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 JUNE 30, 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: 49.4 million as of August 4, 2004.
The Exhibit Index begins on page 79.
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 June 30, 2004 to amend the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 previously
filed by the Company (the "Form 10-Q") in order to restate its condensed
consolidated financial statements for the three and six month periods ending
June 30, 2004 and June 30, 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 March 31, 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
periods ended March 31, 2004 and June 30, 2004, the impact of this valuation
allowance required a reversal of the tax expense on the U.S. pre-tax income in
the periods ended March 31, 2004 and June 30, 2004, requiring the Company to
restate its financial statements for such periods. Additionally, the Company has
adjusted its tax accounts for errors identified for the periods ended June 30,
2004 and in all prior periods presented in this 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 June 30, 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;
1
o Part I, Item 3, Quantitative and Qualitative Disclosures About
Market Risk;
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 August 6, 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 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 June 30, 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 S to the Company's
June 30, 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.
--------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
TEREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations -
Three months and six months ended June 30, 2004 and 2003.......................... 5
Condensed Consolidated Balance Sheet - June 30, 2004 and December 31, 2003............. 6
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 2004 and 2003........................................... 7
Notes to Condensed Consolidated Financial Statements - June 30, 2004................... 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 40
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................... 68
Item 4 Controls and Procedures.................................................................. 69
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................ 72
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......... 73
Item 3 Defaults Upon Senior Securities.......................................................... 73
Item 4 Submission of Matters to a Vote of Security Holders...................................... 74
Item 5 Other Information........................................................................ 74
Item 6 Exhibits and Reports on Form 8-K......................................................... 76
SIGNATURES......................................................................................... 78
EXHIBIT INDEX...................................................................................... 79
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 For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
Restated Restated Restated Restated
---------- ---------- ---------- ----------
Net sales ........................................ $ 1,332.5 $ 1,050.1 $ 2,391.9 $ 1,984.5
Cost of goods sold ............................... 1,139.8 934.5 2,038.8 1,742.1
---------- ---------- ---------- ----------
Gross profit ................................ 192.7 115.6 353.1 242.4
Selling, general and administrative expenses ..... (119.6) (101.0) (232.1) (190.2)
Goodwill impairment .............................. -- (44.3) -- (44.3)
---------- ---------- ---------- ----------
Income (loss) from operations ............ 73.1 (29.7) 121.0 7.9
Other income (expense):
Interest income ............................. 1.4 2.1 2.4 3.8
Interest expense ............................ (23.4) (26.6) (45.9) (52.5)
Other income (expense) - net ................ 19.8 (4.8) 17.4 (4.5)
---------- ---------- ---------- ----------
Income (loss) before income taxes ........... 70.9 (59.0) 94.9 (45.3)
(Provision for) benefit from income taxes ........ (7.6) 13.5 (12.9) 9.3
---------- ---------- ---------- ----------
Net income (loss) ................................ $ 63.3 $ (45.5) $ 82.0 $ (36.0)
========== ========== ========== ==========
Per common share:
Basic ....................................... $ 1.29 $ (0.96) $ 1.68 $ (0.76)
========== ========== ========== ==========
Diluted ..................................... $ 1.24 $ (0.96) $ 1.61 $ (0.76)
========== ========== ========== ==========
Weighted average number of shares outstanding in
per share calculation:
Basic .................................... 49.1 47.6 48.9 47.4
Diluted .................................. 51.0 47.6 50.9 47.4
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)
June 30, December 31,
2004 2003
Restated Restated
------------ ------------
Assets
Current assets
Cash and cash equivalents .............................................. $ 454.5 $ 467.5
Trade receivables (net of allowance of $36.4 at June 30, 2004
and $38.3 at December 31, 2003) .................................... 641.1 509.3
Inventories ............................................................ 1,092.7 1,038.5
Deferred taxes ......................................................... 80.1 78.6
Other current assets ................................................... 127.2 125.6
------------ ------------
Total current assets ................................................... 2,395.6 2,219.5
Long-term assets
Property, plant and equipment .......................................... 337.9 353.8
Goodwill ............................................................... 629.2 616.7
Deferred taxes ......................................................... 34.7 47.0
Other assets ........................................................... 306.9 317.2
------------ ------------
Total assets .............................................................. $ 3,704.3 $ 3,554.2
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and current portion of long-term debt .................... $ 75.7 $ 86.8
Trade accounts payable ................................................. 784.1 614.9
Accrued compensation and benefits ...................................... 92.5 89.7
Accrued warranties and product liability ............................... 85.8 89.7
Other current liabilities .............................................. 300.7 287.5
------------ ------------
Total current liabilities .............................................. 1,338.8 1,168.6
Non-current liabilities
Long-term debt, less current portion ................................... 1,187.1 1,274.8
Other .................................................................. 433.7 436.2
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value - authorized 150.0 shares; issued 50.5
and 50.0 shares at June 30, 2004 and December 31, 2003, respectively 0.5 0.5
Additional paid-in capital ............................................. 840.4 813.5
Accumulated deficit .................................................... (123.2) (205.2)
Accumulated other comprehensive income ................................. 73.8 110.4
Less cost of shares of common stock in treasury - 2.0 and 1.9 shares at
June 30, 2004 and December 31, 2003, respectively .................. (46.8) (44.6)
------------ ------------
Total stockholders' equity ......................................... 744.7 674.6
------------ ------------
Total liabilities and stockholders' equity ............................. $ 3,704.3 $ 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 Six Months
Ended June 30,
----------------------------
2004 2003
Restated Restated
------------ ------------
Operating Activities
Net income (loss) ....................................................... $ 82.0 $ (36.0)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation ........................................................ 29.1 27.5
Amortization ........................................................ 8.0 5.9
Impairment charges and asset write downs ............................ -- 65.5
Loss on retirement of debt .......................................... 1.5 1.4
Gain on sale of fixed assets ........................................ (19.0) (2.9)
Changes in operating assets and liabilities (net of effects of
acquisitions):
Trade receivables .............................................. (105.7) 38.5
Inventories .................................................... (95.6) 50.5
Trade accounts payable ......................................... 181.3 42.3
Other, net ..................................................... (3.2) (9.1)
------------ ------------
Net cash provided by operating activities .................. 78.4 183.6
------------ ------------
Investing Activities
Acquisition of businesses, net of cash acquired ......................... (9.6) (8.7)
Capital expenditures .................................................... (15.7) (14.1)
Proceeds from sale of assets ............................................ 24.0 3.5
------------ ------------
Net cash used in investing activities ...................... (1.3) (19.3)
------------ ------------
Financing Activities
Principal repayments of long-term debt .................................. (75.0) (53.0)
Proceeds from stock options exercised ................................... 5.5 0.7
Net borrowings (repayments) under revolving line of credit agreements ... (2.2) (36.5)
Payment of premium on early retirement of debt .......................... -- (2.2)
Other, net .............................................................. (15.1) (16.4)
------------ ------------
Net cash used in financing activities ...................... (86.8) (107.4)
------------ ------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ................. (3.3) 11.2
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ......................... (13.0) 68.1
Cash and Cash Equivalents at Beginning of Period ............................. 467.5 352.2
------------ ------------
Cash and Cash Equivalents at End of Period ................................... $ 454.5 $ 420.3
============ ============
The accompanying notes are an integral part of these financial statements.
7
TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 August 6, 2004. For a description of subsequent
events, this Form 10-Q/A should be read in conjunction with the Company's
filings made subsequent to the filing of the original Form 10-Q ,including 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 June 30, 2004
and for the three months and six months ended June 30, 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 of these interim financial statements 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 and six months ended
June 30, 2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004.
Cash and cash equivalents at June 30, 2004 and December 31, 2003 include $2.0
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.
The results for prior periods have been reclassified to conform to the current
periods' presentation. The Terex Mining segment 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 June 30, 2004, there were no such entities that are required to be
consolidated by the Company. For all other entities, the Company has adopted the
provisions of FIN 46R effective March 31, 2004. The adoption of FIN 46R has not
had a material impact on the Company's consolidated financial position, results
of operations or cash flows.
8
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, results of operations
or cash flows.
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, results of operations or cash
flows.
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, results of operations or cash flows.
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 P - "Litigation and Contingencies."
Substantially all receivables were trade receivables at June 30, 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 consolidated product warranty
liability:
For the
Six Months Ended
June 30, 2004
Restated
----------------
Balance at beginning of period ....................... $ 69.6
Accruals for warranties issued during the period ..... 36.0
Changes in estimates ................................. (1.9)
Settlements during the period ........................ (36.6)
Foreign exchange effect .............................. (1.2)
----------------
Balance at end of period ............................. $ 65.9
================
Stock-Based Compensation. At June 30, 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 For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
Restated Restated Restated Restated
---------- ---------- ---------- ----------
Reported net income (loss) ............................ $ 63.3 $ (45.5) $ 82.0 $ (36.0)
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related income tax effects ............ (1.6) (1.0) (3.4) (2.1)
---------- ---------- ---------- ----------
Pro forma net income (loss) ........................... $ 61.7 $ (46.5) $ 78.6 $ (38.1)
========== ========== ========== ==========
Per common share:
Basic:
Reported net income (loss) ........................ $ 1.29 $ (0.96) $ 1.68 $ (0.76)
---------- ---------- ---------- ----------
Pro forma net income (loss) ....................... $ 1.26 $ (0.98) $ 1.61 $ (0.80)
---------- ---------- ---------- ----------
Diluted:
Reported net income (loss) ........................ $ 1.24 $ (0.96) $ 1.61 $ (0.76)
---------- ---------- ---------- ----------
Pro forma net income (loss) ....................... $ 1.21 $ (0.98) $ 1.54 $ (0.80)
========== ========== ========== ==========
10
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 For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Dividend yields ............................. 0.0% 0.0% 0.0% 0.0%
Expected volatility ......................... 51.10% 52.16% 51.10% 52.16%
Risk-free interest rates .................... 4.04% 4.59% 4.04% 4.59%
Expected life (in years) .................... 10.0 10.0 10.0 9.7
Aggregate fair value of options granted ..... $ 1.1 $ 0.1 $ 7.1 $ 4.6
Weighted average fair value at date of
grant for options granted .................. $ 21.39 $ 12.22 $ 22.42 $ 7.61
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
periods ended March 31, 2004 and June 30, 2004, the impact of this valuation
allowance required a reversal of the tax expense on the U.S. pre-tax income in
the periods ended March 31, 2004 and June 30, 2004, requiring the Company to
restate its financial statements for such periods. Additionally, the Company
adjusted its tax accounts for errors identified for the periods ended June 30,
2004 and in all prior periods presented in this 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 and six months ended June 30, 2004
and 2003 and the Company's restated balance sheet as of June 30, 2004 and
December 31, 2003, on a summary basis.
11
All other information presented in the notes to these financial statements is
presented on a restated basis.
