UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 10 - Q/A
-------------
Amendment No. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
---------------------------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10702
TEREX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1531521
(State of Incorporation) (IRS Employer Identification No.)
500 POST ROAD EAST, SUITE 320, WESTPORT, CONNECTICUT 06880
(Address of principal executive offices)
(203) 222-7170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [_] NO [X]
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.
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]
Number of outstanding shares of common stock: 49.3 million as of May 4, 2004.
The Exhibit Index begins on page 65.
EXPLANATORY NOTE
Terex Corporation (the "Company" or "Terex") is filing this Amendment No. 1 on
Form 10-Q/A (the "Form 10-Q/A") for the quarter ended March 31, 2004 to amend
the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
previously filed by the Company (the "Form 10-Q") in order to restate its
condensed consolidated financial statements for the three month periods ending
March 31, 2004 and March 31, 2003.
This Form 10-Q/A is part of the Company's restatement of its financial
statements for the years ended December 31, 2002 and 2003, in an Annual Report
on Form 10-K for the year ended December 31, 2004 to be filed with the
Securities and Exchange Commission ("SEC") substantially contemporaneously
herewith. That Annual Report on Form 10-K also will include restated selected
financial data for the years ended December 31, 2000 and 2001. In addition,
Terex is amending its filing for the interim period ended June 30, 2004 in an
Amendment to Quarterly Report on Form 10-Q/A. 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 condensed 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. During the
period ended March 31, 2004, the impact of this valuation allowance required a
reversal of the tax expense on the U.S. pre-tax income in the period ended March
31, 2004, requiring the Company to restate its financial statements for such
period. Additionally, the Company has adjusted its tax accounts for errors
identified for the period ended March 31, 2004 and in all prior periods
presented in this Quarterly Report on Form 10-Q/A.
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 Note B of the
Notes to Condensed Consolidated Financial Statements, Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Restatement of Consolidated Financial Statements," and Item 4 -- "Controls and
Procedures." 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 Form 10-Q/A with respect to this
matter.
All amounts referenced in this Quarterly Report on Form 10-Q/A for prior periods
and prior period comparisons reflect the balances and amounts on a restated
basis.
Terex has not amended its Quarterly Report on Form 10-Q for the interim period
ended March 31, 2003. The information that has been previously filed or
otherwise reported for this period is superseded by the information in this
Quarterly Report, and the financial statements and related financial information
contained in such other report should no longer be relied upon.
The following items originally included in the Form 10-Q are amended by this
Form 10-Q/A:
o Part I, Item 1, Condensed Consolidated Financial Statements;
o Part I, Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations;
o Part I, Item 3, Quantitative and Qualitative Disclosures About
Market Risk;
1
o Part I, Item 4, Controls and Procedures;
o Part II, Item 5, Other Information
o Part II, Item 6, Exhibits and Reports on Form 8-K.
The Chief Executive Officer and Chief Financial Officer of Terex have also
reissued their certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act in this Form 10-Q/A.
Except for the items mentioned above, no attempt has been made in this Form
10-Q/A to modify or update other disclosures presented in the original report on
Form 10-Q except as required to reflect the effects of the restatement.
Accordingly, this Form 10-Q/A, including the financial statements and notes
thereto included herein, generally does not reflect events occurring after the
date of the original filing of the Form 10-Q or modify or update those
disclosures affected by subsequent events. Consequently, all other information
not affected by the restatement is unchanged and reflects the disclosures made
at the time of the original filing of the Form 10-Q on May 7, 2004. For a
description of subsequent events, this Form 10-Q/A should be read in conjunction
with Terex's filings made subsequent to the filing of the original Form 10-Q,
including the Company's amended Quarterly Report on Form 10-Q/A for the quarter
ended June 30, 2004, the Company's Current Reports on Form 8-K, and any filings
to be made by the Company to reflect the impact of the restatement of its
financial statements discussed above.
2
INDEX
TEREX CORPORATION AND SUBSIDIARIES
GENERAL
This Quarterly Report on Form 10-Q/A filed by Terex Corporation ("Terex" or the
"Company") includes financial information with respect to the following
subsidiaries of the Company (all of which are wholly-owned) which were
guarantors on March 31, 2004 (the "Guarantors") of the Company's $300 million
principal amount of 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8%
Notes"), $300 million principal amount of 10-3/8% Senior Subordinated Notes due
2011 (the "10-3/8% Notes"), and $200 million principal amount of 9-1/4% Senior
Subordinated Notes due 2011 (the "9-1/4% Notes"). See Note R to the Company's
March 31, 2004 Condensed Consolidated Financial Statements included in this
Quarterly Report.
State or other
jurisdiction of I.R.S. employer
incorporation or identification
Guarantor organization number
----------- ------------------- -------------------
Amida Industries, Inc........................................ South Carolina 57-0531390
Benford America, Inc......................................... Delaware 76-0522879
BL-Pegson USA, Inc........................................... Connecticut 31-1629830
Cedarapids, Inc.............................................. Iowa 42-0332910
CMI Dakota Company........................................... South Dakota 46-0440642
CMI Terex Corporation........................................ Oklahoma 73-0519810
CMIOIL Corporation........................................... Oklahoma 73-1125438
EarthKing, Inc............................................... Delaware 06-1572433
Finlay Hydrascreen USA, Inc.................................. New Jersey 22-2776883
Fuchs Terex, Inc............................................. Delaware 06-1570294
Genie Access Services, Inc................................... Washington 91-2073567
Genie China, Inc............................................. Washington 91-1973009
Genie Financial Services, Inc................................ Washington 91-1712115
Genie Holdings, Inc.......................................... Washington 91-1666966
Genie Industries, Inc........................................ Washington 91-0815489
Genie International, Inc..................................... Washington 91-1975116
Genie Manufacturing, Inc..................................... Washington 91-1499412
GFS Commercial LLC........................................... Washington n/a
GFS National, Inc............................................ Washington 91-1959375
Go Credit Corporation........................................ Washington 91-1563427
Koehring Cranes, Inc......................................... Delaware 06-1423888
Lease Servicing & Funding Corp............................... Washington 91-1808180
O & K Orenstein & Koppel, Inc................................ Delaware 58-2084520
Payhauler Corp............................................... Illinois 36-3195008
Powerscreen Holdings USA Inc................................. Delaware 61-1265609
Powerscreen International LLC................................ Delaware 61-1340898
Powerscreen North America Inc................................ Delaware 61-1340891
Powerscreen USA, LLC......................................... Kentucky 31-1515625
PPM Cranes, Inc.............................................. Delaware 39-1611683
Product Support, Inc......................................... Oklahoma 73-1488926
Royer Industries, Inc........................................ Pennsylvania 24-0708630
Schaeff Incorporated......................................... Iowa 42-1097891
Spinnaker Insurance Company.................................. Vermont 03-0372517
Standard Havens, Inc......................................... Delaware 43-0913249
Standard Havens Products, Inc................................ Delaware 43-1435208
Terex Advance Mixer, Inc..................................... Delaware 06-1444818
Terex Bartell, Inc........................................... Delaware 34-1325948
Terex Cranes, Inc............................................ Delaware 06-1513089
Terex Financial Services, Inc................................ Delaware 45-0497096
Terex Mining Equipment, Inc.................................. Delaware 06-1503634
Terex Utilities, Inc......................................... Delaware 04-3711918
Terex Utilities South, Inc................................... Delaware 74-3075523
Terex-RO Corporation......................................... Kansas 44-0565380
Terex-Telelect, Inc.......................................... Delaware 41-1603748
The American Crane Corporation............................... North Carolina 56-1570091
Utility Equipment, Inc....................................... Oregon 93-0557703
3
Page No.
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PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
TEREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations --
Three months ended March 31, 2004 and 2003................................................ 5
Condensed Consolidated Balance Sheet -- March 31, 2004 and December 31, 2003.................... 6
Condensed Consolidated Statement of Cash Flows --
Three months ended March 31, 2004 and 2003................................................ 7
Notes to Condensed Consolidated Financial Statements -- March 31, 2004.......................... 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 36
Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................... 55
Item 4 Controls and Procedures......................................................................... 56
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................................................... 60
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities................ 60
Item 3 Defaults Upon Senior Securities................................................................. 60
Item 4 Submission of Matters to a Vote of Security Holders............................................. 60
Item 5 Other Information............................................................................... 60
Item 6 Exhibits and Reports on Form 8-K................................................................ 62
SIGNATURES................................................................................................. 64
EXHIBIT INDEX.............................................................................................. 65
4
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in millions, except per share data)
For the Three
Months
Ended March 31,
------------------
2004 2003
Restated Restated
-------- --------
Net sales.............................................................. $1,059.4 $ 934.4
Cost of goods sold..................................................... 899.0 807.6
-------- --------
Gross profit......................................................... 160.4 126.8
Selling, general and administrative expenses........................... (112.5) (89.2)
-------- --------
Income from operations............................................... 47.9 37.6
Other income (expense):
Interest income...................................................... 1.0 1.7
Interest expense..................................................... (22.5) (25.9)
Other income (expense) -- net........................................ (2.4) 0.3
-------- --------
Income before income taxes........................................... 24.0 13.7
Provision for income taxes............................................. (5.3) (4.2)
-------- --------
Net income............................................................. $18.7 $9.5
======== ========
Per common share:
Basic................................................................ $0.38 $0.20
======== ========
Diluted.............................................................. $0.37 $0.19
======== ========
Weighted average number of shares outstanding in per share calculation:
Basic................................................................ 48.8 47.2
Diluted.............................................................. 50.8 49.4
The accompanying notes are an integral part of these financial statements.
5
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in millions, except par value)
March 31, December 31,
2004 2003
Restated Restated
--------- ------------
Assets
Current assets
Cash and cash equivalents............................................... $ 408.0 $ 467.5
Trade receivables (net of allowance of $40.3 at March 31, 2004
and $38.3 at December 31, 2003)...................................... 595.2 509.3
Inventories............................................................. 1,115.5 1,038.5
Deferred taxes.......................................................... 79.9 78.6
Other current assets.................................................... 120.6 125.6
--------- ------------
Total current assets.................................................. 2,319.2 2,219.5
Long-term assets
Property, plant and equipment........................................... 343.1 353.8
Goodwill................................................................ 623.7 616.7
Deferred taxes.......................................................... 45.5 47.0
Other assets............................................................ 325.8 317.2
--------- ------------
Total assets.............................................................. $ 3,657.3 $ 3,554.2
========= ============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and current portion of long-term debt..................... $ 96.8 $ 86.8
Trade accounts payable.................................................. 691.2 614.9
Accrued compensation and benefits....................................... 97.6 89.7
Accrued warranties and product liability................................ 85.0 89.7
Other current liabilities............................................... 289.6 287.5
--------- ------------
Total current liabilities............................................. 1,260.2 1,168.6
Non-current liabilities
Long-term debt, less current portion.................................... 1,279.4 1,274.8
Other................................................................... 414.6 436.2
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value -- authorized 150.0 shares; issued 50.3 and
50.0 shares at March 31, 2004 and December 31, 2003, respectively..... 0.5 0.5
Additional paid-in capital.............................................. 836.4 813.5
Accumulated deficit..................................................... (186.5) (205.2)
Accumulated other comprehensive income.................................. 98.1 110.4
Less cost of shares of common stock in treasury -- 2.0 and 1.9 shares at
March 31, 2004 and December 31, 2003, respectively.................... (45.4) (44.6)
--------- ------------
Total stockholders' equity.......................................... 703.1 674.6
--------- ------------
Total liabilities and stockholders' equity................................ $ 3,657.3 $ 3,554.2
========= ============
The accompanying notes are an integral part of these financial statements.
6
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in millions)
For the Three
Months
Ended March 31,
------------------
2004 2003
Restated Restated
-------- --------
Operating Activities
Net income................................................................. $ 18.7 $ 9.5
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation........................................................... 14.3 12.9
Amortization........................................................... 4.0 2.7
Impairment charges and asset write downs............................... --- 1.7
Gain on sale of fixed assets........................................... (0.8) (0.5)
Changes in operating assets and liabilities (net of effects of
acquisitions):
Trade receivables................................................... (55.7) 27.1
Inventories......................................................... (108.5) 7.6
Trade accounts payable.............................................. 83.1 59.2
Other, net.......................................................... (19.5) (5.4)
-------- --------
Net cash provided by (used in) operating activities............... (64.4) 114.8
-------- --------
Investing Activities
Acquisition of businesses, net of cash acquired............................ (1.1) (8.5)
Capital expenditures....................................................... (8.9) (8.6)
Proceeds from sale of assets............................................... 0.8 2.6
-------- --------
Net cash used in investing activities............................. (9.2) (14.5)
-------- --------
Financing Activities
Principal repayments of long-term debt..................................... --- (1.5)
Proceeds from stock options exercised...................................... 4.1 ---
Net borrowings (repayments) under revolving line of credit agreements...... 14.0 (22.5)
Other, net................................................................. (3.4) (11.6)
-------- --------
Net cash provided by (used in) financing activities............... 14.7 (35.6)
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents................. (0.6) 2.9
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents......................... (59.5) 67.6
Cash and Cash Equivalents at Beginning of Period............................. 467.5 352.2
-------- --------
Cash and Cash Equivalents at End of Period................................... $ 408.0 $ 419.8
======== ========
The accompanying notes are an integral part of these financial statements.
7
TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(dollar amounts in millions, unless otherwise noted, except per share amounts)
Except for the items mentioned in the Explanatory Note and Note B of the Notes
to Condensed Consolidated Financial Statements, no attempt has been made in this
Form 10-Q/A to modify or update other disclosures presented in the original
report on Form 10-Q except as required to reflect the effects of the
restatement. Accordingly, this Form 10-Q/A, including the financial statements
and notes thereto included herein, does not reflect events occurring after the
date of the original filing of the Form 10-Q or modify or update those
disclosures affected by subsequent events except for the items mentioned in the
Explanatory Note and Note B of the Notes to Condensed Consolidated Financial
Statements. Consequently, all other information not affected by the restatement
is unchanged and reflects the disclosures made at the time of the original
filing of the Form 10-Q on May 7, 2004. For a description of subsequent events,
this Form 10-Q/A should be read in conjunction with Terex's filings made
subsequent to the filing of the original Form 10-Q including, the Company's
amended Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004, the
Company's Current Reports on Form 8-K, and any filings to be made by the Company
to reflect the impact of the restatement of its financial statements discussed
herein.
NOTE A -- BASIS OF PRESENTATION
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements of Terex Corporation and subsidiaries as of March 31, 2004
and for the three months ended March 31, 2004 and 2003 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America to be included in full year financial
statements.
The condensed consolidated financial statements include the accounts of Terex
Corporation and its majority owned subsidiaries ("Terex" or the "Company"). All
material intercompany balances, transactions and profits have been eliminated.
In the opinion of management, all adjustments considered necessary for a fair
statement have been made. Except as otherwise disclosed, all such adjustments
consist only of those of a normal recurring nature. Operating results for the
three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
Cash and cash equivalents at March 31, 2004 and December 31, 2003 include $3.1
and $10.9, respectively, which was not immediately available for use. These
consist primarily of cash balances held in escrow to secure various obligations
of the Company.
Certain prior period amounts have been reclassified to conform with the current
period presentation. The Terex mining truck business is included as a continuing
operation.
Recent Accounting Pronouncements. In January 2003, the Financial Accounting
Standards Board (the "FASB") issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities." A variable interest entity
("VIE") is a corporation, partnership, trust or other legal entity that does not
have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its own
activities. The interpretation requires a company to consolidate a VIE when the
company has a majority of the risk of loss from the VIE's activities or is
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB revised FIN 46 ("FIN 46R") and modified its effective
date. The Company adopted the provisions of FIN 46R, for special purpose
entities and VIEs created on or after February 1, 2003, effective December 31,
2003. As of March 31, 2004, there were no such entities that are required to be
consolidated by the Company. For all
8
other entities, the Company has adopted the provisions of FIN 46R effective
March 31, 2004. The adoption of FIN 46R did not have a material impact on the
Company's consolidated financial position or results of operations.
In January 2003, the Emerging Issues Task Force (the "EITF") released EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 clarifies the timing and recognition of revenue from certain transactions
that include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
impact on the Company's consolidated financial position or results of
operations.
During April 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends and clarifies financial accounting
and reporting for derivative instruments and hedging activities, resulting
primarily from decisions reached by the FASB Derivatives Implementation Group
subsequent to the original issuance of SFAS No. 133. This statement is generally
effective prospectively for contracts and hedging relationships entered into
after June 30, 2003. The adoption of SFAS No. 149 has not had a material impact
on the Company's consolidated financial position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 must be applied
immediately to instruments entered into or modified after May 31, 2003 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The adoption of SFAS
No. 150 has not had a material impact on the Company's consolidated financial
position or results of operations.
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 O -- "Litigation and Contingencies."
Substantially all receivables were trade receivables at March 31, 2004 and
December 31, 2003.
Accrued Warranties. The Company records accruals for potential warranty claims
based on the Company's claim experience. The Company's products are typically
sold with a standard warranty covering defects that arise during a fixed period
of time. Each business provides a warranty specific to the products it offers.
The specific warranty offered by a business is a function of customer
expectations and competitive forces. The length of warranty is generally a fixed
period of time, a fixed number of operating hours, or both.
A liability for estimated warranty claims is accrued at the time of sale. The
non-current portion of the warranty accrual is included in Other Non-current
liabilities. The liability is established using a historical warranty claim
experience for each product sold. The historical claim experience may be
adjusted for known design improvements or for the impact of unusual product
quality issues. Warranty reserves are reviewed quarterly to ensure that critical
assumptions are updated for known events that may impact the potential warranty
liability.
9
The following table summarizes the changes in the aggregate product warranty
liability:
For the Three Months
Ended March 31, 2004
Restated
--------------------
Balance at beginning of period.................. $ 69.6
Accruals for warranties issued during the period 15.7
Changes in estimates............................ (2.0)
Settlements during the period................... (17.9)
Foreign exchange effect......................... (0.3)
--------------------
Balance at end of period........................ $ 65.1
====================
Stock-Based Compensation. At March 31, 2004, the Company had stock-based
employee compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees,"("APB No. 25") and related interpretations. No
employee compensation cost is reflected in net income for the granting of
employee stock options, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") to
stock-based employee compensation.
For the Three
Months Ended
March 31,
------------------
2004 2003
Restated Restated
-------- --------
Reported net income............................................... $ 18.7 $ 9.5
Deduct: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related
income tax effects.............................................. (1.8) (1.1)
-------- --------
Pro forma net income.............................................. $ 16.9 $ 8.4
======== ========
Per common share:
Basic:
Reported net income............................................ $ 0.38 $ 0.20
======== ========
Pro forma net income........................................... $ 0.35 $ 0.18
======== ========
Diluted:
Reported net income............................................ $ 0.37 $ 0.19
======== ========
Pro forma net income........................................... $ 0.33 $ 0.17
======== ========
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the Three
Months Ended
March 31,
------------------
2004 2003
--------- -------
Dividend yields................................................. 0.0% 0.0%
Expected volatility............................................. 51.10% 51.24%
Risk-free interest rates........................................ 4.04% 4.90%
Expected life (in years)........................................ 10.0 9.7
Aggregate fair value of options granted......................... $ 6.0 $ 4.5
Weighted average fair value at date of grant for options granted $ 22.61 $ 7.59
10
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE B -- RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company is restating its financial statements as of and for the year ended
December 31, 2003. 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. During the
period ended March 31, 2004, the impact of this valuation allowance required a
reversal of the tax expense on the U.S. pre-tax income in the period ended March
31, 2004, requiring the Company to restate its financial statements for such
period. Additionally, the Company has adjusted its tax accounts for errors
identified for the period ended March 31, 2004 and in all prior periods
presented in this Quarterly Report on Form 10-Q/A.
