of $850,000, subject to increase by the Board, as well as annual bonuses and
long-term incentive compensation during his term of employment in accordance
with any plan or plans established by the Company. The Company also agrees to
use its best efforts to have Mr. DeFeo elected as a member of the Board and,
consistent with generally accepted best corporate governance standards, Chairman
of the Board during the term of the DeFeo Agreement.
If Mr. DeFeo's employment with the Company is terminated for any reason,
including for Cause (as such term is defined in the DeFeo Agreement), due to Mr.
DeFeo's death or disability, or by Mr. DeFeo voluntarily, or if Mr. DeFeo elects
not to extend the DeFeo Agreement at the end of its term, Mr. DeFeo or his
beneficiary is to receive, in addition to his salary, bonus and other
compensation earned through the time of such termination, (i) any deferred
compensation then in effect, (ii) any other compensation or benefits that have
vested through the date of termination or to which Mr. DeFeo may then be
entitled, including long term incentive compensation awards, stock and stock
option awards, and (iii) reimbursement of expenses incurred by Mr. DeFeo through
the date of termination but not yet reimbursed. If Mr. DeFeo's employment with
the Company is terminated as the result of Mr. DeFeo's death or disability, then
Mr. DeFeo or his beneficiary would also be entitled to receive a prorated
portion of his bonus for the fiscal year during which such termination occurs.
If Mr. DeFeo's employment with the Company is terminated by the Company without
Cause or by Mr. DeFeo for Good Reason (as such term is defined in the DeFeo
Agreement), or if the Company elects not to extend the DeFeo Agreement at the
end of its term, Mr. DeFeo is to receive, in addition to his salary, bonus and
other compensation earned through the time of such termination, (i) two times
his base salary, (ii) two times the average of his annual bonuses for the two
calendar years preceding termination, (iii) a prorated portion of his bonus for
the fiscal year during which such termination occurs, (iv) continuing insurance
coverage for up to two years from termination, (v) immediate vesting of
non-performance based unvested stock options and stock grants with a period of
one year following termination to exercise his options, and (vi) continuation of
all other benefits in effect at the time of termination for up to two years from
termination. The cash portion of this payment is spread over a 13-month period
following the date of termination, except if such termination occurs within 24
months following a Change in Control, in which event the cash portion is to be
paid in a lump sum. In addition, if Mr. DeFeo's employment is terminated by the
Company without Cause or by Mr. DeFeo for Good Reason within 24 months following
a Change in Control, Mr. DeFeo is entitled to (A) the greater of (1) the sum of
(i), (ii) and (iii) above and (2) an amount equal to all compensation required
to be paid to Mr. DeFeo for the balance of the term of the DeFeo Agreement, (B)
the immediate vesting of any unvested performance stock options, stock grants,
long term incentive compensation awards and other similar awards, with a period
of one year following termination to exercise any such options and (C) any
amounts payable under the Terex Supplemental Executive Retirement Plan for the
number of years of service achieved by Mr. DeFeo on the date of termination.
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The DeFeo Agreement also provides for additional payments to Mr. DeFeo in the
event that any payments under the DeFeo Agreement are subject to excise tax
under the Internal Revenue Code of 1986, as amended, such that Mr. DeFeo retains
an amount of such additional payments equal to the amount of such excise tax.
The DeFeo Agreement requires Mr. DeFeo to keep certain information of the
Company confidential during his employment and thereafter. The DeFeo Agreement
also contains an agreement by Mr. DeFeo not to compete with the business of the
Company during his term of employment with the Company and for a period of 18
months thereafter (24 months thereafter, if the date of Mr. DeFeo's termination
is within 24 months following a Change in Control).
As soon as legally permissible and reasonably practicable after the execution of
the DeFeo Agreement, Mr. DeFeo shall receive a restricted stock award of 100,000
shares which shall vest as follows: (i) 30,000 shares shall vest 10,000 per
annum over three years beginning on March 31, 2006, provided that Terex's Return
on Invested Capital (as such term is defined in the DeFeo Agreement) equals or
exceeds 20% for such prior calendar year; (ii) 35,000 shares shall vest on March
31, 2009 in the event that Terex's Return on Invested Capital for each of the
four calendar years 2005, 2006, 2007 and 2008 equals or exceeds the average
Return on Invested Capital of the Machinery Group (as such term is defined in
the DeFeo Agreement) for each of those four years; provided, however, that in
the event Terex's Return on Invested Capital for each of the four calendar years
2005, 2006, 2007 and 2008 is less than the average Return on Invested Capital of
the Machinery Group for each of those four years, but Terex's average Return on
Invested Capital for any three of such four years equals or exceeds the average
Return on Invested Capital for the Machinery Group for the comparable three
years, then 20,000 shares (of the 35,000 shares provided for in this clause
(ii)) shall vest on March 31, 2009 and (iii) 35,000 shares shall vest on March
31, 2009 in the event that the ratio of Terex's average Return on Invested
Capital for the three calendar years 2006, 2007 and 2008 to the average Return
on Invested Capital of the Diversified Industrial Group (as such term is defined
in the DeFeo Agreement) for 2006, 2007 and 2008 (the "Three Year Ratio") equals
or exceeds 110% of the ratio that Terex's average Return on Invested Capital for
2005 bears to the average Return on Invested Capital of the Diversified
Industrial Group for 2005 (the "2005 Ratio"); provided, however, that 20,000
shares (of the 35,000 shares provided for in this clause (iii)) shall vest on
March 31, 2009 if the Three Year Ratio equals or exceeds 100% of the 2005 Ratio
but is less than 110% of the 2005 Ratio.
The Company and Colin Robertson entered into an Offer Letter dated as of January
5, 2006 (the "Robertson Letter"). Pursuant to the Robertson Letter, Mr.
Robertson's employment with the Company as Executive Vice President, Operations,
reporting to Ronald M. DeFeo, the Chairman, President and Chief Executive
Officer of the Company, is strictly at will. However, termination of employment
by Mr. Robertson is subject to twelve (12) months written notice from him to the
Company.
Under the Robertson Letter, Mr. Robertson is to receive an initial annual base
salary of $525,000, subject to review periodically by the Compensation Committee
of the Board of Directors, as well as annual bonuses and long-term incentive
compensation in accordance with any plan or plans established by the Company.
Mr. Robertson will continue to be eligible to participate in the Terex SERP and
will receive additional benefits, including reimbursement of certain relocation
expenses and a company car.
As soon as practicable and to the extent permitted by law, Mr. Robertson will
receive a grant of 10,000 shares of Terex common stock as well as an option to
purchase 5,000 shares of Terex common stock at the closing price of a share of
Terex common stock on the trading day immediately preceding the date of the
award. All shares and options will typically vest ratably over a four-year
period.
If the Company appoints a new Chief Operating Officer of the Company, other than
Mr. Robertson, on or before December 31, 2008, then under certain circumstances
Mr. Robertson will be entitled to receive severance benefits equal to his annual
base salary.
The Robertson Letter requires Mr. Robertson to keep certain information of the
Company confidential during his employment and thereafter. The Robertson Letter
also contains an agreement by Mr. Robertson not to compete with the business of
the Company during his term of employment with the Company and for a period of
twelve (12) months thereafter. In addition, Mr. Robertson agrees that he will
not at any time during the period of his employment with the Company and for a
period of eighteen (18) months thereafter, directly or indirectly, engage in any
business or own or control any interest in, or act as a director, officer,
employee, agent or consultant of certain specified competitors of the Company.
The Company and each of Colin Robertson, Robert R. Wilkerson, Phillip C. Widman
and Eric I Cohen (each an "Executive") has a Change in Control and Severance
Agreement (the "Executive Agreements"). The Company and Colin Robertson are
party to a Change in Control and Severance Agreement dated as of March 16, 2004,
the Company and Mr. Widman are party to a Change in Control and Severance
Agreement dated as of March 24, 2004, the Company and Mr. Wilkerson are party to
a Change in Control and Severance Agreement dated as of September 18, 2002, and
the Company and Mr. Cohen are party to a Change in Control and Severance
Agreement dated as of April 1, 2002. Mr. Wilkerson and Mr. Cohen each signed an
extension of his Executive Agreement on March 15, 2004.
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If an Executive's employment with the Company is terminated within 24 months
following a Change in Control (or, in the case of Mr. Widman, concurrent with,
or in contemplation of, a Change in Control), other than for Cause, by reason of
death or Permanent Disability, or by the Executive without Good Reason (each as
defined in the Executive Agreements), the Executive is to receive (i) two times
his base salary, (ii) two times his annual bonus for the last calendar year
preceding termination, and (iii) any accrued vacation pay. This payment is to be
paid in a lump sum simultaneously with the Executive's termination. The
Executive Agreements also provide for additional payments to the Executives in
the event that any payments under the Executive Agreements are subject to excise
tax under the Code, such that the Executive retains an amount of such additional
payments equal to the amount of such excise tax.
In addition, if an Executive is so terminated within 24 months following a
Change in Control (or, in the case of Mr. Widman, concurrent with, or in
contemplation of, a Change in Control), the Executive also will receive (a)
immediate vesting of unvested stock options and stock grants, with a period of
six months following termination to exercise his options, (b) immediate vesting
of all unvested units granted under the LTIP, (c) continuing insurance coverage
for up to 24 months from termination, and (d) continuation of all other benefits
in effect at the time of termination for up to 24 months from termination.
In the event an Executive's employment with the Company is terminated by the
Company without Cause or by the Executive for Good Reason (other than in
connection with a Change in Control), the Company is to pay the Executive (i)
two times his base salary, (ii) two times his annual bonus for the last calendar
year preceding termination and (iii) any accrued vacation pay in 24 equal
monthly payments. In such event, the Executive would also have the right to
exercise any stock options, LTIP awards or similar awards for at least six
months following termination, and would continue to vest in options and stock
awards granted under the Company's incentive plans for 24 months from the date
of termination. In addition, the Company would also provide continuing insurance
coverage and continuation of all other benefits in effect at the time of
termination for up to 24 months from termination.
As part of the Executive Agreements, the Executives agree to keep confidential
certain Company information and not to disparage the Company. In addition, in
the cases of Mr. Widman, Mr. Robertson and Mr. Wilkerson, the Executive agrees
that, for a period of 12, 18 and 18 months, respectively, following his date of
termination (or 24 months following such termination, if such termination is
within 24 months following a Change in Control), the Executive will not, without
the prior written consent of the Company, directly or indirectly engage in any
Competitive Business (as such term is defined in Mr. Widman's, Mr. Robertson's
and Mr. Wilkerson's Executive Agreement) nor solicit, induce or entice any
employee of the Company to leave the Company. Each Executive Agreement remains
in effect until the earliest of: (i) termination of the Executive's employment
prior to a Change in Control (other than termination in anticipation of a Change
in Control) by the Company for Cause, by the Executive for any reason other than
Good Reason or by reason of the Executive's death or Permanent Disability; (ii)
termination of the Executive's employment with the Company following a Change in
Control, by reason of death or Permanent Disability, by the Company for Cause or
by the Executive for any reason other than Good Reason; or (iii) three years
after the date of a Change in Control; however, each Executive Agreement
terminates approximately two years after its effective date if the Executive is
still in the employ of the Company at such time and a Change in Control has not
yet occurred and is not reasonably expected to occur within six months
thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board, recommending compensation for executive
officers, including the Named Executive Officers, at the end of 2004 consisted
of G. Chris Andersen, Don DeFosset, William H. Fike, David A. Sachs and J.C.
Watts, Jr. There are no Compensation Committee interlocks or insider
participation with respect to such individuals.
COMPENSATION COMMITTEE REPORT
Executive Compensation Philosophy
The objectives of the Company's executive compensation program are to: (i)
attract and retain executives with the skills critical to the long-term success
of the Company, (ii) motivate and reward individual and team performance in
attaining business objectives and maximizing stockholder value and (iii) link a
significant portion of compensation to appreciation in the price of the
Company's stock, so as to align the interests of the executive officers with
those of the stockholders.
To meet these objectives, the total compensation program is designed to be
competitive with the programs of other corporations of comparable revenue size
in industries with which the Company competes for customers and executives and
to be fair and equitable to both the executive and the Company. Consideration is
given to the executive's overall responsibilities, professional qualifications,
business experience, job performance, technical expertise and career potential
and the combined value of these factors to the Company's long-term performance
and growth.
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Executive Compensation Program
Each year the Compensation Committee (the "Committee"), which is comprised
entirely of independent directors, determines the compensation arrangements for
the Company's executive officers, including the individuals whose compensation
is detailed in this Proxy Statement. The executive compensation program has
three principal components: salary, short-term incentive compensation (annual
bonus) and long-term incentive compensation, each of which is described below.
While the components of compensation are considered separately, the Committee
takes into account the full compensation package afforded by the Company to the
individual executive.
Salary
Salary is determined by evaluating the responsibilities of the position held,
the individual's past experience, current performance and the competitive
marketplace for executive talent. Salary ranges for the Company's executive
officers are comparable to salary ranges of executives at companies of similar
size, as reported in data available to the Committee.
Annual Bonus
In addition to salary, each executive officer is eligible for an annual bonus
under the Company's general executive bonus plan. As discussed below, the bonus
of the Chief Executive Officer (the "CEO") in 2004 was determined under a
different plan. Bonuses are paid for attainment of (i) Company operating profit
and cash flow goals established annually and (ii) specific performance goals
established for each executive officer at the beginning of each year. The
Committee believes that bonuses paid to these individuals, including those whose
compensation is reported in the Summary Compensation Table, reflect the level of
achievement of Company goals and individual performance goals during 2004.
Long-Term Incentive Compensation
The purpose of long-term awards, currently in the form of stock options, grants
of Common Stock including Restricted Stock, and grants under the LTIP, is to
align the interests of the executive officers with the interests of the
stockholders. Additionally, long-term awards offer executive officers an
incentive for the achievement of superior performance over time and foster the
retention of key management personnel. In determining stock option, Common Stock
and LTIP grants, the Committee bases its decision on the individual's
performance and potential to improve stockholder value and on the relationship
of equity and objective performance goals to the other components of the
individual's compensation.
CEO Compensation
The compensation of the CEO is determined pursuant to the principles stated
above. Specific consideration is given to the CEO's responsibilities and
experience in the industry and the compensation package of chief executive
officers of comparable companies. In order to determine an appropriate overall
level of compensation for Mr. DeFeo for 2004, the Committee retained an outside
consultant and also considered information relating to the compensation of CEOs
at comparable companies.
In appraising the CEO's performance during 2004, the Committee noted that net
sales for the Company for 2004 were $5.0 billion, an increase of over 28% from
the Company's 2003 net sales of $3.9 billion. The Committee considered the
Company's earnings per share of $6.34 in 2004, and earnings per share in 2004 of
$2.41 excluding special charges, as compared to a loss per share of $4.75 in
2003. The Committee also took into account that the Company was able to continue
to reduce its debt by $162.8 million in 2004.
The Committee particularly noted the improvement in the Company's stock price
during 2004, which increased over 67% from $28.48 at December 31, 2003 to $47.65
at December 31, 2004. As part of its review, the Committee compared the
Company's performance with that of various other companies in the construction,
infrastructure and surface mining equipment manufacturing sector, and noted that
the Company generally performed favorably, especially with respect to its return
on invested capital, increase in enterprise value and growth of market
capitalization as compared to the performance of these other companies.
The Committee noted that the CEO guided the Company in making further
investments in 2004. The CEO oversaw the acquisition of the Reedrill drilling
equipment business and a component manufacturing facility in Mexico, and was the
major force behind the Company's business development activities in China and
India. In addition, the CEO invested a significant amount of time in reaching an
agreement with Caterpillar Inc. to market the Company's mining shovels through
the Caterpillar distribution network.
-78-
The Committee noted the CEO's leadership in establishing a "Think Terex" culture
across the Company in 2004. The Committee reviewed the CEO's oversight of the
Terex Improvement Program in 2004 and his preparation for the introduction of
the Terex Business System at the start of 2005. They noted the CEO's efforts to
institute viable strategic and human resources plans at the Company, and his
oversight of changes in senior management and reporting within the organization,
including the creation of a new Materials Processing & Mining group headed by
Rick Nichols, appointing Robert Wilkerson as the Company's Chief Change Officer,
overseeing changes in the reporting structure for the Company's finance group,
and allocating new responsibilities among other members of senior management.
The Committee noted that the CEO invested a significant amount of time in
dealing with the Company's intercompany account imbalance situation and various
other financial reporting issues in 2004, including compliance with the
requirements of the Sarbanes-Oxley Act with respect to disclosure controls and
internal controls over financial reporting.
The Committee also recognized that, since becoming CEO in 1995, Mr. DeFeo
continues to be the principal architect in transforming Terex and positioning
the Company for the future.
The Committee established an annual salary for Mr. DeFeo of $850,000, effective
April 1, 2004. Mr. DeFeo was scheduled to earn a formula bonus for 2004, based
on his achievement of predetermined performance goals related to return on
invested capital, earnings per share, management of working capital and
reduction of debt. While Mr. DeFeo was not personally involved in the issues and
errors that gave rise to the need to restate the Company's financial statements
for the years ended 2000, 2001, 2002 and 2003, the Committee determined that, as
CEO, Mr. DeFeo should share responsibility for such issues and errors.
Accordingly, the Committee determined that Mr. DeFeo's formula bonus for 2004,
scheduled to be $1,547,000 would be reduced by approximately 35%, resulting in a
total bonus for 2004 to Mr. DeFeo of $1,000,000. Payment of Mr. DeFeo's bonus
for the Company's 2004 fiscal year has been delayed pending the completion of
the Company's financial restatement process and is intended to be paid shortly
after the filing of this Annual Report on Form 10-K.
Deductibility of Executive Compensation
Section 162(m) of the Code limits to $1 million a year the deduction that a
publicly held corporation may take for compensation paid to each of its chief
executive officer and four other most highly compensated employees unless the
compensation is "performance-based." Performance-based compensation must be
based on the achievement of preestablished, objective performance goals under a
plan approved by stockholders.
In order to reduce or eliminate the amount of compensation that would not
qualify for a tax deduction should the compensation of the CEO or any other
executive officer exceed $1 million in any year, the Company's LTIP and 2004
Annual Incentive Compensation Plan were submitted to and approved by
stockholders at the Company's 1999 and 2004 meeting, respectively, so that
amounts earned thereunder by certain employees will qualify as
performance-based.
COMPENSATION COMMITTEE
G. CHRIS ANDERSEN
DON DEFOSSET
WILLIAM H. FIKE
DAVID A. SACHS
J.C. WATTS, JR.
-79-
PERFORMANCE GRAPH
The following stock performance graph is intended to show the Company's stock
performance compared with that of comparable companies. The stock performance
graph shows the change in market value of $100 invested in the Company's Common
Stock, the Standard & Poor's 500 Stock Index and a peer group of comparable
companies ("Index") for the period commencing December 31, 1999 through December
31, 2004. The cumulative total stockholder return assumes dividends are
reinvested. The stockholder return shown on the graph below is not indicative of
future performance.
The Index consists of the following companies, which are in similar lines of
business as the Company: Astec Industries, Inc., Caterpillar Inc., CNH Global
N.V., Deere & Co., JLG Industries, Inc., Joy Global Inc. (since 2001) and
Manitowoc Co. The companies in the Index are weighted by market capitalization.
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1999
WITH DIVIDENDS REINVESTED
[Graphic - Graph illustrating Cumulative Total Return using the data below:
Source: Georgeson Shareholder Communications Inc.]
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1999
WITH DIVIDENDS REINVESTED
DEC-99 DEC-00 DEC-01 DEC-02 DEC-03 DEC-04
---------- ---------- ---------- ---------- ---------- ----------
Terex Corp. $ 100 $ 58 $ 63 $ 40 $ 103 $ 172
---------- ---------- ---------- ---------- ---------- ----------
S&P 500(R) $ 100 $ 91 $ 80 $ 62 $ 80 $ 89
---------- ---------- ---------- ---------- ---------- ----------
Custom Composite Index
(7 Stocks) $ 100 $ 99 $ 103 $ 96 $ 157 $ 188
---------- ---------- ---------- ---------- ---------- ----------
THE CUSTOM COMPOSITE INDEX CONSISTS OF ASTEC INDUSTRIES, INC., CATERPILLAR INC.,
CNH GLOBAL N.V., DEERE & CO., JLG INDUSTRIES, INC., JOY GLOBAL INC. (SINCE 3Q01)
AND MANITOWOC CO.
COPYRIGHT (C) 2005, STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ALL RIGHTS RESERVED.
-80-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of December 31, 2004.
NUMBER OF
SECURITIES
REMAINING AVAILABLE
NUMBER OF WEIGHTED FOR FUTURE
SECURITIES TO BE AVERAGE ISSUANCE
ISSUED UPON EXERCISE UNDER EQUITY
EXERCISE OF PRICE OF COMPENSATION
OUTSTANDING OUTSTANDING PLANS
OPTIONS, OPTIONS, (EXCLUDING SECURITIES
WARRANTS WARRANTS REFLECTED
PLAN CATEGORY AND RIGHTS (a) AND RIGHTS (b) IN COLUMN (a)) (c)
- ----------------------------------------- ---------------- -------------- ---------------------
Equity compensation plans approved by
shareholders 2,237,605 $ 19.50 2,810,960
Equity compensation plans not approved by
shareholders (1) -- -- --
---------------- ---------------------
Total 2,237,605 $ 19.50 2,810,960
================ =====================
(1) Does not include options assumed in connection with the Company's
acquisition of CMI Corporation ("CMI") in 2001. As of December 31, 2004, there
were 2,200 options outstanding as a result of the Company's assumption of
options granted by CMI, with a weighted-average exercise price of $42.58. The
Company has not made, and will not make, any grants or awards under the CMI
equity compensation plan.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, by each director, by
each executive officer of the Company named in the summary compensation table
below, and by all directors and executive officers as a group, as of January 12,
2006 (unless otherwise indicated below). Each person named in the following
table has sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such person, except as otherwise set forth
in the notes to the table. Shares of Common Stock that any person has a right to
acquire within 60 days after January 12, 2006, pursuant to an exercise of
options or otherwise, are deemed to be outstanding for the purpose of computing
the percentage ownership of such person, but are not deemed to be outstanding
for computing the percentage ownership of any other person shown in the table.
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------------------------ -------------------- --------
Neuberger Berman, Inc. 4,799,975 (1) 9.6%
605 Third Avenue
New York, NY 10158
G. Chris Andersen 149,583 (2) *
c/o G.C. Andersen Partners, LLC
1330 Avenue of the Americas, 36th Floor
New York, NY 10019
Paula H. J. Cholmondeley 4,230 *
c/o The Sorrel Group
P.O. Box 490
Brookline, MA 02446
Ronald M. DeFeo 703,905 (3) 1.4%
c/o Terex Corporation
500 Post Road East
Westport, CT 06880
Don DeFosset 27,850 (4) *
4221 W. Boy Scout Blvd., Suite 1000
Tampa, FL 33607
-81-
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------------------------ -------------------- --------
William H. Fike 47,600 (5) *
c/o Fike & Associates
6282 Lakeshore Road
Lakeshore, MI 48059
Dr. Donald P. Jacobs 37,656 (6) *
c/o J.L. Kellogg Graduate School of
Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
David A. Sachs 160,153 (7) *
c/o Ares Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, CA 90067
J.C. Watts, Jr. 12,431 *
c/o J. C. Watts Companies
600 13th Street, NW, Suite 790
Washington, D.C. 20005
Helge H. Wehmeier 23,829 *
"Hillside"
Blackburn Road
Sewickley, PA 15143
Colin Robertson 93,875 (8) *
c/o Terex Corporation
500 Post Road East
Westport, CT 06880
Robert Wilkerson 864,471 (9) 1.7%
c/o Terex Corporation
500 Post Road East
Westport, CT 06880
Phillip C. Widman 79,657 (10) *
c/o Terex Corporation
500 Post Road East
Westport, CT 06880
Eric I Cohen 123,391 (11) *
c/o Terex Corporation
500 Post Road East
Westport, CT 06880
All directors and executive officers 2,727,053 (12) 5.3%
as a group (18 persons)
* Amount owned does not exceed one percent (1%) of the class so owned.