STATEMENTS OF OPERATIONS:
For the Three Months For the Six Months
Ended June 30, 2003 Ended June 30, 2003
------------------------ ------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
---------- ---------- ---------- ----------
Net sales ...................................... $ 1,048.8 $ 1,050.1 $ 1,976.5 $ 1,984.5
Cost of goods sold ............................. $ 932.1 $ 934.5 $ 1,730.1 $ 1,742.1
Gross profit ................................... $ 116.7 $ 115.6 $ 246.4 $ 242.4
Selling, general and administrative expenses ... $ (100.9) $ (101.0) $ (190.1) $ (190.2)
Goodwill impairment ............................ $ (51.3) $ (44.3) $ (51.3) $ (44.3)
Income (loss) from operations .................. $ (35.5) $ (29.7) $ 5.0 $ 7.9
Other income (expense) - net ................... $ (4.9) $ (4.8) $ (4.6) $ (4.5)
Income (loss) before income taxes .............. $ (64.9) $ (59.0) $ (48.3) $ (45.3)
Benefit from (provision for) income taxes ...... $ 13.1 $ 13.5 $ 8.5 $ 9.3
Net Income (loss) .............................. $ (51.8) $ (45.5) $ (39.8) $ (36.0)
Per common share:
Basic ...................................... $ (1.09) $ (0.96) $ (0.84) $ (0.76)
Diluted .................................... $ (1.09) $ (0.96) $ (0.84) $ (0.76)
For the Three Months For the Six Months
Ended June 30, 2004 Ended June 30, 2004
------------------------ ------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
---------- ---------- ---------- ----------
Net sales ...................................... $ 1,336.4 $ 1,332.5 $ 2,380.2 $ 2,391.9
Cost of goods sold ............................. $ 1,141.4 $ 1,139.8 $ 2,024.9 $ 2,038.8
Gross profit ................................... $ 195.0 $ 192.7 $ 355.3 $ 353.1
Selling, general and administrative expenses ... $ (119.2) $ (119.6) $ (231.2) $ (232.1)
Income (loss) from operations .................. $ 75.8 $ 73.1 $ 124.1 $ 121.0
Income (loss) before income taxes .............. $ 73.6 $ 70.9 $ 98.0 $ 94.9
Benefit from (provision for) income taxes ...... $ (14.5) $ (7.6) $ (21.9) $ (12.9)
Net Income (loss) .............................. $ 59.1 $ 63.3 $ 76.1 $ 82.0
Per common share:
Basic ...................................... $ 1.20 $ 1.29 $ 1.55 $ 1.68
Diluted .................................... $ 1.17 $ 1.24 $ 1.50 $ 1.61
12
BALANCE SHEET:
As of June 30, 2004 As of December 31, 2003
------------------------ ------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
---------- ---------- ---------- ----------
Trade receivables .............................. $ 660.9 $ 641.1 $ 540.2 $ 509.3
Inventories .................................... $ 1,075.9 $ 1,092.7 $ 1,009.7 $ 1,038.5
Current deferred taxes ......................... $ 55.4 $ 80.1 $ 53.9 $ 78.6
Other current assets ........................... $ 124.3 $ 127.2 $ 122.7 $ 125.6
Total current assets ........................... $ 2,371.0 $ 2,395.6 $ 2,194.0 $ 2,219.5
Property, plant and equipment .................. $ 354.2 $ 337.9 $ 370.1 $ 353.8
Goodwill ....................................... $ 615.9 $ 629.2 $ 603.5 $ 616.7
Deferred taxes ................................. $ 227.2 $ 34.7 $ 238.9 $ 47.0
Other assets ................................... $ 298.2 $ 306.9 $ 317.3 $ 317.2
Total assets ................................... $ 3,866.5 $ 3,704.3 $ 3,723.8 $ 3,554.2
Trade accounts payable ......................... $ 776.7 $ 784.1 $ 608.6 $ 614.9
Accrued compensation and benefits .............. $ 100.8 $ 92.5 $ 94.5 $ 89.7
Accrued warranties and product liability ....... $ 84.6 $ 85.8 $ 88.5 $ 89.7
Other current liabilities ...................... $ 284.1 $ 300.7 $ 281.0 $ 287.5
Total current liabilities ...................... $ 1,321.9 $ 1,338.8 $ 1,159.4 $ 1,168.6
Other non-current liabilities .................. $ 425.5 $ 433.7 $ 412.9 $ 436.2
Additional paid-in capital ..................... $ 802.9 $ 840.4 $ 795.1 $ 813.5
Retained earnings (accumulated deficit) ........ $ 118.0 $ (123.2) $ 41.9 $ (205.2)
Cumulative translation adjustment .............. $ 54.0 $ 105.4 $ 79.6 $ 140.0
Accumulated other comprehensive income ......... $ 29.3 $ 73.8 $ 57.0 $ 110.4
Cost of shares of common stock in treasury ..... $ (18.7) $ (46.8) $ (17.8) $ (44.6)
Total stockholders' equity ..................... $ 932.0 $ 744.7 $ 876.7 $ 674.6
Total liabilities and stockholders' equity ..... $ 3,866.5 $ 3,704.3 $ 3,723.8 $ 3,554.2
Net cash from operating activities, financing activities and investing
activities for the six months ended June 30, 2004 and 2003 did not change from
previously issued results. The impact of the restatement on individual lines
items within operating activities are reflected in the consolidated statement of
cash flows for the six months ended June 30, 2004 and 2003.
The cumulative effect of the restatement of the Company's previously filed
financial statements was to reduce retained earnings as of June 30, 2004,
December 31, 2003 and 2002 by $241.2 (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) $9.0, ($185.7) and $6.7, respectively. Total
stockholders' equity as of June 30, 2004, December 31, 2003 and December 31,
2002 decreased by $187.3 (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 in the three and six
months ended June 30, 2004 and $0.0 and $1.7 in the three and six months ended
June 30, 2003, respectively, not being recorded as expenses.
North American Distribution (Construction Segment): The Company failed to timely
and accurately reconcile certain intercompany imbalances and resulted in costs
totaling $0.0 in the three and six months ended June 30, 2004, and $0.3 in the
three and six months ended June 30, 2003 not being recorded as expenses.
13
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 in the three and six months
ended June 30, 2004, and $0.7 and $1.3 in the three and six months ended June
30, 2003, respectively, were not recorded as expenses.
Compact Equipment (Construction Segment): The Company failed to reconcile the
accrual for goods received not invoiced to underlying detailed records for raw
material and parts inventory in connection with assessing the appropriateness of
the accrued liability. As a result, costs totaling $0.5 and $1.0 in the three
and six months ended June 30, 2004, and $0.2 and $0.3 were not recorded for the
three months and six months ended June 30, 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, expenses were not recorded
totaling $0.3 and $0.9 in the three and six months ended June 30, 2004, and $0.3
and $0.7 in the three and six months ended June 30, 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 stockholders' 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 (decrease) in revenue of ($3.9) and $11.7 for the three
months and six months ended June 30, 2004 and $1.3 and $8.0 for the three months
and six months ended June 30, 2003. As a result of these adjustments, there was
an increase (decrease) in pre-tax income of ($1.0) and $0.2 in the three months
and six months ended June 30, 2004 and $0.8 and $1.4 in the three months and six
months ended June 30, 2003.
Acquisition Accounting: During the Company's review of the accounting for
certain of its acquisitions, errors were identified related to excess accruals
for estimated future legal expenses and assumed product liabilities, as well as
asset valuation errors. These errors also resulted in an overstatement of
goodwill at the time of the acquisitions. As the goodwill was subsequently
impaired, such errors also resulted in an overstatement of the goodwill
impairment by $7.0 during the year ended December 31, 2003. As a result of these
aggregate errors, expenses were not recorded totaling $0.9 and $1.4 in the three
months and six months ended June 30, 2004. In addition, expenses totaling $0.4
and $1.1 were not recorded in the three months and six months ended June 30,
2003, which were offset by $7.0 of income relating to a reduction in goodwill
impairment from $51.3 to $44.3.
Cumulative Translation Adjustment: Management has also determined that the
accounting treatment of certain of its goodwill related to foreign acquisitions
did not meet the requirements of SFAS No. 52, "Foreign Currency Translation." At
the time these foreign acquisitions were completed, mainly in 1999 and 2002, the
Company valued goodwill at the historic exchange rate, and failed to translate
this goodwill in subsequent reporting periods at current exchange rates as
required by SFAS No. 52. The cumulative impact of this correction has increased
(decreased) the Company's goodwill and the translation adjustment account within
stockholders' equity by $31.9 as of June 30, 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 account 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)
14
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 June 30, 2004 and December 31, 2003 totaling $7.0 and $6.9,
respectively. In addition, non-current liabilities increased as of June 30, 2004
and December 31, 2003 by $10.0 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
totaling $26.8. As of June 30, 2004, the net result was a decrease in current
liabilities totaling $5.7, a decrease in non-current liabilities totaling $3.0,
an increase in paid in capital of $36.8 and an increase in treasury stock
totaling $28.1.
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 June 30, 2004 by $9.0 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.
15
NOTE C - ACQUISITIONS AND DIVESTITURES
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, its date of acquisition.
On August 28, 2003, the Company acquired an additional 51% of the outstanding
shares of TATRA a.s. ("Tatra") from SDC Prague s.r.o., a subsidiary of SDC
International, Inc. Tatra is located in the Czech Republic and is a manufacturer
of on/off road heavy-duty vehicles for commercial and military applications.
Consideration for the acquisition was comprised of debt forgiveness totaling
$8.1, cash of $0.2 and approximately 209 thousand shares of Terex Common Stock.
On April 22, 2004, the Company purchased an additional 10% of the outstanding
shares of Tatra for $1.2 in cash. These acquisitions bring Terex's total
ownership interest in Tatra to approximately 81%. Tatra's results have been
included in the Company's consolidated financial statements since August 28,
2003. Upon the initial consolidation of Tatra into the Company's consolidated
financial results, Tatra's debt totaled approximately $33. This debt primarily
consisted of notes payable to financial institutions. Tatra is part of the
Company's Roadbuilding, Utility Products and Other segment.
The Company owns an approximately 67% interest in American Truck Company
("ATC"). ATC is located in the United States and manufactures heavy-duty
off-road trucks for military and severe duty commercial applications. The
Company and Tatra each owned approximately a one-third interest in ATC at August
28, 2003. As a result of the Company's August 28, 2003 acquisition of additional
ownership of Tatra, the results of ATC also have been included in the Company's
consolidated financials statements since August 28, 2003. Prior to this date the
Company accounted for its investment in ATC under the equity method of
accounting. The Company subsequently acquired Tatra's interest in ATC on June
14, 2004 for approximately $1.4, which was used to repay certain indebtedness of
Tatra to the Company.
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 and liabilities 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.
Divestitures
During the second quarter of 2004, the Company sold certain legacy parts
businesses for $2.5 in cash and promissory notes, as the Company's strategy is
to focus on supporting core Terex products. These legacy parts businesses were
included in the Terex Cranes and Terex Mining segments prior to their sale and
resulted in a loss of
16
$2.3 recorded in cost of goods sold. In addition, the Company entered into a 10
year non-compete agreement with the purchaser of these businesses for a $0.8
promissory note.
In 2002, the Company acquired an interest in Crane & Machinery, Inc. ("C&M"),
which distributed, rented and serviced crane products, including those products
manufactured by the Company. During 2002, the Company acquired from an
unaffiliated financial institution outstanding loans in the amount of
approximately $5.9 owed by C&M to that financial institution, and C&M was
obligated to make payments to the Company pursuant to the terms of such loans.
The results of C&M were consolidated in the Company's financial results from
December 31, 2002 through November 10, 2003. On November 10, 2003, the Company
sold its interest in C&M, and obtained a third party guarantee of the loans
payable by C&M to the Company, as well as a pledge of the assets of C&M as
security for the payment of such loans. As a result, the Company ceased to
consolidate C&M's results as of November 10, 2003. In addition, on November 10,
2003, the Company sold substantially all of the assets of its Schaeff
Incorporated subsidiary (a manufacturer of forklifts) to C&M, in consideration
of C&M assuming approximately $3.1 of Schaeff Incorporated's indebtedness to the
Company, with such indebtedness secured by the guarantee and pledge described
above. The results of Schaeff Incorporated and C&M were included in the Terex
Cranes segment prior to the November 10, 2003 transactions.
NOTE 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 ..................... -- -- 9.0 -- 6.4 15.4
Foreign exchange effect/other .... (0.1) (2.9) -- -- 0.1 (2.9)
------------ --------- --------- --------- ------------- ---------
Balance at June 30, 2004
(Restated) .................... $ 325.7 $ 95.7 $ 62.0 -- $ 145.8 $ 629.2
============ ========= ========= ========= ============= =========
In April 2004 the Company made an $8.5 cash payment to the previous owners of
Genie Holdings, Inc. and its affiliates ("Genie"). The payment was related to a
contingent deferred purchase price adjustment, and was based on the collection
of certain trade receivables which were outstanding on the acquisition date.
Genie is included in the Terex Aerial Work Platforms segment.
The goodwill recognized for the acquisitions of Tatra, CEL and Asplundh Canada
as of June 30, 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
17
nature and relationships between the hedging instruments and hedged items, as
well as its risk-management objectives, strategies for undertaking the various
hedge transactions and method of assessing hedge effectiveness. Additionally,
for hedges of forecasted transactions, the significant characteristics and
expected terms of a forecasted transaction must be specifically identified, and
it must be probable that each forecasted transaction will occur. If it were
deemed probable that the forecasted transaction will not occur, the gain or loss
would be recognized in earnings currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period. The Company does not engage in trading or other speculative
use of financial instruments.
The Company uses forward contracts and options to mitigate its exposure to
changes in foreign currency exchange rates on third-party and intercompany
forecasted transactions. The primary currencies to which the Company is exposed
include the Euro, the British Pound, the Czech Koruna and the Australian Dollar.
When using options as a hedging instrument, the Company excludes the time value
from the assessment of effectiveness. The effective portion of unrealized gains
and losses associated with forward contracts and the intrinsic value of option
contracts are deferred as a component of accumulated other comprehensive income
until the underlying hedged transactions are reported on the Company's
consolidated statement of operations. The Company uses interest rate swaps to
mitigate its exposure to changes in interest rates related to existing issuances
of variable rate debt and to fair value changes of fixed rate debt. Primary
exposure includes movements in the London Interbank Offer Rate ("LIBOR").
Changes in the fair value of derivatives that are designated as fair value
hedges are recognized in earnings as offsets to the changes in fair value of
exposures being hedged. The change in fair value of derivatives that are
designated as cash flow hedges are deferred in accumulated other comprehensive
income and are recognized in earnings as the hedged transactions occur. Any
ineffectiveness is recognized in earnings immediately.
The Company records hedging activity related to debt instruments in interest
expense and hedging activity related to foreign currency and lease obligations
in operating profit. On the Consolidated Statement of Cash Flows, the Company
records cash flows from hedging activities in the same manner as it records the
underlying item being hedged.