The following tables set forth the restatement of the Company's previously
issued statement of operations for the three months ended March 31, 2004 and
2003 and the Company's restated balance sheet as of March 31, 2004 and December
31, 2003, on a summary basis.
All other information presented in the notes to these financial statements is
presented on a restated basis.
For the Three Months For the Three Months
Ended March 31, 2004 Ended March 31, 2003
--------------------------- --------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
------------- ------------ ------------ -----------
Net sales........................................ $ 1,043.8 $ 1,059.4 $ 927.7 $ 934.4
Cost of goods sold............................... $ 883.5 $ 899.0 $ 798.0 $ 807.6
Gross profit..................................... $ 160.3 $ 160.4 $ 129.7 $ 126.8
Selling, general and administrative expenses..... $ (112.0) $ (112.5) $ (89.2) $ (89.2)
Income from operations........................... $ 48.3 $ 47.9 $ 40.5 $ 37.6
Income (loss) before income taxes................ $ 24.4 $ 24.0 $ 16.6 $ 13.7
Provision for income taxes....................... $ (7.4) $ (5.3) $ (4.6) $ (4.2)
Net Income (loss) ............................... $ 17.0 $ 18.7 $ 12.0 $ 9.5
Per common share:
Basic......................................... $ 0.35 $ 0.38 $ 0.25 $ 0.20
Diluted....................................... $ 0.34 $ 0.37 $ 0.24 $ 0.19
11
BALANCE SHEETS:
As of March 31, 2004 As of December 31, 2003
--------------------------- ----------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
------------ ------------ ------------ ------------
Trade receivables................................... $ 610.8 $ 595.2 $ 540.2 $ 509.3
Inventories......................................... $ 1,101.1 $ 1,115.5 $ 1,009.7 $ 1,038.5
Current deferred taxes.............................. $ 55.2 $ 79.9 $ 53.9 $ 78.6
Other current assets................................ $ 117.7 $ 120.6 $ 122.7 $ 125.6
Total current assets................................ $ 2,292.8 $ 2,319.2 $ 2,194.0 $ 2,219.5
Property, plant and equipment....................... $ 359.4 $ 343.1 $ 370.1 $ 353.8
Goodwill............................................ $ 606.8 $ 623.7 $ 603.5 $ 616.7
Deferred taxes...................................... $ 237.6 $ 45.5 $ 238.9 $ 47.0
Other assets........................................ $ 323.8 $ 325.8 $ 317.3 $ 317.2
Total assets........................................ $ 3,820.4 $ 3,657.3 $ 3,723.8 $ 3,554.2
Trade accounts payable.............................. $ 684.3 $ 691.2 $ 608.6 $ 614.9
Accrued compensation and benefits................... $ 102.8 $ 97.6 $ 94.5 $ 89.7
Accrued warranties and product liability............ $ 83.8 $ 85.0 $ 88.5 $ 89.7
Other current liabilities........................... $ 272.6 $ 289.6 $ 281.0 $ 287.5
Total current liabilities........................... $ 1,240.3 $ 1,260.2 $ 1,159.4 $ 1,168.6
Other non-current liabilities....................... $ 418.1 $ 414.6 $ 412.9 $ 436.2
Additional paid-in capital.......................... $ 800.2 $ 836.4 $ 795.1 $ 813.5
Retained earnings (accumulated deficit)............. $ 58.9 $ (186.5) $ 41.9 $ (205.2)
Cumulative translation adjustment................... $ 67.2 $ 131.3 $ 79.6 $ 140.0
Accumulated other comprehensive income.............. $ 40.8 $ 98.1 $ 57.0 $ 110.4
Cost of shares of common stock in treasury.......... $ (17.8) $ (45.4) $ (17.8) $ (44.6)
Total stockholders' equity.......................... $ 882.6 $ 703.1 $ 876.7 $ 674.6
Total liabilities and stockholders' equity.......... $ 3,820.4 $ 3,657.3 $ 3,723.8 $ 3,554.2
Net cash from operating activities, financing activities and investing
activities for the three months ended March 31, 2004 and 2003 did not change
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 for the three months ended March 31, 2004 and 2003.
The cumulative effect of the restatement of the Company's previously filed
financial statements was to reduce retained earnings as of March 31, 2004,
December 31, 2003 and 2002 by $245.4 (of which $200.7 relates to the tax
valuation allowance discussed below), $247.1 (of which $200.7 relates to the tax
valuation allowance discussed below) and $46.0, respectively, which includes tax
benefits of (provisions for) $2.1, ($185.7) and $6.7, respectively. Total
stockholders' equity as of March 31, 2004, December 31, 2003 and December 31,
2002 decreased by $179.5 (of which $200.7 relates to the tax valuation allowance
discussed below), $202.1 (of which $200.7 relates to the tax valuation allowance
discussed below) and $42.3, 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 $0.0 and $1.7 during the
three months ended March 31, 2004 and 2003, respectively, not being recorded as
expenses.
Light Construction (Roadbuilding, Utility Products and Other 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 $0.0 and $0.6 were not recorded as
expenses during the three months ended March 31, 2004 and 2003, respectively.
12
Compact Equipment (Construction Segment): The Company failed to reconcile the
accrual of goods received not invoiced to underlying detailed records for raw
materials and parts inventory in connection with assessing the appropriateness
of the accrued liability. As a result, costs were not recorded as expenses
totaling $0.5 and $0.1 in the three months ended March 31, 2004 and 2003,
respectively.
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 foreign
currency adjustments. In addition, certain benefit accruals were corrected in
2004 periods. As a result of these aggregate errors, $0.6 and $0.4 of expenses
were not recorded during the three months ended March 31, 2004 and 2003,
respectively. 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 stockholder's equity in the amount of $23.5, beginning in 2002.
Revenue Recognition: The Company has determined that there were errors in the
timing of revenue recognition in certain transactions 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 of $15.6 and $6.7 for the three months ended
March 31, 2004 and 2003, respectively. As a result of these adjustments, there
was an increase in pre-tax income of $1.2 and $0.6 in the three months ended
March 31, 2004 and 2003, respectively.
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. As a result, of these aggregate errors, expenses were
not recorded totaling $0.5 and $0.7 in the three months ended March 31, 2004 and
2003, respectively.
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
stockholder's equity by $36.0 as of March 31, 2004, $32.3 as of December 31,
2003 and ($0.6) as of December 31, 2002. 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 March 31, 2004 and December 31, 2003
totaling $7.1 and $6.9, respectively. In addition, non-current liabilities
increased as of March 31, 2004 and December 31, 2003 by $10.1 and $9.8,
respectively. The Company also determined it was not properly accounting for
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 APB No. 25 as permitted by
SFAS No. 123. Prior to January 1, 2004, the Company's deferred compensation plan
permitted participants to transfer their investments between the plan's
investment options and such deferred compensation was recorded as a non-current
liability on the balance sheet. Effective January 1, 2004, the plan was revised
to prohibit transfers between investment options; this revision resulted in a
reclassification of the current and non-current liability established through
December 31, 2003 to additional paid-in capital within stockholders' equity. As
of December 31, 2003, the net result of correcting these errors was a decrease
in current liabilities totaling $5.2, an increase in non-current liabilities
totaling $14.4, an increase in paid in capital totaling $17.7 and an increase in
treasury stock
13
totaling $26.8. As of March 31, 2004, the net result was a decrease in current
liabilities totaling $5.6, a decrease in non-current liabilities totaling $2.3,
an increase in paid in capital of $35.5 and an increase in treasury stock
totaling $27.6.
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 and reduced tax expense in
the three months ended March 31, 2004 by $3.3 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
On February 14, 2003, the Company completed the acquisition of Commercial Body
Corporation ("Commercial Body"). Commercial Body, headquartered in San Antonio,
Texas with locations in various states, distributes, assembles, rents and
provides service of products for the utility, telecommunications and municipal
markets. In connection with the acquisition, the Company issued approximately
600 thousand shares of Common Stock and paid $3.7 cash. In addition, the Company
may be required to pay cash or issue additional shares of Common Stock (at the
Company's option) if, on the second anniversary of the Commercial Body
acquisition, the Common Stock is not trading on the New York Stock Exchange at a
price at least 50% higher than it was at the time of the acquisition, up to a
maximum number of shares of Common Stock having a value of $3.4. At the time of
Terex's acquisition of Commercial Body, Commercial Body had a 50% equity
interest in Combatel Distribution, Inc. ("Combatel"). The remaining 50% of
Combatel was owned by Terex and prior to the Commercial Body acquisition had
been accounted for under the equity method of accounting. During the second
quarter of 2003, Commercial Body and Combatel merged to form Terex Utilities
South, Inc. ("Utilities South"). Utilities South is included in the Terex
Roadbuilding, Utility Products and Other segment.
The operating results of Commercial Body and Combatel are included in the
Company's consolidated results of operations since February 14, 2003 (date of
acquisition).
14
On August 28, 2003, the Company acquired an additional 51% of the outstanding
shares of TATRA a.s. ("Tatra") from SDC Prague s.r.o., a subsidiary of SDC
International, Inc. Tatra is located in the Czech Republic and is a manufacturer
of on/off road heavy-duty vehicles for commercial and military applications.
Consideration for the acquisition was comprised of debt forgiveness totaling
$8.1, cash of $0.2 and approximately 209 thousand shares of Terex common stock.
On April 22, 2004, the Company purchased an additional 10% of the outstanding
shares of Tatra for $1.2 in cash. These acquisitions bring Terex's total
ownership interest in Tatra to approximately 81%. Tatra's results have been
included in the Company's consolidated financial statements since August 28,
2003. Upon the initial consolidation of Tatra into the Company's consolidated
financial results, Tatra's debt totaled approximately $33. This debt primarily
consisted of notes payable to financial institutions. Tatra is part of the
Company's Roadbuilding, Utility Products and Other segment.
The Company owns an approximately 33% interest in American Truck Company
("ATC"). ATC is located in the United States and manufactures heavy-duty
off-road trucks for military and severe duty commercial applications. Tatra also
owns an approximately 33% interest in ATC. As a result of the Company's August
28, 2003 acquisition of additional ownership of Tatra, the results of ATC also
have been included in the Company's consolidated financials statements since
August 28, 2003.
The Company is in the process of completing certain valuations, appraisals and
other studies for purposes of determining the respective fair values of tangible
and intangible assets used in the allocation of purchase consideration for the
acquisition of Tatra. The Company does not anticipate that the final results of
these valuations will have a material impact on its financial position, results
of operations or cash flows.
On December 19, 2003, the Company completed the acquisition of substantially all
of the assets comprising the business of Compass Equipment Leasing ("CEL") and
Asplundh Canada. Both businesses rent digger derricks, aerial devices and other
related equipment to contractors and utility customers in the United States and
Canada, respectively. The purchase consideration was $0.1 plus the assumption of
CEL's and Asplundh Canada's operating lease obligations. Both businesses are
included in the Terex Roadbuilding, Utility Products and Other segment.
The Company is in the process of completing certain appraisals and other studies
for the purpose of determining the respective fair value of the tangible and
intangible assets acquired. This information will be used to allocate the
purchase consideration. The Company does not anticipate that the final results
of these studies will have a material impact on its financial position, results
of operations or cash flows.
NOTE D -- GOODWILL
On April 1, 2003, the Company changed the composition of its reporting units and
segments when it moved the North American operations of its telehandlers
business from the Terex Construction segment to the Terex Aerial Work Platforms
segment due to a change in the way the Company's operating decision makers view
the business.
An analysis of changes in the Company's goodwill by business segment is as
follows:
Terex
Terex Roadbuilding,
Aerial Utility
Terex Terex Work Terex Products and
Construction Cranes Platforms Mining Other Total
--------------- ----------- ----------- ----------- ------------- ------------
Balance at December 31, 2003
(Restated) ................ $ 325.8 $ 98.6 $ 53.0 $ --- $ 139.3 $ 616.7
Acquisitions.................. --- --- --- --- 3.4 3.4
Impairment.................... --- --- --- --- --- ---
Foreign exchange effect/other
(Restated) ................ 4.2 (0.6) --- --- --- 3.6
--------------- ----------- ----------- ----------- ------------- ------------
Balance at March 31, 2004
(Restated) ................ $ 330.0 $ 98.0 $ 53.0 $ --- $ 142.7 $ 623.7
=============== =========== =========== =========== ============= ============
15
The goodwill recognized for the acquisitions of Tatra, CEL and Asplundh Canada
as of March 31, 2004 is not final as the Company has not yet completed its
valuations of the acquired tangible and intangible assets.
NOTE E -- 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
(loss) until the underlying hedged transactions are reported on the Company's
consolidated statement of operations. The Company uses interest rate swaps to
mitigate its exposure to changes in interest rates related to existing issuances
of variable rate debt and to fair value changes of fixed rate debt. Primary
exposure includes movements in the London Interbank Offer Rate ("LIBOR").
Changes in the fair value of derivatives that are designated as fair value
hedges are recognized in earnings as offsets to the changes in fair value of
exposures being hedged. The change in fair value of derivatives that are
designated as cash flow hedges are deferred in accumulated other comprehensive
income (loss) and are recognized in earnings as the hedged transactions occur.
Any ineffectiveness is recognized in earnings immediately.
The Company records hedging activity related to debt instruments in interest
expense and hedging activity related to foreign currency and lease obligations
in operating profit. On the Consolidated Statement of Cash Flows, the Company
records cash flows from hedging activities in the same manner as it records the
underlying item being hedged.
The Company entered into interest rate swap agreements that effectively
converted variable rate interest payments into fixed rate interest payments. At
March 31, 2004, the Company had $100.0 notional amount of such interest rate
swap agreements outstanding, all of which mature in 2009. The fair market value
of these swaps at March 31, 2004 was a loss of $5.5, which is recorded in other
non-current liabilities. These swap agreements have been designated as, and are
effective as, cash flow hedges of outstanding debt instruments. During the three
months ended March 31, 2004 and 2003, the Company recorded the change in fair
value to accumulated other comprehensive income (loss) and reclassified to
earnings a portion of the deferred loss from accumulated other comprehensive
income (loss) as the hedged transactions occurred and were recognized in
earnings.
The Company has entered into a series of interest rate swap agreements that
converted fixed rated interest payments into variable rate interest payments. At
March 31, 2004, the Company had $279.0 notional amount of such interest rate
swap agreements outstanding, all of which mature in 2006 through 2014. The fair
market value of these swaps at March 31, 2004 was a gain of $11.7, which is
recorded in other non-current assets. These swap agreements have
16
been designated as, and are effective as, fair value hedges of outstanding debt
instruments. During December 2002, the Company exited an interest rate swap
agreement in the notional amount of $100.0 with a 2011 maturity that converted
fixed rate interest payments into variable rate interest payments. The Company
received $5.6 upon exiting this swap agreement. These gains are being amortized
over the original maturity and, combined with the market value of the swap
agreements held at March 31, 2004, are offset by a $16.5 addition in the
carrying value of the long-term obligations being hedged.
The Company is also a party to currency exchange forward contracts to manage its
exposure to changing currency exchange rates that mature within 18 months. At
March 31, 2004, the Company had $174.6 of notional amount of currency exchange
forward contracts outstanding, all of which mature on or before September 30,
2005. The fair market value of these swaps at March 31, 2004 was a gain of $9.4.
At March 31, 2004, $165.6 notional amount of these swap agreements have been
designated as, and are effective as, cash flow hedges of specifically identified
assets and liabilities.
During the three months ended March 31, 2004 and 2003, the Company recorded the
change in fair value to accumulated other comprehensive income (loss) and
reclassified to earnings a portion of the deferred loss from accumulated other
comprehensive income (loss) as the hedged transactions occurred and were
recognized in earnings.
At March 31, 2004, the fair value of all derivative instruments has been
recorded in the Condensed Consolidated Balance Sheet as a net asset of $15.5,
net of income taxes.
Counterparties to interest rate derivative contracts and currency exchange
forward contracts are major financial institutions with credit ratings of
investment grade or better and no collateral is required. There are no
significant risk concentrations. Management believes the risk of incurring
losses on derivative contracts related to credit risk is remote and any losses
would be immaterial.
Unrealized net gains (losses) included in Other Comprehensive Income (Loss) are
as follows:
For the
Three Months Ended
March 31,
-------------------------
2004 2003
---------- ----------
Balance at beginning of period................................................ $ 6.5 $ 2.1
Additional gains (losses)..................................................... (0.5) (0.5)
Amounts reclassified to earnings.............................................. (3.3) (0.8)
---------- ----------
Balance at end of period...................................................... $ 2.7 $ 0.8
========== ==========
The estimated amount of existing pre-tax net gains for derivative contracts in
accumulated other comprehensive income as of March 31, 2004 that is expected to
be reclassified into earnings during the twelve month period ending March 31,
2005 is $7.0.
NOTE F -- RESTRUCTURING AND OTHER CHARGES
The Company continually evaluates its cost structure to ensure that it is
appropriately positioned to respond to changing market conditions. During 2003
and 2002, the Company experienced declines in several markets. In addition, the
Company's recent acquisitions have created product, production and selling and
administrative overlap with existing businesses. In response to changing market
demand and to optimize the impact of recently acquired businesses, the Company
has initiated the restructuring programs described below.
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.
17
2003 PROGRAMS
In the first quarter of 2003, the Company recorded a charge of $0.7 related to
restructuring at its CMI Terex facility in Oklahoma City, Oklahoma. Due to the
continued poor performance in the Roadbuilding business, the Company reduced
employment by approximately 146 employees at its CMI Terex facility. As of June
30, 2003, all of the employees had ceased employment with the Company. The
program was substantially complete at June 30, 2003. CMI Terex is included in
the Terex Roadbuilding, Utility Products and Other segment.
Also in the first quarter of 2003, the Company recorded charges of $0.3 for
restructuring at its Terex-RO facility in Olathe, Kansas. As a result of weak
demand in the Company's North American crane business, the Terex-RO facility has
been closed and the production performed at that facility has been consolidated
into the Company's hydraulic crane production facility in Waverly, Iowa. The
program reduced employment by approximately 50 employees and was substantially
completed at September 30, 2003. Booms for the Terex-RO product were already
being produced in the Waverly facility; accordingly, no production problems are
anticipated in connection with this consolidation. Terex-RO is included in the
Terex Cranes segment.
The Company recorded a charge of $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 is
included in the Terex Roadbuilding, Utility Products and Other segment. The
program was completed as of September 30, 2003. Additionally, during the first
quarter of 2003, the Company wrote down certain investments it held in
technology businesses related to its EarthKing subsidiary. These investments
were no longer economically viable, as these businesses were unsuccessful in
gaining customer acceptance and were generating revenue at levels insufficient
to warrant anticipated growth, and resulted in a write-down of $0.8.