(1) Neuberger Berman, Inc. ownership information is updated to reflect a
Schedule 13G, dated February 14, 2006, disclosing the beneficial
ownership of 4,799,975 shares of Common Stock.
-82-
(2) Includes 21,841 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(3) Includes 363,125 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(4) Includes 7,500 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(5) Includes 5,231 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(6) Includes 14,413 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(7) Includes 3,800 shares of Common Stock owned by Mr. Sachs' wife. Mr.
Sachs disclaims the beneficial ownership of such shares. Also includes
30,326 shares of Common Stock issuable upon the exercise of options
exercisable within 60 days.
(8) Includes 475 shares of Common Stock owned by Mr. Robertson's wife or
issuable upon the exercise of options exercisable within 60 days by Mr.
Robertson's wife. Mr. Robertson disclaims the beneficial ownership of
such shares. Also includes 58,750 shares of Common Stock issuable upon
the exercise of options exercisable within 60 days.
(9) Includes 70,012 shares of Common Stock owned by Wilkerson Limited
Partnership. Also includes 14,000 shares of Common Stock issuable upon
the exercise of options exercisable within 60 days.
(10) Includes 29,250 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(11) Includes 75,750 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
(12) Includes 831,311 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 2, 2000, the Company made a loan to Ronald M. DeFeo, the Chairman,
Chief Executive Officer, President and Chief Operating Officer of the Company,
in the amount of $3 million. The purpose of the loan was to enable Mr. DeFeo to
purchase a house at a time when he was not permitted to sell any shares of his
Common Stock. Further, at such time, the Board of Directors determined that it
did not desire that Mr. DeFeo be required to sell his Common Stock when he was
able to do so in order to satisfy his other obligations, and preferred instead
to grant him this loan, secured by his shares of Common Stock and amounts earned
by Mr. DeFeo under the LTIP. Mr. DeFeo repaid $950,000 of the principal amount
of the loan in October 2000. Mr. DeFeo repaid the remaining $2,050,000 principal
amount of the loan in April 2004.
The Company intends that all transactions with affiliates are to be on terms no
less favorable to the Company than could be obtained in comparable transactions
with an unrelated person. The Board will be advised in advance of any such
proposed transaction or agreement and will utilize such procedures in evaluating
their terms and provisions as are appropriate in light of the Board's fiduciary
duties under Delaware law. In addition, the Company has an Audit Committee
consisting solely of independent directors. One of the responsibilities of the
Audit Committee is to review related party transactions. All of the transactions
with affiliates described above have been reviewed and approved by the Board
and/or the Audit Committee.
-83-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
During the last two fiscal years ended December 31, 2004 and December 31, 2003,
PricewaterhouseCoopers LLP charged the Company $8,800,000 and $4,060,000,
respectively for professional services rendered by such firm for the audit of
the Company's annual financial statements and review of the Company's financial
statements included in the Company's quarterly reports on Form 10-Q for that
fiscal year. Audit fees for the fiscal year ended December 31, 2004 includes
fees of $2,900,000 for professional services provided in connection with the
assessment of the Company's internal controls pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002.
AUDIT-RELATED FEES
Audit-Related Fees consist of fees for assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements. This category includes fees related to various audit and
attest services, due diligence related to mergers, acquisitions and investments,
and consultations concerning financial accounting and reporting standards. The
aggregate fees billed by PricewaterhouseCoopers LLP for such audit-related
services for the fiscal years ended December 31, 2004 and December 31, 2003,
were $168,000 and $212,000, respectively.
TAX FEES
The aggregate fees billed for tax services provided by PricewaterhouseCoopers
LLP in connection with tax compliance, tax consulting and tax planning services
for the fiscal years ended December 31, 2004 and December 31, 2003, were
$185,000 and $412,000, respectively.
ALL OTHER FEES
The aggregate fees billed for services not included in the above services for
the fiscal years ended December 31, 2004 and December 31, 2003, were $50,000 and
$81,000, respectively and were primarily related to miscellaneous items,
including foreign government filings.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee has established a policy requiring its pre-approval of all
audit and permissible non-audit services provided by the independent accountant.
On an annual basis, the Chief Financial Officer provides the Audit Committee an
estimate for the services needed and seeks pre-approval of such services from
the Audit Committee. The Audit Committee considers whether such services are
consistent with the rules of the SEC on auditor independence. The policy
prohibits the Audit Committee from delegating to management the Audit
Committee's responsibility to pre-approve permitted services of the independent
accountant.
Requests for pre-approval for services must be detailed as to the services to be
provided and the estimated total cost and must be submitted to the Company's
Chief Financial Officer. The Chief Financial Officer then determines whether the
services requested fall within the guidance of the Audit Committee as to the
services eligible for pre-approval. If the service was not of a type that was
already pre-approved or the estimated cost would exceed the amount already
pre-approved, then the Chief Financial Officer seeks pre-approval of the Audit
Committee on a timely basis.
All of the services related to the Audit-Related Fees, Tax Fees or All Other
Fees described above were approved by the Audit Committee pursuant to the
general pre-approval provisions set forth above.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" on Page F-1.
(3) EXHIBITS
See "Exhibit Index" on Page E-1.
-84-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Ronald M. DeFeo February 17, 2006
---------------------------------
Ronald M. DeFeo,
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ---------------------- ----------------------------------------------- --------------------
/s/ Ronald M. DeFeo Chairman, Chief Executive Officer, February 17, 2006
- ---------------------- and Director
Ronald M. DeFeo (Principal Executive Officer)
/s/ Phillip C. Widman Senior Vice President - Chief Financial February 17, 2006
- ---------------------- Officer
Phillip C. Widman (Principal Financial Officer)
/s/ Jonathan D. Carter Vice President, Controller and Chief Accounting February 17, 2006
- ---------------------- Officer
Jonathan D. Carter (Principal Accounting Officer)
/s/ G. Chris Andersen Director February 17, 2006
- ----------------------
G. Chris Andersen
/s/ Paula Cholmondeley Director February 17, 2006
- ----------------------
Paula Cholmondeley
/s/ Don DeFosset Director February 17, 2006
- ----------------------
Don DeFosset
/s/ Donald P. Jacobs Director February 17, 2006
- ----------------------
Donald P. Jacobs
/s/ William H. Fike Director February 17, 2006
- ----------------------
William H. Fike
/s/ David A. Sachs Director February 17, 2006
- ----------------------
David A. Sachs
/s/ J. C. Watts, Jr. Director February 17, 2006
- ----------------------
J. C. Watts, Jr.
/s/ Helge H. Wehmeier Director February 17, 2006
- ----------------------
Helge H. Wehmeier
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NEXT PAGE IS NUMBERED "E-1"
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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, 1997 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).
E-1
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).
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-Q for the
quarter ended June 30, 2004 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, 2004 of Terex Corporation, Commission File No. 1-10702).
10.9 Form of Restricted Stock Agreement under the Terex Corporation 2000
Incentive Plan between Terex Corporation and participants of the 2000
Incentive Plan (incorporated by reference to Exhibit 10.4 of the Form
8-K Current Report, Commission File No. 1-10702, dated January 1, 2005
and filed with the Commission on January 5, 2005).
10.10 Form of Option Agreement under the Terex Corporation 2000 Incentive
Plan between Terex Corporation and participants of the 2000 Incentive
Plan (incorporated by reference to Exhibit 10.5 of the Form 8-K Current
Report, Commission File No. 1-10702, dated January 1, 2005 and filed
with the Commission on January 5, 2005).
10.11 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).
10.12 Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated
by reference to Exhibit 10.10 to the Form 10-Q for the quarter ended
March 31, 2004 of Terex Corporation, Commission File No. 1-10702).
10.13 Summary of material terms of non-CEO 2004 performance targets under the
Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated
by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission
File No. 1-10702, dated October 6, 2005 and filed with the Commission
on October 12, 2005).
10.14 Summary of material terms of CEO 2004 performance targets under the
Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated
by reference to Exhibit 10.2 of the Form 8-K Current Report, Commission
File No. 1-10702, dated October 6, 2005 and filed with the Commission
on October 12, 2005).
10.15 Summary of material terms of non-CEO 2005 performance targets under the
Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated
by reference to Exhibit 10.3 of the Form 8-K Current Report, Commission
File No. 1-10702, dated January 1, 2005 and filed with the Commission
on January 5, 2005).
10.16 Summary of material terms of CEO 2005 performance targets under the
Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated
by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission
File No. 1-10702 dated March 31, 2005 and filed with the Commission on
April 6, 2005).
10.17 Terex Corporation Amended and Restated Deferred Compensation Plan
(incorporated by reference to Exhibit 10.11 to the Form 10-Q for the
quarter ended June 30, 2004 of Terex Corporation, Commission File No.
1-10702).
E-2
10.18 Summary of material terms of Terex Corporation Outside Directors'
Compensation Program (incorporated by reference to Exhibit 10.2 of the
Form 8-K Current Report, Commission File No. 1-10702, dated January 1,
2005 and filed with the Commission on January 5, 2005).
10.19 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).
10.20 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).
10.21 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).
10.22 Amendment No. 2, Waiver and Agreement dated as of October 15, 2005, 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, as Administrative Agent (incorporated by
reference to Exhibit 10.1 of the Form 8-K Current Report, Commission
File No. 1-10702, dated October 15, 2005 and filed with the Commission
on October 17, 2005).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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
(incorporated by reference to Exhibit 10.22 to the Form 10-Q for the
quarter ended March 31, 2004 of Terex Corporation, Commission File No.
1-10702).
10.29 Employment and Compensation Agreement, dated as of July 1, 2005,
between Terex Corporation and Ronald M. DeFeo (incorporated by
reference to Exhibit 10.1 of the Form 8-K Current Report, Commission
File No. 1-10702, dated July 1, 2005 and filed with the Commission on
July 7, 2005).
10.30 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).
10.31 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).
E-3
10.32 Offer Letter, dated as of January 5, 2006, between Terex Corporation
and Colin Robertson (incorporated by reference to Exhibit 10.1 of the
Form 8-K Current Report, Commission File No. 1-10702, dated December
30, 2005 and filed with the Commission on January 6, 2006).
10.33 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).
10.34 Consulting Agreement dated as of November 13, 2003 between Terex
Corporation and Filver S.A. (incorporated by reference to Exhibit 10.30
to Form S-4 Registration Statement of Terex Corporation, Registration
No. 333-112097).
10.35 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.*
21.1 Subsidiaries of Terex Corporation.*
24.1 Power of Attorney.*
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.
E-4
TEREX CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
TEREX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 AND 2003
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2004
Page
----
Report of independent registered public accounting firm F-2
Consolidated statement of income F-5
Consolidated balance sheet F-6
Consolidated statement of changes in stockholders' equity F-7
Consolidated statement of cash flows F-8
Notes to consolidated financial statements F-9
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves F-60
All other schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Terex Corporation
We have completed an integrated audit of Terex Corporation's 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Terex Corporation and its subsidiaries (the "Company") at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index on page F-1
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note B to the consolidated financial statements, the Company has
restated its consolidated financial statements and financial statement schedule
for the years ended December 31, 2003 and 2002.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, we have audited management's assessment, included in Management's Annual
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that Terex Corporation did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effects of material
weaknesses relating to the Company not maintaining effective controls over its
i) financial reporting process due to an insufficient complement of personnel
with a level of accounting knowledge, experience and training in the application
of generally accepted accounting principles commensurate with the Company's
financial reporting requirements, ii) recording and elimination of intercompany
accounts, iii) accounting for income taxes, iv) accounting for goods received
but not yet invoiced, v) accounting for goodwill denominated in foreign
currencies, and vi) accounting for certain of its retirement and other benefit
plans, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management's assessment and on the effectiveness of
the Company's internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material aspects. An audit of internal
control over financial reporting includes obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2004.
o The Company did not maintain effective controls over its financial
reporting process due to an insufficient complement of personnel with a
level of accounting knowledge, experience and training in the
application of generally accepted accounting principles commensurate
with the Company's financial reporting requirements. Specifically, this
control deficiency directly contributed to the material weaknesses
described below, as well as resulting in errors in the timing of
revenue recognition of certain transactions and not maintaining
effective controls over the Company's acquisition accounting, primarily
resulting in errors in accruing for estimated future legal expenses,
assumed product liabilities and certain asset valuations. This control
deficiency also resulted in errors in net sales, cost of goods sold,
goodwill, accounts receivable, accrued warranties and product liability
and other non-current liabilities resulting in restatements of the
2000, 2001, 2002 and 2003 annual consolidated financial statements, the
consolidated financial statements for the interim periods in 2003 and
the first two quarters of 2004. This control deficiency further
resulted in audit adjustments at two of the Company's operating
locations to the cost of sales and inventory accounts in the 2004
annual consolidated financial statements due to the Company not
maintaining effective controls over its accounting for inventory;
specifically, the reconciliation of parts and finished goods inventory
accounts and the costing of internally transferred parts and work in
process inventory were not sufficient to ensure the completeness and
accuracy of those accounts.
o The Company did not maintain effective controls over the recording and
elimination of its intercompany accounts. As a result of an internal
investigation into the Company's intercompany accounting practices,
management determined that the Company did not maintain effective
controls over the proper accounting for and monitoring of the recording
of its intercompany transactions. This control deficiency resulted in
management's failure to detect the improper recording of elimination
entries related to intercompany transactions, resulting in restatements
of the 2000, 2001, 2002 and 2003 annual consolidated financial
statements, the consolidated financial statements for the interim
periods in 2003 and the first two quarters of 2004. This control
deficiency primarily impacted cost of goods sold, accounts payable,
goodwill and cumulative translation adjustment.
o The Company did not maintain effective controls over its accounting for
income taxes, including income taxes payable, deferred income tax
assets and liabilities and the related income tax provision.
Specifically, the Company did not maintain effective controls over the
accuracy and completeness of the components of the income tax provision
calculations and related deferred income taxes and income taxes
payable, and over the monitoring of the differences between the income
tax basis and the financial reporting basis of assets and liabilities
to effectively reconcile the differences to the reported deferred
income tax balances. This control deficiency resulted in restatements
of the 2000, 2001, 2002 and 2003 annual consolidated financial
statements, the consolidated financial statements for the interim
periods in 2003 and the first two quarters of 2004 as well as audit
adjustments to the 2004 annual consolidated financial statements.
o The Company did not maintain effective controls over its accounting for
goods received but not yet invoiced. The Company's processes,
procedures and controls at two of the Company's operating locations,
including reconciliation and review related to the completeness and
accuracy of its goods received not invoiced liability, were
ineffective. The goods received not invoiced account at the two
locations was not adequately documented and differences were not
adequately analyzed between detailed account listings and amounts
recorded in the general ledger. This control deficiency resulted in
restatement adjustments to the 2003 annual consolidated financial
statements, as well as the consolidated financial statements for the
interim periods in 2003 and the first two quarters of 2004. In
addition, the control deficiency resulted in audit adjustments at one
of these locations to the cost of sales and goods received not invoiced
liability accounts in the 2004 annual consolidated financial
statements.
o The Company did not maintain effective controls over its accounting for
goodwill denominated in foreign currencies. The Company's processes,
procedures and controls related to certain asset valuations, in
addition to the translation of certain goodwill accounts denominated in
a currency other than U.S. dollars, were not sufficient to ensure that
goodwill was accurately recorded in accordance with generally accepted
accounting principles. This control deficiency resulted in restatements
of the 2000, 2001, 2002 and 2003 annual consolidated financial
statements, the consolidated financial statements for the interim
periods in 2003 and the first two quarters of 2004, as well as
adjustments to the 2004 annual consolidated financial statements. This
control deficiency primarily affected goodwill and accumulated other
comprehensive income.
F-3
o The Company did not maintain effective controls over its accounting for
certain of its retirement and other benefit plans. Specifically, the
Company's processes, procedures and controls related to the use of
actuarial information in the determination of its minimum pension
liability for foreign defined benefit plans were not sufficient to
ensure that such liability was accurately recorded. In addition, the
Company's processes, procedures and controls related to the accounting
for the Company's common stock component of its deferred compensation
plan were not effective. This control deficiency resulted in
restatements of the 2000, 2001, 2002 and 2003 annual consolidated
financial statements, the consolidated financial statements for the
interim periods in 2003 and the first two quarters of 2004, as well as
adjustments to the 2004 consolidated financial statements. This control
deficiency primarily impacted other long-term liability, accumulated
other comprehensive income, additional paid-in capital and treasury
stock.
Additionally, each of these control deficiencies could result in a misstatement
of the aforementioned account balances or disclosures that would result in a
material misstatement to the Company's annual or interim consolidated financial
statements that would not be prevented or detected.
Accordingly, management has determined that each of these control deficiencies
constitutes a material weakness in the Company's internal control over financial
reporting as of December 31, 2004.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 consolidated financial
statements and our opinion regarding the effectiveness of the Company's internal
control over financial reporting does not affect our opinion on those
consolidated financial statements.
In our opinion, management's assessment that Terex Corporation did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material aspects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effects of the material weaknesses described above on
the achievement of the objectives of the control criteria, Terex Corporation has
not maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO.
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 16, 2006
F-4
TEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
NET SALES $ 5,019.8 $ 3,909.8 $ 2,816.5
COST OF GOODS SOLD 4,316.7 3,410.8 2,487.2
----------- ----------- -----------
GROSS PROFIT 703.1 499.0 329.3
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (488.5) (396.7) (291.1)
GOODWILL IMPAIRMENT -- (44.3) --
----------- ----------- -----------
INCOME FROM OPERATIONS 214.6 58.0 38.2
OTHER INCOME (EXPENSE)
Interest income 5.1 7.1 7.5
Interest expense (92.1) (99.9) (92.6)
Loss on retirement of debt (2.9) (10.9) (2.4)
Amortization of debt issuance costs (4.6) (5.5) (4.8)
Other income (expense) - net 27.3 0.5 (6.7)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 147.4 (50.7) (60.8)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 176.7 (175.9) 15.8
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 324.1 (226.6) (45.0)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(net of income tax expense of $1.0 in 2002) -- -- (113.4)
----------- ----------- -----------
NET INCOME (LOSS) $ 324.1 $ (226.6) $ (158.4)
=========== =========== ===========
PER COMMON SHARE:
Basic
Income (loss) before cumulative effect of change in
accounting principle $ 6.60 $ (4.75) $ (1.04)
Cumulative effect of change in accounting principle -- -- (2.63)
=========== =========== ===========
Net income (loss) $ 6.60 $ (4.75) $ (3.67)
=========== =========== ===========
Diluted
Income (loss) before cumulative effect of change in
accounting principle $ 6.34 $ (4.75) $ (1.04)
Cumulative effect of change in accounting principle -- -- (2.63)
=========== =========== ===========
Net income (loss) $ 6.34 $ (4.75) $ (3.67)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING IN PER SHARE CALCULATION:
Basic 49.1 47.7 43.2
Diluted 51.1 47.7 43.2
The accompanying notes are an integral part of these financial statements.
F-5
TEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except par value)
DECEMBER 31,
---------------------------
2003
2004 RESTATED
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 418.8 $ 467.5
Trade receivables (net of allowance of $52.3 and $38.3 as
of December 31, 2004 and 2003, respectively) 683.6 509.3
Inventories 1,281.3 1,038.5
Deferred taxes 109.9 78.6
Other current assets 153.5 125.6
------------ ------------
Total Current Assets 2,647.1 2,219.5
LONG-TERM ASSETS
Property, plant and equipment - net 362.6 353.8
Goodwill 667.1 616.7
Deferred taxes 226.0 47.0
Other assets 276.3 317.2
------------ ------------
TOTAL ASSETS $ 4,179.1 $ 3,554.2
============ ============
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 84.6 $ 86.8
Trade accounts payable 895.8 614.9
Accrued compensation and benefits 111.5 89.7
Accrued warranties and product liability 90.0 89.7
Other current liabilities 347.6 287.5
------------ ------------
Total Current Liabilities 1,529.5 1,168.6
NON-CURRENT LIABILITIES
Long-term debt, less current portion 1,114.2 1,274.8
Other 400.2 436.2
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value -- authorized 150.0 shares;
issued 50.8 and 50.0 shares at December 31, 2004 and
2003, respectively 0.5 0.5
Additional paid-in capital 844.5 813.5
Retained earnings (accumulated deficit) 118.9 (205.2)
Accumulated other comprehensive income 206.5 110.4
Less cost of shares of common stock in treasury 2.0 and
1.9 shares at December 31, 2004 and 2003, respectively (35.2) (44.6)
------------ ------------
Total Stockholders' Equity 1,135.2 674.6
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,179.1 $ 3,554.2
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
TEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
ACCUMULATED
RETAINED OTHER
ADDITIONAL EARNINGS COMPREHEN- COMMON
EQUITY COMMON PAID-IN (ACCUMULATED SIVE INCOME STOCK IN
RIGHTS STOCK CAPITAL DEFICIT) (LOSS) TREASURY TOTAL
-------- -------- ---------- ------------ ------------ -------- --------
BALANCE AT DECEMBER 31, 2001
As originally reported $ 0.5 $ 0.4 $ 532.4 $ 199.9 $ (120.3) $ (17.5) $ 595.4
Adjustments -- -- 4.2 (20.1) (13.9) (11.1) (40.9)
-------- -------- ---------- ------------ ------------ -------- --------
As restated 0.5 0.4 536.6 179.8 (134.2) (28.6) 554.5
Net Income (Loss) (Restated) -- -- -- (158.4) -- -- (158.4)
Other Comprehensive Income (Loss):
Translation adjustment (Restated) -- -- -- -- 121.6 -- 121.6
Pension liability adjustment
(Restated) -- -- -- -- (34.2) -- (34.2)
Derivative hedging adjustment -- -- -- -- 2.9 -- 2.9
--------
Comprehensive Income (Loss) (Restated) (68.1)
--------
Exercise of Equity Rights (0.5) -- 0.5 -- -- -- --
Issuance of Common Stock -- 0.1 119.0 -- -- -- 119.1
Acquisition of Treasury Shares -- -- 13.7 -- -- (12.8) 0.9
Acquisition of Businesses -- -- 120.5 -- -- -- 120.5
-------- -------- ---------- ------------ ------------ -------- --------
BALANCE AT DECEMBER 31, 2002 (Restated) -- 0.5 790.3 21.4 (43.9) (41.4) 726.9
Net Income (Loss) (Restated) -- -- -- (226.6) -- -- (226.6)
Other Comprehensive Income (Loss):
Translation adjustment (Restated) -- -- -- -- 144.9 -- 144.9
Pension liability adjustment
(Restated) -- -- -- -- 5.0 -- 5.0
Derivative hedging adjustment -- -- -- -- 4.4 -- 4.4
--------
Comprehensive Income (Loss) (Restated) (72.3)
--------
Issuance of Common Stock (Restated) -- -- 8.5 -- -- -- 8.5
Acquisition of Treasury Stock -- -- 0.1 -- -- (3.2) (3.1)
Acquisition of Businesses -- -- 14.6 -- -- -- 14.6
-------- -------- ---------- ------------ ------------ -------- --------
BALANCE AT DECEMBER 31, 2003 (Restated) -- 0.5 813.5 (205.2) 110.4 (44.6) 674.6
Net Income (Loss) -- -- -- 324.1 -- -- 324.1
Other Comprehensive Income (Loss):
Translation adjustment -- -- -- -- 108.3 -- 108.3
Pension liability adjustment -- -- -- -- (8.3) -- (8.3)
Derivative hedging adjustment -- -- -- -- (3.9) -- (3.9)
--------
Comprehensive Income (Loss) 420.2
--------
Issuance of Common Stock -- -- 19.9 -- -- -- 19.9
Acquisition of Treasury Shares -- -- 11.1 -- -- 9.4 20.5
-------- -------- ---------- ------------ ------------ -------- --------
BALANCE AT DECEMBER 31, 2004 $ -- $ 0.5 $ 844.5 $ 118.9 $ 206.5 $ (35.2) $1,135.2
======== ======== ========== ============ ============ ======== ========
The accompanying notes are an integral part of these financial statements.