The Company entered into interest rate swap agreements that effectively
converted variable rate interest payments into fixed rate interest payments. At
June 30, 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 June 30, 2004 was a loss of $1.1, 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 and six months ended June 30, 2004 and 2003, the Company recorded the
change in fair value to accumulated other comprehensive income and reclassified
to earnings a portion of the deferred loss from accumulated other comprehensive
income as the hedged transactions occurred and were recognized in earnings.
The Company has entered into a series of interest rate swap agreements that
converted fixed rated interest payments into variable rate interest payments. At
June 30, 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 June 30, 2004 was a loss of $4.1, which is
recorded in other non-current liabilities. These swap agreements have been
designated as, and are effective as, fair value hedges of outstanding debt
instruments. During December 2002, the Company exited an interest rate swap
agreement in the notional amount of $100.0 with a 2011 maturity that converted
fixed rate interest payments into variable rate interest payments. The Company
received $5.6 upon exiting this swap agreement. These gains are being amortized
over the original maturity and, netted against the market value of the swap
agreements held at June 30, 2004, are offset by a $0.5 addition in the carrying
value of the long-term obligations being hedged.
The Company is also a party to currency exchange forward contracts that mature
within 15 months, to manage its exposure to changing currency exchange rates. At
June 30, 2004, the Company had $270.8 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 June 30, 2004 was a gain of $7.2.
At June 30, 2004, $261.8 notional amount of these swap agreements have been
designated as, and are effective as, cash flow hedges of specifically identified
assets and liabilities. For these cash flow hedges, during the three months and
six months ended June 30, 2004 and 2003, the Company recorded the change in fair
value to accumulated other comprehensive income and reclassified to earnings
18
a portion of the deferred loss from accumulated other comprehensive income as
the hedged transactions occurred and were recognized in earnings.
At June 30, 2004, the fair value of all derivative instruments designated as
cash flow hedges and fair value hedges have been recorded in the Condensed
Consolidated Balance Sheet as a net asset of $6.1 and $4.1, respectively.
Counterparties to interest rate derivative contracts and currency exchange
forward contracts are major financial institutions with credit ratings of
investment grade or better and no collateral is required. There are no
significant risk concentrations. Management believes the risk of incurring
losses on derivative contracts related to credit risk is remote and any losses
would be immaterial.
Unrealized net gains (losses) included in Other Comprehensive Income are as
follows:
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Balance at beginning of period .... $ 2.7 $ 0.8 $ 6.5 $ 2.1
Additional gains (losses) ......... 5.8 (1.3) 5.3 (3.8)
Amounts reclassified to earnings .. (4.1) (3.3) (7.4) (2.1)
---------- ---------- ---------- ----------
Balance at end of period .......... $ 4.4 $ (3.8) $ 4.4 $ (3.8)
========== ========== ========== ==========
The estimated amount of existing pre-tax net gains for derivative contracts in
accumulated other comprehensive income as of June 30, 2004 that is expected to
be reclassified into earnings during the twelve month period ending June 30,
2005 is $5.8.
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.
2004 PROGRAMS
In the second quarter of 2004, the Company recorded a charge of $2.7 related to
restructuring at its Atlas Terex facility in Loeningen, Germany, of which $2.2
has been recorded in cost of goods sold and $0.5 has been recorded in selling,
general and administrative expenses. The Company implemented this restructuring
because it had concluded that it is more cost-effective to outsource the
activities that have been performed at the Loeningen facility. The closure of
this facility will reduce employment by approximately 40 employees and will be
completed by December 31, 2005. As of June 30, 2004, 28 employees have ceased
working for the Company. The cash impact of the program will be approximately
$2, excluding any proceeds that may be received from the sale of the facility.
The results of Atlas Terex are reported in the Terex Construction segment. The
Loeningen closure is expected to generate annual cost savings of approximately
$1 when fully implemented.
Also in the second quarter of 2004, the Company recorded a charge of $4.3 in
cost of goods sold for restructuring related to the closure of its Atlas Terex
truck-mounted crane facility in Hamilton, Scotland. The charge is a result of
the Company's decision to consolidate production at the Atlas Terex facility in
Delmenhorst, Germany, which already manufactures truck-mounted cranes. The
consolidation will lower the Company's cost structure for this
19
business and better utilize manufacturing capacity. As a result of the
restructuring, the Company has accrued for a headcount reduction of
approximately 90 employees at the Hamilton facility, which will be completed by
December 31, 2005. The cash impact of the program will be approximately $1.7,
excluding any proceeds that may be received from the sale of the facility. The
Hamilton facility closing is expected to reduce annual operating expenses by
approximately $5 when fully implemented.
In addition, during the second quarter of 2004, the Company established a
restructuring program, recorded in cost of goods sold, to move its pump
manufacturing business from its B.L. Pegson facility in Coalville, England to
another Terex Construction segment component manufacturing facility in Scotland.
The non-cash charge to cost of goods sold was $0.3. The Company anticipates it
will complete the relocation of this manufacturing line by September 30, 2004 in
order to free needed capacity at the B.L. Pegson facility for crushing equipment
production.
In the second quarter of 2004, the Company created a restructuring program to
reduce the number of installation facilities in its Terex Utilities South
business unit from four facilities to three facilities. Headcount related to
this program was reduced by 20 employees. The Company recorded a $0.3 charge to
cost of goods sold related to this program. This charge consists of $0.2 cash
and a $0.1 non-cash component. This program is expected to be completed during
the third quarter of 2004. Terex Utilities South is part of the Terex
Roadbuilding, Utility Products and Other Segment.
2003 PROGRAMS
In the first quarter of 2003, the Company recorded a charge of $0.7 related to
restructuring at its CMI Terex facility in Oklahoma City, Oklahoma. Due to the
continued poor performance in the Roadbuilding business, the Company reduced
employment by approximately 146 employees at its CMI Terex facility. As of June
30, 2003, the program was substantially complete and all employees had ceased
working for the Company. 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 June
30, 2004, all of the employees had ceased employment with the Company and the
program was completed. Terex Peiner is included in the Terex Cranes segment. The
Terex Peiner closing is expected to reduce annual operating costs by $3.4.
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
20
Company's cost structure for this business and better utilize manufacturing
capacity. As a result of the restructuring, the Company has accrued for a
headcount reduction of 121 employees at the Kilbeggan facility. As of September
30, 2003, all of the employees had ceased employment with the Company. The
program was substantially complete at March 31, 2004, except for the disposal of
certain real property which is expected to be finalized in 2004. The Powerscreen
Kilbeggan facility is included in the Terex Construction segment. During the
three months ended June 30, 2003, $1.8 and $0.1 were recorded in cost of goods
sold and selling, general and administrative expenses, respectively. The
Kilbeggan facility closing is expected to generate annual cost savings of
approximately $3.
In addition, during the second quarter of 2003, the Company recorded
restructuring charges of $4.7 in the Terex Roadbuilding, Utility Products and
Other segment. These restructuring charges are the result of continued poor
performance in the Roadbuilding business and the Company's efforts to streamline
operations and improve profitability. The $4.7 restructuring charge is comprised
of the following components:
o A $2.8 charge related to exiting the bio-grind recycling
business, with $2.5 recorded in cost of goods sold and $0.3
recorded in selling, general and administrative expenses.
o A charge of $1.8 related to the exiting of the screening and
shredder-mixer business operated at its Durand, Michigan
facility, with $1.7 recorded in cost of goods sold and $0.1
recorded in selling, general and administrative expenses.
o A $0.1 charge was recorded in selling, general and
administrative expenses related to the headcount reduction of 17
employees at the Company's Cedarapids facility.
During the third quarter of 2003, the Company recorded a severance charge of
$0.1 for future cash expenditures at its hydraulic crane production facility in
Waverly, Iowa. The Company has terminated six employees due to the integration
of the Terex-RO facility into Waverly. This charge has been recorded in cost of
goods sold.
All of the 2003 projects are expected to reduce annual operating costs by
approximately $15 in the aggregate when fully implemented.
2002 PROGRAMS
During 2002, the Company initiated a series of restructuring projects that
related to productivity and business rationalization. Restructuring programs
which began in 2002, but which were not completed prior to January 1, 2003,
include:
In the second quarter of 2002, the Company announced that its surface mining
truck production facility in Tulsa, Oklahoma would be closed and the production
activities outsourced to a third party supplier. The Company recorded a charge
of $4.2 related to the Tulsa closure. The closure was in response to continued
weakness in demand for the Company's mining trucks. Demand for mining trucks is
closely related to commodity prices, which have been declining in real terms
over recent years. Approximately $1.0 of this charge related to severance and
other employee related charges, while $2.2 of this charge relates to inventory
deemed uneconomical to relocate to other distribution facilities. The remaining
$1.0 of the cost accrued related to the Tulsa building closure costs and
occupancy costs expected to be incurred after production is ended. Approximately
93 positions have been eliminated as a result of this action. The transfer of
production activities to a third party was completed prior to December 31, 2002
and the Company is currently marketing the Tulsa property for sale.
Projects initiated in the fourth quarter of 2002 related to productivity and
business rationalization include the following:
o The closure of the Company's pressurized vessel container
business. This business, located in Clones, Ireland, provided
pressurized containers to the transportation industry. The
business, acquired as part of the Powerscreen acquisition in
1999, was part of the Company's Construction segment and was not
core to the Company's overall strategy. The Company recorded a
charge of $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.
21
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 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 had 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
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. This
program was completed as of June 30, 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 six months ended June 30, 2004 that related to
productivity and business rationalization:
Employee
Termination Asset Facility
Costs Disposals Exit Costs Other Total
----------- ---------- ---------- ---------- ----------
Accrued restructuring charges at
December 31, 2003 .............. $ 0.1 $ -- $ 1.4 $ 1.3 $ 2.8
Restructuring charges .............. 3.9 4.6 1.0 -- 9.5
Cash expenditures .................. -- -- (0.8) (0.3) (1.1)
Non-cash charges ................... -- (4.6) -- (4.6)
----------- ---------- ---------- ---------- ----------
Accrued restructuring charges at
June 30, 2004 .................. $ 4.0 $ -- $ 1.6 $ 1.0 $ 6.6
=========== ========== ========== ========== ==========
In the aggregate, the restructuring charges described above incurred during the
six months ended June 30, 2004 and 2003 were included in cost of goods sold
($8.2 and $11.4) and selling, general and administrative expenses ($1.3 and
$1.4), respectively.
22
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 in 2002.
Projects initiated in the Terex Cranes segment in the fourth quarter of 2002,
but which were not completed prior to January 1, 2003, related to the
acquisition of Demag consist of:
o The elimination of certain PPM branded 3, 4 and 5 axle cranes
produced at the Company's Montceau, France facility. The Company
determined that the products produced under the PPM brand were
similar to products produced by Demag and has opted to eliminate
these PPM models in favor of the similar Demag products, which
the Company believes have superior capabilities. As a result,
employment levels in Montceau were reduced. As of June 30, 2003,
102 employees had ceased employment with the Company. In
addition, the Company also recognized a loss in value on the
affected PPM branded cranes inventory in France and Spain. The
Company recorded a charge of $15.3, of which $5.4 was for
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 during 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 three months ended March 31, 2004 and June 30, 2004, the Company
recorded an additional $0.8 and $0.2, respectively, 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.
23
The following table sets forth the components and status of the restructuring
charges recorded in the six months ended June 30, 2004 that relate to addressing
product, channel and production overlaps created by the acquisition of the Demag
and Genie businesses:
Employee
Termination Asset Facility
Costs Disposals Exit Costs Other Total
----------- ---------- ---------- ---------- ----------
Accrued restructuring charges at
December 31, 2003 .............. $ 1.0 $ -- $ 0.6 $ -- $ 1.6
Restructuring charges .............. -- 0.8 -- -- 0.8
Cash expenditures .................. (0.5) -- (0.6) -- (1.1)
Non-cash charges ................... -- (0.8) -- -- (0.8)
----------- ---------- ---------- ---------- ----------
Accrued restructuring charges at
June 30, 2004 .................. $ 0.5 $ -- $ -- $ -- $ 0.5
=========== ========== ========== ========== ==========
In the aggregate, the restructuring charges described above incurred during the
six months ended June 30, 2004 and 2003 were included in cost of goods sold
($0.8 and $0.0).
NOTE G - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
Restated Restated
------------ ------------
Finished equipment ................... $ 370.3 $ 395.2
Replacement parts .................... 254.6 250.6
Work-in-process ...................... 236.6 187.4
Raw materials and supplies ........... 231.2 205.3
------------ ------------
Inventories .......................... $ 1,092.7 $ 1,038.5
============ ============
NOTE H - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, December 31,
2004 2003
Restated Restated
------------ ------------
Property ............................. $ 51.1 $ 51.7
Plant ................................ 220.8 222.5
Equipment ............................ 251.5 245.0
------------ ------------
523.4 519.2
Less: Accumulated depreciation ....... (185.5) (165.4)
------------ ------------
Net property, plant and equipment .... $ 337.9 $ 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.