This write-down was reported in "Other income (expense) -- net."
During the second quarter of 2003, the Company recorded a severance charge of
$3.1 for future cash expenditures related to restructuring at its Terex Peiner
tower crane manufacturing facility in Trier, Germany. This charge is a result of
the Company's decision to consolidate its German tower crane manufacturing into
its German Demag facilities in an effort to lower fixed overhead and improve
manufacturing efficiencies and profitability. As a result of the restructuring,
the Company has accrued for a headcount reduction of 65 employees. As of March
31, 2004, 62 of the employees had ceased employment with the Company. The
program is expected to be completed in the second quarter of 2004. Terex Peiner
is included in the Terex Cranes segment. The Terex Peiner closing is expected to
reduce annual operating costs by $3.4 once the program is fully implemented.
The Company also recorded a restructuring charge in the second quarter of 2003
of $1.9 for future cash expenditures related to the closure of its Powerscreen
facility in Kilbeggan, Ireland. The $1.9 was comprised of $1.0 of severance
charges and $0.9 of accruable exit costs. This charge is a result of the
Company's decision to consolidate its European Powerscreen business at its
facility in Dungannon, Northern Ireland. This consolidation will lower the
Company's cost structure for this business and better utilize manufacturing
capacity. As a result of the restructuring, the Company has accrued for a
headcount reduction of 121 employees at the Kilbeggan facility. As of September
30, 2003, all of the employees had ceased employment with the Company. The
program was substantially complete at March 31, 2004, except for the disposal of
certain real property which is expected to be finalized in 2004. The Powerscreen
Kilbeggan facility is included in the Terex Construction segment. During the
three months ended June 30, 2003, $1.8 and $0.1 were recorded in cost of goods
sold and selling, general and administrative expenses, respectively. The
Kilbeggan facility closing is expected to generate annual cost savings of
approximately $3.
In addition, during the second quarter of 2003, the Company recorded
restructuring charges of $4.7 in the Terex Roadbuilding, Utility Products and
Other segment. These restructuring charges are the result of continued poor
performance in the Roadbuilding business and the Company's efforts to streamline
operations and improve profitability. The $4.7 restructuring charge is comprised
of the following components:
o A $2.8 charge related to exiting the bio-grind recycling business,
with $2.5 recorded in cost of goods sold and $0.3 recorded in
selling, general and administrative expenses.
18
o A charge of $1.8 related to the exiting of the screening and
shredder-mixer business operated at its Durand, Michigan facility,
with $1.7 recorded in cost of goods sold and $0.1 recorded in
selling, general and administrative expenses.
o A $0.1 charge was recorded in selling, general and administrative
expenses related to the headcount reduction of 17 employees at the
Company's Cedarapids facility.
During the third quarter of 2003, the Company recorded a severance charge of
$0.1 for future cash expenditures at its hydraulic crane production facility in
Waverly, Iowa. The Company has terminated six employees due to the integration
of the Terex-RO facility into Waverly. This charge has been recorded in cost of
goods sold.
All of the 2003 projects are expected to reduce annual operating costs by
approximately $15 in the aggregate when fully implemented.
2002 PROGRAMS
During 2002, the Company initiated a series of restructuring projects that
related to productivity and business rationalization. Restructuring programs
which began in 2002, but which were not completed prior to January 1, 2003,
include:
In the second quarter of 2002, the Company announced that its surface mining
truck production facility in Tulsa, Oklahoma would be closed and the production
activities outsourced to a third party supplier. The Company recorded a charge
of $4.2 related to the Tulsa closure. The closure was in response to continued
weakness in demand for the Company's mining trucks. Demand for mining trucks is
closely related to commodity prices, which have been declining in real terms
over recent years. Approximately $1.0 of this charge related to severance and
other employee related charges, while $2.2 of this charge relates to inventory
deemed uneconomical to relocate to other distribution facilities. The remaining
$1.0 of the cost accrued related to the Tulsa building closure costs and
occupancy costs expected to be incurred after production is ended. Approximately
93 positions have been eliminated as a result of this action. The transfer of
production activities to a third party was completed prior to December 31, 2002
and the Company is currently marketing the Tulsa property for sale.
Projects initiated in the fourth quarter of 2002 related to productivity and
business rationalization include the following:
o The closure of the Company's pressurized vessel container business.
This business, located in Clones, Ireland, provided pressurized
containers to the transportation industry. The business, acquired
as part of the Powerscreen acquisition in 1999, was part of the
Company's Construction segment and was not core to the Company's
overall strategy. The Company recorded a charge of $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
substantially complete as of September 30, 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 Mining and
Construction segments. The Company's review indicated that it was
not economical to continue its mining equipment rental business due
to the high cost of moving mining equipment between customers and
given the continued weak demand for mining products. In addition,
the Company decided to rationalize its large scraper offering in
its Mining segment given the weak demand for related mining
19
products. The Company recorded a charge of $6.9 associated with the
write down of inventory. The Company expects to complete this
process during 2004.
o The exit of certain non-core tower cranes produced by the Terex
Cranes segment under the Peiner brand in Germany. The European
tower crane business has been negatively impacted by reduced demand
from large rental customers who are undergoing financial
difficulties. This has resulted in reduced demand and deterioration
in margins recognized in the tower crane business. The Company
conducted a review of its offering of tower cranes produced under
the Peiner brand and eliminated certain models that overlap with
models produced at Gru Comedil S.r.l., the Company's tower crane
facility in Italy. The Company recorded a charge of $3.9, of which
$1.0 was for severance and $2.9 for inventory write-downs on
discontinued product lines. The program has reduced employment by
47 and was complete at September 30, 2003.
o The severance costs incurred in re-aligning the Company's
management structure. The Company eliminated an executive position
and recorded a charge of $1.5. The Company paid $0.4 prior to
December 31, 2002 and an additional $0.8 in 2003. The Company
expects to pay the remaining balance during the first half of 2004.
During the first quarter of 2004, the Company recorded an additional $2.7 of
charges in cost of goods sold related to programs begun in 2003 and 2002. These
period charges related to inventory write-downs and the effect of changes in
foreign exchange and were consistent with the initial restructuring plans
established by the Company.
The following table sets forth the components and status of the restructuring
charges recorded in the first quarter of 2004 that related to productivity and
business rationalization:
Employee Facility
Termination Asset Exit
Costs Disposals Costs Other Total
----------- --------- -------- ----- -----
Accrued restructuring charges at
December 31, 2003............. $ 0.1 $ --- $ 1.4 $ 1.3 $ 2.8
Restructuring charges........... --- 2.7 --- --- 2.7
Cash expenditures............... --- --- (0.4) (0.2) (0.6)
Non-cash charges................ --- (2.7) --- --- (2.7)
----------- --------- -------- ----- -----
Accrued restructuring charges at
March 31, 2004................ $ 0.1 $ --- $ 1.0 $ 1.1 $ 2.2
=========== ========= ======== ===== =====
In the aggregate, the restructuring charges described above incurred during the
three months ended March 31, 2004 and 2003 were included in cost of goods sold
($2.7 and $2.8) and selling, general and administrative expenses ($0.0 and
$0.3), respectively.
DEMAG AND GENIE ACQUISITION RELATED PROJECTS
During 2002, the Company also initiated a series of restructuring projects aimed
at addressing product, channel and production overlap created by the
acquisitions of Demag Mobile Cranes GmbH & Co. KG and its affiliates ("Demag")
and Genie Holdings, Inc. and its affiliates ("Genie") in 2002.
Projects initiated in the Terex Cranes segment in the fourth quarter of 2002,
but which were not completed prior to January 1, 2003, related to the
acquisition of Demag consist of:
o The elimination of certain PPM branded 3, 4 and 5 axle cranes
produced at the Company's Montceau, France facility. The Company
determined that the products produced under the PPM brand were
similar to products produced by Demag and has opted to eliminate
these PPM models in favor of the similar Demag products, which the
Company believes have superior capabilities. As a result,
employment levels in Montceau were reduced. As of June 30, 2003,
102 employees had ceased employment with the
20
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. The
Company expects this program to be completed by June 30, 2004.
o The rationalization of certain crawler crane products sold under
the American Crane brand in the United States. The acquisition of
Demag created an overlap with certain large crawler cranes produced
in the Company's Wilmington, North Carolina facility. Certain
cranes produced in the North Carolina facility will be rated for
reduced lifting capacity and marketed to a different class of user.
This change in marketing strategy, triggered by the acquisition of
Demag, negatively impacted inventory values. The Company recorded a
charge of $3.2 associated with the write down of inventory. The
Company completed the sale of such inventory during the fourth
quarter of 2003.
During the first quarter of 2004, the Company recorded an additional $0.8 of
charges related to programs begun in 2002. These period charges related to
inventory write-downs and the effect of changes in foreign exchange and were
consistent with the initial restructuring plans established by the Company.
There were no charges during the first quarter of 2004 related to the Genie
programs.
The following table sets forth the components and status of the restructuring
charges recorded in the first quarter of 2004 that relate to addressing product,
channel and production overlaps created by the acquisition of the Demag and
Genie businesses:
Employee
Termination Facility Exit
Costs Asset Disposals Costs Other Total
----------- --------------- ------------- ----- -----
Accrued restructuring charges at
December 31, 2003............. $ 1.0 $ --- $ 0.6 $ --- $ 1.6
Restructuring charges........... --- 0.8 --- --- 0.8
Cash expenditures............... --- --- --- --- ---
Non-cash charges................ --- (0.8) --- --- (0.8)
----------- --------------- ------------- ----- -----
Accrued restructuring charges at
March 31, 2004................ $ 1.0 $ --- $ 0.6 $ --- $ 1.6
=========== =============== ============= ===== =====
In the aggregate, the restructuring charges described above incurred during the
three months ended March 31, 2004 and 2003 were included in cost of goods sold
($0.8 and $0).
21
NOTE G -- INVENTORIES
Inventories consist of the following:
March 31, 2004 December 31, 2003
Restated Restated
-------------- -----------------
Finished equipment........ $ 408.3 $ 395.2
Replacement parts......... 265.5 250.6
Work-in-process........... 222.8 187.4
Raw materials and supplies 218.9 205.3
-------------- -----------------
Inventories............... $ 1,115.5 $ 1,038.5
============== =================
NOTE H -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, 2004 December 31, 2003
Restated Restated
-------------- -----------------
Property......................... $50.9 $ 51.7
Plant............................ 227.6 222.5
Equipment........................ 239.5 245.0
-------------- -----------------
518.0 519.2
Less: Accumulated depreciation... (174.9) (165.4)
-------------- -----------------
Net property, plant and equipment $ 343.1 $ 353.8
============== =================
NOTE I -- INVESTMENT IN JOINT VENTURE
In April 2001, Genie entered into a joint venture arrangement with a European
financial institution, pursuant to which Genie maintained a forty-nine percent
(49%) ownership interest in the joint venture, Genie Financial Services Holding
B.V. ("GFSH"). GFSH was established to facilitate the financing of Genie's
products sold in Europe. Genie contributed $4.7 in cash in exchange for its
ownership interest in GFSH. During January 2003 and 2002, Genie contributed an
additional $0.8 and $0.6, respectively, in cash to GFSH.
On January 1, 2004, the Company and its joint venture partner revised the
co-operation agreement and operating relationship with respect to GFSH. As part
of the reorganization, the name of the joint venture was changed to Terex
Financial Services Holding B.V. ("TFSH"), Genie's ownership interest in TFSH was
reduced to forty percent (40%), and Genie transferred this interest to another
Company subsidiary. In addition, the scope of TFSH's operations was broadened,
as it was granted the right to facilitate the financing of all of the Company's
products sold in Europe.
As of March 31, 2004, TFSH had total assets of $160.8, consisting primarily of
financing receivables and lease related equipment, and total liabilities of
$144.5, consisting primarily of debt issued by the joint venture partner. The
Company has provided guarantees related to potential losses arising from
shortfalls in the residual values of financed equipment or credit defaults by
the joint venture's customers. As of March 31, 2004, the maximum exposure to
loss under these guarantees was approximately $14. Additionally, the Company is
required to maintain a capital account balance in TFSH, pursuant to the terms of
the joint venture, which could result in the reimbursement to TFSH by the
Company of losses to the extent of the Company's ownership percentage.
As defined by FIN 46R, TFSH is a VIE. For entities created prior to February 1,
2003, FIN 46R requires the application of its provisions effective the first
reporting period after March 15, 2004. Based on the legal and operating
structure of TFSH, the Company has concluded that it is not the primary
beneficiary of TFSH and that it does not control the operations of TFSH.
Accordingly, the Company will not consolidate the results of TFSH into its
consolidated financial results. The Company applies the equity method of
accounting for its investment in TFSH.
22
NOTE J -- EQUIPMENT SUBJECT TO OPERATING LEASES
Operating leases arise from the leasing of the Company's products to customers.
Initial noncancellable lease terms typically range up to 84 months. The net book
value of equipment subject to operating leases was approximately $119 at March
31, 2004 and is included in "Other Assets" on the Company's Condensed
Consolidated Balance Sheet. The equipment is depreciated on the straight-line
basis over the shorter of the estimated useful life or the estimated
amortization period of any borrowings secured by the asset to its estimated
salvage value.
NOTE K -- 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 $21.9 at March 31,
2004. Under these agreements, the Company's recourse obligation is limited to
credit losses up to the first 5%, in any given year, of the remaining discounted
rental payments due, subject to certain minimum and maximum recourse liability
amounts. The Company's maximum credit recourse exposure was $15.0 at March 31,
2004, representing a contingent liability under the limited recourse provisions.
During 2003, Genie entered into a number of arrangements with financial
institutions to provide financing of new and eligible Genie products to
distributors and rental companies. Under these programs, Genie originates leases
or leasing opportunities with distributors and rental companies. If Genie
originates the lease with a distributor or rental company, the financial
institution will purchase the equipment and take assignment of the lease
contract from Genie. If Genie originates a lease opportunity, the financial
institution will purchase the equipment from Genie and execute a lease contract
directly with the distributor or rental company. In some instances, the Company
retains certain credit and/or residual recourse in these transactions. The
Company's maximum exposure, representing a contingent liability, under these
transactions reflects a $40.5 credit risk and a $36.4 residual value risk at
March 31, 2004.
The Company's contingent liabilities previously referred to have not taken into
account various mitigating factors. These factors include the staggered timing
of maturity of lease transactions, resale value of the underlying equipment,
lessee return penalties and annual loss caps on credit loss pools. Further, the
credit risk contingent liability assumes that the individual leases were to all
default at the same time and that the repossessed equipment has no market value.
23
NOTE L -- EARNINGS PER SHARE
For the
Three Months Ended March 31,
(in millions, except per share data)
----------------------------------------------------
2004 2003
Restated Restated
------------------------- -------------------------
Income Per-Share Income Per-Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ --------- ------ ------ ---------
Basic earnings per share
Net Income.......................... $ 18.7 48.8 $ 0.38 $ 9.5 47.2 $ 0.20
Effect of dilutive securities:
Stock Options....................... --- 2.0 --- 0.8
Shares held by deferred compensation
Plan.............................. --- --- --- 0.8
Contingently issuable shares for
acquisitions...................... --- --- --- 0.6
------ ------ ------ ------
Net Income........................... $ 18.7 50.8 $ 0.37 $ 9.5 49.4 $ 0.19
====== ====== ========= ====== ====== =========
Options to purchase 214 thousand and 2,169 thousand shares of Common Stock were
outstanding during the three months ended March 31, 2004 and 2003, respectively,
but were not included in the computation of diluted shares. These options were
excluded because the exercise price of these options was greater than the
average market price of the Common Stock during such periods and, therefore, the
effect would be anti-dilutive. As discussed in Note C -- "Acquisitions", the
Company has a contingent obligation to make additional payments in cash or
Common Stock based on provisions of certain acquisition agreements. The
Company's policy and past practice has been generally to settle such obligations
in cash. Accordingly, contingently issuable Common Stock under these
arrangements totaling 772 thousand shares for the three months ended March 31,
2003 are not included in the computation of diluted earnings per share. At March
31, 2004, due to the market price of the Company's Common Stock, there were no
contingently issuable shares under these arrangements included in the
computation of diluted earnings per share for the three months ended March 31,
2004.
NOTE M -- INCOME TAXES
The effective tax rate increased from (346.9%) for the year ended December 31,
2003 to 22.1% in the first quarter of 2004 due mainly to: (a) the fact that the
2003 rate includes the impact of a valuation allowance recorded in 2003 for
certain U.S. net deferred tax assets, as it was determined that it was more
likely than not that the asset would not be realized; (b) a goodwill impairment
charge recorded during the second quarter of 2003 that is partially
non-deductible for income tax purposes; (c) the benefit from the release of
valuation allowances due to the Company's German operations indicating that it
was more likely than not that the Company would realize the benefits of certain
tax assets; and (d) during the first quarter of 2004, the Company successfully
resolved a statutory review. The effective tax rate for the three months ended
March 31, 2003 was 30.7%, as compared to the effective rate of (346.9%) for the
year ended December 31, 2003, mainly due to the significant events in 2003 that
are mentioned above.
Excluding the impact of the valuation allowance taken on the U.S. deferred tax
asset of $200.7, the effective rate for the year ended December 31, 2003 would
have been 48.9%.
NOTE N -- STOCKHOLDERS' EQUITY
Total non-stockowner changes in equity (comprehensive income) include all
changes in equity during a period except those resulting from investments by,
and distributions to, stockowners. The specific components include: net income,
deferred gains and losses resulting from foreign currency translation, minimum
pension liability
24
adjustments, deferred gains and losses resulting from derivative hedging
transactions and deferred gains and losses resulting from debt and equity
securities classified as available for sale. Total non-stockowner changes in
equity were as follows.
For the Three Months
Ended March 31,
-------------------------------
2004 2003
Restated Restated
-------------- --------------
Net income................................................. $ 18.7 $ 9.5
Other comprehensive income (loss):
Translation adjustment.............................. (8.7) 5.3
Pension liability adjustment........................ 0.2 0.2
Derivative hedging adjustment....................... (3.8) (1.3)
-------------- -------------
Comprehensive income (loss)................................ $ 6.4 $ 13.7
============== =============
As disclosed in "Note C -- Acquisitions", the Company also issued approximately
0.2 million shares and 0.6 million shares of its Common Stock during the three
months ended September 30, 2003 and March 31, 2003 in connection with the
acquisitions of Tatra and Commercial Body, respectively.
NOTE O -- LITIGATION AND CONTINGENCIES
In the Company's lines of business numerous suits have been filed alleging
damages for accidents that have arisen in the normal course of operations
involving the Company's products. The Company is self-insured, up to certain
limits, for these product liability exposures, as well as for certain exposures
related to general, workers' compensation and automobile liability. Insurance
coverage is obtained for catastrophic losses as well as those risks required to
be insured by law or contract. The Company has recorded and maintains an
estimated liability in the amount of management's estimate of the Company's
aggregate exposure for such self-insured risks. For self-insured risks, the
Company determines its exposure based on probable loss estimations, which
requires such losses to be both probable and the amount or range of possible
loss to be estimable. Management does not believe that the final outcome of such
matters will have a material adverse effect on the Company's financial position.