F-7
TEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 324.1 $ (226.6) $ (158.4)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation 51.3 55.2 35.9
Amortization 14.3 15.2 9.1
Deferred taxes (203.9) 158.5 (31.8)
Loss on retirement of debt 2.9 10.9 2.4
Gain on sale of fixed assets (22.0) (4.5) (0.7)
Gain on foreign currency forwards -- -- (3.8)
Restructuring charges -- -- 50.9
Impairment charges and asset writedowns -- 65.5 140.8
Changes in operating assets and liabilities (net of
effects of acquisitions):
Trade receivables (134.7) 114.2 54.2
Inventories (158.3) 160.1 (92.1)
Trade accounts payable 231.6 1.7 86.5
Other 59.3 31.1 (22.7)
----------- ----------- -----------
Net cash provided by operating activities 164.6 381.3 70.3
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (58.7) (7.7) (445.9)
Capital expenditures (35.5) (27.1) (29.2)
Proceeds from sale of assets 32.4 6.1 34.5
----------- ----------- -----------
Net cash used in investing activities (61.8) (28.7) (440.6)
----------- ----------- -----------
FINANCING ACTIVITIES
Principal repayments of long-term debt (147.0) (454.5) (219.6)
Proceeds from issuance of long-term debt, net of
issuance costs -- 290.4 572.0
Issuance of common stock -- -- 113.3
Net borrowings (repayments) under revolving line of
credit agreements (15.4) (65.0) (0.8)
Proceeds from stock options exercised 9.2 2.8 --
Payment of premium on early retirement of debt -- (11.1) --
Other (16.9) (29.4) (4.9)
----------- ----------- -----------
Net cash provided by (used in) financing activities (170.1) (266.8) 460.0
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 18.6 29.5 12.1
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (48.7) 115.3 101.8
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 467.5 352.2 250.4
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 418.8 $ 467.5 $ 352.2
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-8
TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(dollar amounts in millions, unless otherwise noted, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The 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. The equity method is used to account for investments in
affiliates in which the Company has an ownership interest between 20% and 50%.
Investments in entities in which the Company has an ownership interest of less
than 20% are accounted for on the cost method or at fair value in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities."
Reclassification. Certain prior year amounts have been reclassified to conform
with the current year's presentation.
Use of Estimates. 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 and
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. Actual amounts could differ from those estimates.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments
with original maturities of three months or less. The carrying amount of cash
and cash equivalents approximates their fair value. Cash and cash equivalents at
December 31, 2004 and 2003 include $2.1 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.
Inventories. Inventories are stated at the lower of cost or market value. Cost
is determined principally 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 December 31, 2004, reserves for excess and obsolete inventory
totaled $73.2.
Debt Issuance Costs. Debt issuance costs incurred in securing the Company's
financing arrangements are capitalized and amortized over the term of the
associated debt. Capitalized debt issuance costs related to debt that is retired
early are charged to other expense at the time of retirement. Debt issuance
costs before amortization totaled $36.0 and $39.7 at December 31, 2004 and 2003,
respectively.
Intangible Assets. Intangible assets include purchased patents, trademarks and
other specifically identifiable assets and are amortized on a straight-line
basis over the respective estimated useful lives, which range from three to
twelve years. Intangible assets are reviewed for impairment when circumstances
warrant.
Goodwill. Goodwill, representing the difference between the total purchase price
and the fair value of assets (tangible and intangible) and liabilities at the
date of acquisition, are reviewed for impairment annually and written down only
in the period in which the recorded value of such assets exceed their fair
value. The initial impairment test, in accordance with the adoption of the
Financial Accounting Standards Board (the "FASB") issued SFAS No. 142 "Goodwill
and Other Intangible Assets," was performed as of January 1, 2002, which
resulted in an impairment charge of $113.4, net of income taxes, reported in
2002 as a cumulative effect of change in accounting principle. During the second
quarter of 2003, the Company identified indicators of goodwill impairment in its
Roadbuilding, Utility Products and Other segment. As discussed in Note D -
"Accounting Changes - Business Combinations and Goodwill," the Company performed
an impairment test, which resulted in a pretax charge of $44.3. The Company
selected October 1 as the date for the required annual impairment test. The
impairment test performed as of October 1, 2004 resulted in no impairment
charge. Subsequent impairment tests will be performed effective October 1 of
each year and more frequently if circumstances warrant.
The initial recognition of goodwill, as well as the annual review of the
carrying value of goodwill, 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
F-9
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.
Property, Plant and Equipment. Property, plant and equipment are stated at cost.
Expenditures for major renewals and improvements are capitalized while
expenditures for maintenance and repairs not expected to extend the life of an
asset beyond its normal useful life are charged to expense when incurred. Plant
and equipment are depreciated over the estimated useful lives (5-40 years and
3-20 years, respectively) of the assets under the straight-line method of
depreciation for financial reporting purposes and both straight-line and other
methods for tax purposes.
Impairment of Long-Lived Assets. The Company's policy is to assess the
realizability of its long-lived assets, including intangible 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 are less than the carrying value. The amount of any
impairment then recognized would be calculated as the difference between
estimated fair value and the carrying value of the asset. Refer to Note G -
"Restructuring and Other Charges" for information on the recognition of
impairment losses in 2002.
Accounts Receivable and Allowance for Doubtful Accounts. Trade accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in its existing accounts receivable. The Company
determines the allowance based on historical customer review. The Company
reviews its allowance for doubtful accounts quarterly. Past due balances over 90
days and over a specified amount are reviewed individually for collectibility.
All other balances are reviewed on a pooled basis by type of receivable. Account
balances are charged off against the allowance when the Company determines that
it is probable that the receivable will not be recovered. The Company has
off-balance-sheet credit exposure related to guarantees provided to financial
institutions as disclosed in Note S - "Litigation and Contingencies."
Substantially all receivables were trade receivables at December 31, 2004 and
2003.
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 which requires 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 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) 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.
F-10
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 signed off on the acceptance, the time period
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.
Certain new units may be invoiced prior to the time customers take physical
possession. Revenue is recognized in such cases only when the customer has a
fixed commitment to purchase the units, the units have been completed, tested
and made available to the customer for pickup or delivery, and the customer has
requested that the Company hold the units for pickup or delivery at a time
specified by the customer. In such cases, the units are invoiced under the
Company's customary billing terms, title to the units and risks of ownership
pass to the customer upon invoicing, the units are segregated from the Company's
inventory and identified as belonging to the customer and the Company has no
further obligations under the order.
Revenue recognition - lease transactions. Revenue from sales-type leases is
recognized at the inception of the lease. Income from operating leases is
recognized ratably over the term of the lease. The Company routinely sells
equipment subject to operating leases and the related lease payments. If the
Company does not retain a substantial risk of ownership in the equipment, the
transaction is recorded as a sale. If the Company does retain a substantial risk
of ownership, the transaction is recorded as a borrowing, the operating lease
payments are recognized as revenue over the term of the lease and the debt is
amortized over a similar period.
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" in the Company's consolidated balance sheet. 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 consolidated product warranty
liability:
Balance as of December 31, 2002 (Restated) $ 60.3
Businesses acquired 5.7
Accruals for warranties issued during the year 60.4
Changes in estimates 3.0
Settlements during the year (67.5)
Foreign exchange effect 7.7
------------
Balance as of December 31, 2003 (Restated) 69.6
Businesses acquired 1.9
Accruals for warranties issued during the year 81.7
Changes in estimates (1.5)
Settlements during the year (81.1)
Foreign exchange effect 3.7
------------
Balance as of December 31, 2004 $ 74.3
============
F-11
Accrued Product Liability. The Company records accruals for product liability
claims based on the Company's claim experience.
Non Pension Postretirement Benefits. The Company provides postretirement
benefits to certain former salaried and hourly employees and certain hourly
employees covered by bargaining unit contracts that provide such benefits and
has elected the delayed recognition method of adoption of the accounting
standard related to the benefits. See Note R - "Retirement Plans and Other
Benefits."
Deferred Compensation. The Company maintains a deferred compensation plan which
is described more fully in Note R - "Retirement Plans and Other Benefits." The
Company's common stock held in a rabbi trust pursuant to the Company's deferred
compensation plan is treated in a manner similar to treasury stock and is
recorded at cost within stockholders' equity as of December 31, 2004 and 2003.
The corresponding deferred compensation obligation in common stock and other
deferral investments by plan participants were recorded as non-current
liabilities as of December 31, 2003. Subsequent to January 1, 2004, the plan
obligation for participant deferrals in the Company's common stock was
classified as additional paid-in capital within stockholders' equity as a result
of a revision to the plan prohibiting transfers between investment options. The
total of the Company's common stock required to settle this deferred
compensation obligation is included in the denominator in both basic and diluted
earnings per share calculations.
Stock-Based Compensation. At December 31, 2004, the Company has stock-based
employee compensation plans which are described more fully in Note Q -
"Stockholders' Equity." The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and related interpretations. No
stock-based 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
(loss) and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") to stock-based employee compensation.
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
Reported net income (loss) $ 324.1 $ (226.6) $ (158.4)
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related income tax effects (4.7) (5.8) (3.3)
----------- ----------- -----------
Proforma net income (loss) $ 319.4 $ (232.4) $ (161.7)
=========== =========== ===========
Per common share:
Basic:
Reported net income (loss) $ 6.60 $ (4.75) $ (3.67)
=========== =========== ===========
Proforma net income (loss) $ 6.51 $ (4.87) $ (3.74)
=========== =========== ===========
Diluted:
Reported net income (loss) $ 6.34 $ (4.75) $ (3.67)
=========== =========== ===========
Proforma net income (loss) $ 6.25 $ (4.87) $ (3.74)
=========== =========== ===========
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 2004, 2003 and 2002, respectively: dividend yields of 0%, 0% and
0%; expected volatility of 50.22%, 51.10% and 51.24%; risk-free interest rates
of 3.74%, 4.41% and 5.42%; and expected life of 5.7 years, 9.8 years and 9.9
years. The aggregate fair value of options granted during 2004, 2003 and 2002
for which the exercise price equals the market price on the grant date was $5.7,
$5.4 and $8.4, respectively. The weighted average fair value at date of grant
for options granted during 2004, 2003 and 2002 was $17.28, $8.14 and $14.97,
respectively.
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.
Foreign Currency Translation. Assets and liabilities of the Company's
international operations are translated at year-end exchange rates. Income and
expenses are translated at average exchange rates prevailing during the year.
For operations whose functional currency is the local currency, translation
adjustments are accumulated in the Cumulative Translation Adjustment component
of Stockholders' Equity. Gains or losses resulting from foreign currency
transactions are recorded in the accounts based on the underlying transaction.
Derivatives. Derivative financial instruments are recorded on the consolidated
balance sheet at their fair value as either assets or liabilities. Changes in
the fair value of derivatives are recorded each period in earnings or
accumulated other comprehensive income,
F-12
depending on whether a derivative is designated and effective as part of a hedge
transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in accumulated other comprehensive income are
included in earnings in the periods in which earnings are affected by the hedged
item. See Note F - "Derivative Financial Instruments."
Environmental Policies. Environmental expenditures that relate to current
operations are either expensed or capitalized depending on the nature of the
expenditure. Expenditures relating to conditions caused by past operations that
do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments and/or remedial actions
are probable, and the costs can be reasonably estimated. Such amounts were not
material at December 31, 2004 and 2003.
Research and Development Costs. Research and development costs are expensed as
incurred. Such costs incurred in the development of new products or significant
improvements to existing products are included in Selling, General and
Administrative Expenses. Research and development costs were $46.3, $38.6 and
$24.7 during 2004, 2003, and 2002, respectively.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. See Note P - "Income Taxes."
Earnings Per Share. Basic earnings per share is computed by dividing net income
(loss) for the period by the weighted average number of shares of Terex common
stock, par value $0.01 ("Common Stock"), outstanding. Diluted earnings per share
is computed by dividing net income (loss) for the period by the weighted average
number of shares of Common Stock outstanding and potential dilutive common
shares.
Recent Accounting Pronouncements. SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002," was issued in May 2002. SFAS No. 145 became effective for
certain leasing transactions occurring after May 15, 2002 and is being applied
by the Company from January 1, 2003 with respect to reporting gains and losses
from extinguishments of debt. The adoption of SFAS No. 145 has resulted in the
Company reporting gains and losses from extinguishments of debt as a component
of income or loss from continuing operations before income taxes and
extraordinary items; there has been no effect on the Company's net income or
loss. In accordance with SFAS No. 145, loss on the extinguishment of debt of
$2.4 in 2002 has been reclassified.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare ("Medicare Part D") as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In January
2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." In May 2004, the FASB issued FSP No. 106-2,
which superceded FSP No. 106-1. FSP Nos. 106-1 and 106-2 became effective in
2004. FSP No. 106-2 provides guidance to employers that have determined that
prescription drug benefits available under their retiree health care benefit
plans are at least actuarially equivalent to Medicare Part D. The Company's U.S.
postretirement healthcare plans provide for prescription drug benefits for
certain participants. Due to the limited number of participants in the Company's
postretirement healthcare plans that are affected by the Act, the adoption of
FSP Nos. 106-1 and 106-2 did not have a material impact on the Company's
financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of
ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to
the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on
allocating certain costs to inventory. SFAS No. 151 amends ARB 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges.
In addition, SFAS No. 151 requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of production
facilities. As required by SFAS No. 151, the Company will adopt this new
accounting standard on January 1, 2006. The adoption of SFAS No. 151 is not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." SFAS No. 153 addresses the measurement of
exchanges of nonmonetary assets. It eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and
replaces it with an exception for exchanges that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. As required by SFAS No. 153, the Company will adopt this new
accounting standard effective July 1, 2005. The adoption of SFAS No. 153 is not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment." SFAS No.
123R requires that the cost resulting from all share-based payment transactions
be recognized in the financial statements. SFAS No. 123R also establishes fair
value as the measurement method in accounting for share-based payments to
employees. As per SEC Release No. 33-8568, issued in April 2005,
F-13
Terex will adopt this new accounting standard effective January 1, 2006. Terex
expects to transition to the new guidance using the modified prospective method.
The adoption of SFAS No. 123R is not expected to have a material impact on the
Company's financial statements.
NOTE B - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated the accompanying financial statements as of and for the
years ended December 31, 2003 and 2002, and stockholders' equity as of
December 31, 2001. The restatement principally pertains to errors identified by
the Company in accounting for, and reconciliation of, certain intercompany
imbalances, as well as in the failure of the Company to properly eliminate, in
consolidation, all intercompany accounts in accordance with generally accepted
accounting principles. Prior to the restatement, the intercompany imbalances
were eliminated by affecting the translation adjustment account within
accumulated other comprehensive income (loss) within stockholders' equity,
rather than the accounts giving rise to the imbalance. The Company's review of
prior year financial statements identified other errors in accounting which
primarily impacted net sales, cost of goods sold, goodwill, accumulated other
comprehensive income, additional paid-in capital and treasury stock, which are
also corrected in these restatements.
In addition, as a result of the impact of the restatement items on the pre-tax
income of the Company's U.S. business, the Company reassessed its need for a
valuation allowance and determined that a valuation allowance to reduce Terex's
U.S. deferred tax asset was required, as a result of a reassessment, to be
recorded at December 31, 2003 in the restated financial statements. The
valuation allowance was subsequently reversed in the quarter ended December 31,
2004, thereby increasing net income in that quarter. The reversal was based upon
improving operating results during 2004 and significant, profitable backlog
generated in early 2005. During the periods ended March 31, 2004 and June 30,
2004, the impact of this valuation allowance required a reversal of the tax
expense on the U.S. pre-tax income in the periods ended March 31, 2004 and June
30, 2004, requiring the Company to restate its financial statements for such
periods. Additionally, the Company has adjusted its tax accounts for errors
identified for the periods ended June 30, 2004 and in all prior periods
presented in this Annual Report on Form 10-K.
The following sets forth the restatement of the Company's previously issued
financial statements as of December 31, 2003 and 2002 and for the years then
ended, and as of December 31, 2001 for stockholders' equity. The information
below summarizes the nature of the adjustments recorded to correct previously
issued financial statements.
All other information presented in the notes to these financial statements is
presented on a restated basis.
STATEMENTS OF INCOME:
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- -------------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
----------- ----------- ----------- -----------
Net sales $ 3,897.1 $ 3,909.8 $ 2,797.4 $ 2,816.5
Cost of goods sold $ 3,378.6 $ 3,410.8 $ 2,440.7 $ 2,487.2
Gross profit $ 518.5 $ 499.0 $ 356.7 $ 329.3
Selling, general and administrative expenses $ (393.7) $ (396.7) $ (288.1) $ (291.1)
Goodwill impairment $ (51.3) $ (44.3) --- ---
Income from operations $ 73.5 $ 58.0 $ 68.6 $ 38.2
Interest expense $ (99.9) $ (99.9) $ (92.9) $ (92.6)
Other income (expense) - net $ 0.4 $ 0.5 $ (4.2) $ (6.7)
Income (loss) before income taxes and cumulative
effect of change in accounting principle $ (35.3) $ (50.7) $ (28.2) $ (60.8)
Benefit from (provision for) income taxes $ 9.8 $ (175.9) $ 9.1 $ 15.8
Income (loss) before cumulative effect of
change in accounting principle $ (25.5) $ (226.6) $ (19.1) $ (45.0)
Net income (loss) $ (25.5) $ (226.6) $ (132.5) $ (158.4)
Per common share:
Basic and diluted -
Income (loss) before cumulative effect of
change in accounting principle $ (0.53) $ (4.75) $ (0.44) $ (1.04)
Net income (loss) $ (0.53) $ (4.75) $ (3.07) $ (3.67)
F-14
BALANCE SHEETS:
AS OF
DECEMBER 31, 2003
-------------------------
AS
ORIGINALLY AS
REPORTED RESTATED
----------- -----------
Trade receivables $ 540.2 $ 509.3
Inventories $ 1,009.7 $ 1,038.5
Current deferred taxes $ 53.9 $ 78.6
Other current assets $ 122.7 $ 125.6
Total current assets $ 2,194.0 $ 2,219.5
Property, plant and equipment - net $ 370.1 $ 353.8
Goodwill $ 603.5 $ 616.7
Deferred taxes $ 238.9 $ 47.0
Other assets $ 317.3 $ 317.2
Total assets $ 3,723.8 $ 3,554.2
Trade accounts payable $ 608.6 $ 614.9
Accrued compensation and benefits $ 94.5 $ 89.7
Accrued warranty and product liability $ 88.5 $ 89.7
Other current liabilities $ 281.0 $ 287.5
Total current liabilities $ 1,159.4 $ 1,168.6
Other non-current liabilities $ 412.9 $ 436.2
Additional paid-in capital $ 795.1 $ 813.5
Retained earnings (accumulated deficit) $ 41.9 $ (205.2)
Cumulative translation adjustment $ 79.6 $ 140.0
Accumulated other comprehensive income (loss) $ 57.0 $ 110.4
Cost of shares of common stock in treasury $ (17.8) $ (44.6)
Total stockholders' equity $ 876.7 $ 674.6
Total liabilities and stockholders' equity $ 3,723.8 $ 3,554.2
Net cash from operating activities, investing activities and financing
activities did not change during the years ended December 31, 2003 or December
31, 2002 from previously issued results due to the impact of restatement. The
impact of the restatement on individual line items within operating activities
are reflected in the consolidated statement of cash flows for the years ended
December 31, 2003 and December 31, 2002.
The cumulative effect of the restatement of the Company's previously filed
financial statements was to reduce retained earnings as of December 31, 2003,
2002 and 2001 by $247.1 (of which $200.7 relates to the tax valuation allowance
discussed below), $46.0 and $20.1 respectively, which includes a tax benefit
(provision) of ($185.7), $6.7 and $0.0 respectively. Total stockholders' equity
as of December 31, 2003, 2002 and 2001 decreased by $202.1 (of which $200.7
relates to the tax valuation allowance discussed below), $42.3 and $40.9,
respectively. The issues giving rise to the restatement of the Company's
previously filed financial statements, and the pre-tax adjustments resulting
therefrom, are summarized below:
North American Cranes (Cranes Segment): The Company failed to properly record
certain items related to inventory shortages, warranty and third party payables
activity. These items were improperly recorded to intercompany accounts that
were not timely reconciled, leading to costs totaling $7.4 in the year ended
December 31, 2003 and $6.9 during the year ended December 31, 2002 not being
recorded as expenses.
North American Distribution (Construction Segment): The Company failed to timely
and accurately reconcile certain intercompany imbalances and this resulted in
costs totaling $1.4 in the year ended December 31, 2003 and $11.6 during the
year ended December 31, 2002 not being recorded as expenses.
Light Construction (Aerial Work Platforms Segment): The Company failed to timely
and accurately reconcile certain intercompany imbalances, which resulted in
errors in the recording of intercompany transactions and, as a result, costs
totaling $2.1 in the year ended December 31, 2003 and $4.8 during the year ended
December 31, 2002 were not recorded as expenses.
Compact and Heavy Equipment (Construction Segment): The Company failed to
reconcile the accrual for goods received not invoiced to underlying detailed
records for raw material and parts inventory in connection with assessing the
appropriateness of the accrued liability. As a result, costs were not recorded
as expenses totaling $5.7 in the year ended December 31, 2003 and $0.4 during
the year ended December 31, 2002.
F-15
Other Intercompany Imbalances and Other Items: The Company's various business
units buy and sell products and services from each other in the normal course of
operations. Errors were identified as a result of not reconciling intercompany
activity in a timely manner between certain business units. Other errors, not
specifically related to intercompany activity, were identified during the review
and were corrected in the restatement. These errors related mainly to the
reconciliation of certain accruals, foreign currency adjustments, and the
disposition of a foreign sales distribution business. As a result of these
aggregate errors, expenses were not recorded totaling $1.9 in the year ended
December 31, 2003 and $7.5 in the year ended December 31, 2002. These errors
occurred mainly in the Construction and Cranes segments.
Schaeff Goodwill: On January 14, 2002, the Company completed the acquisition of
the Schaeff Group of Companies ("Schaeff"), a German manufacturer of compact
construction equipment and a full range of scrap material handlers. An error in
the recording of the Company's investment led to an overstatement of goodwill
and the cumulative translation adjustment account within other comprehensive
income within stockholders' equity in the amount of $23.5, beginning in 2002.
Revenue Recognition: The Company has determined that there was an error in the
timing of revenue recognition with respect to a particular transaction in 2001
involving United Rentals, Inc. because the risks and rewards of ownership in the
equipment involved in such transaction had not passed from the Company to its
customer. The correction of this error has resulted in an increase in revenue in
the year ended December 31, 2002 of $24.0. As a result of these adjustments,
there was an increase in pre-tax income of $1.9 in the year ended December 31,
2002.
Additionally, other errors in the timing of revenue recognition where the risks
and rewards of ownership had not passed from the Company to its customers were
corrected, which increased revenue in the year ended December 31, 2003 by $12.7
and decreased revenue in the year ended December 31, 2002 by $4.9. As a result
of these adjustments, there was an increase in pre-tax income (loss) of $2.6 in
the year ended December 31, 2003 and ($1.2) in the year ended December 31, 2002.
Acquisition Accounting: During the Company's review of the accounting for
certain of its acquisitions, errors were identified related to excess accruals
for estimated future legal expenses and assumed product liabilities, as well as
asset valuation errors. These errors also resulted in an overstatement of
goodwill at the time of the acquisitions. As the goodwill was subsequently
impaired, such errors also resulted in an overstatement of the goodwill
impairment by $7.0 during the year ended December 31, 2003. As a result of these
aggregate errors, $6.5 of expenses were not recorded (which were offset by $7.0
of income relating to a reduction in goodwill impairment from $51.3 to $44.3) in
the year ended December 31, 2003 and $2.1 in the year ended December 31, 2002.