24
On January 1, 2004, the Company and its joint venture partner revised the
co-operation agreement and operating relationship with respect to GFSH. As part
of the reorganization, the name of the joint venture was changed to Terex
Financial Services Holding B.V. ("TFSH"), Genie's ownership interest in TFSH was
reduced to forty percent (40%) in exchange for consideration of $1.2 from the
joint venture partner, and Genie transferred its interest to another Company
subsidiary. In addition, the scope of TFSH's operations was broadened, as it was
granted the right to facilitate the financing of all of the Company's products
sold in Europe.
As of June 30, 2004, TFSH had total assets of $170.7, consisting primarily of
financing receivables and lease related equipment, and total liabilities of
$154.3, consisting primarily of debt issued by the joint venture partner. From
time to time, the Company has provided guarantees related to potential losses
arising from shortfalls in the residual values of financed equipment or credit
defaults by the joint venture's customers. As of June 30, 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
a result of the capital account balance requirements for TFSH, in June 2004 the
Company contributed an additional $1.9 in cash to TFSH.
As defined by FIN 46R, TFSH is a VIE. For entities created prior to February 1,
2003, FIN 46R requires the application of its provisions effective the first
reporting period after March 15, 2004. Based on the legal, financial and
operating structure of TFSH, the Company has concluded that it is not the
primary beneficiary of TFSH and that it does not control the operations of TFSH.
Accordingly, the Company does not consolidate the results of TFSH into its
consolidated financial results. The Company applies the equity method of
accounting for its investment in TFSH.
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 $109 at June
30, 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 $15.9 at June 30,
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 June 30,
2004, representing a contingent liability under the limited recourse provisions.
25
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 $35.6 credit risk and a $41.5 residual value risk at
June 30, 2004.
The Company's contingent liabilities previously referred to have not taken into
account various mitigating factors. These factors include the staggered timing
of maturity of lease transactions, resale value of the underlying equipment,
lessee return penalties and annual loss caps on credit loss pools. Further, the
credit risk contingent liability assumes that the individual leases were to all
default at the same time and that the repossessed equipment has no market value.
NOTE L - EARNINGS PER SHARE
For the
Three Months Ended June 30,
(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 (loss) ............ $ 63.3 49.1 $ 1.29 $ (45.5) 47.6 $ (0.96)
Effect of dilutive securities:
Stock options ................ -- 1.9 -- --
---------- ---------- ---------- ----------
Net income (loss) ................ $ 63.3 51.0 $ 1.24 $ (45.5) 47.6 $ (0.96)
========== ========== ========== ========== ========== ==========
For the
Six Months Ended June 30,
(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 (loss) ............ $ 82.0 48.9 $ 1.68 $ (36.0) 47.4 $ (0.76)
Effect of dilutive securities:
Stock Options ................ -- 2.0 -- --
---------- ---------- ---------- ----------
Net income (loss) ................ $ 82.0 50.9 $ 1.61 $ (36.0) 47.4 $ (0.76)
========== ========== ========== ========== ========== ==========
Had the Company recognized income (versus a loss) in the three months ended June
30, 2003, diluted shares outstanding would have increased by 1.1 million for the
assumed exercise of stock options, 0.6 million for the effect of Common Stock
held by the Company's deferred compensation plan and 0.5 million for the
Company's contingent obligation to make additional payments for the acquisition
of Genie. For the six months ended June 30, 2003, diluted shares outstanding
would have increased by 0.9 million for the assumed exercise of stock options,
0.6 million for the effect of Common Stock held by the Company's deferred
compensation plan and 0.6 million for the Company's contingent obligation to
make additional payments for the acquisition of Genie.
26
Options to purchase 245 thousand, 1,017 thousand, 230 thousand and 1,593
thousand shares of Common Stock were outstanding during the three months and six
months ended June 30, 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 226 thousand and 499 thousand
shares for the three months and six months ended June 30, 2003, respectively,
are not included in the computation of diluted earnings per share. At June 30,
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 and six months
ended June 30, 2004.
NOTE M - INCOME TAXES
The effective tax rate for the three months and six months ended June 30, 2004
was 10.7% and 13.6%, respectively, as compared to an effective rate of (346.9%)
for the twelve months ended December 31, 2003. The effective tax rate for the
three months and six months ended June 30, 2004 is higher than the prior year's
effective tax rate due 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 and (b) the strong financial performance of the Company's Fermec
business, where recent performance indicated that it was more likely than not
that the Company would be able to realize the benefits of certain tax assets,
and, therefore, the valuation allowance held for this business was released. The
financial impact of this item was recognized in the second quarter, resulting in
a three month and six month tax rate that is significantly lower than the full
year's tax rate in 2003.
The effective tax rate for the three and six months ended June 30, 2003 was
22.9% and 20.5%, respectively, as compared to the effective rate of (346.9%) for
the year ended December 31, 2003. The higher effective tax rate during the three
months and six months ended June 30, 2003 was due to the impact of the U.S.
valuation allowance mentioned above partially offset by a goodwill impairment
related to the Company's roadbuilding reporting unit recorded during the second
quarter of 2003. This goodwill impairment charge was only partially deductible
for income tax purposes.
Excluding the impact of the valuation allowance taken on the U.S. net deferred
tax asset of $200.7, the effective tax rate for the year ended December 31, 2003
would have been 48.9%.
NOTE N - EARLY EXTINGUISHMENT OF DEBT
During the second quarter of 2004, the Company prepaid $75.0 of term debt under
its bank credit facility and recorded a related non-cash charge of $1.5. The
non-cash charge related to the write-off of unamortized debt acquisition costs.
During the second quarter of 2003, the Company redeemed $50.0 aggregate
principal amount of its 8-7/8% Senior Subordinated Notes due 2008 and recognized
a non-cash charge of $1.9. The charge was comprised of the payment of an early
redemption premium ($2.2), the write off of unamortized original issuance
discount ($1.6) and the write off of unamortized debt acquisition costs ($0.2),
which were partially offset by the recognition of deferred gains related to
previously closed fair value interest rate swaps on this debt ($2.1).
27
NOTE O - STOCKHOLDERS' EQUITY
Total non-stockowner changes in equity (comprehensive income) include all
changes in equity during a period except those resulting from investments by,
and distributions to, stockowners. The specific components include: net income,
deferred gains and losses resulting from foreign currency translation, minimum
pension liability adjustments, deferred gains and losses resulting from
derivative hedging transactions and deferred gains and losses resulting from
debt and equity securities classified as available for sale. Total
non-stockowner changes in equity were as follows.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
Restated Restated Restated Restated
---------- ---------- ---------- ----------
Net income (loss) .................. $ 63.3 $ (45.5) $ 82.0 $ (36.0)
Other comprehensive income (loss):
Translation adjustment ......... (25.9) 45.6 (34.6) 50.9
Pension liability adjustment ... (0.1) (0.5) 0.1 (0.3)
Derivative hedging adjustment .. 1.7 (4.6) (2.1) (5.9)
---------- ---------- ---------- ----------
Comprehensive income (loss) ........ $ 39.0 $ (5.0) $ 45.4 $ 8.7
========== ========== ========== ==========
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. On April 7, 2004,
Ronald M. DeFeo, the Company's Chairman, Chief Executive Officer and President,
delivered 22,429 shares of Common Stock to the Company in connection with his
repayment of a loan made by the Company to Mr. DeFeo on March 2, 2000. The loan
was repaid in full by Mr. DeFeo, through this Common Stock payment and
additional cash payments, in April 2004.
NOTE P - 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 a
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 $93.2 at June 30, 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
28
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.
In the second quarter of 2004, the Company settled an outstanding litigation
matter related to the Company's acquisition of O&K Mining in 1998. In connection
with the settlement, the Company recognized a gain of $5.8, which was recorded
in "Other income (expense) - net" in the Condensed Consolidated Statement of
Operations during the second quarter of 2004.
Credit Guarantees
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of 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 June 30, 2004, the Company's maximum exposure to such credit guarantees
was $289.5. The terms of these guarantees coincide with the financing arranged
by the customer and generally does not exceed five years. Given the Company's
position as the original equipment manufacturer and its knowledge of end
markets, the Company, when called upon to fulfill a guarantee, generally has
been able to liquidate the financed equipment at a minimal loss, if any, to the
Company.
Residual Value and Buyback Guarantees
The Company issues residual value guarantees under sales-type leases. A residual
value guarantee involves a guarantee that a piece of equipment will have a
minimum fair market value at a future point in time. As described in Note K -
"Net Investment in Sales-Type Leases," the Company's maximum exposure related to
residual value guarantees under sales-type leases was $41.5 at June 30, 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 June 30, 2004, the Company's maximum exposure to buyback guarantees was
$43.4. 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 a liability within "other current liabilities" and
"other non-current liabilities" of approximately $10 for the estimated fair
value of all guarantees provided as of June 30, 2004.
NOTE Q - RETIREMENT PLANS AND OTHER BENEFITS
Pension Plans
U.S. Plans - As of June 30, 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
29
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 programs. The health care
programs are contributory with participants' contributions adjusted annually;
the life insurance plan is noncontributory. The Company provides postemployment
health and life insurance benefits to certain former salaried and hourly
employees of Terex Cranes - Waverly Operations (also known as Koehring Cranes,
Inc.) and Terex Corporation. The Company provides post-employment health
benefits for certain employees at Cedarapids and Simplicity Engineering. The
Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," on January 1, 1993. This statement requires accrual of
postretirement benefits (such as health care benefits) during the years an
employee provides service. Terex adopted the provisions of SFAS No. 106 using
the delayed recognition method, whereby the amount of the unrecognized
transition obligation at January 1, 1993 is recognized prospectively as a
component of future years' net periodic postretirement benefit expense. The
unrecognized transition obligation at January 1, 1993 was $4.5. Terex is
amortizing this transition obligation over 12 years, the average remaining life
expectancy of the participants.
Pension Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
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% 8.00% 8.00%
Rate of compensation increase ......... 4.00% 5.00% 4.00% 5.00%
Pension Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Components of net periodic cost:
Service cost .......................... $ 0.4 $ 0.1 $ 0.7 $ 0.3
Interest cost ......................... 1.7 1.7 3.5 3.5
Expected return on plan assets ........ (1.9) (1.6) (3.8) (3.3)
Amortization of prior service cost .... 0.2 0.2 0.4 0.3
Recognized actuarial (gain) loss ...... 0.5 0.6 1.1 1.2
---------- ---------- ---------- ----------
Net periodic cost (benefit) .............. $ 0.9 $ 1.0 $ 1.9 $ 2.0
========== ========== ========== ==========
30
Other Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted-average assumptions:
Discount rate ......................... 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets ........ -- -- -- --
Rate of compensation increase ......... -- -- -- --
Other Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Components of net periodic cost:
Service cost .......................... $ 0.1 $ 0.1 $ 0.1 $ 0.1
Interest cost ......................... 0.2 0.1 0.4 0.3
Amortization of prior service cost .... -- 0.1 -- 0.1
Amortization of transition obligation . -- 0.1 0.1 0.2
Recognized actuarial (gain) loss ...... 0.2 -- 0.3 0.1
---------- ---------- ---------- ----------
Net periodic cost (benefit) .............. $ 0.5 $ 0.4 $ 0.9 $ 0.8
========== ========== ========== ==========
The Company plans to contribute approximately $3 to its U.S. defined benefit
pension plans in 2004. During the three months and six months ended June 30,
2004, the Company contributed $1.6 and $1.8, respectively, to its U.S. defined
benefit pension plans.
International Plans - The Company maintains defined benefit plans in Germany,
France, Ireland and the United Kingdom for some of its subsidiaries. The plans
in Germany and France are unfunded plans.
Pension Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted-average assumptions:
Discount rate ......................... 5.50%-6.00% 5.75%-6.00% 5.50%-6.00% 5.75%-6.00%
Expected return on plan assets ........ 2.00%-6.50% 2.00%-7.00% 2.00%-6.50% 2.00%-7.00%
Rate of compensation increase ......... 2.75%-4.00% 3.75%-4.25% 2.75%-4.00% 3.75%-4.25%
Pension Benefits
----------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Components of net periodic cost:
Service cost .......................... $ 1.0 $ 1.0 $ 2.0 $ 1.9
Interest cost ......................... 3.0 2.8 6.1 5.5
Expected return on plan assets ........ (1.1) (1.0) (2.2) (1.9)
Recognized actuarial (gain) loss ...... 0.1 0.2 0.2 0.4
---------- ---------- ---------- ----------
Net periodic cost (benefit) .............. $ 3.0 $ 3.0 $ 6.1 $ 5.9
========== ========== ========== ==========
31
The Company plans to contribute approximately $10 to its international defined
benefit pension plans in 2004. During the three months and six months ended June
30, 2004, the Company contributed $2.5 and $6.0, respectively, to its
international defined benefit pension plans.
NOTE R - 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 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 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 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, Peiner, PPM and
RO-Stinger.
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 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. Terex also owns much of the North American distribution channel
for the utility products group through the distributors Terex Utilities South
and Terex Utilities
32
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
underwritten by TFS Capital Funding, an affiliate of the General Electric
Company, and TFSH to assist in the acquisition of the Company's products.
The results of businesses acquired during 2003 are included from the dates of
their respective acquisitions.