The Company is involved in various other legal proceedings which have arisen in
the normal course of its operations. The Company has recorded provisions for
estimated losses in circumstances where a loss is probable and the amount or
range of possible amounts of the loss is estimable.
The Company's outstanding letters of credit totaled $84.3 at March 31, 2004. The
letters of credit generally serve as collateral for certain liabilities included
in the Condensed Consolidated Balance Sheet. Certain of the letters of credit
serve as collateral guaranteeing the Company's performance under contracts.
The Company has a letter of credit outstanding covering losses related to two
former subsidiaries' worker compensation obligations. The Company has recorded
liabilities for these contingent obligations representing management's estimate
of the potential losses which the Company might incur.
In the third quarter of 2002, the Company obtained a favorable court judgment on
appeal as the defendant in a patent infringement case brought against the Terex
Construction segment's Powerscreen business. This favorable court judgment
reversed a lower court decision for which the Company had previously recorded a
liability. During the first quarter of 2003, amounts previously paid for the
litigation were returned to the Company. As a result, the Company recorded $2.4
of income in "Other income (expense) -- net" in the Condensed Consolidated
Statement of Operations during the first quarter of 2003.
Credit Guarantees
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company,
25
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 a customer default, the Company is generally able to dispose of the
equipment with the Company realizing the benefits of any net proceeds in excess
of the remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4. The terms of these guarantees coincide with the financing arranged
by the customer and generally does not exceed five years. Given the Company's
position as the original equipment manufacturer and its knowledge of end
markets, the Company, when called upon to fulfill a guarantee, generally has
been able to liquidate the financed equipment at a minimal loss, if any, to the
Company.
Residual Value and Buyback Guarantees
The Company, through its Genie subsidiary, issues residual value guarantees
under sales-type leases. A residual value guarantee involves a guarantee that a
piece of equipment will have a minimum fair market value at a future point in
time. As described in Note K -- "Net Investment in Sales-Type Leases," the
Company's maximum exposure related to residual value guarantees under sales-type
leases is $36.4 at March 31, 2004. The Company is able to mitigate the risk
associated with these guarantees because the maturity of these guarantees is
staggered, which limits the amount of used equipment entering the marketplace at
any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. These conditions generally pertain to the functionality and state of
repair of the machine. Such guarantees are referred to as buyback guarantees. As
of March 31, 2004, the Company's maximum exposure to buyback guarantees is
$49.1. The Company is able to mitigate the risk of these guarantees by
staggering the timing of the buybacks and through leveraging its access to the
used equipment markets provided by the Company's original equipment manufacturer
status.
The Company has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" of approximately $10 for the
estimated fair value of all guarantees provided as of March 31, 2004.
NOTE P -- RETIREMENT PLANS AND OTHER BENEFITS
Pension Plans
U.S. Plans - As of March 31, 2004, the Company maintained four defined benefit
pension plans covering certain domestic employees (the "Terex Plans"). The
benefits for the plans covering the salaried employees are based primarily on
years of service and employees' qualifying compensation during the final years
of employment. Participation in the plans for salaried employees was frozen on
or before October 15, 2000, and no participants will be credited with service
following such dates except that participants not fully vested were credited
with service for purposes of determining vesting only. The benefits for the
plans covering the hourly employees are based primarily on years of service and
a flat dollar amount per year of service. It is the Company's policy generally
to fund the Terex Plans based on the minimum requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Plan assets consist primarily
of common stocks, bonds, and short-term cash equivalent funds.
The Company adopted a Supplemental Executive Retirement Plan ("SERP") effective
October 1, 2002. The SERP provides retirement benefits to certain senior
executives of the Company. Generally, the SERP provides a benefit based on
average total compensation and years of service reduced by benefits earned under
other Company funded retirement programs, including Social Security. The SERP is
unfunded.
Other Postemployment Benefits
The Company has five nonpension postretirement benefit plans. The health care
plans are contributory with participants' contributions adjusted annually; the
life insurance plan is noncontributory. The Company provides postemployment
health and life insurance benefits to certain former salaried and hourly
employees of Terex Cranes-
26
Waverly Operations (also known as Koehring Cranes, Inc.), Cedarapids and
Simplicity Engineering. The Company adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," on January 1, 1993. This
statement requires accrual of postretirement benefits (such as health care
benefits) during the years an employee provides service. Terex adopted the
provisions of SFAS No. 106 using the delayed recognition method, whereby the
amount of the unrecognized transition obligation at January 1, 1993 is
recognized prospectively as a component of future years' net periodic
postretirement benefit expense. The unrecognized transition obligation at
January 1, 1993 was $4.5. Terex is amortizing this transition obligation over 12
years, the average remaining life expectancy of the participants.
Pension Benefits Other Benefits
--------------------------- ------------------------
For the Three Months Ended For the Three Months
March 31, Ended March 31,
--------------------------- ------------------------
2004 2003 2004 2003
------- -------- -------- --------
Weighted-average assumptions:
Discount rate................................. 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets................ 8.00% 8.00% --- ---
Rate of compensation increase................. 4.00% 5.00% --- ---
Pension Benefits Other Benefits
--------------------------- ------------------------
For the Three Months Ended For the Three Months
March 31, Ended March 31,
--------------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- ----------
Components of net periodic cost:
Service cost................................................ $ 0.3 $ 0.2 $ --- $ ---
Interest cost............................................... 1.8 1.8 0.2 0.2
Expected return on plan assets.............................. (1.9) (1.7) --- ---
Amortization of prior service cost.......................... 0.2 0.1 --- ---
Amortization of transition obligation....................... --- --- 0.1 0.1
Recognized actuarial (gain) loss............................ 0.6 0.6 0.1 0.1
----------- ----------- ----------- ---------
Net periodic cost (benefit).................................... $ 1.0 $ 1.0 $ 0.4 $ 0.4
=========== =========== =========== =========
The Company plans to contribute approximately $3 to its U.S. defined benefit
pension plans in 2004. During the three months ended March 31, 2004, the Company
contributed $0.2 to its U.S. defined benefit pension plans.
International Plans -- Terex Equipment Limited maintains a government-required
defined benefit plan (which includes certain defined contribution elements)
covering substantially all of its management employees. Terex Aerials Limited
(Ireland) maintains two voluntary defined benefit plans covering its employees.
PPM SAS maintains an unfunded noncontributory defined benefit plan covering
substantially all of its employees. O&K Mining maintains an unfunded
noncontributory defined benefit plan covering substantially all of its
employees. Fermec maintains a voluntary defined benefit pension plan covering
substantially all of its employees. Atlas maintains an unfunded noncontributory
defined benefit plan covering substantially all of its employees in Germany.
Additionally, Atlas maintains a government required defined benefit plan for its
employees in Scotland. Demag maintains two unfunded noncontributory defined
benefit plans covering substantially all of its employees in Germany.
27
Pension Benefits
------------------------------------
For the Three Months Ended March 31,
------------------------------------
2004 2003
--------------- ------------
The range of assumptions:
Discount rate.......................................... 5.50%--6.00% 5.75%--6.00%
Expected return on plan assets......................... 2.00%--6.50% 2.00%--7.00%
Rate of compensation increase.......................... 2.75%--4.00% 3.75%--4.25%
Pension Benefits
----------------------------
For the Three Months
Ended March 31,
----------------------------
2004 2003
------------- -------------
Components of net periodic cost:
Service cost.................................................................... $ 1.0 $ 0.9
Interest cost................................................................... 3.1 2.7
Expected return on plan assets.................................................. (1.1) (0.9)
Recognized actuarial (gain) loss................................................ 0.1 0.2
------------- -------------
Net periodic cost.................................................................. $ 3.1 $ 2.9
============= =============
The Company plans to contribute approximately $10 to its international defined
benefit pension plans in 2004. During the three months ended March 31, 2004, the
Company contributed $3.5 to its international defined benefit pension plans.
NOTE Q -- BUSINESS SEGMENT INFORMATION
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
The Company operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Mining; and (v)
Terex Roadbuilding, Utility Products and Other.
The Terex Construction segment designs, manufactures and markets three primary
categories of equipment and their related components and replacement parts:
heavy construction equipment (including off-highway trucks and scrapers),
compact equipment (including loader backhoes, compaction equipment, mini and
midi excavators, loading machines, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing screens and trommels). These products are primarily used
by construction, logging, mining, industrial and government customers in
construction and infrastructure projects and supplying coal, minerals, sand and
gravel. Terex Construction products are currently marketed principally under the
following brand names: Terex, Atlas, Finlay, Fuchs, Pegson, Powerscreen,
Benford, Fermec, Schaeff and TerexLift. The Company's strategy going forward is
to build the Terex brand. As part of that effort, Terex will, over time, be
migrating historic brand names to Terex and may include the use of the historic
brand name in conjunction with the Terex brand for a transitional period of
time.
The Terex Cranes segment designs, manufactures and markets mobile telescopic
cranes, tower cranes, lattice boom crawler cranes, truck mounted cranes (boom
trucks) and telescopic container stackers, as well as their related replacement
parts and components. These products are used primarily for construction, repair
and maintenance of infrastructure, building and manufacturing facilities.
Currently, Terex Cranes products are marketed principally under the following
brand names: Terex, American, Bendini, Comedil, Demag, Franna, Lorain, P&H,
Peiner, PPM and RO-Stinger. The Company's strategy going forward is to build the
Terex brand. As part of that effort, Terex
28
will, over time, be migrating historic brand names to Terex and may include the
use of the historic brand name in conjunction with the Terex brand for a
transitional period of time.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie and its affiliates on September 18, 2002. The Terex
Aerial Work Platforms segment designs, manufactures and markets aerial work
platform equipment and telehandlers. Products include material lifts, portable
aerial work platforms, trailer mounted booms, articulating booms, stick booms,
scissor lifts, telehandlers, related components and replacement parts, and other
products. These products are used primarily by customers in the construction and
building maintenance industries to lift people and/or equipment as required to
build and/or maintain large physical assets and structures. Terex Aerial Work
Platforms products currently are marketed principally under the Genie and Terex
brand names.
The Terex Mining segment designs, manufactures and markets large hydraulic
excavators and high capacity surface mining trucks, related components and
replacement parts, and other products. These products are used primarily by
construction, mining, quarrying and government customers in construction,
excavation and supplying coal and minerals. Currently, Terex Mining products are
marketed principally under the following brand names: O&K, Payhauler, Terex and
Unit Rig. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex will, over time, be migrating historic brand names to
Terex and may include the use of the historic brand name in conjunction with the
Terex brand for a transitional period of time.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets fixed installation crushing and screening equipment (including
crushers, impactors, screens and feeders), asphalt and concrete equipment
(including pavers, plants, mixers, reclaimers, stabilizers and profilers),
utility equipment (including digger derricks, aerial devices and cable placers),
light construction equipment (including light towers, trowels, power buggies,
generators and arrow boards), construction trailers and on/off road heavy-duty
vehicles, as well as related components and replacement parts. These products
are used primarily by government, utility and construction customers to build
roads, maintain utility lines, trim trees and for commercial and military
applications. These products are currently marketed principally under the
following brand names: Terex, Advance, American Truck Company, Amida, ATC,
Bartell, Benford, Bid-Well, Canica, Cedarapids, Cedarapids/Standard Havens, CMI
Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Jaques, Load King,
Morrison, Re-Tech, Royer, Simplicity, Tatra, Terex Power, Terex Recycling and
Terex Telelect. The Company's strategy going forward is to build the Terex
brand. As part of that effort, Terex will, over time, be migrating historic
brand names to Terex and may include the use of the historic brand name in
conjunction with the Terex brand for a transitional period of time. Terex also
owns much of the North American distribution channel for the utility products
group through the distributors Terex Utilities South and Terex Utilities West.
These operations distribute and install the Company's utility aerial devices as
well as other products that service the utility industry. The Company also
operates a fleet of rental utility products under the name of Terex Utilities
Rental. The Company also leases and rents a variety of heavy equipment to third
parties under the Terex Re-Rentals brand name. The Company, through Terex
Financial Services, Inc., also offers customers loans and leases originated by
General Electric Capital Corporation Vendor Financial Services to assist in the
acquisition of the Company's products.
The results of businesses acquired during 2003 are included from the dates of
their respective acquisitions.
29
Included in Eliminations/Corporate are the eliminations among the five segments,
as well as general and corporate items for the three months ended March 31, 2004
and 2003. Business segment information is presented below:
For the Three Months
Ended March 31,
--------------------------
2004 2003
Restated Restated
------------ -------------
Sales
Terex Construction.............................................................. $ 401.1 $ 316.7
Terex Cranes.................................................................... 210.8 254.4
Terex Aerial Work Platforms..................................................... 168.0 147.2
Terex Mining.................................................................... 73.5 78.8
Terex Roadbuilding, Utility Products and Other.................................. 216.5 151.0
Eliminations/Corporate.......................................................... (10.5) (13.7)
------------ -------------
Total....................................................................... $ 1,059.4 $ 934.4
============ =============
Income (Loss) from Operations
Terex Construction.............................................................. $ 16.8 $ 14.3
Terex Cranes.................................................................... 6.5 6.5
Terex Aerial Work Platforms..................................................... 20.3 15.4
Terex Mining.................................................................... 2.0 4.5
Terex Roadbuilding, Utility Products and Other.................................. 5.0 (0.8)
Eliminations/Corporate.......................................................... (2.7) (2.3)
------------ -------------
Total....................................................................... $ 47.9 $ 37.6
============ =============
March 31, December
2004 31, 2003
Restated Restated
------------- ---------------
Identifiable Assets
Terex Construction........................................................... $ 1,500.1 $ 1,433.8
Terex Cranes................................................................. 903.0 903.6
Terex Aerial Work Platforms.................................................. 462.4 448.6
Terex Mining................................................................. 447.5 444.7
Terex Roadbuilding, Utility Products and Other............................... 681.1 641.1
Corporate.................................................................... 1,829.0 1,803.7
Eliminations................................................................. (2,165.8) (2,121.3)
------------- ---------------
Total...................................................................... $ 3,657.3 $ 3,554.2
============= ===============
NOTE R -- CONSOLIDATING FINANCIAL STATEMENTS
On November 25, 2003, the Company sold and issued $300 aggregate principal
amount of 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8% Notes"). On
March 29, 2001, the Company sold and issued $300 aggregate principal amount of
10-3/8% Senior Subordinated Notes due 2011 (the "10-3/8% Notes"). On December
17, 2001, the Company sold and issued $200 aggregate principal amount of 9-1/4%
Senior Subordinated Notes due 2011 (the "9-1/4% Notes"). As of March 31, 2004,
the 7-3/8% Notes, the 10-3/8% Notes and the 9-1/4% Notes were each jointly and
severally guaranteed by the following wholly-owned subsidiaries of the Company
(the "Wholly-owned Guarantors"): Amida Industries, Inc., Benford America, Inc.,
BL-Pegson USA, Inc., Cedarapids, Inc., CMI Dakota Company, CMI Terex
Corporation, CMIOIL Corporation, EarthKing, Inc., Finlay Hydrascreen USA, Inc.,
Fuchs Terex, Inc., Genie Access Services, Inc., Genie China, Inc., Genie
Financial Services, Inc., Genie Holdings, Inc., Genie Industries, Inc., Genie
International, Inc., Genie Manufacturing, Inc., GFS Commercial LLC, GFS
National, Inc., Go Credit Corporation, Koehring Cranes, Inc., Lease Servicing &
Funding Corp., O & K Orenstein & Koppel, Inc., Payhauler Corp., Powerscreen
Holdings USA Inc., Powerscreen International LLC, Powerscreen North America
Inc., Powerscreen USA, LLC, PPM Cranes, Inc., Product Support, Inc., Royer
Industries, Inc.,
30
Schaeff Incorporated, Spinnaker Insurance Company, Standard Havens, Inc.,
Standard Havens Products, Inc., Terex Advance Mixer, Inc., Terex Bartell, Inc.,
Terex Cranes, Inc., Terex Financial Services, Inc., Terex Mining Equipment,
Inc., Terex Utilities, Inc., Terex Utilities South, Inc., Terex-RO Corporation,
Terex-Telelect, Inc., The American Crane Corporation, and Utility Equipment,
Inc. All of the guarantees are full and unconditional.
No subsidiaries of the Company except the Wholly-owned Guarantors have provided
a guarantee of the 7-3/8% Notes, the 10-3/8% Notes and the 9-1/4% Notes.
The following summarized condensed consolidating financial information for the
Company segregates the financial information of Terex Corporation, the
Wholly-owned Guarantors and the Non-guarantor Subsidiaries. The results of
businesses acquired 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.