Cumulative Translation Adjustment: Management has also determined that the
accounting treatment of certain of its goodwill related to foreign acquisitions
did not meet the requirements of SFAS No. 52, "Foreign Currency Translation." At
the time these foreign acquisitions were completed, mainly in 1999 and 2002, the
Company valued goodwill at the historic exchange rate, and failed to translate
this goodwill in subsequent reporting periods at current exchange rates as
required by SFAS No.52. The cumulative impact of this correction has increased
(decreased) the Company's goodwill and the translation adjustment account within
stockholders' equity by $32.3, ($0.6) and ($23.3) as of December 31, 2003, 2002
and 2001, respectively. In addition, the reconciliation of intercompany
imbalances described in the previous paragraphs affected the translation
adjustment within stockholders' equity.
Retirement and Other Benefit Plans: During the Company's review of its foreign
defined benefit plans in 2004, an error was identified in the application of
SFAS No. 87, "Employers' Accounting for Pensions." The Company did not record
the minimum pension liability adjustment for these plans to other comprehensive
income (net of taxes) within stockholders' equity and other non-current
liabilities. The net result of correcting this error was a reduction in other
comprehensive income (net of taxes) as of December 31, 2003 and 2002 totaling
$6.9 and $10.7, respectively. In addition, non-current liabilities increased as
of December 31, 2003 and 2002 by $9.8 and $15.3, respectively. The Company also
determined that it was not properly accounting for its equity based compensation
in accordance with Emerging Issues Task Force Issue No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested" ("EITF No. 97-14") and APB No. 25 as permitted by SFAS No.
123. The net result of correcting these errors was a decrease to current
liabilities as of December 31, 2003 and 2002 totaling $5.2 and $5.2,
respectively, an increase to non-current liabilities as of December 31, 2003 and
2002 totaling $14.4 and $11.2, respectively, and a reduction in stockholders'
equity of $9.1 and $6.0 as of December 31, 2003 and 2002, respectively.
Taxes: As a result of the impact of the pre-tax income restatement items
previously discussed, and the reconciliation of tax accounts, the Company is
restating its tax accounts to decrease deferred taxes by $244.2 and to increase
income taxes payable by $1.6 at December 31, 2003, and to increase (decrease)
tax expense by $185.7 and ($6.7) for the years ended December 31, 2003 and
December 31, 2002, respectively.
Included in the restatement amounts discussed above are amounts related to the
reconciliation of the Company's tax accounts that increased deferred taxes by
$6.9 and increased goodwill by $7.0 at December 31, 2003, and increased
(decreased) tax expense by ($3.0) and $6.2 for the years ended December 31, 2003
and December 31, 2002, respectively.
F-16
As a result of the pre-tax income restatement adjustments discussed above, a
reassessment was performed as to the likely realization of the Company's U.S.
deferred tax assets at each reporting date. The reassessment of the
realizability of the Company's deferred tax assets resulted in a valuation
allowance being recorded at December 31, 2003 in the restated financial
statements. This increased the Company's deferred tax valuation allowance and
corresponding tax expense in 2003 by $200.7 million. Based on the profitability
of the Company in 2004 and significant, profitable backlog generated in early
2005, the valuation allowance was reversed in the quarter ended December 31,
2004.
The Company's reassessment began with an analysis of the Company's cumulative
three-year historical U.S. pre-tax earnings. As of December 31, 2003, the
Company had a cumulative three-year historical U.S. pre-tax loss, which is
considered significant objective evidence that a valuation allowance may be
required, unless there existed objective evidence of a significant magnitude
that would indicate that it is more likely than not that the U.S. deferred tax
assets would be realized. It was determined that only the evidence that was
available as of the time of the filing of the original financial statements
could be used in this assessment. During the Company's evaluation of other
evidence available as of the original issuance date of the December 31, 2003
financial statements, several items were considered, including the cyclical
nature of the Company's industry, the impact of its restructuring activities,
the goodwill impairment in the Company's Roadbuilding, Utility Products and
Other segment, profitable U.S. acquisitions (mainly Genie Holdings, Inc. and its
affiliates and Advance Mixer, Inc.) made during the three-year period but not
available for the whole period, the timeframe of expiration of the Company's net
operating loss carry-forwards, the favorable impact of the Company's debt
reduction activities, and the indication of an industry recovery based on trends
in non-residential construction spending and rental channel capital expenditure
projections. The Company concluded that the weight of the objective negative
evidence available at the time of the original financial statement filing
(without the benefit of current hindsight) could not be overcome by these other
factors, and therefore a valuation allowance was recorded at December 31, 2003
in the restated financial statements.
NOTE C - ACQUISITIONS
2004 ACQUISITIONS
On September 7, 2004, the Company completed the acquisition of Noble CE, LLC and
its Mexican subsidiary ("Noble CE"). Noble CE, with its manufacturing facility
located in Mexico, designs, fabricates and assembles forklift products, pull
scrapers and water tanks, and performs fabrication work for other businesses. In
connection with the acquisition, the Company paid $5.0 cash, subject to
post-closing adjustments based upon the finalization of the closing date balance
sheet. Noble CE is included in the Terex Materials Processing & Mining segment.
The operating results of Noble CE, now known as Terex Mexico, are included in
the Company's consolidated results of operations since September 7, 2004.
On December 31, 2004, the Company completed the acquisition of the Reedrill
division of Metso Corporation ("Reedrill"). Reedrill, headquartered in Sherman,
Texas, is a manufacturer of surface drilling equipment for use in the mining,
construction and utility industries. In connection with the acquisition, the
Company paid $38.6 cash, subject to post-closing adjustments based upon the
finalization of the closing date balance sheet. Reedrill is included in the
Terex Materials Processing & Mining segment, and operating results of Reedrill
will be included in the Company's consolidated results of operations beginning
January 1, 2005.
2003 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 in cash. 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 Terex
Roadbuilding, Utility Products and Other segment.
F-17
The Company owns an approximately 67% 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. The
Company and Tatra each owned approximately a one-third interest in ATC at August
28, 2003. 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. Prior to this date,
the Company accounted for its investment in ATC under the equity method of
accounting. The Company subsequently acquired Tatra's interest in ATC on June
14, 2004 for approximately $1.4, which was used to repay certain indebtedness of
Tatra to the Company. ATC is included in the Terex Roadbuilding, Utility
Products and Other segment.
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 dereks, 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.
2002 ACQUISITIONS
On January 14, 2002, the Company completed the acquisition of the Schaeff Group
of Companies ("Schaeff"). Schaeff is a German manufacturer of compact
construction equipment and a full range of scrap material handlers. Schaeff's
annual revenues for 2001 were approximately $220. Total cash consideration paid
for Schaeff was approximately $62. In a separate transaction, certain former
shareholders of Schaeff purchased approximately 1.3 million shares of Common
Stock from the Company in January 2002 for $17.3045 per share, or approximately
$23 in total. The per share purchase price was based on the average price of the
Common Stock on the New York Stock Exchange ("NYSE") for a twenty day trading
period prior to the sale. Schaeff is included in the Terex Construction segment.
On January 15, 2002, the Company completed the acquisition of Utility Equipment,
Inc., which does business as Pacific Utility Equipment Co. and Terex Utilities
West ("Utility Equipment"). Utility Equipment, headquartered in Oregon 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 455 thousand
shares of Common Stock. Utility Equipment is included in the Terex Roadbuilding,
Utility Products and Other segment.
On March 26, 2002, the Company acquired EPAC Holdings, Inc., which did business
under the names Telelect East and Eusco ("Telelect Southeast"). Telelect
Southeast, headquartered in Richmond, Virginia 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 300 thousand shares of Common Stock and $1.1
cash. Telelect Southeast is included in the Terex Roadbuilding, Utility Products
and Other segment. Effective January 1, 2004, Telelect Southeast merged into
Utilities South.
On April 11, 2002, the Company acquired certain assets and liabilities of
Advance Mixer, Inc. ("Advance Mixer") in the bankruptcy proceedings of Advance
Mixer for $12.5 cash. Advance Mixer manufactures and markets concrete mixer
trucks at its facilities in Fort Wayne, Indiana. Advance Mixer is included in
the Terex Roadbuilding, Utility Products and Other segment.
On August 30, 2002, the Company completed the acquisition of Demag Mobile Cranes
GmbH & Co. KG and its affiliates ("Demag") for approximately 160 million Euros.
Demag, headquartered in Zweibrucken, Germany, manufactures and distributes
telescopic and lattice boom cranes, and had 2001 revenues of approximately $360.
Demag is included in the Terex Cranes segment.
On September 18, 2002, the Company completed the acquisition of Genie Holdings,
Inc. and its affiliates ("Genie"), a global manufacturer of aerial work
platforms with 2001 revenues of approximately $575 (the "Genie Acquisition").
The purchase consideration was approximately $75, consisting of $64.9 in Common
Stock (approximately 3.2 million shares of Common Stock) and $10.1 in cash,
subject to adjustment. In addition, the Company assumed and refinanced
approximately $168 of Genie's debt. The number of shares of Common Stock issued
in the Genie Acquisition was determined based on the average price of the Common
Stock on the NYSE for a ten day trading period prior to the closing of the
transaction. In addition, one of the purchase consideration adjustments required
the Company to issue additional shares of Common Stock on September 18, 2003,
the twelve month anniversary date of the acquisition, as the Company's Common
Stock was not trading at least 15% higher than the price at the time of
acquisition. As a result, the Company issued 98 thousand shares of Common Stock
to the selling shareholders in October 2003. The Company initiated the Genie
Acquisition as an opportunity to diversify its product offering with the
addition of a complete line of aerial work platforms with a strong global brand
and significant market share. The Genie Acquisition was also intended to provide
operational and marketing synergies and cost savings, such as allowing the Genie
product line to expand the reach of its distribution through the Company's
existing sales base, particularly in Europe. Genie is included in the Terex
Aerial Work Platforms segment.
F-18
The following pro forma summary presents the consolidated results of operations
as though the Company completed the Genie Acquisition as of the beginning of the
year ended December 31, 2002, after giving effect to certain adjustments for
interest expense, amortization of debt issuance costs and other expenses related
to the transaction:
Net sales (Restated) $ 3,201.8
Income from operations (Restated) $ 47.5
Income (loss) before cumulative effect of change
in accounting principle (Restated) $ (49.4)
Income (loss) before cumulative effect of change
in accounting principle, per share:
Basic (Restated) $ (1.14)
Diluted (Restated) $ (1.14)
The pro forma information is not necessarily indicative of what the actual
results of operations of the Company would have been for the periods indicated,
nor does it purport to represent the results of operations for future periods.
The estimated fair values of assets and liabilities acquired by the Company in
the Genie Acquisition are summarized as follows:
Cash $ 14.5
Net trade receivables (Restated) 112.7
Inventories 87.9
Other current assets 83.2
Property, plant and equipment 49.6
Goodwill (Restated) 40.0
Other non-current assets 167.0
Accounts payable (83.7)
Other current liabilities (60.0)
Current portion of long-term debt (59.5)
Long-term debt, less current portion (28.5)
Other liabilities (Restated) (66.6)
-----------
$ 256.6
===========
The Company has evaluated various alternatives to integrate the activities of
certain of the businesses acquired in 2002 into the Company, including
alternatives to exit or consolidate certain facilities and/or activities and
restructure certain functions and reduce the related headcount. These
alternatives have impacted the acquired businesses and existing businesses, and
the Company finalized its plans prior to December 31, 2002. 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. See Note G - "Restructuring and Other Charges" for a description of
these restructuring activities.
The Company recorded approximately $28 of liabilities under EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination,"
for the businesses acquired in 2002. Approximately $22 of these recorded
liabilities were related to severance and relocation costs for employees at
acquired businesses. These employees' positions were deemed duplicative and
eliminated as a direct result of these acquisitions. The remainder of
liabilities under EITF 95-3 related to plant closings of approximately $6.
The operating results of the acquired businesses are included in the Company's
consolidated results of operations since their respective dates of acquisition.
NOTE D - ACCOUNTING CHANGES - BUSINESS COMBINATIONS AND GOODWILL
In 2002, on the adoption of SFAS No. 141 "Business Combinations", the Company
recorded a cumulative effect of an accounting change of $17.8 ($10.7, net of
income taxes), related to the write-off of negative goodwill at January 1, 2002
from the acquisition of Fermec Manufacturing Limited in December 2000.
Also in 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible
Assets", and under this standard, goodwill and indefinite life intangible assets
are to be reviewed at least annually for impairment and written down only in the
period in which the recorded value of such assets exceed their fair value. The
Company's initial impairment test was performed on all reporting units prior to
June 30, 2002, as required.
Under the transitional provisions of SFAS No. 142, the Company identified its
reporting units and performed impairment tests on the net goodwill and other
intangible assets associated with each of the reporting units, using a valuation
date of January 1, 2002. The SFAS No. 142 impairment test is a two-step process.
First, it requires comparison of the book value of net assets to the fair value
of the related reporting units. If the fair value is determined to be less than
book value, a second step is performed to compute the amount
F-19
of impairment. In the second step, the implied fair value of goodwill is
estimated as the fair value of the reporting unit used in the first step less
the fair values of all other tangible and intangible assets of the reporting
unit. If the carrying amount of goodwill exceeds its implied fair market value,
an impairment loss is recognized in an amount equal to that excess.
Consistent with the approach required under SFAS No. 142, the Company estimated
the fair value of each of its ten reporting units existing as of January 1,
2002. Fair value was determined using a projection of undiscounted cash flow for
each reporting unit. Undiscounted cash flow was calculated using projected after
tax operating earnings, adding back depreciation and amortization, deducting
projected capital expenditures and also including the net change in working
capital employed. The assumptions were based on the Company's 2002 operating
plan. The present value of the undiscounted cash flows were calculated using
each reporting unit's weighted cost of capital. The Company used an explicit
five-year projection of cash flow along with a terminal value based on the fifth
year's projected cash flow. The Company created these models. The total fair
value of the Company, as determined above, as of January 1, 2002, was
approximately equal to the market value of the Company at the same date, as
determined by the market value of the Company's equity and debt.
Upon adoption of SFAS No. 142, the Company performed the test described in SFAS
No. 142 for all units where the Company's carrying amount for such unit was
below the fair value of that unit as calculated by the method described above.
SFAS No. 142 defines how a company determines the implied fair value of
goodwill.
The carrying value of the Terex Materials Processing & Mining segment (formerly
the Terex Mining segment) exceeded the present value of the cash flow expected
to be generated by the segment. Future cash flow expectations had been reduced
due to the continued weakness in mineral commodity prices which are a major
determinant of the overall demand for mining equipment. The Company calculated
the fair market value of the Terex Materials Processing & Mining segment's fixed
assets and intangible assets. Given the specialized nature of this calculation,
the Company employed a third party to assist in the determination of the fair
value of intangible assets at the Terex Materials Processing & Mining reporting
unit. The appraiser helped determine the value for the Terex Materials
Processing & Mining unit's intangible assets, which included trade names,
customer relationships, backlog and technology, as defined in SFAS No. 141. An
income-based approach was used to determine the market value of these intangible
assets. A market comparable approach was used to determine appropriate royalty
rates. In addition, the fair value of the Terex Materials Processing & Mining
unit's plant, property and equipment was calculated using a cost approach. The
Company provided guidance to the appraiser related to assumptions and
methodologies used in valuation and took responsibility for determining the
goodwill impairment charge. The results of this valuation work were used in the
determination of the implied value of the Terex Materials Processing & Mining
unit's goodwill as of January 1, 2002, which resulted in a goodwill impairment
of $105.7 ($105.7, net of income taxes).
The Light Construction reporting unit, formerly a component of the Terex
Roadbuilding, Utility Products and Other segment and, with effect from July 1,
2004, now a component of the Terex Aerial Work Platforms segment, also was
determined to have a carrying value in excess of its projected discounted cash
flow. The market for the unit's products, primarily light towers, has been
negatively impacted by the consolidation of distribution outlets for the unit's
products, which has reduced demand for these products, and the increasing
preference of end users of the unit's products to rent, rather than purchase,
equipment. The analysis resulted in a goodwill impairment of $26.2 as of January
1, 2002 ($18.1, net of income taxes).
The EarthKing reporting unit, a component of the Terex Roadbuilding, Utility
Products and Other segment, was also determined to have a carrying value in
excess of its projected discounted cash flow. EarthKing was created to provide
on-line training and web based procurement services. Several businesses within
EarthKing were unsuccessful in gaining customer acceptance and were generating
revenue at levels insufficient to warrant anticipated growth, which
substantially reduced the value of EarthKing. A goodwill impairment of $0.3
($0.3, net of income taxes) was recorded as of January 1, 2002.
The Company did not require the assistance of a third party when determining the
goodwill impairment associated with the Light Construction and EarthKing
reporting units, whose carrying amount exceeded their fair value, as it was
evident that the fair value of net tangible assets at these units was greater
than the estimated fair value of the reporting units, and that 100% of the
related goodwill was impaired.
The adjustment from the adoption of SFAS No. 142, an impairment loss of $132.2
($124.1, net of income taxes) was recorded as a cumulative effect of change in
accounting principle adjustment as of January 1, 2002.
Business performance during the first six months of 2003 in the Roadbuilding
reporting unit did not meet the expectations of the Company that were used when
goodwill was last reviewed for impairment as of October 1, 2002. Funding for
road projects had remained at historically low levels, as federal and state
budgets had been negatively impacted by a weak economy and the war in Iraq. In
response to the revised business outlook, management initiated several changes
to address the expected market conditions, including a change in business
management, discontinuance of several non-core products, work force furloughs
and reductions, and an inventory write-down based on anticipated lower sales
volume. Based on the continued weakness in the Roadbuilding reporting unit, the
Company initiated a review of the long-term outlook for the Roadbuilding
reporting unit. The revised outlook for the Roadbuilding
F-20
reporting unit assumed that funding levels for domestic road projects would not
improve significantly in the short term. In addition, the outlook assumed that
the Company would continue to reduce working capital invested in the reporting
unit to better match revenue expectations.
Based on this review during the second quarter of 2003, the Company determined
the fair value of the Roadbuilding reporting unit in accordance with the SFAS
No. 142 approach used during the initial review. The SFAS No. 142 approach uses
the present value of the cash flow expected to be generated by the reporting
unit. The cash flow was determined based on the expected revenues, after tax
profits, working capital levels and capital expenditures for the Roadbuilding
reporting unit. The present value was calculated by discounting the cash flow by
the Company's weighted average cost of capital. The Company, with the assistance
of a third-party, also reviewed the market value of the Roadbuilding reporting
unit's tangible and intangible assets. These values were included in the
determination of the carrying value of the Roadbuilding reporting unit.
Based on the revised fair value of the Roadbuilding reporting unit, a goodwill
impairment of $44.3 was recognized during the three months ended June 30, 2003,
of which $21.1 was non-deductible for income tax purposes. Of the overall
goodwill impairment of $44.3, $21.1 related to the Roadbuilding business, which
is part of the Terex Roadbuilding, Utility Products and Other segment, and $23.2
related to the Materials Processing business, which is now a part of the Terex
Materials Processing & Mining segment.
The Company performed its last annual review of the carrying value of its
goodwill, as required by SFAS No. 142, as of October 1, 2004, which resulted in
no additional impairment. Subsequent impairment tests will be performed
effective October 1 of each year and more frequently as circumstances warrant.
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. The goodwill balance at December 31, 2002 and 2001 has been
reclassified within the two segments to reflect this change in the Company's
reportable segments.
On July 1, 2004, Terex realigned certain operations in an effort to strengthen
its ability to service customers and to recognize certain operational
efficiencies. The Materials Processing group, formerly part of the Terex
Roadbuilding, Utility Products and Other segment, is now consolidated with the
Terex Mining group under the Terex Materials Processing & Mining segment. The
Terex Light Construction and Load King businesses, formerly part of the Terex
Roadbuilding, Utility Products and Other segment, are now part of the Terex
Aerial Work Platforms segment.
An analysis of changes in the Company's goodwill by business segment is as
follows:
TEREX
TEREX TEREX ROADBUILDING,
AERIAL MATERIALS UTILITY
TEREX TEREX WORK PROCESSING PRODUCTS AND
CONSTRUCTION CRANES PLATFORMS & MINING OTHER TOTAL
------------ ----------- ----------- ----------- ------------- -----------
Balance at December 31, 2002
(Restated) $ 276.1 $ 89.2 $ 62.7 $ 54.1 $ 90.6 $ 572.7
Impairment (Restated) -- -- -- (23.2) (21.1) (44.3)
Acquisitions (Restated) -- 2.9 (1.1) 2.3 11.8 15.9
Disposals -- (3.1) -- -- -- (3.1)
Utilization of tax net operating
losses -- (2.7) -- -- (2.5) (5.2)
Foreign exchange effect and other
(Restated) 49.6 12.3 9.7 8.4 0.7 80.7
------------ ----------- ----------- ----------- ------------- -----------
Balance at December 31, 2003
(Restated) 325.7 98.6 71.3 41.6 79.5 616.7
Acquisitions (1.4) -- 13.4 5.1 9.0 26.1
Disposals -- -- -- -- -- --
Utilization of tax net operating
losses -- -- (2.7) -- -- (2.7)
Foreign exchange effect and other 28.3 6.1 (5.1) (6.0) 3.7 27.0
------------ ----------- ----------- ----------- ------------- -----------
Balance at December 31, 2004 $ 352.6 $ 104.7 $ 76.9 $ 40.7 $ 92.2 $ 667.1
============ =========== =========== =========== ============= ===========
F-21
NOTE E - SALE OF BUSINESSES
During the second quarter of 2004, the Company sold certain legacy parts
businesses for $2.5 in cash and promissory notes, as the Company's strategy is
to focus on supporting core Terex products. These legacy parts businesses were
included in the Terex Cranes and Terex Materials Processing & Mining segments
prior to their sale and resulted in a loss of $2.3 recorded in cost of goods
sold. In addition, the Company entered into a 10 year non-compete agreement with
the purchaser of these businesses for a $0.8 promissory note.
In 2002, the Company acquired an interest in Crane & Machinery, Inc. ("C&M"),
which distributed, rented and serviced crane products, including those products
manufactured by the Company. During 2002, the Company acquired from an
unaffiliated financial institution outstanding loans in the amount of
approximately $5.9 owed by C&M to that financial institution, and C&M was
obligated to make payments to the Company pursuant to the terms of such loans.
The results of C&M were consolidated in the Company's financial results from
December 31, 2002 through November 10, 2003. On November 10, 2003, the Company
sold its interest in C&M, and obtained a third party guarantee of the loans
payable by C&M to the Company, as well as a pledge of the assets of C&M as
security for the payment of such loans. As a result, the Company ceased to
consolidate C&M's results as of November 10, 2003. In addition, on November 10,
2003, the Company sold substantially all of the assets of its Schaeff
Incorporated subsidiary (a manufacturer of forklifts) to C&M, in consideration
of C&M assuming approximately $3.1 of Schaeff Incorporated's indebtedness to the
Company, with such indebtedness secured by the guarantee and pledge described
above. The results of Schaeff Incorporated and C&M were included in the Terex
Cranes segment prior to the November 10, 2003 transactions.
NOTE F - 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.
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
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 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
December 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 December 31, 2004 was a loss of $2.7, which is recorded in
other current liabilities. These swap agreements have been designated as, and
are effective as, cash flow hedges of outstanding debt instruments. During 2004,
2003 and 2002, the Company recorded the change in fair value to accumulated
other
F-22
comprehensive income and reclassified to earnings a portion of the deferred loss
from accumulated other comprehensive income 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 rate interest payments into variable rate interest payments. At
December 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 December 31, 2004 was a gain of $2.0, which is
recorded in other non-current assets. 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 December 31, 2004, are offset by a
$6.2 addition in the carrying value of the long-term obligations being hedged.
On March 31, 2003, the Company exited certain interest rate swap agreements in
the notional amount of $175.0 with a 2011 maturity that converted fixed rate
interest payments into variable rate interest payments. The Company received
$7.8 upon exiting these swap agreements. The gain was being amortized over the
original maturity of the Company's 8-7/8% Senior Subordinated Notes due 2008,
the debt being hedged, prior to the retirement in June 2003 and December 2003 of
that debt. At the time of the retirement of the debt being hedged the
unamortized gain was recorded as an offset to the loss on the retirement of the
debt. See Note N - "Long-Term Obligations" for additional information on the
retirement of debt.