Included in Eliminations/Corporate are the eliminations among the five segments,
as well as general and corporate items for the three months and six months ended
June 30, 2004 and 2003. Business segment information is presented below:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
Restated Restated Restated Restated
---------- ---------- ---------- ----------
Sales
Terex Construction .................... $ 472.5 $ 380.1 $ 873.6 $ 696.8
Terex Cranes .......................... 275.9 274.7 486.7 529.1
Terex Aerial Work Platforms ........... 238.1 167.8 406.1 315.0
Terex Mining .......................... 98.6 73.9 172.1 152.7
Terex Roadbuilding, Utility Products
and Other ............................ 268.1 172.6 484.6 323.6
Eliminations/Corporate ................ (20.7) (19.0) (31.2) (32.7)
---------- ---------- ---------- ----------
Total ............................... $ 1,332.5 $ 1,050.1 $ 2,391.9 $ 1,984.5
========== ========== ========== ==========
Income (Loss) from Operations
Terex Construction .................... $ 21.0 $ 18.0 $ 37.8 $ 32.3
Terex Cranes .......................... 10.1 1.5 16.6 8.0
Terex Aerial Work Platforms ........... 32.7 21.3 53.0 36.7
Terex Mining .......................... 6.5 4.1 8.5 8.6
Terex Roadbuilding, Utility Products
and Other ............................ 6.4 (70.5) 11.4 (71.3)
Eliminations/Corporate ................ (3.6) (4.1) (6.3) (6.4)
---------- ---------- ---------- ----------
Total ............................... $ 73.1 $ (29.7) $ 121.0 $ 7.9
========== ========== ========== ==========
June 30, December 31,
2004 2003
Restated Restated
------------- -------------
Identifiable Assets
Terex Construction ................................ $ 1,539.0 $ 1,433.8
Terex Cranes ...................................... 900.7 903.6
Terex Aerial Work Platforms ....................... 466.0 448.6
Terex Mining ...................................... 462.9 444.5
Terex Roadbuilding, Utility Products and Other .... 717.9 641.3
Corporate ......................................... 1,847.8 1,803.7
Eliminations ...................................... (2,230.0) (2,121.3)
------------- -------------
Total ........................................... $ 3,704.3 $ 3,554.2
============= =============
33
NOTE S - CONSOLIDATING FINANCIAL STATEMENTS
On March 29, 2001, the Company sold and issued $300 aggregate principal amount
of 10-3/8% Senior Subordinated Notes due 2011 (the "0-3/8% 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"). 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"). As of June 30, 2004, the
10-3/8% Notes, the 9-1/4% Notes and the 7-3/8% Notes were each jointly and
severally guaranteed by the following wholly-owned subsidiaries of the Company
(the "Wholly-owned Guarantors"): Amida Industries, Inc., Benford America, Inc.,
BL-Pegson USA, Inc., Cedarapids, Inc., CMI Dakota Company, CMI Terex
Corporation, CMIOIL Corporation, EarthKing, Inc., Finlay Hydrascreen USA, Inc.,
Fuchs Terex, Inc., Genie Access Services, Inc., Genie China, Inc., Genie
Financial Services, Inc., Genie Holdings, Inc., Genie Industries, Inc., Genie
International, Inc., Genie Manufacturing, Inc., GFS Commercial LLC, GFS
National, Inc., Go Credit Corporation, Koehring Cranes, Inc., Lease Servicing &
Funding Corp., O&K Orenstein & Koppel, Inc., Payhauler Corp., Powerscreen
Holdings USA Inc., Powerscreen International LLC, Powerscreen North America
Inc., Powerscreen USA, LLC, PPM Cranes, Inc., Product Support, Inc., Royer
Industries, Inc., Schaeff Incorporated, Spinnaker Insurance Company, Standard
Havens, Inc., Standard Havens Products, Inc., Terex Advance Mixer, Inc., Terex
Bartell, Inc., Terex Cranes, Inc., Terex Financial Services, Inc., Terex Mining
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 10-3/8% Notes, the 9-1/4% Notes and the 7-3/8% 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 10-3/8%
Notes, the 9-1/4% Notes and the 7-3/8% Notes.
Debt and goodwill allocated to subsidiaries is presented on an accounting
"push-down" basis.
34
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net sales ........................................ $ 104.8 $ 479.0 $ 792.0 $ (43.3) $ 1,332.5
Cost of goods sold ......................... 95.7 417.4 670.0 (43.3) 1,139.8
----------- ------------ ------------- ------------ ------------
Gross profit ..................................... 9.1 61.6 122.0 -- 192.7
Selling, general & administrative expenses . (7.6) (39.8) (72.2) -- (119.6)
----------- ------------ ------------- ------------ ------------
Income (loss) from operations .................... 1.5 21.8 49.8 -- 73.1
Interest income ............................ 0.3 (0.2) 1.3 -- 1.4
Interest expense ........................... (11.0) (0.9) (11.5) -- (23.4)
Income (loss) from equity investees ........ 71.0 -- -- (71.0) --
Other income (expense) - net ............... 4.5 0.1 15.2 -- 19.8
----------- ------------ ------------- ------------ ------------
Income (loss) before income taxes ................ 66.3 20.8 54.8 (71.0) 70.9
Provision for income taxes ....................... (3.0) (0.2) (4.4) -- (7.6)
----------- ------------ ------------- ------------ ------------
Net income (loss) ................................ $ 63.3 $ 20.6 $ 50.4 $ (71.0) $ 63.3
=========== ============ ============= ============ ============
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net sales ........................................ $ 81.1 $ 367.4 $ 656.0 $ (54.4) $ 1,050.1
Cost of goods sold ......................... 73.0 345.9 570.0 (54.4) 934.5
----------- ------------ ------------- ------------ ------------
Gross profit ..................................... 8.1 21.5 86.0 -- 115.6
Selling, general & administrative
expenses ............................... (13.2) (32.1) (55.7) -- (101.0)
Goodwill impairment ........................ (3.7) (40.6) -- -- (44.3)
----------- ------------ ------------- ------------ ------------
Income (loss) from operations .................... (8.8) (51.2) 30.3 -- (29.7)
Interest income ............................ 0.2 2.2 (0.3) -- 2.1
Interest expense ........................... (7.8) (7.2) (11.6) -- (26.6)
Income (loss) from equity
investees .......................... (43.5) -- -- 43.5 --
Other income (expense) - net ............... (3.5) (0.1) (1.2) -- (4.8)
----------- ------------ ------------- ------------ ------------
Income (loss) before income taxes ................ (63.4) (56.3) 17.2 43.5 (59.0)
(Provision for) benefit from
income taxes ........................... 17.9 (0.4) (4.0) -- 13.5
----------- ------------ ------------- ------------ ------------
Net income (loss) ................................ $ (45.5) $ (56.7) $ 13.2 $ 43.5 $ (45.5)
=========== ============ ============= ============ ============
35
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net sales ........................................ $ 185.0 $ 863.8 $ 1,441.8 $ (98.7) $ 2,391.9
Cost of goods sold ......................... 168.9 750.3 1,218.3 (98.7) 2,038.8
----------- ------------ ------------- ------------ ------------
Gross profit ..................................... 16.1 113.5 223.5 -- 353.1
Selling, general & administrative
expenses ............................... (15.7) (73.0) (143.4) -- (232.1)
----------- ------------ ------------- ------------ ------------
Income (loss) from operations .................... 0.4 40.5 80.1 -- 121.0
Interest income ............................ 0.5 (0.7) 2.6 -- 2.4
Interest expense ........................... (9.2) (13.8) (22.9) -- (45.9)
Income (loss) from equity investees ........ 86.8 -- -- (86.8) --
Other income (expense) - net ............... 5.6 (0.7) 12.5 -- 17.4
----------- ------------ ------------- ------------ ------------
Income (loss) before income taxes ................ 84.1 25.3 72.3 (86.8) 94.9
Provision for income taxes ....................... (2.1) (0.6) (10.2) -- (12.9)
----------- ------------ ------------- ------------ ------------
Net income (loss) ................................ $ 82.0 $ 24.7 $ 62.1 $ (86.8) $ 82.0
=========== ============ ============= ============ ============
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net sales ........................................ $ 144.9 $ 716.5 $ 1,224.5 $ (101.4) $ 1,984.5
Cost of goods sold ......................... 133.3 651.7 1,058.5 (101.4) 1,742.1
----------- ------------ ------------- ------------ ------------
Gross profit ..................................... 11.6 64.8 166.0 -- 242.4
Selling, general & administrative
expenses ............................... (19.8) (62.5) (107.9) -- (190.2)
Goodwill impairment ........................ (3.7) (40.6) -- -- (44.3)
----------- ------------ ------------- ------------ ------------
Income (loss) from operations .................... (11.9) (38.3) 58.1 -- 7.9
Interest income ............................ 0.5 2.4 0.9 -- 3.8
Interest expense ........................... (14.7) (13.7) (24.1) -- (52.5)
Income (loss) from equity investees ........ (29.2) -- -- 29.2 --
Other income (expense) - net ............... (5.3) (0.9) 1.7 -- (4.5)
----------- ------------ ------------- ------------ ------------
Income (loss) before income taxes ................ (60.6) (50.5) 36.6 29.2 (45.3)
(Provision for) benefit from income taxes ........ 24.6 (3.2) (12.1) -- 9.3
----------- ------------ ------------- ------------ ------------
Net income (loss) ................................ $ (36.0) $ (53.7) $ 24.5 $ 29.2 $ (36.0)
=========== ============ ============= ============ ============
36
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2004 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Assets
Current assets
Cash and cash equivalents ................. $ 111.5 $ 2.6 $ 340.4 $ -- $ 454.5
Trade receivables - net ................... 22.1 173.0 446.0 -- 641.1
Intercompany receivables .................. 20.7 150.0 39.1 (209.8) --
Net inventories ........................... 69.1 305.0 702.7 15.9 1,092.7
Other current assets ...................... 44.5 22.3 140.5 -- 207.3
----------- ------------ ------------- ------------ ------------
Total current assets ................... 267.9 652.9 1,668.7 (193.9) 2,395.6
Property, plant & equipment - net ............ 0.1 95.1 242.7 -- 337.9
Investment in and advances to
(from) subsidiaries ........................ 1,028.7 (397.3) (334.0) (297.4) --
Goodwill - net ............................... 11.0 216.7 401.5 -- 629.2
Other assets - net ........................... (62.9) 184.0 220.5 -- 341.6
----------- ------------ ------------- ------------ ------------
Total assets ..................................... $ 1,244.8 $ 751.4 $ 2,199.4 $ (491.3) $ 3,704.3
=========== ============ ============= ============ ============
Liabilities and stockholders' equity
(deficit)
Current liabilities
Notes payable and current portion
of long-term debt ..................... $ 0.1 $ 21.9 $ 53.7 $ -- $ 75.7
Trade accounts payable .................... 31.0 186.5 566.6 -- 784.1
Intercompany payables ..................... 24.8 63.8 121.2 (209.8) --
Accruals and other current
liabilities ........................... 53.6 94.7 330.7 -- 479.0
----------- ------------ ------------- ------------ ------------
Total current liabilities .............. 109.5 366.9 1,072.2 (209.8) 1,338.8
Long-term debt, less current portion ......... 266.1 342.2 578.8 -- 1,187.1
Other long-term liabilities .................. 124.5 40.7 268.5 -- 433.7
Stockholders' equity (deficit) ............... 744.7 1.6 279.9 (281.5) 744.7
----------- ------------ ------------- ------------ ------------
Total liabilities and stockholders'
equity (deficit) ............................. $ 1,244.8 $ 751.4 $ 2,199.4 $ (491.3) $ 3,704.3
=========== ============ ============= ============ ============
37
TEREX CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-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
=========== ============ ============= ============ ============
38
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities ........................... $ (42.0) $ 64.4 $ 56.0 $ -- $ 78.4
----------- ------------ ------------- ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired .................................... (0.6) (9.0) -- -- (9.6)
Capital expenditures .......................... (0.1) (5.2) (10.4) -- (15.7)
Proceeds from sale of assets .................. -- 1.8 22.2 -- 24.0
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
investing activities ................... (0.7) (12.4) 11.8 -- (1.3)
----------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Principal repayments of long-term
debt ........................................ -- (39.7) (35.3) -- (75.0)
Proceeds from stock options
exercised ................................... 5.5 -- -- -- 5.5
Net borrowings (repayments) under
revolving line of credit agreements ......... -- -- (2.2) -- (2.2)
Other ......................................... -- (12.5) (2.6) -- (15.1)
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
financing activities ................... 5.5 (52.2) (40.1) -- (86.8)
----------- ------------ ------------- ------------ ------------
Effect of exchange rates on cash and
cash equivalents ............................... -- -- (3.3) -- (3.3)
----------- ------------ ------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents .................................... (37.2) (0.2) 24.4 -- (13.0)
Cash and cash equivalents, beginning of
period ......................................... 148.7 2.8 316.0 -- 467.5
----------- ------------ ------------- ------------ ------------
Cash and cash equivalents, end of period ......... $ 111.5 $ 2.6 $ 340.4 $ -- $ 454.5
=========== ============ ============= ============ ============
39
TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 (RESTATED)
(IN MILLIONS)
Terex Wholly-owned Non-guarantor Intercompany
Corporation Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net cash provided by operating
activities ..................................... $ 46.8 $ 16.9 $ 119.9 $ -- $ 183.6
----------- ------------ ------------- ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired .................................... -- (8.7) -- -- (8.7)
Capital expenditures .......................... (0.7) (2.8) (10.6) -- (14.1)
Proceeds from sale of assets .................. -- 1.6 1.9 -- 3.5
----------- ------------ ------------- ------------ ------------
Net cash used in investing
activities ............................. (0.7) (9.9) (8.7) -- (19.3)
----------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Principal repayments of long-term debt......... (51.5) (0.5) (1.0) -- (53.0)
Proceeds from stock options exercised.......... 0.7 -- -- -- 0.7
Net borrowings (repayments) under
revolving line of credit agreements.......... -- (2.0) (34.5) -- (36.5)
Payment on premium on early
retirement of debt .......................... (2.2) -- -- -- (2.2)
Other ......................................... -- (3.6) (12.8) -- (16.4)
----------- ------------ ------------- ------------ ------------
Net cash used in financing
activities ............................. (53.0) (6.1) (48.3) -- (107.4)
----------- ------------ ------------- ------------ ------------
Effect of exchange rates on cash and
cash equivalents ............................... -- -- 11.2 -- 11.2
----------- ------------ ------------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents ............................... (6.9) 0.9 74.1 -- 68.1
Cash and cash equivalents, beginning of
period ......................................... 134.0 6.2 212.0 -- 352.2
----------- ------------ ------------- ------------ ------------
Cash and cash equivalents, end of
period ......................................... $ 127.1 $ 7.1 $ 286.1 $ -- $ 420.3
=========== ============ ============= ============ ============
NOTE T - SUBSEQUENT EVENT
On July 21, 2004, the Company prepaid $50.0 of term debt under its bank credit
facility and recorded a non-cash charge of $1.0. The non-cash charge related to
the write-off of unamortized debt acquisition costs.