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 (RESTATED)
(IN MILLIONS)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Net sales.................................. $ 80.2 $ 384.8 $ 649.8 $ (55.4) $ 1,059.4
Cost of goods sold........................ 73.2 332.9 548.3 (55.4) 899.0
----------- ---------- ------------ ------------ ------------
Gross profit............................... 7.0 51.9 101.5 --- 160.4
Selling, general & administrative expenses (8.1) (33.2) (71.2) --- (112.5)
----------- ---------- ------------ ------------ ------------
Income (loss) from operations.............. (1.1) 18.7 30.3 --- 47.9
Interest income........................... 0.2 (0.5) 1.3 --- 1.0
Interest expense.......................... 1.8 (12.9) (11.4) --- (22.5)
Income (loss) from equity investees....... 15.8 --- --- (15.8) ---
Other income (expense) -- net............. 1.1 (0.8) (2.7) --- (2.4)
----------- ---------- ------------ ------------ ------------
Income (loss) before income taxes.......... 17.8 4.5 17.5 (15.8) 24.0
Benefit from (provision for) income taxes. 0.9 (0.4) (5.8) --- (5.3)
----------- ---------- ------------ ------------ ------------
Net income (loss).......................... $ 18.7 $ 4.1 $ 11.7 $ (15.8) $ 18.7
=========== ========== ============ ============ ============
31
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 (RESTATED)
(IN MILLIONS)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Net sales.................................. $ 63.8 $ 349.1 $ 568.5 $ (47.0) $ 934.4
Cost of goods sold........................ 60.3 305.8 488.5 (47.0) 807.6
----------- ---------- ------------ ------------ ------------
Gross profit............................... 3.5 43.3 80.0 --- 126.8
Selling, general & administrative expenses (6.6) (30.4) (52.2) --- (89.2)
----------- ---------- ------------ ------------ ------------
Income (loss) from operations.............. (3.1) 12.9 27.8 --- 37.6
Interest income........................... 0.3 0.2 1.2 --- 1.7
Interest expense.......................... (6.9) (6.5) (12.5) --- (25.9)
Income (loss) from equity investees....... 14.3 --- --- (14.3) ---
Other income (expense) -- net............. (1.8) (0.8) 2.9 --- 0.3
----------- ---------- ------------ ------------ ------------
Income (loss) before income taxes.......... 2.8 5.8 19.4 (14.3) 13.7
Benefit from (provision for) income taxes. 6.7 (2.8) (8.1) --- (4.2)
----------- ---------- ------------ ------------ ------------
Net income (loss).......................... $ 9.5 $ 3.0 $ 11.3 $ (14.3) $ 9.5
=========== ========== ============ ============ ============
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2004
(RESTATED)
(IN MILLIONS)
Wholly Non
Terex Owned Guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents.......................... $ 139.6 $ 5.8 $ 262.6 $ --- $ 408.0
Trade receivables -- net........................... 23.2 133.0 439.0 --- 595.2
Intercompany receivables........................... 17.4 17.4 30.1 (64.9) ---
Net inventories.................................... 75.5 304.8 718.1 17.1 1,115.5
Other current assets............................... 41.7 22.7 136.1 --- 200.5
----------- ---------- ------------ ------------ ------------
Total current assets ............................ 297.4 483.7 1,585.9 (47.8) 2,319.2
Property, plant & equipment -- net................. 0.2 100.1 242.8 --- 343.1
Investment in and advances to (from) subsidiaries.. 929.5 (359.9) (261.2) (308.4) ---
Goodwill -- net.................................... 13.7 208.2 401.8 --- 623.7
Other assets -- net................................ (47.6) 192.3 226.6 --- 371.3
----------- ---------- ------------ ------------ ------------
Total assets ......................................... $ 1,193.2 $ 624.4 $ 2,195.9 $ (356.2) $ 3,657.3
=========== ========== ============ ============ ============
Liabilities and stockholders' equity (deficit)
Current liabilities
Notes payable and current portion of long-term debt $ 0.1 $ 30.9 $ 65.8 $ --- $ 96.8
Trade accounts payable............................. 31.6 160.0 499.6 --- 691.2
Intercompany payables.............................. 25.4 (85.0) 124.5 (64.9) ---
Accruals and other current liabilities............. 51.5 94.3 326.4 --- 472.2
----------- ---------- ------------ ------------ ------------
Total current liabilities ....................... 108.6 200.2 1,016.3 (64.9) 1,260.2
Long-term debt less current portion ................. 282.0 402.1 595.3 --- 1,279.4
Other long-term liabilities ......................... 99.5 41.5 273.6 --- 414.6
Stockholders' equity (deficit) ...................... 703.1 (19.4) 310.7 (291.3) 703.1
----------- ---------- ------------ ------------ ------------
Total liabilities and stockholders'equity (deficit) .. $ 1,193.2 $ 624.4 $ 2,195.9 $ (356.2) $ 3,657.3
=========== ========== ============ ============ ============
32
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........................... 28.5 107.2 373.6 --- 509.3
Intercompany receivables........................... 11.7 14.0 18.0 (43.7) ---
Net 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
=========== ========== ============ ============ ============
33
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 (RESTATED)
(IN MILLIONS)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities.................. $ (12.5) $ 9.5 $ (61.4) $ --- $ (64.4)
----------- ---------- ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired.............................. (0.6) (0.5) --- --- (1.1)
Capital expenditures................... (0.1) (3.2) (5.6) --- (8.9)
Proceeds from sale of assets........... --- 0.3 0.5 --- 0.8
----------- ---------- ------------ ------------ ------------
Net cash used in investing
activities......................... (0.7) (3.4) (5.1) --- (9.2)
----------- ---------- ------------ ------------ ------------
Cash flows from financing activities:
Principal borrowings (repayments) of
long-term debt....................... --- --- --- --- ---
Proceeds from stock options exercised.. 4.1 --- --- --- 4.1
Net borrowings (repayments) under
revolving line of credit agreements.. --- (0.5) 14.5 --- 14.0
Other.................................. --- (2.6) (0.8) --- (3.4)
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities............... 4.1 (3.1) 13.7 --- 14.7
----------- ---------- ------------ ------------ ------------
Effect of exchange rates on cash and
cash equivalents..................... --- --- (0.6) --- (0.6)
----------- ---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents........................... (9.1) 3.0 (53.4) --- (59.5)
Cash and cash equivalents, beginning of
period............................... 148.7 2.8 316.0 --- 467.5
----------- ---------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 139.6 $ 5.8 $ 262.6 $ --- $ 408.0
=========== ========== ============ ============ ============
34
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 (RESTATED)
(IN MILLIONS)
Wholly- Non-
Terex owned guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------
Net cash provided by operating
activities............................ $ 18.5 $ 8.1 $ 88.2 $ --- $ 114.8
----------- ---------- ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired ............................ --- (8.5) --- --- (8.5)
Capital expenditures .................. (0.4) (1.2) (7.0) --- (8.6)
Proceeds from sale of assets .......... --- 0.9 1.7 --- 2.6
----------- ---------- ------------ ------------ ------------
Net cash used in investing
activities........................ (0.4) (8.8) (5.3) --- (14.5)
----------- ---------- ------------ ------------ ------------
Cash flows from financing activities:
Principal borrowings (repayments) of
long-term debt ...................... --- (0.5) (1.0) --- (1.5)
Net borrowings (repayments) under
revolving line of credit agreements . --- (1.1) (21.4) --- (22.5)
Other ................................. --- --- (11.6) --- (11.6)
----------- ---------- ------------ ------------ ------------
Net cash used in financing
activities........................ --- (1.6) (34.0) --- (35.6)
----------- ---------- ------------ ------------ ------------
Effect of exchange rates on cash and
cash equivalents...................... --- --- 2.9 --- 2.9
----------- ---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents........................... 18.1 (2.3) 51.8 --- 67.6
Cash and cash equivalents, beginning of
period................................ 134.0 6.2 212.0 --- 352.2
----------- ---------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 152.1 $ 3.9 $ 263.8 $ --- $ 419.8
=========== ========== ============ ============ ============
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the items mentioned in the Explanatory Note and Note B of the Notes
to Condensed Consolidated Financial Statements, no attempt has been made in this
Form 10-Q/A to modify or update other disclosures presented in the original
report on Form 10-Q except as required to reflect the effects of the
restatement. Accordingly, this Form 10-Q/A, including the financial statements
and notes thereto included herein, does not reflect events occurring after the
date of the original filing of the Form 10-Q or modify or update those
disclosures affected by subsequent events, except for the items mentioned in the
Explanatory Note and Note B of the Notes to Condensed Consolidated Financial
Statements. Consequently, all other information not affected by the restatement
is unchanged and reflects the disclosures made at the time of the original
filing of the Form 10-Q on May 7, 2004. For a description of subsequent events,
this Form 10-Q/A should be read in conjunction with Terex's filings made
subsequent to the filing of the original Form 10-Q including the Company's
amended Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004, the
Company's Current Reports on Form 8-K, and any filings to be made by the Company
to reflect the impact of the restatement of its financial statements discussed
herein.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company is restating its financial statements for the years ended December
31, 2003. 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. During the
period ended March 31, 2004, the impact of this valuation allowance required a
reversal of the tax expense on the U.S. pre-tax income in the period ended March
31, 2004, requiring the Company to restate its financial statements for such
period. Additionally, the Company has adjusted its tax accounts for errors
identified for the period ended March 31, 2004 and in all prior periods
presented in this Quarterly Report on Form 10-Q/A.
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 Note B -- "Restatement of Consolidated
Financial Statements" in the Notes to Condensed Consolidated Financial
Statements included herein. 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.
36
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 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 cost 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 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 stockholder's 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.
37
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,
Inc. 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.
o Errors were identified by the Company in its accounting for income taxes
related to goodwill and tax contingencies.
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 Part I, Item 4, "Controls and Procedures," of this Form 10-Q/A for further
information on the Company's actions.
All amounts presented below have been adjusted to reflect the restatement.
RESULTS OF OPERATIONS
Terex is a diversified global manufacturer of a broad range of equipment
primarily for the construction, infrastructure and surface mining industries.
The Company operates in five business segments: (i) Terex Construction; (ii)
Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Mining; and (v)
Terex Roadbuilding, Utility Products and Other.
The Terex Construction segment designs, manufactures and markets three primary
categories of equipment and their related components and replacement parts:
heavy construction equipment (including off-highway trucks and scrapers),
compact equipment (including loader backhoes, compaction equipment, mini and
midi excavators, loading machines, site dumpers, telehandlers and wheel
loaders); and mobile crushing and screening equipment (including jaw crushers,
cone crushers, washing screens and trommels). These products are primarily used
by construction, logging, mining, industrial and government customers in
construction and infrastructure projects and supplying coal, minerals, sand and
gravel. Terex Construction products are currently marketed principally under the
following brand names: Terex, Atlas, Finlay, Fuchs, Pegson, Powerscreen,
Benford, Fermec, Schaeff and TerexLift. The Company's strategy going forward is
to build the Terex brand. As part of that effort, Terex will, over time, be
migrating historic brand names to Terex and may include the use of the historic
brand name in conjunction with the Terex brand for a transitional period of
time.
The Terex Cranes segment designs, manufactures and markets mobile telescopic
cranes, tower cranes, lattice boom crawler cranes, truck mounted cranes (boom
trucks) and telescopic container stackers, as well as their related replacement
parts and components. These products are used primarily for construction, repair
and maintenance of infrastructure, building and manufacturing facilities.
Currently, Terex Cranes products are marketed principally under the following
brand names: Terex, American, Bendini, Comedil, Demag, Franna, Lorain, P&H,
Peiner, PPM and RO-Stinger. The Company's strategy going forward is to build the
Terex brand. As part of that effort, Terex will, over time, be migrating
historic brand names to Terex and may include the use of the historic brand name
in conjunction with the Terex brand for a transitional period of time.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie Holdings, Inc. and its affiliates ("Genie") on
September 18, 2002. The Terex Aerial Work Platforms segment designs,
manufactures and markets aerial work platform equipment and telehandlers.
Products include material lifts,
38
portable aerial work platforms, trailer mounted booms, articulating booms, stick
booms, scissor lifts, telehandlers, related components and replacement parts,
and other products. These products are used primarily by customers in the
construction and building maintenance industries to lift people and/or equipment
as required to build and/or maintain large physical assets and structures. Terex
Aerial Work Platforms products currently are marketed principally under the
Genie and Terex brand names.
The Terex Mining segment designs, manufactures and markets large hydraulic
excavators and high capacity surface mining trucks, related components and
replacement parts, and other products. These products are used primarily by
construction, mining, quarrying and government customers in construction,
excavation and supplying coal and minerals. Currently, Terex Mining products are
marketed principally under the following brand names: O&K, Payhauler, Terex and
Unit Rig. The Company's strategy going forward is to build the Terex brand. As
part of that effort, Terex will, over time, be migrating historic brand names to
Terex and may include the use of the historic brand name in conjunction with the
Terex brand for a transitional period of time.
The Terex Roadbuilding, Utility Products and Other segment designs, manufactures
and markets fixed installation crushing and screening equipment (including
crushers, impactors, screens and feeders), asphalt and concrete equipment
(including pavers, plants, mixers, reclaimers, stabilizers and profilers),
utility equipment (including digger derricks, aerial devices and cable placers),
light construction equipment (including light towers, trowels, power buggies,
generators and arrow boards), construction trailers and on/off road heavy-duty
vehicles, as well as related components and replacement parts. These products
are used primarily by government, utility and construction customers to build
roads, maintain utility lines, trim trees and for commercial and military
operations. These products are currently marketed principally under the
following brand names: Terex, Advance, American Truck Company, Amida, ATC,
Bartell, Benford, Bid-Well, Canica, Cedarapids, Cedarapids/Standard Havens, CMI
Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Jaques, Load King,
Morrison, Re-Tech, Royer, Simplicity, Tatra, Terex Power, Terex Recycling and
Terex Telelect. The Company's strategy going forward is to build the Terex
brand. As part of that effort, Terex will, over time, be migrating historic
brand names to Terex, and may include the use of the historic brand name in
conjunction with the Terex brand name for a transitional period of time. Terex
also owns much of the North American distribution channel for the utility
products group through the distributors Terex Utilities South and Terex
Utilities West. These operations distribute and install the Company's utility
aerial devices as well as other products that service the utility industry. The
Company also operates a fleet of rental utility products under the name Terex
Utilities Rental. The Company also leases and rents a variety of heavy equipment
to third parties under the Terex Re-Rentals brand name. The Company, through
Terex Financial Services, Inc. ("TFS"), also offers customers loans and leases
originated by General Electric Capital Corporation Vendor Services to assist in
the acquisition of all of the Company's products. On February 14, 2003, the
Company acquired Commercial Body Corporation ("Commercial Body") and Combatel
Distribution, Inc. ("Combatel"). On August 28, 2003 the Company acquired an
additional 51% of the outstanding shares of TATRA a.s. ("Tatra"), for a total of
71% ownership, and acquired a controlling interest in American Truck Company
("ATC"). The results of Commercial Body, Combatel, Tatra and ATC are included in
the results of the Terex Roadbuilding, Utility Products and Other segment from
their respective dates of acquisition.
Included in Eliminations/Corporate are the eliminations of intercompany activity
among the five segments, as well as general and corporate items.
OVERVIEW
The Company is a diversified global manufacturer of capital equipment serving
the construction, infrastructure and surface mining markets. Terex's strategy is
to use its position as a low fixed and total cost manufacturer to provide its
customers with the best return on their capital investment.
In the first quarter of 2004, the Company noted improved economic conditions in
many end-markets as the Company's backlog increased in substantially all of its
businesses. Recent acquisitions, such as Genie and Demag Mobile Cranes GmbH &
Co. KG and affiliates ("Demag"), made positive contributions, while tight
end-markets and currency moves (particularly the weakness of the U.S. dollar
relative to other currencies in which the Company does business) negatively
impacted the Company's financial performance. Overall, during the first quarter
of 2004, the Company experienced a strengthened backlog and moderate revenue
growth. Backlog increased $316 million, or 66%, compared to the first quarter of
2003.
39
The Company anticipates a mix of end market conditions for the remainder of
2004, with certain products anticipating recovering markets and others expecting
continued sluggish markets. For example, the Company sees opportunities for
growth in the Construction and Aerial Work Platforms businesses resulting from
initial signs of economic recovery, and in the Mining business based on
recovering commodity prices; however, the Company envisions a continued weak
North American crane market and difficult end markets for the Roadbuilding
business. Overall, an economic recovery in the markets served by the Company's
businesses would have a beneficial impact on the Company's performance. A
significant area of uncertainty for 2004 remains the impact of currency moves,
particularly the relative strength of the U.S. dollar.
During 2004, the Company is continuing to focus on cash generation, debt
reduction and margin improvement initiatives. The Company experienced a net use
of cash in the first quarter of 2004, as the Company used cash for working
capital purposes in preparation for the second quarter selling season and as a
result of the increase in backlog. The Company recently initiated its Terex
Improvement Process ("TIP") program aimed at improving the Company's internal
processes and benefiting the Company's customers, investors and employees. As
part of the TIP objectives, Terex management will have a particular focus on
achieving a number of key objectives including revenue growth, through a
combination of expansion into markets not currently served and by increasing
market share in existing products, and improving the Company's return on
invested capital, through reducing working capital requirements as a percentage
of sales and by improving operating margins through reducing the total cost of
manufacturing products.
RESTRUCTURING
Prior to 2004, the Company initiated numerous restructuring programs in response
to a slowing economy, to reduce duplicative operating facilities, including
those arising from the Company's acquisitions, and to respond to specific market
conditions. Restructuring programs were initiated within the Company's Terex
Construction, Terex Cranes, Terex Mining and Terex Roadbuilding, Utility
Products and Other segments. The Company's programs have been designed to
minimize the impact of any program on future operating results and the Company's
liquidity. To date, these restructuring programs have not had a material
negative impact on operating results or the Company's liquidity. These
initiatives are intended to generate a reduction in ongoing labor and factory
overhead expense as well as to reduce overall material costs by leveraging the
purchasing power of the consolidated facilities. See Note F -- "Restructuring
and Other Charges" in the Company's Condensed Consolidated Financial Statements
for a detailed description of the Company's restructuring programs, including
the reasons, timing and costs associated with each such program.
40
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2003
TEREX CONSOLIDATED
Three Months Ended March 31,
----------------------------------------
2004 2003
Restated Restated
-------------------- ------------------
% of Sales % of Sales % Change
-------------------- ------------------ --------
($ amounts in millions)
Net Sales............. $1,059.4 $934.4 13.4%
Gross Profit.......... $ 160.4 15.1% $126.8 13.6% 26.5%
SG&A.................. $ 112.5 10.6% $ 89.2 9.5% 26.1%
Income from operations $ 47.9 4.5% $ 37.6 4.0% 27.4%
Total net sales for the three months ended March 31, 2004 totaled $1,059.4
million, an increase of $125.0 million when compared to the same period in 2003.
The impact of a weaker dollar relative to the British Pound and the Euro
increased sales by approximately 8% when compared to the first quarter of 2003.
Sales fell relative to the first quarter of 2003 in the Cranes segment as a
result of continuing weak market conditions in North America, as well as lower
new and used machine sales in the European crane business. Mining sales declined
relative to the first quarter of 2003, in part because of the temporary
disruption in order activity due to the uncertainty surrounding the attempted
sale of the mining truck business in the second half of 2003. These declines
were offset by sales generated by the acquisition of Tatra, higher sales of
aerial work platform products driven by increased demand in the United States,
and increased sales of compact construction and crushing and screening equipment
in Europe and North America. During the first quarter of 2004, the Company's
backlog increased in substantially all of its businesses, reflecting improved
economic conditions in many end markets.
Total gross profit for the three months ended March 31, 2004 totaled $160.4
million, an increase of $33.6 million when compared to the same period in 2003.
During the first quarter of 2003, the Company recorded $5.0 million of charges
primarily related to the fair value of inventory acquired at Genie and Demag as
well as costs related to the closure of the Company's EarthKing Internet
business. The acquisition of the Tatra and ATC businesses increased gross profit
by approximately $7 million when compared to the first quarter of 2003. Gross
profit increased in all segments other than the Mining segment, where lower
sales in South Africa offset other gross profit improvements. The Company's
gross profit was also negatively impacted by the increased value of the Euro and
the British Pound in the first quarter of 2004. This negatively impacted the
gross profit recognized on products produced in Europe and sold in U.S. dollars.
The Company continues to address recent market increases in steel pricing and
potential availability concerns and has taken several actions to mitigate the
impact of these events on the Company.
Total selling, general and administrative costs ("SG&A") increased for the three
months ended March 31, 2004 by $23.3 million when compared to the same period in
2003. A weaker U.S. dollar relative to the British Pound and the Euro accounted
for approximately one-third of the increase, as costs reported in these
currencies translate into more U.S. dollars than reported in 2003. SG&A costs
also increased as a result of higher commissions and related costs due to
increased sales levels during the first quarter of 2004. The acquisitions of the
Tatra and ATC businesses accounted for approximately 20% of the increase in
SG&A. The majority of the remaining increases were experienced in the Aerial
Work Platforms and Construction segments, and were the result of higher sales
levels.
Income from operations increased by $10.3 million for the three months ended
March 31, 2004 when compared to the same period in 2003. The Company benefited
from sales increases in the Aerial Work Platforms and Construction segments as
well as from the acquisition of Tatra. These gains were partially offset by
lower operating profits earned in the Cranes segment as a result of weak demand
in the North American crane businesses, as well as lower sales realized in the
European crane businesses. Operating profit relative to the first quarter 2003
declined in the Mining segment, primarily due to lower sales of large mining
shovels. The Company continues to see improvements in the economic outlook for
many of the businesses in the Construction segment, as well as in the Aerial
Work Platforms segment. The Company has also begun to see increased demand for
its mining products as a result of recent improvements in commodity pricing.