The Company is also a party to currency exchange forward contracts to manage its
exposure to changing currency exchange rates that mature within one year. At
December 31, 2004, the Company had $315.0 of notional amount of currency
exchange forward contracts outstanding, all of which mature on or before
November 30, 2005. The fair market value of these swaps at December 31, 2004 was
a gain of $6.9. At December 31, 2004, $274.3 notional amount ($6.2 of fair value
gains) of these swap agreements have been designated as, and are effective as,
cash flow hedges of specifically identified assets and liabilities. For these
cash flow hedges, during 2004, 2003 and 2002, the Company recorded the change in
fair value to accumulated other comprehensive income and reclassified to
earnings a portion of the deferred loss from accumulated other comprehensive
income as the hedged transactions occurred and were recognized in earnings.
On May 23, 2002, the Company entered a swap agreement in the notional amount of
$79.3. This represented a foreign currency exchange forward contract to hedge a
portion of the purchase price of Demag. The purchase price for Demag was
denominated in Euro. The Company recorded a gain of $5.5 in the second quarter
of 2002 related to this transaction since it did not qualify as a hedge under
SFAS No. 133. This swap agreement matured on July 1, 2002.
At December 31, 2004, the fair value of all derivative instruments designated as
cash flow hedges and fair value hedges have been recorded in the Consolidated
Balance Sheet as an asset of $9.4 and as a liability of $4.9.
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.
Unrealized net gains (losses) included in Other Comprehensive Income are as
follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Balance at beginning of period $ 6.5 $ 2.1 $ (0.8)
Additional gains 13.9 13.1 7.3
Amounts reclassified to earnings (17.8) (8.7) (4.4)
----------- ----------- -----------
Balance at end of period $ 2.6 $ 6.5 $ 2.1
=========== =========== ===========
The estimated amount of existing pre-tax net gains for derivative contracts in
accumulated other comprehensive income as of December 31, 2004 that is expected
to be reclassified into earnings during the year ending December 31, 2005 is
$4.8.
NOTE G - 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
F-23
market demand and to optimize the impact of recently acquired businesses, the
Company has initiated the restructuring programs described below.
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.
2004 Programs
In the second quarter of 2004, the Company recorded a charge of $2.7 related to
restructuring at its Atlas Terex facility in Loeningen, Germany, of which $2.2
has been recorded in cost of goods sold and $0.5 has been recorded in selling,
general and administrative expenses. The Company implemented this restructuring
because it concluded that it is more cost-effective to outsource the activities
that have been performed previously at the Loeningen facility. The closure of
this facility will reduce employment by approximately 40 employees and will be
completed by December 31, 2005. As of September 30, 2004, all of the employees
have ceased working for the Company. The cash impact of the program will be
approximately $2, excluding any proceeds that may be received from the sale of
the facility. The results of Atlas Terex are reported in the Terex Construction
segment. The Loeningen closure is expected to generate annual cost savings of
approximately $1 when fully implemented.
Also, in the second quarter of 2004, the Company recorded a charge of $4.3 in
cost of goods sold for restructuring related to the closure of its Atlas Terex
truck-mounted crane facility in Hamilton, Scotland. The charge is a result of
the Company's decision to consolidate production at the Atlas Terex facility in
Delmenhorst, Germany, which already manufactures truck-mounted cranes. The
consolidation will lower the 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 approximately 90 employees at
the Hamilton facility, which will be completed by December 31, 2005. As of
December 31, 2004, all of these employees have been terminated by the Company.
The cash impact of the program will be approximately $1.7, excluding any
proceeds that may be received from the sale of the facility. The Hamilton
facility closing is expected to reduce annual operating expenses by
approximately $5 when fully implemented.
In addition, during the second quarter of 2004, the Company established a
restructuring program, recorded in cost of goods sold, to move its pump
manufacturing business from its B.L. Pegson facility in Coalville, England to
another Terex Construction segment component manufacturing facility in Scotland.
The non-cash charge to cost of goods sold was $0.3. The Company has completed
the relocation of this manufacturing line at December 31, 2004. This has freed
needed capacity at the B.L. Pegson facility for crushing equipment production.
In addition, substantially all of the costs associated with this relocation have
been incurred. B.L. Pegson is included in the Terex Construction segment.
In the second quarter of 2004, the Company created a restructuring program to
reduce the number of installation facilities in its Terex Utilities South
business unit from four facilities to three facilities. Headcount related to
this program was reduced by 20 employees. The Company recorded a $0.3 charge to
cost of goods sold related to this program. This charge consists of $0.2 cash
and a $0.1 non-cash component. This program was substantially complete at
September 30, 2004. Terex Utilities South is included in the Terex Roadbuilding,
Utility Products and Other segment.
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 has 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 were anticipated in connection with this consolidation. Terex-RO is
included in the Terex Cranes segment.
The Company recorded a charge of $0.9 in the first quarter of 2003 for the exit
of all activities at its EarthKing e-commerce subsidiary. The $0.9 charge is for
non-cash closure costs and has been recorded in cost of goods sold. EarthKing
was 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
F-24
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 Demag facilities in an effort to lower fixed overhead and improve
manufacturing efficiencies and profitability. As a result of this restructuring,
the Company has accrued for a headcount reduction of 65 employees. As of June
30, 2004, all of the employees had ceased employment with the Company and the
program was completed. Terex Peiner is included in the Terex Cranes segment.
During the three months ended June 30, 2003, $2.6 and $0.5 were recorded in cost
of goods sold and selling, general and administrative expenses, respectively.
The Terex Peiner closing is expected to reduce annual operating costs by
approximately $3.
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
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 December 31, 2003, except for obligations
under the lease for the facility. The Company ended its lease obligations for
the Kilbeggan property during 2005. 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 Materials Processing & Mining
segment. These restructuring charges were the result of continued poor
performance in the Materials Processing 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.
In the first quarter of 2002, the Company recorded a charge of $1.2 in
connection with the closure and subsequent relocation of the Cedarapids hot mix
asphalt plant facility to the Company's CMI Terex facility in Oklahoma City,
Oklahoma. The consolidation of duplicative CMI Terex and Cedarapids production
facilities and support functions was intended to lower the Company's operating
costs. Approximately $0.7 of this charge related to severance costs which have
been paid, with the remainder related to non-cash closure costs. Approximately
92 employees were terminated in connection with this action. This restructuring
was complete as of September 30, 2002.
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 had 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 ended. Approximately 93 positions have
been eliminated as a result of this
F-25
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 rental and/or sale.
The Company also recorded a charge of $0.9 in the second quarter of 2002 in
connection with a reduction to the Cedarapids workforce in response to adverse
market conditions and resulting decreased demand for Cedarapids products. The
charge recorded in connection with this reduction to the Cedarapids workforce is
for employee severance costs. Approximately 42 employees have been terminated as
a result of this action. The Cedarapids restructuring was complete as of
December 31, 2002.
In the third quarter of 2002, the Company announced restructuring charges of
$3.5 in connection with the consolidation of facilities in the Light
Construction group and staff reductions at its CMI Terex Roadbuilding operation
and in the Terex Cranes segment. The restructuring charges at the Light
Construction group were $2.6, of which $0.2 was for severance in relation to the
elimination of approximately 71 positions. The remaining $2.4 was for costs
associated with the termination of leases and the write-down of inventory.
Demand for the Light Construction group's products has been negatively impacted
by the consolidation of distribution outlets for the unit's products and a
change in end user preference from direct ownership of the unit's products to
rental of such equipment. These changes have made it uneconomical to maintain
numerous separate production facilities. The restructuring charges at CMI Terex
were $0.7 for severance in connection with the elimination of approximately 146
positions. CMI Terex's roadbuilding business has faced slow market conditions
and reduced demand, due in large part to delays in government funding for
roadbuilding projects, resulting in a need for staff reductions. Additionally,
the Terex Cranes segment recorded restructuring charges of $0.2 for severance in
connection with the elimination of approximately 35 positions at three of its
North American facilities due to reduced demand for the products manufactured at
these facilities. These restructurings were completed by December 31, 2002.
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
$4.9, of which $1.2 was for severance, $2.5 for the write down of
inventory and receivables, and $1.2 for facility closing costs.
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 completed during 2003.
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 Materials
Processing & 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 Materials Processing
& 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 completed 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 had been negatively impacted by reduced
demand from large rental customers who were undergoing financial
difficulties. This 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 elimination of the Standard Havens portable hot mix asphalt
product. The Company performed marketing and engineering analysis
that indicated that the Standard Havens product line did not meet
current customer expectations. As a result, the Company opted to
discontinue the Standard Havens portable hot mix asphalt product.
The Company recorded a charge of $1.8 to write-down the
discontinued inventory. The program was completed prior to
December 31, 2002. The Standard Havens product line was part of
the Terex Roadbuilding, Utility Products and Other segment.
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. This program was
completed in 2004.
F-26
o The elimination of the rotating telehandler product in North
America by the Terex Construction segment. It was determined that
the product, although popular in Europe as a multi-purpose
machine, was not gaining customer acceptance in North America. The
Company recorded a charge of $0.7 to write-down the rotating
telehandler inventory in North America. The program was completed
prior to December 31, 2002.
During 2003, the Company recorded an additional $4.9 of charges ($2.4 recorded
in cost of goods sold and $2.5 in selling, general and administrative expenses)
relating to programs begun in 2002. Further, during 2004 the Company recorded an
additional $3.5 of charges ($3.2 in cost of goods sold and $0.3 in selling,
general and administrative expenses) related to programs begun in 2003 and 2002.
These period charges primarily related to facility closure costs, inventory
write-downs, severance 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 2004, 2003 and 2002 that related to productivity and
business rationalization:
EMPLOYEE
TERMINATION ASSET FACILITY
COSTS DISPOSALS EXIT COSTS OTHER TOTAL
----------- ----------- ----------- ----------- -----------
Restructuring charges $ 13.1 $ 19.3 $ 2.9 $ 2.0 $ 37.3
Cash expenditures (3.0) -- (0.5) (0.6) (4.1)
Non-cash charges (0.4) (19.3) -- -- (19.7)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges at
December 31, 2002 9.7 -- 2.4 1.4 13.5
Restructuring charges 5.2 10.5 0.4 1.1 17.2
Cash expenditures (14.8) (1.0) (0.6) (0.9) (17.3)
Non-cash charges -- (9.5) (0.8) (0.3) (10.6)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges at
December 31, 2003 0.1 -- 1.4 1.3 2.8
Restructuring charges 3.9 4.6 1.0 -- 9.5
Cash expenditures (3.4) -- (1.7) (1.0) (6.1)
Non-cash charges -- (4.6) -- -- (4.6)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges at
December 31, 2004 $ 0.6 $ -- $ 0.7 $ 0.3 $ 1.6
=========== =========== =========== =========== ===========
In aggregate, the restructuring charges described above incurred during 2004,
2003 and 2002 were included in cost of goods sold ($8.2, $15.8 and $25.8) and
selling, general and administrative expenses ($1.3, $1.4 and $11.5),
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 acquisition
of Demag and Genie in 2002.
Projects initiated in the Terex Cranes segment in the fourth quarter of 2002
related to the acquisition of Demag consist of:
o The elimination of certain PPM branded three, four and five 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
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. At December 31, 2004, this program was substantially
completed.
F-27
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.
o In addition, the acquisition of Demag created an overlap of small,
mobile cranes marketed for use in urban work places. As a result,
the Company opted to cease production of this style of crane,
produced under license from another company, and replace them with
cranes produced by Demag. As a result of this decision, a charge
of $4.9 was recorded to terminate the license agreement.
Projects initiated in the Terex Cranes segment in the fourth quarter of 2002
related to the acquisition of Genie consist of:
o The elimination of Terex branded aerial work platforms. The
Company determined that the acquisition of Genie created product
and distribution overlap with its existing Terex branded aerial
work platforms businesses in the United States and Europe. After a
review of products produced by the Company and Genie, the Company
decided to discontinue the Terex branded products. As a result,
the Company reduced the carrying values of the affected
inventories to recognize the loss in value created by the decision
to discontinue these models of aerial work platforms. As a result
of this decision, a charge of $1.9 was recorded to write down
inventory.
During 2003, the Company recorded an additional $4.0 of charges related to
programs begun in 2002. Further, during 2004 the Company recorded an additional
$1.3 of charges for acquisition related programs begun in 2002. These period
charges primarily related to inventory write-downs and plant and equipment
disposals 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 2004, 2003 and 2002 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
----------- ----------- ----------- ----------- -----------
Restructuring Charges $ 6.1 $ 15.9 $ 0.6 $ 2.1 $ 24.7
Cash expenditures (1.0) -- -- -- (1.0)
Non-cash charges -- (15.9) -- (1.8) (17.7)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges
at December 31, 2002 5.1 -- 0.6 0.3 6.0
Restructuring Charges -- 4.0 -- -- 4.0
Cash expenditures (4.1) -- -- (0.3) (4.4)
Non-cash charges -- (4.0) -- -- (4.0)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges
at December 31, 2003 1.0 -- 0.6 -- 1.6
Restructuring Charges -- 0.9 -- -- 0.9
Cash expenditures (1.0) -- (0.6) -- (1.6)
Non-cash charges -- (0.9) -- -- (0.9)
----------- ----------- ----------- ----------- -----------
Accrued restructuring charges
at December 31, 2004 $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
The restructuring charges described above were included in cost of goods sold
($0.9, $4.0 and $22.7) and selling, general and administrative expenses ($0.0,
$0.0 and $2.0) in 2004, 2003 and 2002, respectively.
Asset Impairment
Given the poor performance of the Light Construction group in 2002 and
management's projections of future results, the Company performed an impairment
review of fixed assets under SFAS No. 144. The market for this group's products,
primarily light towers, has been negatively impacted by the consolidation of
distribution outlets for the group's products, which has reduced demand for
these products, and the increasing preference of end users of the group's
products to rent, rather than purchase, equipment. This review took into account
expected future cash flow to be generated by the business given management's
assessment of market conditions. The result of this review was a write-down of
fixed assets within the Light Construction group, formerly a component of the
Terex Roadbuilding, Utility Products and Other segment, but, effective July 1,
2004, now a component of the Terex Aerial Work Platforms segment, to their
estimated fair values based primarily on discounted cash flow analysis. A charge
of $7.9 was recorded as cost of goods sold in the second quarter of 2002 in
connection with this write-down.
F-28
Other Items
In the second quarter of 2002, the Company wrote down the value of notes
receivable and certain investments in the Terex Cranes segment in Europe. This
write-down reflected difficult market conditions at certain divested businesses
and management's future expectation of cash flows from the underlying assets. A
write-down of $12.4 was recorded in the second quarter of 2002. Additionally,
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 $2.6. In the fourth quarter
of 2002, the Company wrote down its investment in SDC International, Inc.
("SDC") by $3.4 due to the decline in market value of SDC. These write-downs, as
well as the write down related to the Terex Cranes segment in Europe, were
reported in "Other income (expense) - net."
NOTE H - EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------
2003 2002
2004 RESTATED RESTATED
------------------------------ ------------------------------ ------------------------------
PER- PER- PER-
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- -------- --------
Basic earnings per share
Income (loss) before
cumulative effect of
change in accounting
principle $ 324.1 49.1 $ 6.60 $ (226.6) 47.7 $ (4.75) $ (45.0) 43.2 $ (1.04)
Effect of dilutive
securities Stock Options -- 2.0 -- -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle $ 324.1 51.1 $ 6.34 $ (226.6) 47.7 $ (4.75) $ (45.0) 43.2 $ (1.04)
======== ======== ======== ======== ======== ======== ======== ======== ========
Had the Company recognized income before cumulative effect of change in
accounting principle in 2003 and 2002, then the incremental shares attributable
to the assumed exercise of outstanding stock options, the effect of Common Stock
to be issued at December 31, 2003 and 2002 for the Company's contingent
obligation to make additional payments for the acquisition of Genie and the
effect of Common Stock held by the Company's deferred compensation plan would
have increased diluted shares outstanding by 1.1 million, 0.4 million and 0.6
million shares in 2003 and by 0.9 million, 0.2 million and 0.0 million shares in
2002, respectively.
Options to purchase 116 thousand, 1,087 thousand and 956 thousand shares of
Common Stock were outstanding during 2004, 2003, 2002 respectively, but were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the common
shares and therefore, the effect would be antidilutive. The Company had
contingent obligations to make additional payments in cash or Common Stock based
on provisions of certain of the Company's agreements to acquire businesses. 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 319 thousand and 639 thousand shares for the years ended
December 31, 2003 and 2002, respectively, are not included in the computation of
diluted earnings per share. There were no contingently issuable Common Stock
under these arrangements at December 31, 2004 due to the closing price of Common
Stock at December 31, 2004.
F-29
NOTE I - INVENTORIES
Inventories consist of the following:
DECEMBER 31,
---------------------------
2003
2004 RESTATED
------------ ------------
Finished equipment $ 404.2 $ 395.2
Replacement parts 278.3 250.6
Work-in-process 287.1 187.4
Raw materials and supplies 311.7 205.3
------------ ------------
Inventories $ 1,281.3 $ 1,038.5
============ ============
At December 31, 2004 and 2003, the Company had inventory reserves of $73.2 and
$59.9, respectively, for excess and obsolete inventory.
NOTE J - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
---------------------------
2003
2004 RESTATED
------------ ------------
Property $ 50.8 $ 51.7
Plant 256.6 222.5
Equipment 276.9 245.0
------------ ------------
584.3 519.2
Less: Accumulated depreciation (221.7) (165.4)
------------ ------------
Net property, plant and equipment $ 362.6 $ 353.8
============ ============
NOTE K - 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%) in exchange for consideration of $1.2 from the
joint venture partner, and Genie transferred its 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 December 31, 2004, TFSH had total assets of $303.0, consisting primarily
of financing receivables and lease related equipment, and total liabilities of
$278.3, consisting primarily of debt issued by the joint venture partner. From
time to time, 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. As of December 31, 2004, the maximum
exposure to loss under these guarantees was approximately $16. 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
a result of the capital account balance requirements for TFSH, in June 2004 the
Company contributed an additional $1.9 in cash to TFSH.
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, financial 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 does not consolidate the results of TFSH into its
consolidated financial results. The Company applies the equity method of
accounting for its investment in TFSH.
F-30
NOTE L- EQUIPMENT SUBJECT TO OPERATING LEASES
Operating leases arise from the leasing of the Company's products to customers.
Initial noncancelable lease terms typically range up to 84 months. The net book
value of equipment subject to operating leases was approximately $87 and $126 at
December 31, 2004 and 2003, respectively, and are included in "Other Assets" on
the Company's 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.
Future minimum lease payments to be received under noncancelable operating
leases with lease terms in excess of one year are as follows:
Years ending December 31,
-------------------------
2005 $ 12.0
2006 11.0
2007 6.7
2008 3.7
2009 3.1
Thereafter --
-------------
$ 36.5
=============
The Company received approximately $12 and $14 of rental income from assets
subject to operating leases with lease terms greater than one year during 2004
and 2003, respectively, none of which represented contingent rental payments.
NOTE M - 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 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
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 $9.7 and $23.5 at
December 31, 2004 and 2003, respectively. 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 $7.7 at December 31, 2004, representing a contingent
liability under the limited recourse provisions.
During 2004, 2003 and 2002, 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 $37.9 credit risk and a $55.6 residual risk at December
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.
F-31
The components of net investment in sales-type leases, which are included in
Other Assets on the Company's consolidated Balance Sheet, consisted of the
following at December 31, 2004:
Gross minimum lease payments receivable $ 21.0
Estimated residual values 10.1
Allowance for future losses (1.6)
Unearned finance income (4.8)
-------------
Net investment in sales-type leases 24.7
Less: Current portion (17.8)
-------------
Non-current net investment in
sales-type leases $ 6.9
=============
Scheduled future gross minimum lease payments receivable are as follows:
Years ending December 31,
-------------------------
2005 $ 12.5
2006 5.4
2007 2.4
2008 0.6
-------------
Total $ 20.9
=============
NOTE N - LONG-TERM OBLIGATIONS
Long-term debt is summarized as follows:
DECEMBER 31,
---------------------------
2004 2003
------------ ------------
7-3/8 % Senior Subordinated Notes due January 15, 2014 $ 297.6 $ 297.3
9-1/4 % Senior Subordinated Notes due July 15, 2011 200.0 200.0
10-3/8% Senior Subordinated Notes due April 1, 2011 300.0 300.0
2002 Bank Credit Facility - term debt 231.2 378.2
2002 Bank Credit Facility - revolving credit facility 37.0 35.1
Notes payable 24.8 26.4
Capital lease obligations 22.6 19.4
Other 85.6 105.2
------------ ------------
Total debt 1,198.8 1,361.6
Less: Notes payable and current portion of long-term debt (84.6) (86.8)
------------ ------------
Long-term debt, less current portion $ 1,114.2 $ 1,274.8
============ ============
Certain prior year amounts in the table above have been reclassified to conform
with the current year's presentation.
During the fourth quarter of 2004, the Company prepaid $22.0 of term debt under
its bank credit facility and recorded a related non-cash charge of $0.4. During
the third quarter of 2004, the Company prepaid $50.0 of term debt under its bank
credit facility and recorded a related non-cash charge of $1.0. During the
second quarter of 2004, the Company prepaid $75.0 of term debt under its bank
credit facility and recorded a related non-cash charge of $1.5. The non-cash
charges in 2004 related to the write-off of unamortized debt acquisition costs.
During the second quarter of 2003, the Company redeemed $50.0 aggregate
principal amount of its 8-7/8% Senior Subordinated Notes due 2008 and recognized
a non-cash charge of $1.9. The charge was comprised of the payment of an early
redemption premium ($2.2), the write off of unamortized original issuance
discount ($1.6) and the write off of unamortized debt acquisition costs ($0.2),
which were partially offset by the recognition of deferred gains related to
previously closed fair value interest rate swaps on this debt ($2.1).
The 7-3/8% Senior Subordinated Notes
On November 25, 2003, the Company sold and issued $300 aggregate principal
amount of 7-3/8% Senior Subordinated Notes Due 2014 discounted to yield 7-1/2%
(the "7-3/8% Notes"). The 7-3/8% Notes are jointly and severally guaranteed by
certain domestic subsidiaries of the Company (see Note V - "Consolidating
Financial Statements"). The Company used the approximately $290 net proceeds
from the offering of the 7-3/8% Notes, together with approximately $119 of cash
on hand, to prepay approximately $200 of its existing term loans and to retire
$200 of aggregate principal of its 8-7/8% Senior Subordinated Notes due 2008
(the "8-7/8% Notes"). The Company recorded a charge of $10.9 to recognize a loss
on the payment of a premium and on the write-off of
F-32
unamortized debt acquisition costs and original issue discount for the early
extinguishment of debt in connection with the prepayment of such existing term
loans and the 8-7/8% Notes, partially offset by a gain on related interest rate
hedges. The 7-3/8% Notes were issued in a private placement made in reliance
upon an exemption from registration under the Securities Act of 1933, as amended
(the "Securities Act"). During the second quarter of 2004, the outstanding
unregistered 7-3/8% Notes were exchanged for 7-3/8% Notes registered under the
Securities Act. The 7-3/8% Notes are redeemable by the Company beginning in
January 2009 at an initial redemption price of 103.688% of principal amount.
The 9-1/4% Senior Subordinated 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"). The
9-1/4% Notes are jointly and severally guaranteed by certain domestic
subsidiaries of the Company (see Note V - "Consolidating Financial Statements").
The Company used approximately $194 of the net proceeds from the offering of the
9-1/4% Notes to prepay a portion of its existing term loans. The Company
recorded a charge of $2.3 to recognize a loss on the write-off of unamortized
debt acquisition costs for the early extinguishment of debt in connection with
the prepayment of such existing term loans. The 9-1/4% Notes were issued in a
private placement made in reliance upon an exemption from registration under the
Securities Act. During the first quarter of 2002, the outstanding unregistered
9-1/4% Notes were exchanged for 9-1/4% Notes registered under the Securities
Act. The 9-1/4% Notes are redeemable by the Company beginning in January 2007 at
an initial redemption price of 104.625% of principal amount.