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 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 August 6, 2004. For a description of subsequent
events, this Form 10-Q/A should be read in conjunction with the Company's
filings made subsequent to the filing of the original Form 10-Q, including 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 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
40
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
periods ended March 31, 2004 and June 30, 2004, the impact of this valuation
allowance required a reversal of the tax expense on the U.S. pre-tax income in
the periods ended March 31, 2004 and June 30, 2004, requiring the Company to
restate its financial statements for such periods. Additionally, the Company has
adjusted its tax accounts for errors identified for the periods ended June 30,
2004 and in all prior periods presented in this 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.
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 costs not being recorded.
o Beginning in 2000, the Company began the integration of several
operations in its Light Construction business. During the second
half of 2002, the Company initiated facility consolidations in
its Light Construction business. During the transition and
related turnover of employees as well as at other times,
41
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 stockholders' equity.
o Management has also determined that the accounting treatment of
certain of its goodwill and other intangibles related to foreign
acquisitions did not meet the requirements of SFAS No.52,
"Foreign Currency Translation." At the time these foreign
acquisitions were completed, mainly in 1999 and 2002, the
Company valued goodwill at the historic exchange rate, and the
Company has consistently applied this accounting treatment. The
Company has now determined that it should have translated
goodwill each period to reflect changes in the foreign currency
exchange rate.
o Management has also identified an error with respect to the
Company's foreign defined benefit plans. The Company did not
record the minimum pension liability adjustment for these plans
to other comprehensive income (net of taxes) within
stockholders' equity and other non-current liabilities.
Management also determined that it was not properly accounting
for its equity based compensation. The Company did not record
the Company's common stock held in a rabbi trust (at cost) as
treasury stock within stockholders' equity and a corresponding
liability within non-current liabilities. In addition, the
Company should have reclassified the non-current liability
established through December 31, 2003 to additional paid-in
capital within stockholders' equity and reclassified other
equity based compensation from current liabilities to additional
paid-in capital within stockholders' equity.
o Management has determined that adjustments to the timing of
revenue recognition of certain arranements 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.
42
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 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 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 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, Peiner, PPM and
RO-Stinger.
The Terex Aerial Work Platforms segment was formed upon the completion of
Terex's acquisition of Genie Holdings, Inc. and its affiliates ("Genie") on
September 18, 2002. The Terex Aerial Work Platforms segment designs,
manufactures and markets aerial work platform equipment and telehandlers.
Products include material lifts, portable aerial work platforms, trailer mounted
booms, articulating booms, stick booms, scissor lifts, telehandlers, related
components and replacement parts, and other products. These products are used
primarily by customers in the construction and building maintenance industries
to lift people and/or equipment as required to build and/or maintain large
physical assets and structures. Terex Aerial Work Platforms products currently
are marketed principally under the Genie and Terex brand names.
The Terex Mining segment designs, manufactures and markets large hydraulic
excavators and high capacity surface mining trucks, related components and
replacement parts, and other products. These products are used primarily by
construction, mining, quarrying and government customers in construction,
excavation and supplying coal and minerals. Currently, Terex Mining products are
marketed principally under the following brand names: O&K, Payhauler, Terex and
Unit Rig.
The 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. 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, install, service and
repair 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
43
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 underwritten by TFS Capital Funding, an affiliate of the General Electric
Company, and Terex Financial Services Holdings B.V. ("TFSH"), a joint venture of
the Company and a European financial institution, 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"), and acquired a controlling interest
in American Truck Company ("ATC"). On April 22, 2004, the Company acquired an
additional 10% of the outstanding shares of Tatra for a total of 81% ownership.
On June 14, 2004, the Company acquired the one-third interest in ATC previously
held by Tatra. The results of 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 second quarter of 2004, the Company performed above expectations, despite
operational challenges arising from increased steel costs and supplier issues.
For the three months and six months ended June 30, 2004, the Company experienced
increases in net sales, gross profit and income from operations as compared to
the same periods in 2003. Net sales in the second quarter of 2004 grew 27% over
the same period in the prior year and 26% over the first quarter of 2004. A
large factor in the Company's performance was the improved economic condition in
many of the Company's end-markets, which was also reflected in increased backlog
in a majority of the Company's business segments. Backlog at June 30, 2004 was
approximately $928 million, an increase of approximately $505 million, or 119%,
from the level of backlog at June 30, 2003. In addition, business integration
measures and cost savings initiatives put in place over the past year are
beginning to yield positive results. Tight end-markets in certain of the
Company's operations, particularly in the North American crane, Roadbuilding,
and Utility Products businesses, and currency moves (particularly weakness of
the U.S. dollar relative to the Euro and the British Pound) negatively impacted
the Company's financial performance.
Based on the current trends, the Company has taken a more positive view of its
expected performance for the remainder of 2004. Continued economic recovery and
rising commodity prices lead the Company to be optimistic about the near term
performance of its Aerial Work Platforms and Mining businesses, and to
anticipate continued improvement from the Construction businesses. The Company
still expects challenging end markets for the remainder of 2004 for the North
American crane, Roadbuilding and Utility Products businesses. 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 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. As part of the TIP initiative, the Company
has numerous projects in process, most being pursued and implemented locally
throughout the Company's business units. The Company is focusing on efforts such
as the disposal of excess assets, mitigating supplier pressures resulting from
improved economic conditions and higher demand, and seeking to leverage volume
benefits from suppliers of common components and freight.
44
RESTRUCTURING
During the second quarter of 2004 and in numerous periods prior to 2004, the
Company has initiated a variety of 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.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
TEREX CONSOLIDATED
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 1,332.5 $ 1,050.1 26.9%
Gross profit ...................... $ 192.7 14.5% $ 115.6 11.0% 66.7%
SG&A .............................. $ 119.6 9.0% $ 101.0 9.6% 18.4%
Goodwill impairment ............... $ -- -- $ 44.3 4.2% (100.0)%
Income (loss) from operations ..... $ 73.1 5.5% $ (29.7) (2.8)% 346.1%
Net sales for the three months ended June 30, 2004 totaled $1,332.5 million, an
increase of $282.4 million when compared to the same period in 2003. The impact
of a weaker U.S. dollar relative to the British Pound and the Euro increased
sales by 4.5% when compared to the second quarter of 2003. The acquisition of a
majority interest in Tatra and ATC on August 28, 2003 increased sales by
approximately $67 million when compared to the second quarter of 2003. Sales
relative to 2003 increased in the Terex Aerial Work Platforms segment as a
result of improved economic conditions in the rental equipment market. Sales in
the Terex Construction segment improved relative to 2003 as a result of strong
demand for its scrap handling equipment, compact construction equipment and
mobile crushing and screening equipment. Sales in the Terex Mining segment
benefited relative to 2003 from improvements in commodity prices for coal and
iron ore. Sales in the Terex Roadbuilding, Utility Products and Other segment
increased relative to 2003 across all product lines. While sales of roadbuilding
products have improved over 2003 levels, they remain low relative to historic
levels and future improvements are dependent on increased state and federal
funding for road projects. Sales in the Terex Cranes segment were relatively
unchanged from 2003 levels after adjusting for foreign exchange movements and
the sale of the Crane & Machinery, Inc. ("C&M") distribution business and
Schaeff Incorporated fork-lift business in the fourth quarter of 2003. During
the second quarter of 2004, the Company began to realize the benefits of end
market recoveries, the integration of its businesses, cost-savings initiatives
put in place over the prior year, and the initial impact of TIP.
Gross profit for the three months ended June 30, 2004 totaled $192.7 million, an
increase of $77.1 million when compared to the same period in 2003. Improvements
relative to 2003 were realized in all segments of the Company from higher sales
volumes, despite an increase in steel costs of approximately $19 million during
the second quarter of 2004. The Company continues to design and implement plans
to mitigate the impact of any future increases in steel prices, including the
use of alternate suppliers, leveraging the Company's overall purchase volumes to
obtain favorable costs and increasing the price of the Company's products. Gross
profit also benefited from several of the programs initiated as part of TIP and
from restructuring initiatives launched during 2003. The acquisitions of Tatra
and ATC, net of the impact of the sale of the Schaeff Incorporated and C&M
businesses, improved gross profit by approximately $7.5 million when compared to
2003.
45
During the second quarter of 2004, the Company recorded restructuring and other
charges, included in gross profit, of $9.9 million, a reduction of $28.2 million
when compared to 2003. Restructuring and other costs incurred in 2003 related
primarily to actions taken to align the cost structure of the roadbuilding
business to expected market conditions and to consolidate production facilities
in the Terex Cranes segment. Restructuring and other costs incurred in 2004
related primarily to a facility consolidation and component sourcing projects in
the Terex Construction segment and to the sale of certain of the Company's
legacy parts businesses.
Total selling, general and administrative costs ("SG&A") increased for the three
months ended June 30, 2004 by $18.6 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 $4 million of the increase, as costs reported in these
currencies translate into more U.S. dollars than reported in 2003. The
acquisitions of Tatra and ATC, net of the impact of the sale of C&M and Schaeff
Incorporated, increased SG&A by approximately $4 million when compared to 2003
levels. SG&A costs also increased as a result of higher commissions and related
costs due to increased sales levels during the second quarter of 2004. As a
percentage of sales, SG&A fell to 9.0% in the second quarter of 2004 from 9.6%
in the second quarter of 2003.
During the second quarter of 2003, the Company recorded a goodwill impairment
charge of $44.3 million related to the performance of its roadbuilding business.
This charge was the result, in part, of poor market demand for the business'
products and is more fully described in the Terex Roadbuilding, Utility Products
and Other segment discussion below.
Income from operations increased by $102.8 million for the three months ended
June 30, 2004 when compared to the same period in 2003. The Terex Aerial Work
Platforms and Terex Construction segments' income from operations improved
relative to 2003 as a result of an improving economy in the United States and
Europe. Income from operations improved in the Terex Mining segment as a result
of increased demand driven by improved commodity price levels. Income from
operations in the Terex Cranes segment grew as a result of increased demand for
tower cranes and from cost reduction initiatives in the North American crane
business. Income from operations was positively impacted by the acquisition of
Tatra and ATC by approximately $2.7 million. Income from operations in the
second quarter of 2004 also improved from the prior year due to decreased
restructuring and other costs and no impairment charges. Restructuring and other
costs in the three months ended June 30, 2004 were lower by $33.4 million when
compared to the comparable period in 2003 and totaled $11.5 million in the
second quarter. During the second quarter of 2003 a goodwill impairment charge
of $44.3 million was recorded as a result of the performance of the roadbuilding
business; no such charge was recorded in the second quarter of 2004.