41
TEREX CONSTRUCTION
Three Months Ended March 31,
--------------------------------------
2004 2003
Restated Restated
------------------ ------------------
% of Sales % of Sales % Change
---------- ---------- --------
($ amounts in millions)
Net Sales............. $401.1 $316.7 26.6%
Gross Profit.......... $ 53.0 13.2% $ 41.8 13.2% 26.8%
SG&A.................. $ 36.2 9.0% $ 27.5 8.7% 31.6%
Income from operations $ 16.8 4.2% $ 14.3 4.5% 17.5%
Net sales in the Terex Construction segment increased by $84.4 million for the
three months ended March 31, 2004 when compared to the same period in 2003 and
totaled $401.1 million. A weaker U.S. dollar relative to the British Pound and
the Euro increased sales by approximately 12% when compared to the first quarter
of 2003. Excluding the effect of changes in foreign currency, sales in the
compact construction equipment, crushing and screening and scrap handling
businesses increased when compared to the comparable period in 2003, while sales
of heavy construction equipment fell, primarily as a result of lower sales of
off-highway trucks and of Atlas products. Sales of compact construction
equipment benefited in part from the Company's ability to leverage the Terex
brand in the United States and recovering end-market conditions. Sales in the
crushing and screening business increased, particularly in the United States,
when compared to the comparable period in 2003.
Gross profit increased to $53.0 million for the three months ended March 31,
2004, an increase of $11.2 million when compared to 2003 results for the same
period. Gross margins, defined as gross profit as a percentage of sales,
improved in the compact construction equipment and crushing and screening
businesses when compared to the first quarter of 2003 as a result of improved
pricing, cost reductions from consolidation of compact equipment manufacturing
facilities in 2003 and the benefit of higher production volumes. Gross margins
in the heavy equipment businesses fell when compared to the first quarter of
2003, as the weakening of the U.S. dollar relative to the British Pound
depressed margins earned on U.S. dollar denominated transactions in the
off-highway truck business. In addition, during the first quarter of 2004, the
percentage of orders sold in U.S. dollars was significantly higher than the
historical average, further depressing margins.
SG&A costs for the three months ended March 31, 2004 totaled $36.2 million, an
increase of $8.7 million when compared to the same period in 2003. A weaker U.S.
dollar relative to the British Pound and the Euro increased SG&A costs by
approximately $4 million when compared to the first quarter of 2003.
Approximately 86% of the segment's SG&A costs are incurred in either British
Pounds or Euro. The remaining increase in SG&A was due primarily to increased
spending for new product development, sales and marketing efforts and increased
administrative costs in the heavy and compact equipment businesses.
Income from operations for the three months ended March 31, 2004 totaled $16.8
million, an increase of $2.5 million when compared to $14.3 million for the same
period in 2003.
TEREX CRANES
Three Months Ended March 31,
--------------------------------------
2004 2003
Restated Restated
------------------ ------------------
% of Sales % of Sales % Change
---------- ---------- --------
($ amounts in millions)
Net Sales............. $210.8 $254.4 (17.1%)
Gross Profit.......... $ 29.9 14.2% $ 26.9 10.6% 11.2%
SG&A.................. $ 23.4 11.1% $ 20.4 8.0% 14.7%
Income from operations $ 6.5 3.1% $ 6.5 2.6% ---
42
Net sales for the Terex Cranes segment for the three months ended March 31, 2004
decreased by $43.6 million and totaled $210.8 million when compared to $254.4
million for the same period in 2003. The year-over-year decrease was due to a
decline in the number of used cranes sold during the first quarter of 2004, a
large one-time public works sale that occurred in 2003, a continuing soft
end-market in North America, and the sale of the Company's fork-lift business,
Schaeff Incorporated, and its Crane & Machinery, Inc. ("C&M") distribution
business in November 2003. Sales in the first quarter of 2003 were also
strengthened due to the order fulfillment of Demag's significant backlog that
existed at the time of its acquisition by Terex in August 2002. The decrease in
net sales was partially offset by the effect of a weaker U.S. dollar relative to
the Euro, an increase in sales volume of all terrain and rough terrain cranes in
Australia, as well as strong markets in Italy, the U.K. and the Asia/Pacific
region. The tower crane business also continued to show signs of growth.
Gross profit for the three months ended March 31, 2004 increased by $3.0 million
relative to the same period in 2003 and totaled $29.9 million. The sale of the
Schaeff Incorporated and C&M businesses reduced gross profit by $0.6 million in
the first quarter of 2004 when compared to the same period in 2003. Gross profit
fell in the North American cranes businesses primarily as a result of lower
production volumes when compared to the first quarter of 2003, and were
partially offset by improvements in the international mobile crane businesses as
well as in the tower crane businesses. Included in gross profit for the first
quarter of 2003 is a $2.1 million non-recurring reduction of gross profit
related to fair value accounting at Demag. The fair value adjustment related to
the acquired inventory of Demag. In addition, the cost reduction impact of past
restructuring activities related to the acquisition of Demag are positively
reflected in the year-over-year results.
SG&A costs for the three months ended March 31, 2004 totaled $23.4 million, an
increase of $3.0 million over the same period in 2003. The sale of Schaeff
Incorporated and C&M reduced SG&A costs in the first quarter of 2004 by $0.6
million relative to the first quarter of 2003. Cost reductions achieved in the
North American cranes businesses in response to continued weak market conditions
were offset by the impact of a weaker U.S. dollar relative to the Euro.
Approximately 85% of the segment's SG&A costs were incurred in Euro.
Income from operations for the three month periods ended March 31, 2004 and 2003
totaled $6.5 million.
TEREX AERIAL WORK PLATFORMS
Three Months Ended March 31,
--------------------------------------
2004 2003
Restated Restated
------------------ ------------------
% of Sales % of Sales % Change
---------- ---------- --------
($ amounts in millions)
Net Sales............. $168.0 $147.2 14.1%
Gross Profit.......... $ 36.2 21.5% $ 29.1 19.8% 24.4%
SG&A.................. $ 15.9 9.5% $ 13.7 9.3% 16.1%
Income from operations $ 20.3 12.1% $ 15.4 10.5% 31.8%
Total net sales for the Terex Aerial Work Platforms segment for the three months
ended March 31, 2004 were $168.0 million, an increase of $20.8 million when
compared to the same period in 2003. Sales increased when compared to the first
quarter of 2003 as a result of stronger demand from the rental channel in the
United States and improved parts sales. Rental market demand was positively
impacted as rental channel customers began to buy new equipment to reduce the
age of their fleets.
Total gross profit for the Aerial Work Platforms segment for the three months
ended March 31, 2004 was $36.2 million, an increase of $7.1 million when
compared to the same period in 2003. Gross profit for the first quarter of 2003
included a $0.6 million charge related to certain fair value adjustments to
Genie's inventory values recorded at the time of acquisition; no such charges
were included in 2004 results. Gross profit also improved relative to 2003, as
the Aerial Work Platforms segment benefited from the impact of higher volumes of
equipment sales.
43
Total SG&A costs for the three months ended March 31, 2004 totaled $15.9
million, an increase of $2.2 million from the same period in 2003. The increase
was due primarily to higher commissions and related costs arising from higher
sales levels.
Income from operations for the Aerial Work Platforms segment for the three
months ended March 31, 2004 was $20.3 million, an increase of $4.9 million from
the same period in 2003 due to the higher sales volume and improved margins.
TEREX MINING
Three Months Ended March 31,
------------------------------------
2004 2003
Restated Restated
----------------- -----------------
% of Sales % of Sales % Change
---------- ---------- --------
($ amounts in millions)
Net Sales............. $73.5 $78.8 (6.7%)
Gross Profit.......... $11.2 15.2% $11.8 15.0% (5.1%)
SG&A.................. $ 9.2 12.5% $ 7.3 9.3% 26.0%
Income from operations $ 2.0 2.7% $ 4.5 5.7% (55.6%)
Net sales in the Terex Mining segment decreased by $5.3 million to $73.5 million
in the first quarter of 2004 compared to $78.8 million in the comparable period
in 2003. The decrease in sales was mainly attributable to the temporary
disruption in order activity due to the uncertainty surrounding the attempted
sale of the mining truck business in the second half of 2003. On December 10,
2003, the Company announced that it had terminated its discussions to sell the
mining truck business. Additionally, there was an unusually high level of new
mining shovel sales in the first quarter of 2003.
Gross profit decreased by $0.6 million in the three months ended March 31, 2004
when compared to the comparable period in 2003 and totaled $11.2 million. Gross
profit earned in South Africa decreased due to a change in the mix of products
sold in that region.
SG&A expense increased by $1.9 million in the first quarter of 2004 relative to
the comparable period in 2003, to a total of $9.2 million. The increase in SG&A
is mainly due to the effect of foreign currency exchange fluctuations.
Income from operations for the Terex Mining segment was $2.0 million in the
first quarter of 2004, or 2.7% of sales, a decrease of $2.5 million from $4.5
million in the comparable period in 2003. This reduction in operating income was
a result of lower sales volumes due to the uncertainty about the future of the
Company's mining business and a change in the mix of products sold in South
Africa.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Three Months Ended March 31,
--------------------------------------
2004 2003
Restated Restated
------------------ ------------------
% of Sales % of Sales % Change
---------- ---------- --------
($ amounts in millions)
Net Sales............. $216.5 $151.0 43.4%
Gross Profit.......... $ 30.0 13.9% $ 17.5 11.6% 71.4%
SG&A.................. $ 25.0 11.5% $ 18.3 12.1% 36.6%
Income from operations $ 5.0 2.3% $ (0.8) (0.5%) (725.0%)
Total net sales for the Terex Roadbuilding, Utility Products and Other segment
for the three months ended March 31, 2004 were $216.5 million, an increase of
$65.5 million when compared to the same period in 2003. The acquisition of Tatra
on August 28, 2003 increased sales in the first quarter of 2004 by approximately
44
$44 million when compared to the same period a year ago. Sales increased
relative to the first quarter of 2003 in all other businesses reported in the
segment. Sales of roadbuilding products increased marginally over the comparable
period in 2003, primarily as a result of increased demand for asphalt paving
products.
Gross profit for the three months ended March 31, 2004 totaled $30.0 million, an
increase of $12.5 million when compared to the same period in 2003. The majority
of the increase is due to the acquisition of Tatra, which was partially offset
by costs incurred by the ATC business. The Company acquired a majority interest
in ATC as a result of its acquisition of Tatra. Gross profit realized in the
Utility Products business fell relative to the first quarter of 2003, in part as
a result of increases in raw material prices as well as a result of investments
made to implement manufacturing process improvements. Gross profit improved in
the Roadbuilding businesses as a result of cost reductions implemented during
2003 and increased parts sales. During the first quarter of 2003, the Company
recorded a $0.9 million charge related to the closure of its EarthKing Internet
subsidiary.
SG&A costs for the segment for the three months ended March 31, 2004 totaled
$25.0 million, an increase of $6.7 million when compared to the same period in
2003. The majority of the increase was due to the acquisition of Tatra and ATC.
Income from operations for the Roadbuilding, Utility Products and Other segment
for the three months ended March 31, 2004 was $5.0 million, compared to a loss
of $0.8 million for the same period in 2003.
NET INTEREST EXPENSE
During the three months ended March 31, 2004, the Company's net interest expense
decreased $2.7 million to $21.5 million from $24.2 million for the prior year
period. The decrease was due to the overall decrease in debt during the first
quarter of 2004 as compared to the same period in 2003 and lower interest rates.
OTHER INCOME (EXPENSE) -- NET
Other income (expense) -- net for the three months ended March 31, 2004 was an
expense of $2.4 million as compared to income of $0.3 million for the prior year
period. During the three months ended March 31, 2003, the Company recorded
income of $2.4 million related to a favorable court judgment on appeal as the
defendant in a patent infringement case. This income was partially offset by a
loss of $0.8 million related to its Internet e-commerce investments.
INCOME TAXES
During the three months ended March 31, 2004, the Company recognized income tax
expense of $5.3 million on income before income taxes of $24.0 million, an
effective rate of 22.1%, as compared to income tax expense of $4.2 million on
income before income taxes of $13.7 million, an effective rate of 30.7%, in the
prior year period. The effective tax rate for the first quarter of 2004 is lower
than the prior period rate due to the impact of recording a valuation allowance
against current period U.S. income, offsetting changes in assumptions in foreign
valuation allowances, the mix of income by jurisdiction, and the impact of
statutory reviews concluded in the first quarter of 2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Changes in the estimates and assumptions used by management could have
significant impact on the Company's financial results. Actual results could
differ from those estimates.
The Company believes that the following are among its most significant
accounting polices which are important in determining the reporting of
transactions and events and which utilize estimates about the effect of matters
that are inherently uncertain and therefore are based on management judgment.
45
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 March 31, 2004, reserves for excess and obsolete inventory
totaled $60.0 million.
ACCOUNTS RECEIVABLE -- Management is required to make judgments relative to the
Company's ability to collect accounts receivable from the Company's customers.
Valuation of receivables includes evaluating customer payment histories,
customer leverage, availability of third party financing, political and exchange
risks and other factors. Many of these factors, including the assessment of a
customer's ability to pay, are influenced by economic and market factors which
cannot be predicted with certainty. At March 31, 2004, reserves for potentially
uncollectible accounts receivable totaled $40.3 million.
GUARANTEES -- The Company has issued guarantees to financial institutions of
customer financing to purchase equipment as of March 31, 2004. The Company must
assess the probability of losses or non-performance in ways similar to the
evaluation of accounts receivable, including consideration of a customer's
payment history, leverage, availability of third party finance, political and
exchange risks and other factors. Many of these factors, including the
assessment of a customer's ability to pay, are influenced by economic and market
factors that cannot be predicted with certainty. To date, losses related to
guarantees have been negligible.
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of
customer default, the Company is generally able to dispose of the equipment with
the Company realizing the benefits of any net proceeds in excess of the
remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4 million. The terms of these guarantees coincide with the financing
arranged by the customer and generally does not exceed five years. Given the
Company's position as the original equipment manufacturer and its knowledge of
end markets, the Company, when called upon to fulfill a guarantee, generally has
been able to liquidate the financed equipment at a minimal loss, if any, to the
Company.
The Company, through its Genie subsidiary, issues residual value guarantees
under sales-type leases. A residual value guarantee involves a guarantee that a
piece of equipment will have a minimum fair market value at a future point in
time. As described in Note K -- "Net Investment in Sales-Type Leases" in the
Notes to the Condensed Consolidated Financial Statements, the Company's maximum
exposure related to residual value guarantees at March 31, 2004 was $36.4
million. The Company is able to mitigate the risk associated with these
guarantees because the maturity of the guarantees is staggered, which limits the
amount of used equipment entering the marketplace at any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. Such guarantees are referred to as buyback guarantees. These
conditions generally pertain to the functionality and state of repair of the
machine. As of March 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.1 million. The Company is able to mitigate the risk
of these guarantees by staggering the timing of the buybacks and through
leveraging its access to the used equipment markets provided by the Company's
original equipment manufacturer status.
46
The Company has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" of approximately $10 million
for the estimated fair value of all guarantees provided as of March 31, 2004.
The Company recognizes a loss under a guarantee when the Company's obligation to
make payment under the guarantee is probable and the amount of the loss can be
estimated. A loss would be recognized if the Company's payment obligation under
the guarantee exceeds the value the Company can expect to recover to offset such
payment, primarily through the sale of the equipment underlying the guarantee.
REVENUE RECOGNITION -- Revenue and costs are generally recorded when products
are shipped and invoiced to either independently owned and operated dealers or
to customers.
Revenue generated in the United States is recognized when title and risk of loss
pass from the Company to its customers which occurs upon shipment when terms are
FOB shipping point (which is customary for the Company) and upon delivery when
terms are FOB destination. The Company also has a policy requiring it to meet
certain criteria in order to recognize revenue, including satisfaction of the
following requirements:
a) Persuasive evidence that an arrangement exists;
b) The price to the buyer is fixed or determinable;
c) Collectibility is reasonably assured; and
d) The Company has no significant obligations for future performance.
In the United States, the Company has the ability to enter into a security
agreement and receive a security interest in the product by filing an
appropriate Uniform Commercial Code ("UCC") financing statement. However, a
significant portion of the Company's revenue is generated outside of the United
States. In many countries outside of the United States, as a matter of statutory
law, a seller retains title to a product until payment is made. The laws do not
provide for a seller's retention of a security interest in goods in the same
manner as established in the UCC. In these countries, the Company retains title
to goods delivered to a customer until the customer makes payment so that the
Company can recover the goods in the event of customer default on payment. In
these circumstances, where the Company only retains title to secure its recovery
in the event of customer default, the Company also has a policy which requires
it to meet certain criteria in order to recognize revenue, including
satisfaction of the following requirements:
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.
47
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 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 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
undiscounted cash flows is less than its carrying value. Future cash flow
projections include assumptions regarding future sales levels, the impact of
cost reduction programs, and the level of working capital needed to support each
business. The Company relies on data developed by business segment management as
well as macroeconomic data in making these calculations. There are no assurances
that future cash flow assumptions will be achieved. The amount of any impairment
then recognized would be calculated as the difference between estimated fair
value and the carrying value of the asset.
ACCRUED WARRANTIES -- The Company records accruals for potential warranty claims
based on the Company's prior claim experience. Warranty costs are accrued at the
time revenue is recognized. However, adjustments to the initial warranty accrual
are recorded if actual claim experience indicates that adjustments are
necessary. These warranty costs are based upon management's assessment of past
claims and current experience. However, actual claims could be higher or lower
than amounts estimated, as the amount and value of warranty claims are subject
to variation as a result of many factors that cannot be predicted with
certainty, including the performance of new products, models and technology,
changes in weather conditions for product operation, different uses for products
and other similar factors.
ACCRUED PRODUCT LIABILITY -- The Company records accruals for potential product
liability claims based on the Company's prior claim experience. Accruals for
product liability claims are valued based upon the Company's prior claims
experience, including consideration of the jurisdiction, circumstances of the
accident, type of loss or injury, identity of plaintiff, other potential
responsible parties, analysis of outside legal counsel, analysis of internal
product liability counsel and the experience of the Company's director of
product safety. The Company provides accruals for estimated product liability
experience on known claims. Actual product liability costs could be different
due to a number of variables such as the decisions of juries or judges.
PENSION BENEFITS -- Pension benefits represent financial obligations that will
be ultimately settled in the future with employees who meet eligibility
requirements. Because of the uncertainties involved in estimating the timing and
amount of future payments, significant estimates are required to calculate
pension expense and liabilities related to the Company's plans. The Company
utilizes the services of several independent actuaries, whose models are used to
facilitate these calculations.
48
Several key assumptions are used in actuarial models to calculate pension
expense and liability amounts recorded in the financial statements. Management
believes the three most significant variables in the models are expected
long-term rate of return on plan assets, the discount rate, and the expected
rate of compensation increase. The actuarial models also use assumptions for
various other factors including employee turnover, retirement age and mortality.