The 10-3/8% Senior Subordinated 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").
Additionally, on March 29, 2001, the Company increased its availability under
its revolving bank credit facilities, described below, from $125 to $300. The
10-3/8% Notes are jointly and severally guaranteed by certain domestic
subsidiaries of the Company (see Note V - "Consolidating Financial Statements").
The Company used approximately $194 of the net proceeds from the offering of the
10-3/8% Notes to prepay a portion of its existing term loans. The Company
recorded a charge of $3.4 to recognize a loss on the write-off of unamortized
debt acquisition costs for the early extinguishment of debt in connection with
the prepayment of such existing term loans. The 10-3/8% Notes were issued in a
private placement made in reliance upon an exemption from registration under the
Securities Act. During the third quarter of 2001, the outstanding unregistered
10-3/8% Notes were exchanged for 10-3/8% Notes registered under the Securities
Act. The 10-3/8% Notes are redeemable by the Company beginning in April 2006 at
an initial redemption price of 105.188% of principal amount.
The 8-7/8% Senior Subordinated Notes
On March 9, 1999 and March 31, 1998, the Company sold and issued $100.0 and
$150.0 aggregate principal amount of the 8-7/8% Notes discounted to yield 9.73%
and 8.94%, respectively. The 8-7/8% Notes were jointly and severally guaranteed
by certain domestic subsidiaries of the Company. The net proceeds from the
offerings were used to repay a portion of the outstanding indebtedness under
Terex's credit facilities, to fund a portion of the aggregate consideration for
the acquisition of O&K Mining GmbH and for other acquisitions. In June 2003, the
Company retired $50.0 principal amount of the 8-7/8% Notes and incurred a loss
on the retirement of debt of $1.9. In December 2003, the Company retired the
remaining $200.0 principal amount of the 8-7/8% Notes and incurred a loss on the
retirement of debt of $9.0. The loss was comprised of the payment of an early
redemption premium ($11.1), the write-off of unamortized debt acquisition costs
($3.4) and original issue discount ($1.7), which were partially offset by gains
related to fair value interest rate swaps ($7.2).
The 2002 Bank Credit Facility
On July 3, 2002, the Company entered into an amended and restated credit
agreement (the "2002 Bank Credit Facility") with its bank lending group, which
replaced the Company's previous 1999 Bank Credit Facility and 1998 Bank Credit
Facility, described below. The 2002 Bank Credit Facility provided for $375 of
term debt maturing on July 3, 2009 and a revolving credit facility of $300 that
is available through July 3, 2007. The proceeds of the term debt were used to
repay amounts outstanding under the 1999 Bank Credit Facility and 1998 Bank
Credit Facility (approximately $288), for the acquisition of Demag and for
general corporate purposes. A loss for the write-off of unamortized debt
acquisition costs of $2.4 was recorded in connection with this transaction. The
revolving credit facility is used for working capital and general corporate
purposes, including acquisitions. The 2002 Bank Credit Facility also includes
provisions for an additional $250 of term borrowing by the Company on terms
similar to the current term loan debt under this facility. On September 13,
2002, the Company consummated a $210 incremental term loan borrowing under this
provision of the 2002 Bank Credit Facility, the net proceeds of which were used
to acquire Genie (approximately $10), to refinance some of Genie's debt
(approximately $168) and for other general corporate purposes.
On November 25, 2003, the Company entered into an amendment of its 2002 Bank
Credit Facility that permitted the redemption of the 8-7/8% Notes with proceeds
from the offering of the 7-3/8% Notes. The amendment, among other things, will
also permit the repurchase of $200 principal amount of the Company's 10-3/8%
Notes on or after April 1, 2006 and extended the period of time until the
maximum consolidated leverage ratio covenant and maximum senior secured debt
leverage ratio covenant adjust downward until
F-33
later in 2004 and 2005, respectively, in order to provide the Company greater
flexibility. In connection with this amendment and the issuance and sale of the
7-3/8% Notes, the Company prepaid $200 of the term loans outstanding under the
2002 Bank Credit Facility.
On October 15, 2005, the Company entered into a second amendment of its 2002
Bank Credit Facility that allows the Company the flexibility to expend up to an
additional $235 to repurchase, redeem, prepay or otherwise acquire for value
indebtedness incurred by the Company other than through the 2002 Bank Credit
Facility. This is in addition to other existing provisions in the 2002 Bank
Credit Facility that allow the Company to repurchase or otherwise acquire
indebtedness outside of the 2002 Bank Credit Facility, including the provision
described above that allows the Company to repurchase up to $200 principal
amount of the Company's 10-3/8% Notes on or after April 1, 2006. This additional
amount will be available if, at such time, and after giving effect to such
payment and to certain other payments, the Company satisfies certain conditions,
including a leverage ratio test.
As of December 31, 2004, the Company had $231.2 of term loans outstanding under
the 2002 Bank Credit Facility. Term loans under the 2002 Bank Credit Facility
bear interest at a rate of 2.0% to 2.5% per annum in excess of the adjusted
Eurodollar rate. The weighted average interest rate on the term loans under the
2002 Bank Credit Facility at December 31, 2004 was 5.55%.
As of December 31, 2004, the Company had a balance of $37.0 outstanding under
the revolving credit component of the 2002 Bank Credit Facility, letters of
credit issued under the 2002 Bank Credit Facility totaled $45.7, and the
additional amount the Company could have borrowed under the revolving credit
component of the 2002 Bank Credit Facility was $217.3. The outstanding principal
amount of loans under the revolving credit portion of the 2002 Bank Credit
Facility bears interest, at the Company's option, at an all-in drawn cost of
1.375% per annum in excess of the adjusted eurocurrency rate or, with respect to
U.S. dollar denominated alternate base rate loans, at an all-in drawn cost of
0.375% per annum above the prime rate. These rates are subject to change based
on the Company's consolidated leverage ratio as defined under the 2002 Bank
Credit Facility. The weighted average interest rate on the outstanding portion
of the 2002 Bank Credit Facility revolving credit component was 4.19% at
December 31, 2004.
With limited exceptions, the obligations of the Company under the 2002 Bank
Credit Facility are secured by a pledge of all of the capital stock of domestic
subsidiaries of the Company, a pledge of 65% of the stock of the foreign
subsidiaries of the Company and a first priority security interest in, and
mortgages on, substantially all of the assets of Terex and its domestic
subsidiaries. The 2002 Bank Credit Facility contains certain financial and
operating covenants, including financial covenant ratios such as a maximum
consolidated leverage ratio, a minimum consolidated interest coverage ratio, a
maximum senior secured debt leverage ratio and a minimum consolidated fixed
charge coverage ratio. The Company was in compliance with its financial
covenants under the 2002 Bank Credit Facility at December 31, 2004. The 2002
Bank Credit Facility also contains various non-financial covenants, both
requiring the Company to take certain actions, such as keeping in good standing
its corporate existence, maintaining insurance and providing its bank lending
group with financial information on a timely basis, and limiting the Company
activities, including without limitation, limitations on dividends and other
payments, incurring certain types of prohibited indebtedness, liens,
investments, mergers and asset sales, related party transactions and capital
expenditures. The Company has obtained a waiver from its bank lending group that
allows the Company until March 1, 2006, to provide its lenders with its
financial information for the year ended December 31, 2004, including the
information contained in these consolidated financial statements, and for the
quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005.
The Company's future ability to provide its bank lending group with financial
information on a timely basis will depend on its ability to file its periodic
reports with the Securities and Exchange Commission in a timely manner.
The 1999 Bank Credit Facility
On July 2, 1999, the Company entered into a credit agreement (the "1999 Bank
Credit Facility") for a term loan of up to $325 to provide the funds necessary
to acquire the outstanding share capital of Powerscreen and for other general
corporate purposes. The 1999 Bank Credit Facility was subsequently amended and
restated on August 23, 1999 to provide an additional term loan of up to $125 to
acquire Cedarapids. The 1999 Bank Credit Facility was further amended and
restated on March 29, 2001 to provide an additional $175 revolving credit
facility (the "1999 Revolving Credit Facility") for working capital and general
corporate purposes, including acquisitions. All amounts outstanding under the
1999 Bank Credit Facility, including the term loans and the 1999 Revolving
Credit Facility, were repaid upon the Company's entry into the 2002 Bank Credit
Facility. During 2002 and 2001, the Company made principal prepayments of $152.9
and $246.0, respectively, on the term loans under the 1999 Bank Credit Facility.
The 1998 Bank Credit Facility
On March 6, 1998, the Company refinanced its then outstanding credit facility
and redeemed or defeased all of its $166.7 principal amount of its then
outstanding 13-1/4% Senior Secured Notes due 2002. The refinancing included
effectiveness of a revolving credit facility aggregating up to $125 for working
capital and general corporate purposes, including acquisitions, and term loan
facilities providing for loans in an aggregate principal amount of up to
approximately $375 (collectively, the "1998 Bank Credit Facility").
F-34
Pursuant to the term loan component of the 1998 Bank Credit Facility, the
Company borrowed (i) $175 in aggregate principal amount pursuant to a Term Loan
A due March 2004 (the "Term A Loan") and (ii) $200 in aggregate principal amount
pursuant to a Term Loan B due March 2005 (the "Term B Loan"). At December 31,
2004, there is no outstanding principal amount for the Term A Loan, as the Term
A Loan was repaid in full during 2001, nor the Term B Loan, as the Term B Loan
was repaid in full during 2002 in connection with the Company's entry into the
2002 Bank Credit Facility. During 2002 and 2001, the Company made principal
prepayments of $65.0 and $142.4, respectively, on the Term A Loan and Term B
Loan. In connection with the Company's entry into the 2002 Bank Credit Facility,
the Company also repaid all amounts outstanding under the revolving loan
component of the 1998 Bank Credit Facility in 2002.
The Letter of Credit Facility
In conjunction with the 1999 Bank Credit Facility, in July 1999 the Company
received a separate letter of credit facility of up to $50. In conjunction with
the July 3, 2002 amendment to the 1999 Bank Credit Facility, this letter of
credit facility was increased to up to $200. The 2002 Bank Credit Facility
incorporates a letter of credit facility of up to $200 in place of the facility
included in the 1999 Bank Credit Facility (the "Letter of Credit Facility").
Under the 2002 Bank Credit Facility, the Company may arrange with lenders for
the issuance of up to $200 of letters of credit, which may be issued either
under the revolving credit component of the 2002 Bank Credit Facility or under
the separate Letter of Credit Facility contained within the 2002 Bank Credit
Facility. Letters of credit issued under the revolving credit facility decrease
availability under the $300 revolving credit component of the 2002 Bank Credit
Facility; however, letters of credit issued under the Letter of Credit Facility
do not decrease availability under the revolving credit component of the 2002
Bank Credit Facility. As of December 31, 2004, the Company has received
commitments to issue letters of credit under the Letter of Credit Facility of
$38.4, and at December 31, 2004, letters of credit issued under the Letter of
Credit Facility totaled $36.4.
Other
Included in Other is $6.2 for a fair value adjustment increasing the carrying
value of debt. This adjustment is a result of the application of accounting for
fair value hedges with respect to fixed interest rate to floating interest rate
swaps on the 10-3/8% Notes and the 7-3/8% Notes. See Note F - "Derivative
Financial Instruments."
Schedule of Debt Maturities
Scheduled annual maturities of long-term debt outstanding at December 31, 2004
in the successive five-year period are summarized below. Amounts shown are
exclusive of minimum lease payments disclosed in Note O - "Lease Commitments":
2005 $ 76.7
2006 7.2
2007 43.8
2008 58.7
2009 183.9
Thereafter 799.7
---------------
Total $ 1,170.0
===============
Total long-term debt at December 31, 2004 is $1,176.2. The $6.2 difference is
due to the fair value adjustment increasing the carrying value of debt as a
result of accounting for fair value hedges for the fixed interest rate to
floating interest rate swaps on the 10-3/8% Notes and the 7-3/8% Notes. See Note
F - "Derivative Financial Instruments."
Based on quoted market values, the Company believes that the fair values of the
7-3/8% Notes, the 9-1/4% Notes and the 10-3/8% Notes were approximately $320,
$225 and $337, respectively as of December 31, 2004. The Company believes that
the carrying value of its other borrowings approximates fair market value, based
on discounting future cash flows using rates currently available for debt of
similar terms and remaining maturities.
The Company paid $86.9, $103.6 and $83.1 of interest in 2004, 2003 and 2002,
respectively.
NOTE O - LEASE COMMITMENTS
The Company leases certain facilities, machinery and equipment, and vehicles
with varying terms. Under most leasing arrangements, the Company pays the
property taxes, insurance, maintenance and expenses related to the leased
property. Certain of the equipment leases are classified as capital leases and
the related assets have been included in Property, Plant and Equipment. Net
assets under capital leases were $17.3 and $10.7, net of accumulated
amortization of $7.1 and $6.3, at December 31, 2004 and 2003, respectively.
F-35
Future minimum capital and noncancelable operating lease payments and the
related present value of capital lease payments at December 31, 2004 are as
follows:
CAPITAL OPERATING
LEASES LEASES
------------ -----------
2005 $ 8.5 $ 59.0
2006 7.2 50.6
2007 3.1 44.5
2008 3.7 37.6
2009 0.5 22.4
Thereafter 1.2 143.2
------------ -----------
Total minimum obligations 24.2 $ 357.3
===========
Less amount representing interest (1.6)
------------
Present value of net minimum obligations 22.6
Less current portion (7.9)
------------
Long-term obligations $ 14.7
============
Most of the Company's operating leases provide the Company with the option to
renew the leases for varying periods after the initial lease terms. These
renewal options enable the Company to renew the leases based upon the fair
rental values at the date of expiration of the initial lease. Total rental
expense under operating leases was $64.5, $55.6 and $31.3 in 2004, 2003 and
2002, respectively.
NOTE P - INCOME TAXES
The components of Income (Loss) From Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting Principle are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
United States $ 33.6 $ (76.9) $ (60.5)
Foreign 113.8 26.2 (0.3)
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle $ 147.4 $ (50.7) $ (60.8)
=========== =========== ===========
The major components of the Company's (benefit from) provision for income taxes
are summarized below:
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
Current:
Federal $ (0.9) $ 2.7 $ 4.7
State (2.1) 0.5 (0.6)
Foreign (24.2) (20.6) (20.1)
----------- ----------- -----------
Current income tax provision (27.2) (17.4) (16.0)
----------- ----------- -----------
Deferred:
Federal 186.8 (169.7) 18.1
State 5.2 (6.0) 3.5
Foreign 11.9 17.2 10.2
----------- ----------- -----------
Deferred income tax provision 203.9 (158.5) 31.8
----------- ----------- -----------
Total benefit from (provision for)
income taxes $ 176.7 $ (175.9) $ 15.8
=========== =========== ===========
Deferred tax assets and liabilities result from differences in the basis of
assets and liabilities for tax and financial statement purposes. The tax effects
of the basis differences and net operating loss carryforward as of December 31,
2004 and 2003 are summarized below for major balance sheet captions:
F-36
2003
2004 RESTATED
------------ ------------
Property, plant and equipment $ (86.7) $ (83.6)
Intangibles 1.0 7.7
Restructuring reserve 8.1 20.5
Trade receivables 17.5 14.3
Net inventories 17.6 16.6
Warranties and product liability 23.0 19.8
Net operating loss carryforwards 313.8 328.7
Pension 31.6 39.1
Equipment lease revenue 68.6 53.9
Other 49.3 15.1
Deferred tax assets valuation allowance (222.6) (434.5)
------------ ------------
Net deferred tax assets $ 221.2 $ (2.4)
============ ============
Deferred tax liabilities are included in current liabilities and non-current
liabilities on the consolidated balance sheet. The current portion is $41.3 and
the non-current portion is $73.4 for the year ended December 31, 2004. The
valuation allowance for deferred tax assets as of January 1, 2003 was $190.4.
The net change in the total valuation allowance for the years ended December 31,
2004 and 2003 was a decrease of $211.9 in 2004 and an increase of $244.1 in
2003. The decrease in valuation allowance for the year ended December 31, 2004
primarily relates to the release of the valuation allowance established for
certain U.S. deferred tax assets in 2003, due to improved operating results
during 2004 and significant, profitable backlog generated in early 2005. The
decrease in valuation allowance also relates to the release of the valuation
allowance previously established for the Company's Fermec business, as it was
determined that it was more likely than not that these assets would be realized.
These reversals were partially offset by an increase in foreign net operating
loss carryforwards for which the Company has provided a valuation allowance, and
movement in foreign currency exchange rates. The increase in the year ended
December 31, 2003 primarily relates to the establishment of the valuation
allowance on the Company's U.S. deferred tax assets, as it was determined, that
it was more likely than not, based on a cumulative three-year historical loss
and other available evidence that the assets would not be realized. In addition,
the 2003 change included acquired deferred tax assets for which a valuation
allowance was provided, as well as movement in foreign currency exchange rates.
Approximately $114.6 of the valuation allowance relates to acquired deferred tax
assets for which subsequently recognized tax benefits will be allocated to
reduce goodwill or other non-current intangibles of the acquired entity. The
Company provides valuation allowances for deferred tax assets whose realization
is not more likely than not based on estimated future taxable income in the
carryforward period. To the extent that estimates of future taxable income
decrease or do not materialize, potentially significant additional valuation
allowances may be required.
The Company's Provision for Income Taxes is different from the amount that would
be provided by applying the statutory federal income tax rate to the Company's
Income From Continuing Operations Before Income Taxes and Cumulative Effect of
Change in Accounting Principle. The reasons for the difference are summarized
below:
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
Tax at statutory federal income tax rate $ (51.6) $ 17.7 $ 21.3
State taxes (net of Federal benefit) (1.4) (0.4) 1.8
Change in valuation allowance relating to NOL
and temporary differences:
U.S. Federal consolidated group 200.7 (200.7) --
Other 23.5 8.6 (6.5)
Foreign tax differential on income/losses of
foreign subsidiaries 7.3 (1.6) (2.0)
Non-deductible goodwill charges (0.2) (9.5) (0.2)
Federal tax credits -- -- 1.3
Other (1.6) 10.0 0.1
----------- ----------- -----------
Total benefit (provision) for income taxes $ 176.7 $ (175.9) $ 15.8
=========== =========== ===========
Income taxes have not been provided for temporary differences between the amount
for financial reporting and the tax basis of investments in foreign
subsidiaries. The Company's intent is to remain indefinitely reinvested or to
repatriate earnings when it is tax efficient to do so. At December 31, 2004,
these temporary differences, which primarily relate to unremitted earnings,
amounted to approximately $535. If earnings of foreign subsidiaries were not
considered indefinitely reinvested, deferred U.S. and foreign income taxes would
have to be provided. However, determination of the amount of deferred federal
and foreign income taxes is not practical.
F-37
At December 31, 2004, the Company had domestic federal net operating loss
carryforwards of $398.1. The U.S. federal net operating loss carryforwards
expire as follows:
NET OPERATING LOSS
CARRYFORWARDS
------------------
2008 $ 49.1
2009 42.5
2010 47.7
2011 4.5
2012 - 2016 0.6
2017 2.1
2018 2.9
2019 33.0
2020 26.0
2021 102.6
2022 51.2
2023 35.9
------------------
Total $ 398.1
==================
The Company also has various state net operating loss carryforwards available to
reduce future state taxable income and income taxes. These net operating loss
carryforwards expire at various dates beginning in 2008 through 2023. In
addition, the Company's foreign subsidiaries have approximately $816.6 of loss
carryforwards; $170.0 in the United Kingdom, $89.9 in the Czech Republic, $515.9
in Germany and $40.8 in other countries, which are available to offset future
foreign taxable income. The majority of these foreign tax loss carryforwards are
available without expiration.
The Company made income tax payments of $26.2, $8.5 and $14.2 in 2004, 2003 and
2002, respectively.
In December 2004, the FASB issued FASB Staff Position No. 109-1 "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" ("FSP 109-1"). FSP 109-1 provides accounting guidance for companies that
will be eligible for a tax deduction resulting from "qualified production
activities income" as defined in the American Jobs Creation Act of 2004 (the
"Act"). FSP 109-1 requires this deduction be treated as a special deduction in
accordance with SFAS 109, which does not require a revaluation of the Company's
U.S. deferred tax assets and liabilities. The Company will apply the guidance in
FSP 109-1 upon recognition of this tax deduction.
In December 2004, the FASB issued FASB Staff Position No. 109-2 "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" ("FSP 109-2"). FSP 109-2 provides accounting
guidance for the one-time tax deduction of 85% of certain non-U.S. earnings that
are repatriated from controlled foreign subsidiaries in excess of a base amount
as defined in the Act. The deduction is subject to a number of limitations and
requirements, including adoption of a specific domestic reinvestment plan for
the repatriated funds. SFAS 109 requires a company to reflect in the period of
enactment the effect of a new tax law; however, FSP 109-2 allows companies time
beyond the financial reporting period of enactment to evaluate the effect of the
Act.
The Company evaluated the effects of the repatriation provision and based on the
guidance published by the U.S. Treasury, the Company determined that it was
eligible for the one-time tax deduction. In 2005, the Company repatriated
approximately $101 from a controlled foreign subsidiary in accordance with the
Act and will record federal tax expense of $5.3 and a state tax expense (net of
federal tax benefit) of $0.2.
NOTE Q - STOCKHOLDERS' EQUITY
Common Stock. The Company's certificate of incorporation was amended in June
1998 to increase the number of authorized shares of Common Stock to 150.0
million. On April 23, 2002, the Company issued 5.3 million shares of Common
Stock in a public offering with net proceeds to the Company of $113.3. As
disclosed in Note C - "Acquisitions," the Company also issued approximately 0.9
million shares of Common Stock in connection with the acquisitions of Commercial
Body, Tatra and Genie during 2003 and the Company issued 5.3 million shares of
Common Stock during 2002 in connection with the acquisitions of Schaeff, Utility
Equipment, Telelect Southeast and Genie.
On December 31, 2004, there were 50.8 million shares of Common Stock issued and
49.4 million shares of Common Stock outstanding. Of the 100.4 million unissued
shares of Common Stock at that date, 3.0 million shares of Common Stock were
reserved for issuance for the exercise of stock options and the vesting of
restricted stock.
F-38
Common Stock in Treasury. The Company values treasury stock on an average cost
basis. As of December 31, 2004, the Company held 2.0 million shares of Common
Stock in treasury totaling $35.2, including 0.8 million shares held in a trust
for the benefit of the Company's deferred compensation plan at a total of $16.5.
Preferred Stock. The Company's certificate of incorporation was amended in June
1998 to authorize 50.0 million shares of preferred stock, $0.01 par value per
share. As of December 31, 2004, there were no shares of preferred stock
outstanding.
Equity Rights. On May 9, 1995, the Company sold one million equity rights
securities (the "Equity Rights") along with a $250 debt offering. During 2002,
holders exercised 44.8 thousand rights. Also, during 2002, 103 thousand rights
were exchanged for approximately 65 thousand shares of Common Stock pursuant to
an offer of accommodation made by the Company. As of December 31, 2004, there
were no Equity Rights outstanding, as all Equity Rights were either exercised or
expired.
Long-Term Incentive Plans. In May 2000, the stockholders approved the Terex
Corporation 2000 Incentive Plan (the "2000 Plan"). The purpose of the 2000 Plan
is to assist the Company in attracting and retaining selected individuals to
serve as directors, officers, consultants, advisors and employees of the Company
and its subsidiaries and affiliates who will contribute to the Company's success
and to achieve long-term objectives which will inure to the benefit of all
stockholders of the Company through the additional incentive inherent in the
ownership of the Common Stock. The 2000 Plan authorizes the granting of (i)
options ("Options") to purchase shares of Common Stock, (ii) stock appreciation
rights ("SARs"), (iii) stock purchase awards, (iv) restricted stock awards and
(v) performance awards. In May 2002, the stockholders approved an increase in
the number of shares of Common Stock authorized for issuance under the 2000 Plan
from 2.0 million shares to 3.5 million shares. In May 2004, the stockholders
approved an increase in the number of shares of Common Stock authorized for
issuance under the 2000 Plan from 3.5 million shares to 6.0 million shares. As
of December 31, 2004, 2.6 million shares were available for grant under the 2000
Plan.