TEREX CONSTRUCTION
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 472.5 $ 380.1 24.3%
Gross profit ...................... $ 61.1 12.9% $ 52.4 13.8% 16.6%
SG&A .............................. $ 40.1 8.5% $ 34.4 9.1% 16.6%
Income (loss) from operations ..... $ 21.0 4.4% $ 18.0 4.7% 16.7%
Net sales in the Terex Construction segment increased by $92.4 million for the
three months ended June 30, 2004 when compared to the same period in 2003 and
totaled $472.5 million. A weaker U.S. dollar relative to the British Pound and
the Euro increased sales by approximately 7% when compared to the second quarter
of 2003. Sales improved in the crushing and screening business primarily as a
result of higher demand for the Terex Pegson line of crushing equipment and from
higher sales of crushing and screening products in the United States. Sales of
compact construction equipment improved relative to 2003 as a result of improved
economic conditions in the United States and from the focus created by the
compact equipment facility consolidation completed in 2003. Sales of heavy
construction equipment were driven primarily by improved demand for articulated
trucks and Fuchs branded scrap-
46
handling equipment. Sales of Fuchs scrap handling products have benefited from
recent increases in the price of steel.
Gross profit increased to $61.1 million for the three months ended June 30,
2004, an increase of $8.7 million when compared to 2003 results for the same
period. Gross profit was negatively impacted by recent increases in steel
pricing as well as an increase in the value of the British Pound and Euro
relative to the U.S. dollar when compared to 2003. The negative impact of
currency movements was largest in the articulated truck business, where a higher
than average level of sales in the second quarter of 2004 were priced in U.S.
dollars. These unfavorable events were offset by the favorable impact of higher
sales volumes and parts pricing.
Restructuring and other charges recorded in gross profit during the second
quarter of 2004 totaled $8.5 million. During the second quarter of 2004, the
Company decided to close its truck-mounted crane manufacturing facility in the
United Kingdom and to consolidate truck-mounted crane production into a single
facility in Germany. A charge of $4.3 million was recorded to reflect the cost
of closing the facility in the United Kingdom. Also during the second quarter of
2004, the Company decided to close a component production facility in Germany
and to outsource production of certain fabricated parts supporting the Atlas
Terex business in Germany. A charge of $2.2 million was recorded in the second
quarter of 2004 as a result of this decision. During the second quarter of 2004,
the Company also recorded costs to relocate its pump business from its B.L.
Pegson facility in Coalville, England to another facility in Scotland ($0.3
million), to record a pre-acquisition credit guarantee provided on two large
hydraulic shovels sold in the United Kingdom ($1.6 million) and $0.1 related to
previously announced restructuring programs. Gross profit in the second quarter
of 2003 included a charge of $2.1 million, primarily related to the closure of
the Kilbeggan crushing and screening facility and relocating its production of
this product line to the Dungannon facility.
SG&A costs for the three months ended June 30, 2004 totaled $40.1 million, an
increase of $5.7 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 $2 million when compared to the second quarter of 2003.
Approximately 85% of the segment's SG&A costs are incurred in either British
Pounds or Euro. During the second quarter of 2004, restructuring and other
charges of $0.6 million were recorded, primarily as a result of the decision to
outsource production at the Atlas Terex German facility.
Income from operations for the three months ended June 30, 2004 totaled $21.0
million, an increase of $3.0 million when compared to $18.0 million for the same
period in 2003. Income from operations grew in the heavy equipment and crushing
and screening businesses as a result of improved volume, which helped to offset
steel price increases.
TEREX CRANES
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 275.9 $ 274.7 0.4%
Gross profit ...................... $ 33.0 12.0% $ 21.8 7.9% 51.4%
SG&A .............................. $ 22.9 8.3% $ 20.3 7.4% 12.8%
Income (loss) from operations ..... $ 10.1 3.7% $ 1.5 0.5% 573.3%
Net sales for the Terex Cranes segment for the three months ended June 30, 2004
increased by $1.2 million and totaled $275.9 million when compared to $274.7
million for the same period in 2003. The effect of a weaker U.S. dollar relative
to the Euro positively impacted sales by approximately 4% when compared to 2003.
Sales of tower cranes, small all-terrain cranes and stacker products improved,
while sales of mobile cranes fell slightly when compared to the second quarter
of 2003. Sales for the C&M and Schaeff Incorporated businesses, which were sold
in the fourth quarter of 2003, were approximately $5 million in the second
quarter of 2003.
47
Gross profit for the three months ended June 30, 2004 increased by $11.2 million
relative to the same period in 2003 and totaled $33.0 million. Gross profit from
mobile cranes in the three months ended June 30, 2004 improved slightly over
2003 levels, in part as a result of improved profitability realized in North
America. Gross profit also improved as a result of higher sales experienced in
the segment's Italian tower crane business and was favorably impacted by lower
used cranes sales realized in the second quarter of 2004 when compared to the
prior year period. These improvements were partially offset by the impact of
steel price increases experienced during 2004.
Included in the second quarter of 2004 gross profit are restructuring and other
charges totaling $0.7 million. During the quarter, the Company sold a legacy
replacement parts business and recorded a loss of $1.9 million, related to
inventory. The Company decided to exit this line of business to focus on
supporting core Terex products. Also during the second quarter of 2004, the
Company completed the closure and sale of its Cork, Ireland facility. As a
result, the Company released to income the remaining restructuring reserve,
which totaled $2.1 million. During the second quarter of 2004, the Company
completed the consolidation of its Demag business located in Paris, France into
its facility in Montceau-les-Mines, France. A charge of $0.5 million was
recorded in connection with this consolidation. During the second quarter of
2003, a charge of $6.9 million was recorded, primarily related to the costs
associated with consolidating the Peiner tower crane business into the segment's
Demag facility in Germany.
SG&A costs for the three months ended June 30, 2004 totaled $22.9 million, an
increase of $2.6 million over the same period in 2003. Contributing to the
increase was higher spending levels in the tower crane business driven by higher
sales volumes and from the effect of the increase in the value of the Euro
relative to the U.S. dollar experienced since the second quarter of 2003. During
the second quarter of 2004, the Company recorded a restructuring charge of $0.3
million related to the closure of its Demag France facility, as described above.
Also during the quarter, the Company recorded costs of $0.7 million related to
the Cork facility closure. Total restructuring charges included in SG&A during
the second quarter of 2004 increased by $0.5 million when compared to the same
period in the prior year. During the second quarter of 2003, the Company
recorded a charge of $0.5 million related to the consolidation of its Peiner
tower crane operations into the Demag facility.
Income from operations for the three months ended June 30, 2004 totaled $10.1
million compared to $1.5 million for the same period in 2003. Total
restructuring charges recorded during the second quarter of 2004 were $1.7
million, a reduction of $5.7 million from a year ago. In addition, operating
profit in 2004 benefited from strong demand for the segment's tower cranes and
improvements in profitability in its North American based crane business,
largely as a result of several actions put in place to address weak market
conditions.
TEREX AERIAL WORK PLATFORMS
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 238.1 $ 167.8 41.9%
Gross profit ...................... $ 48.4 20.3% $ 35.3 21.0% 37.1%
SG&A .............................. $ 15.7 6.6% $ 14.0 8.3% 12.1%
Income (loss) from operations ..... $ 32.7 13.7% $ 21.3 12.7% 53.5%
Net sales for the Terex Aerial Work Platforms segment for the three months ended
June 30, 2004 were $238.1 million, an increase of $70.3 million when compared to
the same period in 2003. Sales increased when compared to the second quarter of
2003 as a result of stronger demand from the rental channel in the United States
and, to a lesser extent, improved parts sales. Rental market demand increased
relative to 2003 as rental channel customers continued to buy new equipment to
reduce the age of their fleets. Sales of the segment's products also improved in
Europe. Sales of material handler products increased when compared to the same
period in 2003 as a result of marketing the product as part of the overall Genie
offering to these same rental distribution channels.
48
Gross profit for the three months ended June 30, 2004 was $48.4 million, an
increase of $13.1 million when compared to the same period in 2003. Gross profit
as a percentage of sales fell slightly as the benefit of increased sales was
offset by higher steel prices.
SG&A costs for the three months ended June 30, 2004 were $15.7 million, an
increase of $1.7 million from the same period in 2003. The increase was due
primarily to higher compensation and related costs arising from higher sales
levels.
Income from operations for the three months ended June 30, 2004 was $32.7
million, an increase of $11.4 million from the same period in 2003. The increase
was due to higher sales volumes and improved margins.
TEREX MINING
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 98.6 $ 73.9 33.4%
Gross profit ...................... $ 17.6 17.8% $ 12.6 17.1% 39.7%
SG&A .............................. $ 11.1 11.3% $ 8.5 11.5% 30.6%
Income (loss) from operations ..... $ 6.5 6.6% $ 4.1 5.5% 58.5%
Net sales in the Terex Mining segment increased by $24.7 million to $98.6
million in the second quarter of 2004 compared to $73.9 million in the
comparable period in 2003. The increase in sales was primarily a result of
increased customer activity in the surface mining area, which is due largely to
improved prices for commodities including coal and iron ore. Order volumes in
the segment increased, with a $55 million order for hydraulic shovels and mining
trucks awarded from a single customer in Southeast Asia.
Gross profit increased by $5.0 million in the three months ended June 30, 2004
when compared to the comparable period in 2003 and totaled $17.6 million. Gross
profit improved as a result of higher margins earned on the sale of new
machines. This gain was partially offset by increased steel costs experienced
during the second quarter of 2004 when compared to a year ago. Included in gross
profit in 2004 is a loss of $0.4 million related to the sale of the Company's
legacy replacement parts business. The Company decided to exit this line of
business to focus on supporting core Terex products.
SG&A expense increased by $2.6 million in the second quarter of 2004 relative to
the comparable period in 2003, to $11.1 million. The increase in SG&A was mainly
due to higher selling costs associated with the 33.4% increase in sales
described above.
Income from operations for the Terex Mining segment was $6.5 million in the
second quarter of 2004, or 6.6% of sales, an increase of $2.4 million from $4.1
million in the comparable period in 2003. The increase was a result of higher
demand for the segment's products resulting from improved commodity pricing
relative to 2003.
49
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Three Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 268.1 $ 172.6 55.3%
Gross profit ...................... $ 32.8 12.2% $ (6.6) (3.8)% (597.0)%
SG&A .............................. $ 26.4 9.8% $ 19.6 11.4% 34.7%
Goodwill impairment ............... $ -- -- $ 44.3 25.7% (100.0)%
Income (loss) from operations ..... $ 6.4 2.4% $ (70.5) (40.8)% (109.1)%
Net sales for the Terex Roadbuilding, Utility Products and Other segment for the
three months ended June 30, 2004 were $268.1 million, an increase of $95.5
million when compared to the same period in 2003. The acquisition of Tatra and
ATC on August 28, 2003 increased sales in the second quarter of 2004 by
approximately $67 million when compared to the same period a year ago. Sales of
roadbuilding products increased marginally over the comparable period in 2003,
with the growth driven by higher demand for concrete mixers and asphalt pavers.
Sales of light towers grew as a result of increased demand from the Middle East.
Gross profit for the three months ended June 30, 2004 totaled $32.8 million, an
increase of $39.4 million when compared to the same period in 2003. The
acquisition of Tatra and ATC accounted for $7.5 million of the gross profit in
the second quarter of 2004. Gross profits generally rose in the second quarter
when compared to 2003, despite recent increases in steel costs. Steel is a major
material component for many of the products included in this segment and the
Company continues to seek ways to mitigate steel cost increases, including the
use of alternate suppliers and leveraging the Company's overall purchase volumes
to obtain favorable pricing.
Gross profit reported in the second quarter of 2003 included $28.9 million of
restructuring and other charges related to activities initiated in response to
poor market conditions for the segment's roadbuilding products. Demand for
roadbuilding products has been dampened by delays in state and federal funding
for road improvement and construction projects. These actions included the exit
of certain product-lines as well as inventory write-downs to reflect expected
sales volumes. Gross profit reported in the second quarter of 2004 includes a
$0.3 million restructuring charge to consolidate production capacity in the
Utility Products businesses.
SG&A costs for the segment for the three months ended June 30, 2004 totaled
$26.4 million, an increase of $6.8 million when compared to the same period in
2003. The majority of the increase was due to the acquisition of Tatra and ATC
and legal costs incurred in the roadbuilding businesses.
During the second quarter of 2003, the Company determined that the business
performance during the first six months of 2003 in the Roadbuilding reporting
unit would not meet the Company's 2003 performance expectations that were used
when goodwill was last reviewed for impairment as of October 1, 2002. As of that
time funding for road projects had remained at historically low levels as
federal and state budgets had been negatively impacted by a weak economy and the
war in Iraq. In response to the revised business outlook, management initiated
several changes to address the expected market conditions, including a change in
business management, discontinuance of several non-core products, work force
furloughs and reductions, and an inventory write-down based on anticipated lower
sales volume. Based on the continued weakness in the reporting unit, the Company
initiated a review of the long-term outlook for the reporting unit. The revised
outlook for the reporting unit assumed that funding levels for domestic road
projects would not improve significantly in the short term. In addition, the
outlook assumed that the Company would continue to reduce working capital
invested in the reporting unit to better match revenue expectations.