The Company's management believes the assumptions used in the actuarial
calculations are reasonable and are within accepted practices in each of the
respective geographic locations in which the Company operates.
The expected long-term rates of return on pension plan assets were 8.00% for
U.S. plans and 2.00% to 6.50% for international plans at March 31, 2004. These
rates are determined annually by management based on a weighted average of
current and historical market trends, historical portfolio performance and the
portfolio mix of investments.
The discount rates for pension plan liabilities were 6.00% for U. S. plans and
5.50% to 6.00% for international plans at March 31, 2004. These rates are used
to calculate the present value of plan liabilities and are determined annually
by management based on market yields for high-quality fixed income investments
on the measurement date.
The expected rates of compensation increase for the Company's pension plans were
4.00% for U.S. plans and 2.75% to 4.00% for international plans at March 31,
2004. These estimated annual compensation increases are determined by management
every year and are based on historical trends and market indices.
INCOME TAXES -- At March 31, 2004, the Company had deferred tax assets of $3.1
million, net of valuation allowances. The income tax expense was $5.3 million
for the three months ended March 31, 2004. The Company estimates income taxes
based on diverse and complex regulations that exist in various jurisdictions
where it conducts business. Deferred income tax assets and liabilities represent
tax benefits or obligations that arise from temporary timing differences due to
differing treatment of certain items for accounting and income tax purposes.
The Company evaluates deferred tax assets each period to ensure that estimated
future taxable income will be sufficient in character, amount and timing to
result in the utilization of its deferred tax assets. "Character" refers to the
type (capital gain vs. ordinary income) as well as the source (foreign vs.
domestic) of the income generated by the Company. "Timing" refers to the period
in which future income is expected to be generated and is important because
certain of the Company's net operating losses expire if not used within an
established time frame based on the jurisdiction in which they were generated.
A significant portion of the Company's deferred tax assets are comprised of net
operating loss ("NOL") generated in the United States by the Company. The
Company has had a history of generating tax losses in the United States and has
accumulated NOLs of $418.1 million as of December 31, 2003. During the fourth
quarter of 2003, and during the subsequent periods, the Company evaluated its
ability to utilize its NOLs generated in the United States. The Company included
the following information in its analysis:
o The three-year cumulative historical loss for U.S. operations.
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 had begun to see an increase in demand for
Genie products in the United States relative to 2002.
o The Company continued to reduce its long-term debt through the
generation of operating cash flow, thereby reducing interest
expense in the United States relative to prior periods.
o The Company has undergone significant restructuring in the United
States to address market conditions in its North American crane
business as well as its Roadbuilding businesses. The Company
believes that these businesses are now properly sized for current
business volumes and that their respective end markets have
stabilized.
o The Company has not yet taken advantage of several tax strategies
that would allow it to accelerate the utilization of accumulated
NOLs.
Based on these facts, the Company has determined that it is more likely than not
that expected future U.S. earnings are not sufficient to fully utilize the
Company's U.S. deferred tax assets and therefore, recorded a valuation allowance
for the year ended December 31, 2003 and for subsequent periods.
49
In addition to its domestic NOLs, the Company has accumulated $887.7 million of
foreign NOLs at December 31, 2003. During the fourth quarter of 2003, and during
the subsequent period, 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.
In the three months ended March 31, 2004, no change in the valuation allowance
was recorded as a discrete item in determining the Company's income tax
provision.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of funding are cash generated from operations, use of
the Company's bank credit facilities and access to capital markets. Management
believes that cash generated from operations, together with the Company's bank
credit facilities and cash on hand, provides the Company with adequate liquidity
to meet the Company's operating and debt service requirements. The Company had
cash and cash equivalents of $408.0 million at March 31, 2004. In addition, the
Company had $225.8 million available for borrowing under its revolving credit
facilities at March 31, 2004.
Cash from operations is dependent on the Company's ability to generate net
income through the sales of the Company's products and by reducing its
investment in working capital. During 2003, the Company's focus shifted from a
largely acquisition oriented growth approach to improving its operating
performance. The Company recently initiated a series of programs, collectively
known as TIP, aimed at improving operating earnings and net income as a
percentage of sales and at reducing the relative level of working capital needed
to operate the business. The Company is improving its liquidity through the
collection of receivables in a more timely manner. Consistent with past
practice, each quarter the Company sells receivables to various third party
financial institutions through a series of established pre-arranged facilities.
The discontinuance of these facilities could negatively impact the Company's
liquidity. During the first quarter of 2004 and 2003, the Company sold, without
recourse, accounts receivable approximating 23% and 25% of its first quarter
revenue in 2004 and 2003, respectively, to provide additional liquidity.
The Company is reducing inventory requirements by sharing, throughout the
Company, many of the lean manufacturing processes that Genie has successfully
utilized. These initiatives are expected to reduce the levels of raw materials
and work in process needed to support the business and enable the Company to
reduce its manufacturing lead times, thereby reducing the Company's working
capital requirements.
The Company's ability to generate cash from operations is subject to the
following factors:
o A substantial number of the Company's customers fund their
purchases through third party finance companies. Finance companies
extend credit to customers based on the credit worthiness of the
customers and the expected residual value of the Company's
equipment. Changes in either the customers' credit rating or in
used equipment values may impact the ability of customers to
purchase equipment.
o As the Company's sales levels increase, the absolute amount of
working capital needed to support the business may increase with a
corresponding reduction in cash generated by operations. The TIP
initiatives described above are intended to reduce the relative
increase in working capital.
o As described above, the Company insures and sells a significant
portion of its accounts receivable to third party finance
companies. These third party finance companies are not obligated to
purchase
50
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 may impact the Company's cash
flow from operations.
o The Company purchases material and services from its suppliers on
terms extended based on the Company's overall credit rating.
Changes in the Company's credit rating may impact suppliers'
willingness to extend terms and increase the cash requirements of
the business.
o Sales of the Company's products are subject to general economic
conditions, weather, competition and foreign currency fluctuations,
and other such factors that in many cases are outside the Company's
direct control. For example, during periods of economic
uncertainty, many of the Company's customers have tended to delay
purchasing decisions, which has had a negative impact on cash
generated from operations.
The Company's sales are seasonal, with more than half of the Company's sales
being generated in the first two quarters of a calendar year. This seasonality
is a result of the needs of the Company's customers to have new equipment
available for the spring, summer and fall construction season. As a result, the
Company tends to use cash to fund its operations during the first half of a
calendar year and generate cash from operations during the second half of the
year. For example, during the first quarter of 2004, the Company used $64.4
million of cash for operations.
To help fund this seasonal cash pattern, the Company maintains a significant
cash balance and a revolving line of credit in addition to term borrowings from
its bank group. The Company maintains a bank credit facility that originally
provided for $375 million of term debt maturing in July 2009 and a revolving
credit facility of $300 million that is available through July 2007. The
facility also includes provisions for an additional $250 million of term
borrowing by the Company on terms similar to the current term loan debt under
the facility, of which the Company has utilized $210 million of additional term
borrowings. During 2003, the Company prepaid $200 million principal amount of
its bank term loans.
The Company's ability to borrow under its existing bank credit facilities is
subject to the Company's ability to comply with a number of covenants. The
Company's bank credit facilities include covenants that require the Company to
meet certain financial tests, including a pro forma consolidated leverage ratio
test, a consolidated interest ratio test, a consolidated fixed charge ratio
test, a pro forma consolidated senior secured debt leverage ratio test and a
capital expenditures test. These covenants require quarterly compliance and
become more restrictive through the third quarter of 2005. The Company has
significant debt service requirements, including semi-annual interest payments
on its senior subordinated notes and monthly interest payments on its bank
credit facilities. Other than a default under the terms of the Company's debt
instruments, there are no other events that would accelerate the repayment of
the Company's debt. In the event of a default, these borrowings would become
payable on demand.
The Company is currently in compliance with all of its financial covenants under
its bank credit facilities. The Company's future compliance with its 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 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 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 ("SEC") on a timely basis.
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 4.41% at
March 31, 2004.
51
During 2003, the Company changed its debt profile by using cash generated from
operations to reduce its debt, extending the maturities of its term debt and
thereby reducing the rate of interest on its debt. On June 30, 2003, the Company
redeemed $50 million of its 8-7/8% Senior Subordinated Notes due 2008 (the
"8-7/8% Notes"). On November 25, 2003, the Company sold and issued $300 million
of its 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8% Notes") using the
proceeds plus $119 million of available cash to prepay the remaining $200
million outstanding principal amount of its 8-7/8% Notes and $200 million plus
accrued interest of its bank term loans.
The Company manages its interest rate risk by maintaining a balance between
fixed and floating rate debt through interest rate derivatives. Over the long
term, the Company believes this balance will produce lower interest cost than a
purely fixed rate mix without substantially increasing risk.
At the same time that it issued its 7-3/8% Notes, the Company negotiated an
amendment to certain of the financial covenants under its bank credit
facilities, described above, to extend the rate at which the pro forma
consolidated leverage ratio and the pro forma consolidated senior secured debt
leverage ratio are reduced in 2004 and 2005.
The Company continues to review its alternatives to improve its capital
structure and to reduce debt service costs through a combination of debt
refinancing, issuing equity, asset sales and the sale of non-strategic
businesses. The Company's ability to access the capital markets to raise funds,
through the sale of equity or debt securities, is subject to various factors,
some specific to the Company and some impacted by general economic and/or
financial market conditions. These include results of operations, projected
operating results for future periods and debt to equity leverage. 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
Cash flow from operations for the three months ended March 31, 2004 was a net
use of $64.4 million. Approximately $81 million of cash was used for working
capital purposes in preparation for the second quarter selling season. The
Company defines working capital as the sum of accounts receivable and inventory
less accounts payable. Cash flow from operations decreased by $179.2 million in
the first quarter of 2004 when compared to the same period in 2003. During the
first quarter of 2003, the Company generated approximately $93 million from the
reduction of working capital. A significant portion of the working capital
reduction in the first quarter of 2003 was due to improvements realized at
Demag, which was acquired in August 2002 with a high level of working capital.
Cash used in investing activities in the first quarter of 2004 was $9.2 million,
$5.3 million less than cash used in investing activities in the first quarter of
2003. The reduction in cash usage is a direct result of the lower number and
size of acquisitions completed in the first quarter of 2004 when compared to the
same period in 2003.
Cash provided by financing activities was $14.7 million in the first quarter of
2004, compared to cash used in financing activities in the first quarter of 2003
of $35.6 million. During the first quarter of 2004, the Company generated $4.1
million from the exercise of stock options and $14.0 from net borrowings under
its revolving line of credit. In the first quarter of 2003, the Company utilized
cash from operations to reduce its debt by approximately $24 million.
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of
52
default. In the event of customer default, the Company is generally able to
dispose of the equipment with the Company realizing the benefits of any net
proceeds in excess of the remaining payments due to the finance company.
As of March 31, 2004, the Company's maximum exposure to such credit guarantees
was $311.4 million, including total credit guarantees issued by Demag and Genie
of $207.0 million and $55.5 million, respectively. The terms of these guarantees
coincide with the financing arranged by the customer and generally does not
exceed five years. Given the Company's position as the original equipment
manufacturer and its knowledge of end markets, the Company, when called upon to
fulfill a guarantee, generally has been able to liquidate the financed equipment
at a minimal loss, if any, to the Company.
The Company, from time to time, issues residual value guarantees under
sales-type leases. A residual value guarantee involves a guarantee that a piece
of equipment will have a minimum fair market value at a future point in time. As
described in Note K -- "Net Investment in Sales-Type Leases" in the Notes to the
Condensed Consolidated Financial Statements, the Company's maximum exposure
related to residual value guarantees under sales-type leases was $36.4 million
at March 31, 2004. Given the Company's position as the original equipment
manufacturer and its knowledge of end markets, the Company is able to mitigate
the risk associated with these guarantees because the maturity of the guarantees
is staggered, which limits the amount of used equipment entering the marketplace
at any one time.
The Company from time to time guarantees that it will buy equipment from its
customers in the future at a stated price if certain conditions are met by the
customer. Such guarantees are referred to as buyback guarantees. These
conditions generally pertain to the functionality and state of repair of the
machine. As of March 31, 2004, the Company's maximum exposure pursuant to
buyback guarantees was $49.1 million. The Company is able to mitigate the risk
of these guarantees by staggering the timing of the buybacks and through
leveraging its access to the used equipment markets provided by the Company's
original equipment manufacturer status.
The Company has recorded an aggregate liability within "other current
liabilities" and "other non-current liabilities" of approximately $10 million
for the estimated fair value of all guarantees provided as of March 31, 2004.
Variable Interest Entities
In April 2001, Genie entered into a joint venture arrangement with a European
financial institution, pursuant to which Genie maintained a forty-nine percent
(49%) ownership interest in the joint venture, Genie Financial Services Holding
B.V. ("GFSH"). GFSH was established to facilitate the financing of Genie's
products sold in Europe. Genie contributed $4.7 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 its joint venture partner revised the
co-operation agreement and operating relationship with respect to GFSH. As part
of the reorganization, the name of the joint venture was changed to Terex
Financial Services Holding B.V. ("TFSH"), Genie's ownership interest in TFSH was
reduced to forty percent (40%), and Genie transferred this interest to another
Company subsidiary. In addition, the scope of TFSH's operations was broadened,
as it was granted the right to facilitate the financing of all of the Company's
products sold in Europe.
As of March 31, 2004, TFSH had total assets of $160.8 million, consisting
primarily of financing receivables and lease related equipment, and total
liabilities of $144.5 million, consisting primarily of debt issued by the joint
venture partner. The Company has provided guarantees related to potential losses
arising from shortfalls in the residual values of financed equipment or credit
defaults by the joint venture's customers. As of March 31, 2004, the maximum
exposure to loss under these guarantees was approximately $14 million.
Additionally, the Company is required to maintain a capital account balance in
TFSH, pursuant to the terms of the joint venture, which could result in the
reimbursement to TFSH by the Company of losses to the extent of the Company's
ownership percentage.
As defined by FASB Interpretation No. 46 ("FIN 46R"), TFSH is a Variable
Interest Entity ("VIE"). For entities created prior to February 1, 2003, FIN 46R
requires the application of its provisions effective the first reporting
53
period after March 15, 2004. Based on the legal and operating structure of TFSH,
the Company has concluded that it is not the primary beneficiary of TFSH and
that it does not control the operations of TFSH. Accordingly, the Company will
not consolidate the results of TFSH into its consolidated financial results. The
Company applies the equity method of accounting for its investment in TFSH.
Sale-Leaseback Transactions
The Company's rental business typically rents equipment to customers for periods
of no less than three months. To better match cash outflows in the rental
business to cash inflows from customers, the Company finances the equipment
through a series of sale-leasebacks which are classified as operating leases.
The leaseback period is typically 60 months in duration. At March 31, 2004, the
historical cost of equipment being leased back from the financing companies was
approximately $100 million and the minimum lease payment for the remainder of
2004 will be approximately $14 million.
CONTINGENCIES AND UNCERTAINTIES
FOREIGN CURRENCIES AND INTEREST RATE RISK
The Company's products are sold in over 100 countries around the world and,
accordingly, revenues of the Company are generated in foreign currencies, while
the costs associated with those revenues are only partly incurred in the same
currencies. The major foreign currencies, among others, in which the Company
does business, are the Euro, the British Pound, the Australian Dollar and the
Czech Koruna. The Company may, from time to time, hedge specifically identified
committed and forecasted cash flows in foreign currencies using forward currency
sale or purchase contracts. At March 31, 2004, the Company had foreign exchange
contracts with a notional value of $174.6 million.
The Company manages exposure to fluctuating interest rates with interest
protection arrangements. Certain of the Company's obligations, including
indebtedness under the Company's bank credit facility, bear interest at floating
rates, and as a result an increase in interest rates could adversely affect,
among other things, the results of operations of the Company. The Company has
entered into interest protection arrangements with respect to approximately $100
million of the principal amount of its indebtedness under its bank credit
facility, fixing interest at 6.52% for the period from July 1, 2004 through June
30, 2009.
Certain of the Company's obligations, including its senior subordinated notes,
bear interest at a fixed interest rate. The Company has entered into interest
rate agreements to convert these fixed rates to floating rates with respect to
approximately $200 million of the principal amount of its indebtedness under its
7-3/8% Senior Subordinated Notes and approximately $79 million of operating
leases. The floating rates are based on a spread of 2.45% to 4.50% over the
London Interbank Offer Rate ("LIBOR"). At March 31, 2004, the floating rates
ranged between 3.61% and 5.59%.
All derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities."
OTHER
The Company is subject to a number of contingencies and uncertainties including,
without limitation, product liability claims, self-insurance obligations, tax
examinations and guarantees. Many of the exposures are unasserted or proceedings
are at a preliminary stage, and it is not presently possible to estimate the
amount or timing of any cost to the Company. However, the Company does not
believe that these contingencies and uncertainties will, in the aggregate, have
a material adverse effect on the Company. When it is probable that a loss has
been incurred and possible to make reasonable estimates of the Company's
liability with respect to such matters, a provision is
54
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (the "FASB") issued
FIN 46, "Consolidation of Variable Interest Entities." A variable interest
entity ("VIE") is a corporation, partnership, trust or other legal entity that
does not have equity investors with voting rights or has equity investors that
do not provide sufficient financial resources for the entity to support its own
activities. The interpretation requires a company to consolidate a VIE when the
company has a majority of the risk of loss from the VIE's activities or is
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB revised FIN 46 ("FIN 46R") and modified its effective
date. The Company is required to adopt the provisions of FIN 46R, for special
purpose entities and VIEs created on or after February 1, 2003, effective
December 31, 2003. As of March 31, 2004, there were no such entities that are
required to be consolidated by the Company. For all other entities, the Company
has adopted the provisions of FIN 46R on March 31, 2004. The application of FIN
46R has not had a material impact on the Company's consolidated financial
position or results of operations.
In January 2003, the Emerging Issues Task Force (the "EITF") released EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 clarifies the timing and recognition of revenue from certain transactions
that include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
impact on the Company's consolidated financial position or results of
operations.
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions reached by the FASB
Derivatives Implementation Group subsequent to the original issuance of SFAS No.
133. This statement is generally effective prospectively for contracts and
hedging relationships entered into after June 30, 2003. The adoption of SFAS No.
149 has not had a material impact on the Company's consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 must be applied
immediately to instruments entered into or modified after May 31, 2003 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The adoption of SFAS
No. 150 has not had a material impact on the Company's financial position or
results of operations.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which exist as part of its
ongoing business operations and the Company uses derivative financial
instruments, where appropriate, to manage these risks. The Company, as a matter
of policy, does not engage in trading or speculative transactions.