In May 1996, the stockholders approved the 1996 Terex Corporation Long-Term
Incentive Plan (the "1996 Plan"). The 1996 Plan authorizes the granting, among
other things, of (i) Options to purchase shares of Common Stock, (ii) shares of
Common Stock, including restricted stock, and (iii) cash bonus awards based upon
a participant's job performance. In May 1999, the stockholders approved an
increase in the aggregate number of shares of Common Stock (including restricted
stock, if any) optioned or granted under the 1996 Plan to 2.0 million shares. At
December 31, 2004, 195 thousand shares were available for grant under the 1996
Plan.
In 1995, the stockholders approved the 1994 Terex Corporation Long-Term
Incentive Plan (the "1994 Plan") covering certain managerial, administrative and
professional employees and outside directors. The 1994 Plan provides for awards
to employees, from time to time and as determined by a committee of outside
directors, of cash bonuses, stock options, stock and/or restricted stock. The
total number of shares of the Company's Common Stock available to be awarded
under the 1994 Plan is 750 thousand, subject to certain adjustments. At December
31, 2004, 10 thousand shares were available for grant under the 1994 Plan.
The Company maintains the Terex Corporation Incentive Stock Option Plan (the
"1988 Plan"). The 1988 Plan is a qualified incentive stock option ("ISO") plan
covering certain officers and key employees. The exercise price of the ISO is
the fair market value of the shares at the date of grant. An ISO allows the
holder to purchase shares of Common Stock, commencing one year after grant. An
ISO expires after ten years. In accordance with the terms of the 1988 Plan, no
additional stock options are available for grant under the 1988 Plan at December
31, 2004, since grants under the 1988 Plan could only be made within ten years
of the date of the 1988 Plan's adoption.
Substantially all stock option grants under the 2000 Plan, the 1996 Plan, the
1994 Plan and the 1988 Plan vest over a four year period, with 25% of each grant
vesting on each of the first four anniversary dates of the grant.
F-39
The following table is a summary of stock options under all of the Company's
plans.
WEIGHTED AVERAGE
EXERCISE
NUMBER OF OPTIONS PRICE PER SHARE
------------------ ---------------
Outstanding at December 31, 2001 1,950,762 $ 17.96
Granted 608,341 $ 21.80
Exercised (221,383) $ 14.48
Canceled or expired (49,450) $ 12.90
------------------
Outstanding at December 31, 2002 2,288,270 $ 19.43
Granted 726,773 $ 12.30
Exercised (201,975) $ 15.33
Canceled or expired (272,578) $ 22.28
------------------
Outstanding at December 31, 2003 2,540,490 $ 17.41
Granted 332,179 $ 33.99
Exercised (488,500) $ 18.08
Canceled or expired (144,364) $ 20.56
------------------
Outstanding at December 31, 2004 2,239,805 $ 19.52
================== ===============
Exercisable at December 31, 2004 1,100,054 $ 18.26
================== ===============
Exercisable at December 31, 2003 1,059,721 $ 18.96
================== ===============
Exercisable at December 31, 2002 969,281 $ 19.56
================== ===============
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EXERCISE
RANGE OF NUMBER OF LIFE EXERCISE PRICE NUMBER OF PRICE PER
EXERCISE PRICES OPTIONS (IN YEARS) PER SHARE OPTIONS SHARE
- ---------------------- --------- ---------- -------------- --------- ----------
$ 3.22 - $ 6.41 18,037 0.9 $ 4.39 18,037 $ 4.39
$ 6.42 - $ 9.62 5,150 1.7 $ 6.75 5,150 $ 6.75
$ 9.63 - $ 12.03 568,860 7.1 $ 11.35 159,985 $ 11.45
$ 12.04 - $ 16.03 136,188 3.9 $ 13.94 135,812 $ 13.94
$ 16.04 - $ 19.24 560,116 5.6 $ 16.94 374,741 $ 16.88
$ 19.25 - $ 22.44 227,875 6.5 $ 22.00 134,000 $ 22.08
$ 22.45 - $ 28.86 350,950 5.3 $ 23.59 206,200 $ 24.21
$ 28.87 - $ 32.06 86,429 5.6 $ 29.65 63,929 $ 29.47
$ 32.07 and over 286,200 9.1 $ 34.63 2,200 $ 42.58
--------- ---------
2,239,805 $ 19.52 1,100,054 $ 18.26
========= =========
Comprehensive Income (Loss). The following table reflects the accumulated
balances of other comprehensive income.
ACCUMULATED
PENSION CUMULATIVE DERIVATIVE OTHER
LIABILITY TRANSLATION HEDGING COMPREHENSIVE
ADJUSTMENT ADJUSTMENT ADJUSTMENT INCOME (LOSS)
------------- ------------- ------------- -------------
Balance at December 31, 2001
(Restated) $ (6.9) $ (126.5) $ (0.8) $ (134.2)
Current year change (Restated) (34.2) 121.6 2.9 90.3
------------- ------------- ------------- -------------
Balance at December 31, 2002
(Restated) (41.1) (4.9) 2.1 (43.9)
Current year change (Restated) 5.0 144.9 4.4 154.3
------------- ------------- ------------- -------------
Balance at December 31, 2003
(Restated) (36.1) 140.0 6.5 110.4
Current year change (8.3) 108.3 (3.9) 96.1
------------- ------------- ------------- -------------
Balance at December 31, 2004 $ (44.4) $ 248.3 $ 2.6 $ 206.5
============= ============= ============= =============
F-40
At December 31, 2004, other accumulated comprehensive income for the pension
liability adjustment and the derivative hedging adjustment are net of a tax
benefit of $24.6 and a tax liability of $1.0, respectively.
NOTE R - RETIREMENT PLANS AND OTHER BENEFITS
Pension Plans
U.S. Plans - As of December 31, 2004, the Company maintained four defined
benefit pension plans covering certain domestic employees (the "Terex Plans").
The benefits for the plan covering the salaried employees are based primarily on
years of service and employees' qualifying compensation. Participation in the
plan for salaried employees was frozen on or before October 15, 2000, and no
participants will be credited with service or earnings 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. At December 31, 2004 and 2003, the
Terex Plans held 0.2 million shares of the Company's Common Stock, with market
values of $9.5 and $5.7, respectively.
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 earned over a participant's final five years of
employment and years of service reduced by benefits earned under any Company
retirement program excluding salary deferrals and matching contributions. In
addition, benefits are reduced by Social Security Primary Insurance Amounts
attributable to Company contributions. The SERP is unfunded.
Other Postemployment Benefits
The Company has non-pension post-retirement benefit programs. The health care
programs are contributory with participants' contributions adjusted annually;
the life insurance plan is non-contributory. 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.) and Terex Corporation. The Company provides postemployment health benefits
for certain former employees at 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.
F-41
The Company uses a December 31 measurement date for its U.S. plans. The
liability of the Company's U.S. plans, including the SERP, as of December 31,
was as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Accumulated benefit obligation at end of year $ 125.0 $ 120.8
=========== ===========
Change in benefit obligation:
Benefit obligation at beginning of year $ 122.6 $ 109.4 $ 11.2 $ 9.0
Service cost 1.3 1.4 0.2 0.1
Interest cost 7.1 7.3 0.8 0.7
Impact of plan amendments -- -- -- --
Actuarial (gain) loss 3.0 11.9 3.1 2.5
Benefits paid (7.6) (7.4) (1.1) (1.1)
----------- ----------- ----------- -----------
Benefit obligation at end of year 126.4 122.6 14.2 11.2
----------- ----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 96.2 86.0 -- --
Actual return on plan assets 10.8 16.3 -- --
Employer contribution 3.0 1.3 1.1 1.1
Benefits paid (7.6) (7.4) (1.1) (1.1)
----------- ----------- ----------- -----------
Fair value of plan assets at end of year 102.4 96.2 -- --
----------- ----------- ----------- -----------
Funded status (24.0) (26.4) (14.2) (11.2)
Unrecognized actuarial (gain) loss 45.4 48.0 6.2 3.7
Unrecognized prior service cost 6.6 7.4 0.7 0.8
Unrecognized transition obligation -- -- -- 0.3
----------- ----------- ----------- -----------
Net amount recognized $ 28.0 $ 29.0 $ (7.3) $ (6.4)
=========== =========== =========== ===========
Amounts recognized in the Consolidated
Balance Sheet consist of:
Accrued benefit liability $ (17.4) $ (18.0) $ (7.3) $ (6.4)
Accumulated other comprehensive income (loss) 45.4 47.0 -- --
----------- ----------- ----------- -----------
Net amount recognized $ 28.0 $ 29.0 $ (7.3) $ (6.4)
=========== =========== =========== ===========
PENSION BENEFITS OTHER BENEFITS
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Weighted-average assumptions as of December 31:
Discount rate 5.75% 6.00% 5.75% 6.00%
Expected return on plan assets 8.00% 8.00% -- --
Rate of compensation increase 4.00% 4.00% -- --
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
2004 2003 2002 2004 2003 2002
-------- -------- -------- -------- -------- --------
Components of net periodic cost:
Service cost $ 1.2 $ 1.4 $ 0.5 $ 0.2 $ 0.1 $ 0.1
Interest cost 7.1 7.3 7.1 0.8 0.7 0.6
Expected return on plan assets (7.4) (6.6) (8.6) -- -- --
Amortization of prior service
cost 0.7 0.7 0.4 0.4 0.4 0.1
Amortization of transition
obligation -- -- -- -- -- 0.3
Recognized actuarial (gain) loss 2.2 2.5 1.0 0.5 0.2 --
-------- -------- -------- -------- -------- --------
Net periodic cost (benefit) $ 3.8 $ 5.3 $ 0.4 $ 1.9 $ 1.4 $ 1.1
======== ======== ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the U.S. pension plans, including the SERP, with accumulated
benefit obligations in excess of plan assets were $126.4, $125.0 and $102.4,
respectively, as of December 31, 2004, and $122.6, $120.8 and $96.2,
respectively, as of December 31, 2003.
F-42
Consistent with the Company's investment strategy, the rate used for the
expected return on plan assets is based on a number of different factors. Both
the historical and prospective long-term expected asset performances are
considered in determining the rate of return. While the Company examines
performance and future expectations annually, it also views historic asset
portfolios and performance over a long period of years before recommending a
change. In the short term there will be positive and negative yields which are
recognized as gains or losses. These fluctuations versus the expected return are
expected to average to zero over the long term.
At December 31, 2004 and 2003, the Terex Plans held the Company's Common Stock.
These shares represented 9.4% and 6.0%, respectively, of the Terex Plans'
assets. The asset allocation, excluding the Company's Common Stock, for the
Company's U.S. defined benefit pension plans at December 31, 2004 and 2003 and
target allocation for 2005 are as follows:
PERCENTAGE OF PLAN TARGET
ASSETS AT DECEMBER 31, ALLOCATION
-------------------------- ---------------
2004 2003 2005
----------- ----------- ---------------
Equity Securities, excluding Terex Common Stock 43.4% 42.0% 32.0% - 48.0%
Fixed Income 56.6% 58.0% 54.0% - 66.0%
----------- -----------
Total, excluding Terex Common Stock 100.0% 100.0%
=========== ===========
The Company plans to contribute approximately $2 to its U.S. defined benefit
pension plans in 2005. The Company's estimated future benefit payments under its
U.S. defined benefit pension plans are as follows:
YEAR ENDING DECEMBER 31,
------------------------
2005 $ 7.7
2006 $ 7.7
2007 $ 8.0
2008 $ 8.2
2009 $ 8.4
2010-2014 $ 45.1
For measurement purposes, a 9.00 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2004. The rate was
assumed to decrease gradually to 4.75 percent for 2009 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total service and interest cost
components 5.07% (4.49)%
Effect on postretirement benefit obligation 4.86% (4.32)%
International Plans - The Company maintains defined benefit plans in Germany,
France, Ireland and the United Kingdom for some of its subsidiaries. The plans
in Germany and France are unfunded plans.
F-43
The Company uses a December 31 measurement date for its international plans. The
liability of the Company's international plans as of December 31, was as
follows:
PENSION BENEFITS
---------------------------
2003
2004 RESTATED
------------ ------------
Accumulated benefit obligation at end of year $ 237.9 $ 196.4
============ ============
Change in benefit obligation:
Benefit obligation at beginning of year $ 207.1 $ 171.5
Service cost 4.0 4.6
Interest cost 11.7 10.5
Actuarial (gain) loss 17.2 0.4
Benefits paid (8.6) (8.2)
Foreign exchange effect 16.4 28.3
------------ ------------
Benefit obligation at end of year 247.8 207.1
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 64.5 49.6
Actual return on plan assets 5.9 8.8
Employer contribution 9.8 8.0
Benefits paid (8.6) (8.2)
Foreign exchange effect 5.1 6.3
------------ ------------
Fair value of plan assets at end of year 76.7 64.5
------------ ------------
Funded status (171.1) (142.6)
Unrecognized actuarial (gain) loss 32.8 16.1
Unrecognized prior service cost (0.1) --
Unrecognized transition obligation (0.1) (0.1)
------------ ------------
Net amount recognized $ (138.5) $ (126.6)
============ ============
Amounts recognized in the Consolidated Balance Sheet
consist of:
Accrued benefit liability $ (161.2) $ (136.4)
Accumulated other comprehensive income (loss) 22.7 9.8
------------ ------------
Net amount recognized $ (138.5) $ (126.6)
============ ============
PENSION BENEFITS
-----------------------------
2004 2003
------------- -------------
The range of assumptions as of December 31:
Discount rate 4.75% - 5.50% 5.50% - 6.00%
Expected return on plan assets 2.00% - 6.50% 2.00% - 7.00%
Rate of compensation increase 1.50% - 4.50% 2.75% - 4.00%
PENSION BENEFITS
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Components of net periodic cost:
Service cost $ 4.0 $ 4.6 $ 4.2
Interest cost 11.7 10.5 7.9
Expected return on plan assets (4.5) (3.8) (3.6)
Curtailment (gain) loss -- 0.3 --
Recognized actuarial (gain) loss 0.3 0.5 0.2
----------- ----------- -----------
Net periodic cost $ 11.5 $ 12.1 $ 8.7
=========== =========== ===========
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the international defined benefit pension plans with
accumulated benefit obligations in excess of plan assets were $247.8, $237.9 and
$76.7, respectively, as of December 31, 2004, and $207.1, $196.4 and $64.5,
respectively, as of December 31, 2003.
F-44
The asset allocation for the Company's international defined benefit pension
plans at December 31, 2004 and 2003 is as follows:
PERCENTAGE OF PLAN ASSETS
AT DECEMBER 31,
----------- -----------
2004 2003
----------- -----------
Equity Securities 85.2% 87.9%
Fixed Income 14.8% 12.1%
----------- -----------
Total 100.0% 100.0%
=========== ===========
The Company is currently reviewing its investment allocation policy for its
funded international defined benefit plans. At the conclusion of its review, the
Company will formalize the target allocation. Until this review is completed,
the Company will invest on a basis consistent with 2004.
The Company plans to contribute approximately $11 to its foreign defined benefit
pension plans in 2005. The Company's estimated future benefit payments under its
international defined benefit pension plans are as follows:
YEAR ENDING DECEMBER 31,
------------------------
2005 $ 8.9
2006 $ 9.3
2007 $ 9.6
2008 $ 10.0
2009 $ 10.3
2010-2014 $ 60.8
Savings Plans
The Company maintains a deferred compensation plan (the "Deferred Compensation
Plan") for participating employees that, prior to January 1, 2004, permitted
participants to transfer funds between investment options, one of which is an
option to invest in shares of the Company's Common Stock. It has been the
practice of the Deferred Compensation Plan to acquire shares of the Company's
Common Stock from time to time as participants contribute to the Company's
Common Stock fund, in order to eliminate the risk associated with fluctuations
in the price of the Company's Common Stock.
Due to the ability of the Deferred Compensation Plan participants to transfer
their investments between the Deferred Compensation Plan investment options, the
Company has recorded obligations to the Deferred Compensation Plan participants
invested in the Company's Common Stock at the fair value of the Company's Common
Stock (without making a corresponding adjustment for any change in value of the
shares of the Company's Common Stock held by the Deferred Compensation Plan).
Effective January 1, 2004, the Deferred Compensation Plan has been revised to
prohibit transfers between investment options, thereby eliminating the need for
future adjustments based on the changes in fair value of the Company's Common
Stock.
In addition to the Company's Deferred Compensation Plan, the Company sponsors
various tax deferred savings plans into which eligible employees may elect to
contribute a portion of their compensation. The Company may, but is not
obligated to, contribute to certain of these plans. The Company's common stock
held in a rabbi trust pursuant to a deferred compensation plan is treated in a
manner similar to treasury stock and is recorded at cost within stockholders'
equity and totaled $16.5 and $26.8, as of December 31, 2004 and 2003,
respectively. The number of shares of the Company's common stock held in a rabbi
trust at December 31, 2004 and 2003 totaled 0.8 and 1.3, respectively. As of
December 31, 2003, the corresponding deferred compensation obligation in the
Company's common stock and other deferral investments by plan participants was
recorded as current liabilities totaling $3.6, non-current liabilities totaling
$21.5 and stockholders' equity totaling $12.0. As of December 31, 2004, the plan
obligation for participant deferral in the Company's common stock was classified
as additional paid-in capital within stockholders' equity and totaled $17.8; the
participant deferral in other investment options totaled $7.5 and was recorded
within current liabilities ($3.9) and non-current liabilities ($3.6).
Charges recognized for the Deferred Compensation Plan and these other savings
plans were $12.3, $13.3 and $4.2 for the years ended December 31, 2004, 2003 and
2002, respectively.
NOTE S - 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
F-45
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
consolidated financial position.
The Company is involved in various other legal proceedings, including workers'
compensation liability and intellectual property litigation, 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 $112.1 at December 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. As a result of this favorable judgment, the Company recorded $9.5 of
income in "Other income (expense) - net" in the Consolidated Statement of
Operations during 2002 and an additional $2.4 during 2003.
In the second quarter of 2004, the Company settled an outstanding litigation
matter related to the Company's acquisition of O&K Mining in 1998. In connection
with the settlement, the Company recognized a gain of $5.8, which was recorded
in "Other income (expense) - net" in the Consolidated Statement of Operations
during 2004.
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
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 December 31, 2004, the Company's maximum exposure to such credit
guarantees is $288.6, including total guarantees issued by Demag and Genie of
$212.6 and $37.9, 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.
Residual Value and Buyback Guarantees
The Company 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 M -
"Net Investment in Sales-Type Leases," the Company's maximum exposure related to
residual value guarantees under sales-type leases is $55.9 at December 31, 2004,
including total guarantees issued by Genie of $55.6. 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 December 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees is $49.9. 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 has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" in the condensed consolidated
balance sheet of approximately $10 for the estimated fair value of all
guarantees provided.
F-46
NOTE T - RELATED PARTY TRANSACTIONS
On March 2, 2000, Terex made a loan to Ronald M. DeFeo, the Chairman, Chief
Executive Officer, President and Chief Operating Officer of the Company, in the
amount of $3.0. The purpose of the loan was to enable Mr. DeFeo to purchase a
house at a time when he was not permitted to sell any shares of his Common
Stock. Further, at such time, the Board of Directors determined that it did not
desire that Mr. DeFeo be required to sell his Common Stock when he was able to
do so in order to satisfy his other obligations, and preferred instead to grant
him this loan, secured by his shares of Common Stock and amounts earned by Mr.
DeFeo under the Company's 1999 Long-Term Incentive Plan ("LTIP"). Mr. DeFeo
prepaid $1.0 of the principal amount of the loan in October 2000. The remaining
$2.0 principal balance of the loan was prepaid in April 2004.
Certain former executive officers and directors of the Company, including Marvin
B. Rosenberg, who retired as a director of the Company at the end of 2002, were
named along with the Company in a private litigation initiated by the End of the
Road Trust, the successor to certain of the assets of the bankruptcy estate of
Fruehauf Trailer Corporation, a former subsidiary of the Company. The Company
expended approximately $0.1 for legal fees and expenses in 2002 for this matter,
which included the defense of Mr. Rosenberg, as well as other former executive
officers and directors of the Company. The Company is unable to separately
determine the portion of these legal fees and expenses allocable to Mr.
Rosenberg individually. The Company settled this matter in 2002 in a manner that
did not have a material adverse effect on the Company's operations.
The Company acquired Genie on September 18, 2002. Prior to the acquisition,
Genie, which became part of the Terex Aerial Work Platforms segment, had entered
into long-term operating leases for two buildings and a parcel of land with
partnerships in which Robert R. Wilkerson, President of the Terex Aerial Work
Platforms segment and former president of Genie, is a partner. These leases
continued in effect following the acquisition. The buildings are used for office
and production purposes, and the land is used for a parking lot. In November
2003, the partnership in which Mr. Wilkerson is a partner sold the properties to
an unrelated third party. During 2003 and 2002, the Company paid a total of
approximately $1.9 and $0.5, respectively, under these leases. These leases were
based on the then-current market rates in effect at the time the leases were
executed.
On November 13, 2003, the Company entered into an agreement with FILVER S.A.
("FILVER"), an entity affiliated with Fil Filipov, the President of the
Company's Terex Cranes segment until his retirement from the Company effective
January 1, 2004. Pursuant to this agreement, FILVER provides consulting services
to Terex as assigned by the Chief Executive Officer of Terex, including an
initial assignment to assist with the operations of Tatra. The term of the
agreement is for three years commencing January 1, 2004, with an initial base
consulting fee of $0.5 per year, subject to adjustment based on usage of
FILVER's services and FILVER's performance (determined at the discretion of the
Company), plus reimbursement of certain expenses. During 2004, the Company
incurred a total cost of $0.6 under this contract, which includes the consulting
fee of $0.5.
During 2004, the Company leased equipment to Connecticut Aggregate Inc. ("Con
Ag"), an entity affiliated with Kerry O'Sullivan, a former executive officer of
the Company. The terms of the agreement between the Company and Con Ag are the
standard terms and conditions that the Company uses when it enters into leases
of its equipment. As of December 31, 2004, the Company was owed $0.1 from Con
Ag.
The Board of Directors is advised in advance of all transactions or agreements
with affiliates of the Company, and utilizes such procedures in evaluating their
terms and provisions as are appropriate in light of the Board's fiduciary duties
under Delaware law. In addition, the Company has an Audit Committee consisting
solely of independent directors. One of the responsibilities of the Audit
Committee is to review related party transactions.
NOTE U - BUSINESS SEGMENT INFORMATION
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
From July 1, 2001 through June 30, 2002, the Company operated in three business
segments: (i) Terex Americas; (ii) Terex Europe; and (iii) Terex Mining. From
July 1, 2002 through September 18, 2002, the Company operated in four business
segments: (i) Terex Construction; (ii) Terex Cranes; (iii) Terex Roadbuilding,
Utility Products and Other; and (iv) Terex Mining, and upon the acquisition of
Genie on September 18, 2002, the Company added the Terex Aerial Work Platforms
segment. On July 1, 2003, the Company announced an agreement in principle to
sell its worldwide electric drive mining truck business, and ceased reporting
Terex Mining as a separate financial reporting segment. On December 10, 2003,
Terex terminated the negotiation for the sale of the electric drive mining truck
business, and has reinstated reporting of the Terex Mining segment. On July 1,
2004, the Company realigned certain operations in an effort to strengthen its
ability to service customers and to recognize certain operational efficiencies.
The Company now operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Materials Processing
& Mining; and (v) Terex Roadbuilding, Utility Products and Other. All prior
periods have been restated to reflect results based on these five business
segments. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex is migrating historic brand names for many of its
products to the Terex brand, including in some
F-47
cases using the historic brand name in conjunction with the Terex brand name for
a transitional period of time. The Company plans to continue the use of the
Genie, Powerscreen and Bid-Well brand names as well.
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, scrapers, hydraulic
excavators, large wheel loaders, loading machines and truck mounted articulated
hydraulic cranes), compact equipment (including loader backhoes, compaction
equipment, mini and midi excavators, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing systems 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
Terex brand name and the following historic brand names, including in some cases
the use of the Terex name in conjunction with these historic brand names: Atlas,
Benford, Fermec, Finlay, Fuchs, Pegson, Powerscreen, Schaeff and TerexLift.
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 Terex brand
name and the following historic brand names, including in some cases the use of
the Terex name in conjunction with these historic brand names: American,
Bendini, Comedil, Demag, Franna, P&H, Peiner and PPM.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie on September 18, 2002. The Terex Aerial Work
Platforms segment designs, manufactures and markets aerial work platform
equipment, telehandlers, light construction equipment and construction trailers.
Products include material lifts, portable aerial work platforms, trailer mounted
booms, articulating booms, stick booms, scissor lifts, telehandlers, light
towers, concrete finishing equipment, power buggies, generators, arrow boards,
construction trailers, related components and replacement parts, and other
products. These products are used primarily by customers in the construction and
building maintenance industries to build and/or maintain large physical assets
and structures. Terex Aerial Work Platforms products currently are marketed
principally under the Terex and Genie brand names and the following historic
brand names, including in some cases the use of the Terex name in conjunction
with these historic brand names: Amida, Bartell, Benford, Load King and
Morrison.
The Terex Materials Processing & Mining segment designs, manufactures and
markets fixed installation crushing and screening equipment (including crushers,
impactors, screens and feeders), hydraulic mining excavators, high capacity
surface mining trucks, drilling equipment, related components and replacement
parts, and other products. These products are used primarily by construction,
mining, quarrying and government customers in construction and commodity mining.
Currently, Terex Materials Processing & Mining products are marketed principally
under the Terex brand name and the following historic brand names, including in
some cases the use of the Terex name in conjunction with these historic brand
names: Canica, Cedarapids, ELJay, Jaques, O&K, Reedrill, Simplicity and Unit
Rig. The Company acquired Noble CE and its affiliates on September 7, 2004 and
certain assets and liabilities of Reedrill and its affiliates on December 31,
2004. The results of Noble CE and Reedrill are included in the Terex Materials
Processing & Mining segment since their respective dates of acquisition.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets, asphalt and concrete equipment (including pavers, plants, mixers,
reclaimers, stabilizers and profilers), utility equipment (including digger
derricks, aerial devices and cable placers) 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,
construct and maintain utility lines, trim trees and for commercial and military
operations. Terex Roadbuilding, Utility Products and Other products are
currently marketed principally under the Terex brand name and the following
historic brand names, including in some cases the use of the Terex name in
conjunction with these historic brand names: Advance, American Truck Company,
ATC, Bid-Well, Cedarapids, Cedarapids/Standard Havens, CMI Johnson-Ross, CMI
Terex, CMI-Cifali, Hi-Ranger, Tatra and Telelect. Terex also owns much of the
North American distribution channel for the utility products group through its
Terex Utilities distribution network, located primarily in the Southern and
Western United States. 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 to third parties under the Terex Re-Rentals name. The Company, through
Terex Financial Services, Inc., also offers customers loans and leases
underwritten by TFS Capital Funding, an affiliate of the General Electric
Company. The Company acquired Utility Equipment on January 15, 2002, Telelect
Southeast on March 26, 2002 and certain assets and liabilities of Terex Advance
Mixer on April 11, 2002. On February 14, 2003, the Company acquired Commercial
Body and Combatel. On August 28, 2003, the Company acquired an additional 51% of
the outstanding shares of Tatra and acquired a controlling interest in ATC. On
April 22, 2004, the Company acquired an additional 10% of the outstanding shares
of Tatra for a total of 81% ownership. On June 14, 2004, the Company acquired
the one-third interest in ATC previously held by Tatra. The results of Utility
Equipment, Telelect
F-48
Southeast, Terex Advance Mixer, 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.
On April 1, 2003, the Company changed the composition of its 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. The
results by segment have been reclassified within the two segments to reflect
this change in the Company's segments.
On July 1, 2004, the Company realigned certain operations in an effort to
strengthen its ability to service customers and to recognize certain operational
efficiencies. The Materials Group, formerly part of the Terex Roadbuilding,
Utility Products and Other Segment, is now consolidated with the Terex Mining
Group under the Terex Materials Processing & Mining Segment. The Terex Light
Construction and Load King businesses, formerly part of the Terex Roadbuilding,
Utility Products and Other Segment, are now part of the Terex Aerial Work
Platforms Segment.
Effective January 1, 2006, Terex realigned certain operations in an effort to
strengthen its ability to service customers and to recognize certain
organizational efficiencies. The Mobile Crushing and Screening Group, consisting
of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the
Terex Construction Segment, now will be consolidated within the Terex Materials
Processing & Mining Segment. The European telehandlers business of TerexLift,
formerly part of the Terex Construction Segment, now will be part of the Terex
Aerial Work Platforms Segment. The segment discussions included herein do not
reflect this realignment. Terex will be presenting segment reporting effective
January 1, 2006 giving effect to this reorganization.
The Company has no customers which accounted for more than 10% of consolidated
sales in 2004. The Company is not dependent upon any single customer. The
Company's largest single customer is United Rentals, Inc. ("United Rentals").
The Company has had a long-standing relationship with United Rentals. The
Company's Chairman, President and Chief Executive Officer served as a director
of United Rentals until June 2005.
The results of businesses acquired during 2004, 2003 and 2002 are included from
the dates of their respective acquisitions.
F-49
Included in Eliminations/Corporate are the eliminations among the five segments,
as well as general and corporate items. Business segment information is
presented below:
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
2004 RESTATED RESTATED
----------- ----------- -----------
Sales
Terex Construction $ 1,773.0 $ 1,350.4 $ 1,186.0
Terex Cranes 1,076.8 1,029.0 715.3
Terex Aerial Work Platforms 915.0 643.0 211.6
Terex Materials Processing & Mining 541.4 397.8 396.5
Terex Roadbuilding, Utility Products and Other 801.7 547.2 396.7
Eliminations/Corporate (88.1) (57.6) (89.6)
----------- ----------- -----------
Total $ 5,019.8 $ 3,909.8 $ 2,816.5
=========== =========== ===========
Income (Loss) from Operations
Terex Construction $ 56.7 $ 42.9 $ 43.1
Terex Cranes 35.3 9.9 (8.4)
Terex Aerial Work Platforms 105.7 67.7 0.5
Terex Materials Processing & Mining 30.8 (18.3) 5.2
Terex Roadbuilding, Utility Products and Other 0.9 (27.8) 9.0
Eliminations/Corporate (14.8) (16.4) (11.2)
----------- ----------- -----------
Total $ 214.6 $ 58.0 $ 38.2
=========== =========== ===========
Depreciation and Amortization
Terex Construction $ 15.9 $ 18.4 $ 13.3
Terex Cranes 10.0 10.2 6.0
Terex Aerial Work Platforms 19.9 24.0 8.4
Terex Materials Processing & Mining 2.9 3.3 3.9
Terex Roadbuilding, Utility Products and Other 12.0 8.9 8.4
Corporate 4.9 5.6 5.0
----------- ----------- -----------
Total $ 65.6 $ 70.4 $ 45.0
=========== =========== ===========
Capital Expenditures
Terex Construction $ 12.1 $ 14.1 $ 12.7
Terex Cranes 6.7 4.0 5.9
Terex Aerial Work Platforms 3.5 2.5 2.9
Terex Materials Processing & Mining 1.8 1.6 1.3
Terex Roadbuilding, Utility Products and Other 10.8 4.4 4.7
Corporate 0.6 0.5 1.7
----------- ----------- -----------
Total $ 35.5 $ 27.1 $ 29.2
=========== =========== ===========
F-50
DECEMBER 31,
--------------------------------------------
2003 2002
2004 RESTATED RESTATED
------------ ------------ ------------
Identifiable Assets
Terex Construction $ 1,607.2 $ 1,433.8 $ 1,331.4
Terex Cranes 989.4 903.6 940.1
Terex Aerial Work Platforms 556.2 487.0 504.0
Terex Materials Processing & Mining 612.2 575.4 537.5
Terex Roadbuilding, Utility Products and Other 557.0 472.0 348.0
Corporate 2,203.5 1,803.7 1,929.3
Eliminations (2,346.4) (2,121.3) (1,980.5)
------------ ------------ ------------
Total $ 4,179.1 $ 3,554.2 $ 3,609.8
============ ============ ============
Sales between segments are generally priced to recover costs plus a reasonable
markup for profit, which is eliminated in consolidation.
Geographic segment information is presented below:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
Restated Restated
------------ ------------ ------------
Sales
United States $ 1,843.5 $ 1,533.2 $ 1,165.3
United Kingdom 542.5 434.2 325.1
Germany 405.8 349.3 278.2
Other European countries 1,166.9 958.7 545.8
All other 1,061.1 634.4 502.1
------------ ------------ ------------
Total $ 5,019.8 $ 3,909.8 $ 2,816.5
============ ============ ============
DECEMBER 31,
--------------------------------------------
2003 2002
2004 RESTATED RESTATED
------------ ------------ ------------
Long-lived Assets
United States $ 93.3 $ 107.6 $ 141.9
United Kingdom 37.0 39.0 32.9
Germany 146.1 140.3 117.5
Other European Countries 75.5 60.9 10.4
All other 10.7 6.0 5.3
------------ ------------ ------------
Total $ 362.6 $ 353.8 $ 308.0
============ ============ ============
The Company attributes sales to unaffiliated customers in different geographical
areas on the basis of the location of the customer. Long-lived assets include
net fixed assets which can be attributed to the specific geographic regions.
The Company is not dependent upon any single customer.
NOTE V - CONSOLIDATING FINANCIAL STATEMENTS
On November 25, 2003, the Company sold and issued $300 aggregate principal
amount of the 7-3/8% Notes. On March 29, 2001, the Company sold and issued $300
aggregate principal amount of the 10-3/8% Notes. On December 17, 2001, the
Company sold and issued $200 aggregate principal amount of the 9-1/4% Notes. As
of December 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, 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 National, Inc., Koehring
Cranes, Inc., O&K Orenstein & Koppel, Inc., Payhauler Corp., Powerscreen
Holdings USA Inc., Powerscreen International LLC, Powerscreen North America
Inc., Powerscreen USA, LLC, Product Support, Inc., Royer Industries, Inc.,
Schaeff Incorporated, Spinnaker Insurance Company, Standard Havens, Inc.,
Standard Havens Products, Inc., Terex Advance Mixer, Inc., Terex Cranes, Inc.,
Terex Financial Services, Inc., Terex Mining Equipment, Inc., Terex Utilities,
Inc., Terex Utilities South, Inc., Terex-RO Corporation, Terex-Telelect, Inc.,
The American Crane Corporation, and Utility
F-51
Equipment, Inc. As of December 31, 2004, the 7-3/8% Notes, the 10-3/8% Notes and
the 9-1/4% Notes are also jointly and severally guaranteed by PPM Cranes, Inc.
Prior to December 2002, PPM Cranes, Inc. was 92.4% owned by Terex. In December
2002, the Company acquired the remaining minority interest in the equity of PPM
Cranes, Inc. The results include PPM Cranes, Inc. with the Wholly-owned
Guarantors. 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
business acquired 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.
F-52
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net sales $ 395.3 $ 1,770.6 $ 3,126.7 $ (272.8) $ 5,019.8
Cost of goods sold 358.1 1,544.7 2,686.7 (272.8) 4,316.7
------------ ------------ ------------ ------------ ------------
Gross profit 37.2 225.9 440.0 -- 703.1
Selling, general & administrative
expenses (38.6) (150.1) (299.8) -- (488.5)
Goodwill impairment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (1.4) 75.8 140.2 -- 214.6
Interest income 1.0 (0.7) 4.8 -- 5.1
Interest expense (21.2) (26.5) (44.4) -- (92.1)
Income (loss) from equity investees 144.7 -- -- (144.7) --
Other income (expense) - net (1.2) 0.8 20.2 -- 19.8
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 121.9 49.4 120.8 (144.7) 147.4
Benefit from (provision for) income taxes 202.2 (1.1) (24.4) -- 176.7
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 324.1 $ 48.3 $ 96.4 $ (144.7) $ 324.1
============ ============ ============ ============ ============
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 (RESTATED)
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net sales $ 292.3 $ 1,362.5 $ 2,479.7 $ (224.7) $ 3,909.8
Cost of goods sold 273.3 1,213.3 2,148.9 (224.7) 3,410.8
------------ ------------ ------------ ------------ ------------
Gross profit 19.0 149.2 330.8 -- 499.0
Selling, general & administrative
expenses (32.8) (132.2) (231.7) -- (396.7)
Goodwill impairment (3.7) (40.6) -- -- (44.3)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (17.5) (23.6) 99.1 -- 58.0
Interest income 1.2 3.7 2.2 -- 7.1
Interest expense (32.1) (24.3) (43.5) -- (99.9)
Income (loss) from equity investees 27.0 -- -- (27.0) --
Other income (expense) - net (15.0) 4.7 (5.6) -- (15.9)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (36.4) (39.5) 52.2 (27.0) (50.7)
Benefit from (provision for) income taxes (190.2) (2.8) 17.1 -- (175.9)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (226.6) $ (42.3) $ 69.3 $ (27.0) $ (226.6)
============ ============ ============ ============ ============
F-53
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 (RESTATED)
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net sales $ 274.5 $ 1,012.6 $ 1,655.8 $ (126.4) $ 2,816.5
Cost of goods sold 292.8 929.0 1,391.8 (126.4) 2,487.2
------------ ------------ ------------ ------------ ------------
Gross profit (18.3) 83.6 264.0 -- 329.3
Selling, general & administrative
expenses (28.7) (98.6) (163.8) -- (291.1)
Goodwill impairment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (47.0) (15.0) 100.2 -- 38.2
Interest income 3.0 1.6 2.9 -- 7.5
Interest expense (23.8) (20.2) (48.6) -- (92.6)
Income (loss) from equity investees 15.9 -- -- (15.9) --
Other income (expense) - net (24.3) (18.0) 28.4 -- (13.9)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary items (76.2) (51.6) 82.9 (15.9) (60.8)
Benefit from (provision for) income
taxes 31.2 (0.3) (15.1) -- 15.8
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle (45.0) (51.9) 67.8 (15.9) (45.0)
Cumulative effect of change in accounting
principle (113.4) (18.4) (95.0) 113.4 (113.4)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (158.4) $ (70.3) $ (27.2) $ 97.5 $ (158.4)
============ ============ ============ ============ ============
F-54
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents $ 111.0 $ 3.5 $ 304.3 $ -- $ 418.8
Trade receivables, net of allowance 20.2 180.0 483.4 -- 683.6
Intercompany receivables 22.6 143.5 41.8 (207.9) --
Inventories 99.7 307.3 859.6 14.7 1,281.3
Current deferred tax assets 60.0 3.9 46.0 -- 109.9
Other current assets 31.5 24.6 97.4 -- 153.5
------------ ------------ ------------ ------------ ------------
Total current assets 345.0 662.8 1,832.5 (193.2) 2,647.1
Property, plant & equipment - net 3.8 89.0 269.8 -- 362.6
Investment in and advances to (from)
subsidiaries 1,177.3 (409.4) (550.6) (217.3) --
Goodwill - net 11.6 233.4 422.1 -- 667.1
Deferred taxes 68.8 75.4 81.8 -- 226.0
Other assets - net 7.9 96.9 171.5 -- 276.3
------------ ------------ ------------ ------------ ------------
Total assets $ 1,614.4 $ 748.1 $ 2,227.1 $ (410.5) $ 4,179.1
============ ============ ============ ============ ============
Liabilities and stockholders' equity (deficit)
Current liabilities
Notes payable and current portion of
long-term debt $ 0.2 $ 26.0 $ 58.4 $ -- $ 84.6
Trade accounts payable 52.8 183.5 659.5 -- 895.8
Intercompany payables 36.2 47.4 124.3 (207.9) --
Accruals and other current liabilities 97.8 85.8 365.5 -- 549.1
------------ ------------ ------------ ------------ ------------
Total current liabilities 187.0 342.7 1,207.7 (207.9) 1,529.5
Long-term debt less current portion 271.9 311.7 530.6 -- 1,114.2
Other long-term liabilities 20.3 68.8 311.1 -- 400.2
Stockholders' equity (deficit) 1,135.2 24.9 177.7 (202.6) 1,135.2
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,614.4 $ 748.1 $ 2,227.1 $ (410.5) $ 4,179.1
============ ============ ============ ============ ============
F-55
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003 (RESTATED)
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents $ 148.7 $ 2.8 $ 316.0 $ -- $ 467.5
Trade receivables, net of allowance 28.5 107.2 373.6 -- 509.3
Intercompany receivables 11.7 14.0 18.0 (43.7) --
Inventories 85.4 264.3 670.4 18.4 1,038.5
Other current assets 47.9 22.8 133.5 -- 204.2
------------ ------------ ------------ ------------ ------------
Total current assets 322.2 411.1 1,511.5 (25.3) 2,219.5
Property, plant & equipment - net 7.3 102.8 243.7 -- 353.8
Investment in and advances to (from) subsidiaries 871.3 (243.6) (444.1) (183.6) --
Goodwill - net 11.8 230.3 374.6 -- 616.7
Deferred taxes (64.3) 65.9 45.4 -- 47.0
Other assets - net 4.9 140.2 172.1 -- 317.2
------------ ------------ ------------ ------------ ------------
Total assets $ 1,153.2 $ 706.7 $ 1,903.2 $ (208.9) $ 3,554.2
============ ============ ============ ============ ============
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 31.3 124.1 459.5 -- 614.9
Intercompany payables 20.6 21.3 1.8 (43.7) --
Accruals and other current liabilities 35.6 108.6 322.7 -- 466.9
------------ ------------ ------------ ------------ ------------
Total current liabilities 87.6 289.6 835.1 (43.7) 1,168.6
Long-term debt less current portion 272.1 404.8 597.9 -- 1,274.8
Other long-term liabilities 118.9 35.7 281.6 -- 436.2
Stockholders' equity (deficit) 674.6 (23.4) 188.6 (165.2) 674.6
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,153.2 $ 706.7 $ 1,903.2 $ (208.9) $ 3,554.2
============ ============ ============ ============ ============
F-56
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ (44.1) $ 147.7 $ 61.0 $ -- $ 164.6
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (1.5) (35.1) (22.1) -- (58.7)
Capital expenditures (1.3) (8.9) (25.3) -- (35.5)
Proceeds from sale of assets -- 1.8 30.6 -- 32.4
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (2.8) (42.2) (16.8) -- (61.8)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal repayments of long-term debt -- (77.9) (69.1) -- (147.0)
Net borrowings (repayments) under revolving line
of credit agreements -- (4.6) (10.8) -- (15.4)
Proceeds from stock options exercised 9.2 -- -- -- 9.2
Payment of premium on early retirement of debt -- -- -- -- --
Other -- (22.3) 5.4 -- (16.9)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 9.2 (104.8) (74.5) -- (170.1)
------------ ------------ ------------ ------------ ------------
Effect of exchange rates on cash and cash equivalents -- -- 18.6 -- 18.6
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (37.7) 0.7 (11.7) -- (48.7)
Cash and cash equivalents, beginning of period 148.7 2.8 316.0 -- 467.5
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 111.0 $ 3.5 $ 304.3 $ -- $ 418.8
============ ============ ============ ============ ============
F-57
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003 (RESTATED)
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ 20.2 $ (0.5) $ 361.6 $ -- $ 381.3
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (7.9) 0.2 -- (7.7)
Capital expenditures (0.9) (6.4) (19.8) -- (27.1)
Proceeds from sale of assets -- 1.6 4.5 -- 6.1
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (0.9) (12.7) (15.1) -- (28.7)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal repayments of long-term debt (53.0) (15.6) (385.9) -- (454.5)
Proceeds from issuance of long-term debt, net of
issuance costs 49.3 46.5 194.6 -- 290.4
Net borrowings (repayments) under revolving line
of credit agreements -- (1.7) (63.3) -- (65.0)
Proceeds from stock options exercised 2.8 -- -- -- 2.8
Payment of premium on early retirement of debt (3.7) (1.4) (6.0) -- (11.1)
Other -- (18.0) (11.4) -- (29.4)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (4.6) 9.8 (272.0) -- (266.8)
------------ ------------ ------------ ------------ ------------
Effect of exchange rates on cash and cash equivalents -- -- 29.5 -- 29.5
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 14.7 (3.4) 104.0 -- 115.3
Cash and cash equivalents, beginning of period 134.0 6.2 212.0 -- 352.2
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 148.7 $ 2.8 $ 316.0 $ -- $ 467.5
============ ============ ============ ============ ============
F-58
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002 (RESTATED)
(IN MILLIONS)
WHOLLY- NON-
TEREX OWNED GUARANTOR INTERCOMPANY
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ (109.4) $ 103.4 $ 76.3 $ -- $ 70.3
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of business -- -- -- -- --
Acquisition of business, net of cash acquired (11.3) (191.5) (243.1) -- (445.9)
Capital expenditures (1.7) (10.3) (17.2) -- (29.2)
Proceeds from sale of assets 0.5 3.5 30.5 -- 34.5
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (12.5) (198.3) (229.8) -- (440.6)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal repayments of long-term debt (1.5) (101.8) (116.3) -- (219.6)
Proceeds from issuance of long-term debt, net of
issuance costs -- 204.8 367.2 -- 572.0
Issuance of common stock 113.3 -- -- -- 113.3
Net borrowings (repayments) under revolving line
of credit agreements -- (1.1) 0.3 -- (0.8)
Other -- (4.9) -- -- (4.9)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 111.8 97.0 251.2 -- 460.0
------------ ------------ ------------ ------------ ------------
Effect of exchange rates on cash and cash equivalents -- -- 12.1 -- 12.1
Net (decrease) increase in cash and cash equivalents (10.1) 2.1 109.8 -- 101.8
Cash and cash equivalents, beginning of period 144.2 4.0 102.2 -- 250.4
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 134.1 $ 6.1 $ 212.0 $ -- $ 352.2
============ ============ ============ ============ ============
F-59
TEREX CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in millions)
ADDITIONS
BALANCE ----------------------------
BEGINNING CHARGES TO BALANCE END
OF YEAR EARNINGS(3) OTHER(1) DEDUCTIONS(2) OF YEAR
------------ ------------ ------------ -------------- ------------
Year ended December 31, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 38.3 $ 20.1 $ 0.5 $ (6.6) $ 52.3
Reserve for excess and obsolete inventory 59.9 40.1 4.6 (31.4) 73.2
Valuation allowances for deferred tax assets 434.5 (224.2) 12.3 -- 222.6
------------ ------------ ------------ -------------- ------------
Totals $ 532.7 $ (164.0) $ 17.4 $ (38.0) $ 348.1
============ ============ ============ ============== ============
Year ended December 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts (Restated) $ 19.9 $ 32.7 $ 0.9 $ (15.2) $ 38.3
Reserve for excess and obsolete inventory
(Restated) 37.1 52.8 7.8 (37.8) 59.9
Valuation allowances for deferred tax assets
(Restated) 190.4 192.1 52.0 -- 434.5
------------ ------------ ------------ -------------- ------------
Totals (Restated) $ 247.4 $ 277.6 $ 60.7 $ (53.0) $ 532.7
============ ============ ============ ============== ============
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ 8.8 $ 31.6 $ 2.1 $ (22.6) $ 19.9
Reserve for excess and obsolete inventory
(Restated) 27.1 43.5 3.8 (37.3) 37.1
Valuation allowances for deferred tax assets
(Restated) 180.8 6.5 3.1 -- 190.4
------------ ------------ ------------ -------------- ------------
Totals (Restated) $ 216.7 $ 81.6 $ 9.0 $ (59.9) $ 247.4
============ ============ ============ ============== ============
(1) Primarily represents the impact of foreign currency exchange.
(2) Primarily represents the utilization of established reserves, net of
recoveries.
(3) The valuation allowance recorded in 2003 for U.S. deferred tax assets
is reversed in 2004 and represents substantially all of the activity in
those two years.
F-60