55
FOREIGN EXCHANGE RISK
The Company is exposed to fluctuations in foreign currency cash flows related to
third party purchases and sales, intercompany product shipments and intercompany
loans. The Company is also exposed to fluctuations in the value of foreign
currency investments in subsidiaries and cash flows related to repatriation of
these investments. Additionally, the Company is exposed to volatility in the
translation of foreign currency earnings to U.S. Dollars. Primary exposures
include the U.S. Dollars versus functional currencies of the Company's major
markets which include the Euro, the British Pound, the Czech Koruna and the
Australian Dollar. The Company assesses foreign currency risk based on
transactional cash flows and identifies naturally offsetting positions and
purchases hedging instruments to protect anticipated exposures. At March 31,
2004, the Company had foreign currency contracts with a notional value of $174.6
million. The fair market value of these arrangements, which represents the cost
to settle these contracts, was an asset of approximately $9 million at March 31,
2004.
INTEREST RATE RISK
The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt.
Primary exposure includes movements in the U.S. Prime Rate and LIBOR. The
Company uses interest rate swaps to manage its interest rate risk. At March 31,
2004, approximately 50% of the Company's debt was floating rate debt and the
weighted average interest rate for all debt was approximately 6%.
At March 31, 2004, the Company had approximately $100 million of interest rate
swaps fixing interest rates at 6.52% for the period from July 1, 2004 through
June 30, 2009. The fair market value of these arrangements, which represents the
cost to settle these contracts, was a liability of approximately $5 million at
March 31, 2004.
At March 31, 2004, the Company had approximately $279 million of interest rate
swaps that converted fixed rates to floating rates. The floating rates ranged
between 3.61% and 5.59% at March 31, 2004. The fair market value of these
arrangements, which represent the cost to settle these contracts, was an asset
of approximately $12 million.
At March 31, 2004, the Company performed a sensitivity analysis for the
Company's derivatives and other financial instruments that have interest rate
risk. The Company calculated the pretax earnings effect on its interest
sensitive instruments. Based on this sensitivity analysis, the Company has
determined that an increase of 10% in the Company's weighted average interest
rates at March 31, 2004 would have increased interest expense by approximately
$1 million in the three months ended March 31, 2004.
COMMODITIES RISK
Principal materials used by the Company in its various manufacturing processes
include steel, castings, engines, tires, hydraulic cylinders, drive trains,
electric controls and motors, and a variety of other commodities and fabricated
or manufactured items. The Company's performance may be impacted by extreme
movements in material pricing and from availability of these materials. For
example, steel prices have increased and steel availability has decreased in
response to higher demand caused from a recovering end-market and higher
consumption of emerging market countries, such as China. In the absence of labor
strikes or other unusual circumstances, substantially all materials are normally
available from multiple suppliers. Current and potential suppliers are evaluated
on a regular basis on their ability to meet the Company's requirements and
standards. The Company actively manages its material supply sourcing and prices,
and may employ various methods to limit risk associated with commodity pricing
and availability.
ITEM 4 -- CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q/A, the
Company's management carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as of March 31,
2004, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as such term is
56
defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (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 March 31, 2004 because of the material weaknesses discussed
below and because the Company was unable to file the Annual Report on Form 10-K
for the year ended December 31, 2004 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 condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q/A make a fair statement in all
material respects of the Company's financial condition, results of operations
and cash flows for the periods presented in conformity with generally accepted
accounting principles.
(b) Changes in Internal Control Over Financial Reporting
In connection with their audit of the Company's financial statements for the
year ended December 31, 2003, PricewaterhouseCoopers LLP ("PwC"), the Company's
independent auditors, did not report any material weaknesses related to the
Company's internal controls. PwC did, however, advise management and the Audit
Committee of the Board of Directors of two conditions with respect to the
Company's design or operations of internal controls that needed improvement.
The first condition identified by PwC related to the Company's process for
collecting, reconciling and analyzing information to support the valuation of
its foreign deferred tax assets and liabilities. In addition, PwC identified a
need to enhance the process used to estimate future taxable income, as this
information is used in determining the appropriateness of valuation allowances.
The second condition related to accounting controls at a Cranes segment
location, as well as the associated monitoring controls used by the Cranes
segment's management team.
As a result, the Company implemented changes to its internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's fiscal quarter ended March 31, 2004, to
enhance its internal control over financial reporting in these areas.
To address the tax matters, during the first quarter of 2004, the Company
enhanced certain processes used to determine future taxable income by statutory
entity, related to the calculation of valuation allowances, and reserves related
to specific statutory issues. To address the conditions identified in the Cranes
segment, during the first quarter of 2004, the Company increased corporate
oversight within the Cranes segment. The Company has also launched a process to
increase the level of supervision and review within the accounting function of
the Cranes segment.
(c) Effectiveness of Internal Control Over Financial Reporting
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. Subsequent to March 31, 2004 and prior to filing this Form 10-Q/A,
the Company identified the material weaknesses described below in its annual
assessment of the effectiveness of the Company's internal control over financial
reporting. These material weaknesses also existed as of March 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.
57
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.
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
58
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.
(d) Management's Remediation Initiatives
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 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.
59
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain claims and litigation arising in the ordinary
course of business, which are not considered material to the financial
operations or cash flow of the Company. For information concerning litigation
and other contingencies see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Contingencies and Uncertainties."
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Recent Developments
60
On April 16, 2004, the Company commenced an offer to exchange up to $300 million
aggregate principal amount of its new 7-3/8% Senior Subordinated Notes due 2014,
which have been registered under the Securities Act of 1933, for a like amount
of its outstanding 7-3/8% Senior Subordinated Notes due 2014, which the Company
issued on November 25, 2003 in a private offering. The exchange offer will
expire at 5:00 p.m., New York City time, on May 17, 2004, unless extended by the
Company.
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 will be completing in the very near future 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
Note B of the Notes to Condensed Consolidated Financial Statements, Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restatement of Consolidated Financial Statements" and Item 4
"Controls and Procedures."
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. 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
New York Stock Exchange 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.
61
Forward-Looking Information
Certain information in this Quarterly Report includes forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Contingencies and
Uncertainties." In addition, when included in this Quarterly Report or in
documents incorporated herein by reference, the words "may," "expects,"
"intends," "anticipates," "plans," "projects," "estimates" and the negatives
thereof and analogous or similar expressions are intended to identify
forward-looking statements. However, the absence of these words does not mean
that the statement is not forward-looking. The Company has based these
forward-looking statements on current expectations and projections about future
events. These statements are not guarantees of future performance. Such
statements are inherently subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those reflected in such
forward-looking statements. Such risks and uncertainties, many of which are
beyond the Company's control, include, among others:
o the Company's business is highly cyclical and weak general economic
conditions may affect the sales of its products and its financial
results;
o the sensitivity of construction, infrastructure and mining activity
and products produced for the military to interest rates and
government spending;
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 limitations on the Company's ability to access the capital markets
using short form SEC documents;
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 compliance with applicable environmental laws and regulations; and
o other factors.
Actual events or the actual future results of the Company may differ materially
from any forward looking statement due to these and other risks, uncertainties
and significant factors. The forward-looking statements contained herein speak
only as of the date of this Quarterly Report and the forward-looking statements
contained in documents incorporated herein by reference speak only as of the
date of the respective documents. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statement contained or incorporated by reference in this
Quarterly Report to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits set forth on the accompanying Exhibit Index have been
filed as part of this Form 10-Q.
(b) Reports on Form 8-K:
62
During the quarter ended March 31, 2004, the Company filed or
furnished the following Current Reports on Form 8-K:
-- A report on Form 8-K was filed on January 23, 2004, announcing
that Rick Nichols was named to the position of President of Terex
Material Processing and Mining.
-- A report on Form 8-K was filed on February 4, 2004, announcing
the intention of the Company to make presentations at a number of
conferences and the departure of Thys de Beer from the Company.
-- A report on Form 8-K was filed on February 9, 2004, announcing a
conference call to be held to review the Company's year-end 2003
financial results and 2004 outlook.
-- A report on Form 8-K was filed on February 18, 2004, announcing
the intention of the Company to amend its financial statements for
the first three quarters of 2003 to revise the accounting for its
deferred compensation plan.
-- A report on Form 8-K was furnished on February 18, 2004,
providing the Company's press release reviewing the Company's
financial results for the year-ended December 31, 2003 and its 2004
outlook.
-- A report on Form 8-K/A was furnished on February 19, 2004,
providing corrected information with respect to the Company's
financial results for the year-ended December 31, 2003.
-- A report on Form 8-K was filed on February 26, 2004, announcing
the Company's hosting of a meeting with analysts on February 26,
2004.
-- A report on Form 8-K was filed on March 1, 2004, announcing that
a transcript of the February 26, 2004 meeting with analysts was
posted on the Company's website.
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEREX CORPORATION
(Registrant)
Date: February 17, 2006 /s/ Phillip C. Widman
------------------------------
Phillip C. Widman
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 17, 2006 /s/ Jonathan D. Carter
------------------------------
Jonathan D. Carter
Vice President, Controller
and Chief Accounting Officer
(Principal Accounting Officer)
64
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Terex Corporation
(incorporated by reference to Exhibit 3.1 to the Form S-1 Registration
Statement of Terex Corporation, Registration No. 33-52297).
3.2 Certificate of Elimination with respect to the Series B Preferred Stock
(incorporated by reference to Exhibit 4.3 to the Form 10-K for the year
ended December 31, 1998 of Terex Corporation, Commission File No.
1-10702).
3.3 Certificate of Amendment to Certificate of Incorporation of Terex
Corporation dated September 5, 1998 (incorporated by reference to
Exhibit 3.3 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
3.4 Amended and Restated Bylaws of Terex Corporation (incorporated by
reference to Exhibit 3.2 to the Form 10-K for the year ended December
31, 1998 of Terex Corporation, Commission File No. 1-10702).
4.1 Indenture, dated as of March 29, 2001, between Terex Corporation and
United States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.12 to the Form 10-Q for the quarter ended March
31, 2001 of Terex Corporation, Commission File No. 1-10702).
4.2 First Supplemental Indenture, dated as of October 1, 2001, between
Terex Corporation and United States Trust Company of New York, as
Trustee (to Indenture dated as of March 29, 2001) (incorporated by
reference to Exhibit 4.15 to the Form 10-Q for the quarter ended
September 30, 2001 of Terex Corporation, Commission File No. 1-10702).
4.3 Second Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
March 29, 2001) (incorporated by reference to Exhibit 4.18 to the Form
10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.4 Third Supplemental Indenture, dated as of March 31, 2003, between Terex
Corporation and Bank of New York (as successor to United States Trust
Company of New York), as Trustee (to Indenture dated as of March 29,
2001) (incorporated by reference to Exhibit 4.21 to the Form 10-Q for
the quarter ended March 31, 2003 of Terex Corporation, Commission File
No. 1-10702).
4.5 Fourth Supplemental Indenture, dated as of November 25, 2003, among
Terex Corporation, the Subsidiary Guarantors named therein and The Bank
of New York (as successor to United States Trust Company of New York),
as Trustee (to Indenture dated as of March 29, 2001) (incorporated by
reference to Exhibit 4.5 to the Form 10-K for the year ended December
31, 2003 of Terex Corporation, Commission File No. 1-10702).
4.6 Indenture, dated as of December 17, 2001, between Terex Corporation,
the Guarantors named therein and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.16 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-75700).
4.7 First Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
December 17, 2001) (incorporated by reference to Exhibit 4.20 to the
Form 10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.8 Second Supplemental Indenture, dated as of March 31, 2003, between
Terex Corporation and Bank of New York (as successor to United States
Trust Company of New York), as Trustee (to Indenture dated as of
December 17, 2001) (incorporated by reference to Exhibit 4.24 to the
Form 10-Q for the quarter ended March 31, 2003 of Terex Corporation,
Commission File No. 1-10702).
65
4.9 Third Supplemental Indenture, dated as of November 25, 2003, among
Terex Corporation, the Subsidiary Guarantors named therein and The Bank
of New York (as successor to United States Trust Company of New York),
as Trustee (to Indenture dated as of December 17, 2001) (incorporated
by reference to Exhibit 4.9 to the Form 10-K for the year ended
December 31, 2003 of Terex Corporation, Commission File No. 1-10702).
4.10 Indenture, dated as of November 25, 2003, between Terex Corporation,
the Guarantors named therein and HSBC Bank USA, as Trustee
(incorporated by reference to Exhibit 4.10 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.1 Terex Corporation Incentive Stock Option Plan, as amended (incorporated
by reference to Exhibit 4.1 to the Form S-8 Registration Statement of
Terex Corporation, Registration No. 33-21483).
10.2 1994 Terex Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Form 10-K for the year ended December
31, 1994 of Terex Corporation, Commission File No. 1-10702).
10.3 Terex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Form 10-K for the
year ended December 31, 2003 of Terex Corporation, Commission File No.
1-10702).
10.4 1996 Terex Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to Form S-8 Registration Statement of Terex
Corporation, Registration No. 333-03983).
10.5 Amendment No. 1 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.5 to the Form 10-K for the
year ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.6 Amendment No. 2 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Form 10-K for the
year ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.7 Terex Corporation 1999 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.7 to the Form 10-Q for the quarter ended March
31, 2000 of Terex Corporation, Commission File No. 1-10702).
10.8 Terex Corporation 2000 Incentive Plan, as amended (incorporated by
reference to Exhibit 10.8 to the Form 10-Q for the quarter ended June
30, 2002 of Terex Corporation, Commission File No. 1-10702).
10.9 Terex Corporation Supplemental Executive Retirement Plan, effective
October 1, 2002 (incorporated by reference to Exhibit 10.9 to the Form
10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
10.10 Terex Corporation 2004 Annual Incentive Compensation Plan 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).
10.11 Amended and Restated Credit Agreement, dated as of July 3, 2002, among
Terex Corporation, certain of its Subsidiaries, the Lenders named
therein, and Credit Suisse First Boston, as Administrative Agent
(incorporated by reference to Exhibit 10.9 to the Form 10-Q for the
quarter ended June 30, 2002 of Terex Corporation, Commission File No.
1-10702).
10.12 Incremental Term Loan Assumption Agreement, dated as of September 13,
2002, relating to the Amended and Restated Credit Agreement dated as of
July 3, 2002, among Terex Corporation, certain of its subsidiaries, the
lenders party thereto and Credit Suisse First Boston, as administrative
agent (incorporated by reference to Exhibit 2 of the Form 8-K Current
Report, Commission File No. 1-10702, dated September 13, 2002 and filed
with the Commission on September 20, 2002).
66
10.13 Amendment No. 1 and Agreement, dated as of November 25, 2003, to the
Amended and Restated Credit Agreement, dated as of July 3, 2002, among
Terex Corporation, certain of its Subsidiaries, the Lenders named
therein, and Credit Suisse First Boston, as Administrative Agent
(incorporated by reference to Exhibit 10.12 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.14 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation and
Credit Suisse First Boston, as Collateral Agent (incorporated by
reference to Exhibit 10.14 to the Form 10-K for the year ended December
31, 1998 of Terex Corporation, Commission File No. 1-10702).
10.15 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation,
each of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.15 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.16 Security Agreement dated as of March 6, 1998 of Terex Corporation, each
of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.16 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.17 Pledge Agreement dated as of March 6, 1998 of Terex Corporation, each
of the subsidiaries of Terex Corporation listed therein and Credit
Suisse First Boston, as Collateral Agent (incorporated by reference to
Exhibit 10.17 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.18 Form Mortgage, Leasehold Mortgage, Assignment of Leases and Rents,
Security Agreement and Financing entered into by Terex Corporation and
certain of the subsidiaries of Terex Corporation, as Mortgagor, and
Credit Suisse First Boston, as Mortgagee (incorporated by reference to
Exhibit 10.18 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
10.19 Sale and Purchase Agreement, dated May 16, 2002, among Terex
Corporation, Terex Germany GmbH & Co. KG and Demag Mobile Cranes GmbH
(incorporated by reference to Exhibit 1 of the Form 8-K Current Report,
Commission File No. 1-10702, dated May 16, 2002 and filed with the
Commission on May 17, 2002).
10.20 Agreement and Plan of Merger, dated July 19, 2002, among Terex
Corporation, Magic Acquisition Corp., Genie Holdings, Inc., Robert
Wilkerson, S. Ward Bushnell, F. Roger Brown, Wilkerson Limited
Partnership, Bushnell Limited Partnership and R. Brown Limited
Partnership (incorporated by reference to Exhibit 1 of the Form 8-K
Current Report, Commission File No. 1-10702, dated July 19, 2002 and
filed with the Commission on July 22, 2002).
10.21 First Amendment to Agreement and Plan of Merger, dated as of September
18, 2002, by and among Terex Corporation, Magic Acquisition Corp.,
Genie Holdings, Inc. and Robert Wilkerson, S. Ward Bushnell and F.
Roger Brown and certain limited partnerships (incorporated by reference
to Exhibit 1 of the Form 8-K Current Report, Commission File No.
1-10702, dated September 13, 2002 and filed with the Commission on
September 20, 2002).
10.22 Second Amendment to Agreement and Plan of Merger, dated as of April 14,
2004, by and among Terex Corporation, Robert Wilkerson, S. Ward
Bushnell and F. Roger Brown and certain limited partnerships
(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).
10.23 Purchase Agreement, dated as of November 10, 2003, among Terex
Corporation and the Initial Purchasers, as defined therein Agent
(incorporated by reference to Exhibit 10.22 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
67
10.24 Registration Rights Agreement, dated as of November 25, 2003, among
Terex Corporation and the Initial Purchasers, as defined therein
(incorporated by reference to Exhibit 10.23 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-112097).
10.25 Second Amended and Restated Employment and Compensation Agreement,
dated as of January 1, 2002, between Terex Corporation and Ronald M.
DeFeo (incorporated by reference to Exhibit 10.34 to the Form 10-K for
the year ended December 31, 2001 of Terex Corporation, Commission File
No. 1-10702).
10.26 Form of Amended and Restated Change in Control and Severance Agreement
between Terex Corporation and certain executive officers (incorporated
by reference to Exhibit 10.36 to the Form 10-Q for the quarter ended
March 31, 2002 of Terex Corporation, Commission File No. 1-10702).
10.27 Form of Change in Control and Severance Agreement between Terex
Corporation and certain executive officers (incorporated by reference
to Exhibit 10.35 to the Form 10-K for the year ended December 31, 2002
of Terex Corporation, Commission File No. 1-10702).
10.28 Retirement Agreement dated as of November 13, 2003 between Terex
Corporation and Filip Filipov (incorporated by reference to Exhibit
10.29 to Form S-4 Registration Statement of Terex Corporation,
Registration No. 333-112097).
10.29 Consulting Agreement dated as of November 13, 2003 between Terex
Corporation and Filver S.A. (incorporated by reference to Exhibit 10.30
to Form S-4 Registration Statement of Terex Corporation, Registration
No. 333-112097).
10.30 Termination, Severance, General Release and Waiver Agreement between
Terex Corporation and Matthys de Beer dated as of February 1, 2004
(incorporated by reference to Exhibit 99.1 of the Form 8-K Current
Report, Commission File No. 1-10702, dated February 1, 2004 and filed
with the Commission on February 4, 2004).
12 Calculation of Ratio of Earnings to Fixed Charges.*
31.1 Chief Executive Officer Certification pursuant to Rule
13a-14(a)/15d-14(a).*
31.2 Chief Financial Officer Certification pursuant to Rule
13a-14(a)/15d-14(a).*
32 Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes -Oxley Act of 2002. *
* Exhibit filed with this document.
68