Based on this review, the Company determined the fair value of the Roadbuilding
reporting unit using the present value of the cash flow expected to be generated
by the reporting unit. The cash flow was determined based on the expected
revenues, after tax profits, working capital levels and capital expenditures for
the reporting unit. The present value was calculated by discounting the cash
flow by the Company's weighted average cost of capital. The
50
Company, with the assistance of a third-party, also reviewed the market value of
the Roadbuilding reporting unit's tangible and intangible assets. These values
were included in the determination of the carrying value of the Roadbuilding
reporting unit.
Based on the revised fair value of the reporting unit, a goodwill impairment of
$44.3 million was recognized during the three months ended June 30, 2003.
Income from operations for the Terex Roadbuilding, Utility Products and Other
segment for the three months ended June 30, 2004 was $6.4 million, compared to a
loss of $70.5 million for the same period in 2003. The improvement reflects the
impact of restructuring costs incurred in 2003, the acquisition of Tatra and ATC
and improved performance in the roadbuilding businesses. Income from operations
declined relative to 2003 in the Utility Products business as a result of
increases in steel costs and higher selling and administrative costs.
NET INTEREST EXPENSE
During the three months ended June 30, 2004, the Company's net interest expense
decreased $2.5 million to $22.0 million from $24.5 million for the prior year
period. The decline was due to the overall decrease in the Company's level of
debt in the second quarter of 2004 as compared to the same period in 2003,
offset somewhat by higher average interest rates.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the three months ended June 30, 2004 was income
of $19.8 million as compared to a net expense of $4.8 million for the prior year
period. During the second quarter of 2004, the Company recognized a net gain of
$16.6 million on the sale of the former Fermec facility in Manchester, England,
its former aerial platform facility in Cork, Ireland, its former tower crane
facility in Trier, Germany and its former boom truck facility in Olathe, Kansas.
During the quarter, the Company also settled a dispute related to the purchase
price paid in connection with the O&K Mining business acquisition. The
settlement, in favor of the Company, totaled $5.8 million. The Company also
recorded an impairment charge of $1.0 million during the second quarter of 2004
related to its investment in a joint venture in Southeast Asia. The joint
venture, which supplies components to the roadbuilding business and also
distributes certain of the Company's roadbuilding products in Southeast Asia,
had not been performing to expectations and as such, the Company wrote the value
of the investment down to reflect actual performance trends. During the second
quarter of 2004, the Company recognized a loss of $1.5 million related to the
repayment of $75.0 million of term debt under its bank credit facility. The loss
related to the write-off of unamortized debt acquisition costs.
During the second quarter of 2003, the Company redeemed $50.0 million aggregate
principal of its 8-7/8% Senior Subordinated Notes due 2008 and recognized a loss
of $1.9 million. The loss was comprised of the payment of an early redemption
premium ($2.2 million), the write off of unamortized original issuance discount
($1.6 million) and the write off of unamortized debt acquisition costs ($0.2
million), which were partially offset by the recognition of deferred gains
related to previously closed fair value interest rate swaps on this debt ($2.1
million). Also, during the three months ended June 30, 2003, the Company
recorded an expense of $1.1 million to reduce the carrying cost of its
investment in SDC International, Inc. ("SDC") to zero. This write-down reflected
the current market value of SDC's stock.
INCOME TAXES
During the three months ended June 30, 2004, the Company recognized an income
tax expense of $7.6 million on income before income taxes of $70.9 million, an
effective rate of 10.7%, as compared to an income tax benefit of $13.5 million
on a loss before income taxes of $59.0 million, an effective rate of 22.9%, in
the prior year period. The effective tax rate for the three months ended June
30, 2004 was higher than the Company's 2003 full-year effective tax rate of
(346.9%) primarily due to the impact of a valuation allowance recorded in 2003
for certain U.S. net deferred tax assets, as it was determined that it was more
likely than not that the assets would not be realized, partially offset by
strong financial performance of the Company's Fermec business, where recent
performance indicated that the Company was more likely than not to realize the
benefits of certain tax assets, and, therefore, the valuation allowance held for
this business was released.
51
The effective tax rate for the three months ended June 30, 2003 was 22.9% as
compared to the effective rate of (346.9%) for the year ended December 31, 2003.
The higher effective rate during the three months ended June 30, 2003 was due to
the impact of the U.S. valuation allowance mentioned above, partially offset by
a goodwill impairment related to the Company's roadbuilding reporting unit
recorded during the second quarter of 2003. This goodwill impairment charge was
only partially deductible for income tax purposes.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
TEREX CONSOLIDATED
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 2,391.9 $ 1,984.5 20.5%
Gross profit ...................... $ 353.1 14.8% $ 242.4 12.2% 45.7%
SG&A .............................. $ 232.1 9.7% $ 190.2 9.6% 22.0%
Goodwill impairment ............... $ -- -- $ 44.3 2.2% (100.0)%
Income (loss) from operations ..... $ 121.0 5.1% $ 7.9 0.4% 1,431.6%
Net sales for the six months ended June 30, 2004 totaled $2,391.9 million, an
increase of $407.4 million when compared to the same period in 2003. Sales in
the Terex Aerial Work Platforms and Terex Construction segments benefited from
improving economic conditions in the United States and Europe. Sales of Terex
Mining products, while relatively unchanged from 2003 levels through the first
six months of 2004, grew significantly in the second quarter of 2004 relative to
2003, reflecting strong commodity prices which have increased mining activity.
Sales in the Terex Cranes segment fell relative to 2003 as the volume of used
crane sales declined and the sale of new mobile cranes fell relative to 2003.
The acquisitions of Tatra and ATC, net of the impact of the sale of the C&M and
Schaeff Incorporated businesses, increased sales in the first six months of 2004
by approximately $101 million when compared to the six months ended June 30,
2003. Finally, the impact of a weaker U.S. dollar relative to the British Pound
and the Euro increased sales by approximately 7% when compared to the first six
months of 2003.
Gross profit for the six months ended June 30, 2004 totaled $353.1 million, an
increase of $110.7 million when compared to the same period in 2003. Gross
profit in all segments rose relative to 2003 levels despite the impact of
increased steel costs experienced during the first half of 2004. The unfavorable
movement in steel costs was offset by increased sales volumes as well as by the
benefit of several TIP initiatives. Restructuring and other charges for the
first half of 2004 were lower by $33.8 million when compared to 2003 and totaled
$9.9 million.
SG&A expenses increased for the six months ended June 30, 2004 by $41.9 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 30% 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 half of 2004.
The acquisitions of the Tatra and ATC businesses accounted for approximately 20%
of the increase in SG&A. During the first half of 2004, restructuring and other
costs were $6.3 million lower than in 2003 and totaled $1.6 million.
During the second quarter of 2003, the Company determined that the business
performance during the first six months of 2003 in the Roadbuilding reporting
unit would not meet the Company's 2003 performance expectations that were used
when goodwill was last reviewed for impairment. The facts and circumstances
associated with this charge, which totaled $44.3 million, are described below in
the Terex Roadbuilding, Utility Products and Other segment discussion.
Income from operations increased by $113.1 million for the six months ended June
30, 2004 when compared to the same period in 2003. Operating earnings grew
relative to 2003 levels in the Terex Construction and Terex Aerial Work
Platforms segments as a result of improved volumes despite increases in steel
costs. During 2004,
52
restructuring and other charges included in income from operations fell by $40.1
million and totaled $11.5 million. Also included in income from operations was a
$44.3 million charge related to goodwill impairment in the Terex Roadbuilding,
Utility Products and Other segment in June 2003.
TEREX CONSTRUCTION
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 873.6 $ 696.8 25.4%
Gross profit ...................... $ 114.1 13.1% $ 94.2 13.5% 21.1%
SG&A .............................. $ 76.3 8.7% $ 61.9 8.9% 23.3%
Income (loss) from operations ..... $ 37.8 4.3% $ 32.3 4.6% 17.0%
Net sales in the Terex Construction segment increased by $176.8 million for the
six months ended June 30, 2004 when compared to the same period in 2003 and
totaled $873.6 million. A weaker U.S. dollar relative to the British Pound and
the Euro increased sales by approximately 10% when compared to the first half of
2003. Excluding the impact of foreign exchange, sales grew relative to 2003 in
the heavy and compact equipment businesses as well as in the crushing and
screening businesses. Sales grew marginally over 2003 levels in the heavy
equipment business with strong sales as a result of increased steel prices seen
in the Fuchs scrap handling equipment business. Sales of articulated trucks
improved relative to the same period in 2003 with sales denominated in U.S.
dollars increasing relative to total sales when compared to 2003 levels. Sales
in the compact equipment business grew relative to 2003 as the business
benefited from an improved economy in North America and from the consolidation
of several facilities in the United Kingdom into a single facility in Coventry,
England. Sales of crushing and screening products increased relative to 2003 in
part due to strong demand for Pegson branded crushing equipment.
Gross profit increased to $114.1 million for the six months ended June 30, 2004,
an increase of $19.9 million when compared to 2003 results for the same period.
Gross profit in 2004 included restructuring and other costs of $8.5 million, an
increase of $6.4 million when compared to the same period in 2003. During the
first half of 2004, the Company initiated programs to consolidate the Atlas
Terex truck-mounted crane production into a single facility in Germany and to
outsource certain component manufacturing performed by the Atlas business in
Germany. The Terex Construction business also recognized costs related to a
pre-acquisition credit guarantee provided on two large hydraulic shovels sold in
the United Kingdom. During the first half of 2003, restructuring and other
charges totaled $2.1 million and related primarily to the cost of consolidating
facilities in the crushing and screening group. The impact of steel cost
increases experienced during the first half of 2004 negatively impacted gross
profit when compared to 2003. Gross profit fell relative to 2003 in the heavy
equipment group in part as a result of the high percentage of U.S. dollar orders
received when compared to 2003, as a majority of product cost for articulated
trucks is incurred in British Pounds. Gross profit in the compact equipment and
crushing and screening segment increased relative to 2003 as the benefit of
increased sales volumes offset the impact of increases in the cost of steel.
SG&A costs for the six months ended June 30, 2004 totaled $76.3 million, an
increase of $14.4 million when compared to the same period in 2003.
Approximately 43% of the increase was due to a weaker U.S. dollar relative to
the British Pound and the Euro. Restructuring and other costs included in the
first half of 2004 were $0.6 million, an increase of $0.5 million over 2003 and
related primarily to component sourcing activities in Germany. The remainder of
the increase was due to higher spending levels to support the increase in sales.
Income from operations for the six months ended June 30, 2004 totaled $37.8
million, an increase of $5.5 million when compared to $32.3 million for the same
period in 2003. Total restructuring and other costs for the first six months
totaled $9.1 million compared to $2.2 million in 2003. Income from operations
improved in the compact equipment and crushing and screening businesses relative
to 2003 as a result of improved sales volumes. Income from operations fell in
the heavy equipment business relative to 2003 as a result of a higher than
average mix of U.S. dollar denominated sales.
53
TEREX CRANES
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 486.7 $ 529.1 (8.0)%
Gross profit ...................... $ 62.9 12.9% $ 48.7 9.2% 29.2%
SG&A .............................. $ 46.3 9.5% $ 40.7 7.7% 13.8%
Income (loss) from operations ..... $ 16.6 3.4% $ 8.0 1.5% 107.5%
Net sales for the Terex Cranes segment for the six months ended June 30, 2004
decreased by $42.4 million and totaled $486.7 million when compared to $529.1
million for the same period in 2003. The sale of Schaeff Incorporated and C&M in
the fourth quarter of 2003 reduced sales by $8.9 million when compared to 2003.
The impact of a weaker U.S. dollar relative to the British Pound and Euro
increased sales by approximately 9% relative to 2003 levels. Sales declined
relative to 2003 primarily as a result of lower sales of used cranes and mobile
cranes. Order backlog for mobile cranes remained stable despite North American
crane market demand that remained relatively unchanged from 2003 levels.
Gross profit for the six months ended June 30, 2004 increased by $14.2 million
relative to the same period in 2003 and totaled $62.9 million. The sale of the
Schaeff Incorporated and C&M businesses reduced gross profit by $1.5 million in
2004 when compared to the same period in 2003. Gross profit improved in the
mobile crane business, in part from higher margins realized on the sale of new
machines. Gross profits also improved relative to 2003 in the tower crane
business as a result of higher sales volumes.
Restructuring and other charges recorded in the first six months of 2004 totaled
$0.7 million, a reduction of $8.6 million when compared to 2003. Restructuring
and other charges in 2004 relate primarily to a loss on the sale of a
replacement parts business, the consolidation of the segment's French
distribution outlets and the completion of several projects initiated in 2002
and 2003. Restructuring and other charges in 2003 included the closure of the
segment's German tower crane facility along with a cost related to the fair
value of inventory acquired with the acquisition of the Demag mobile crane
business.
SG&A costs for the six months ended June 30, 2004 totaled $46.3 million, an
increase of $5.6 million over the same period in 2003. The sale of Schaeff
Incorporated and C&M reduced SG&A costs in the first six months of 2004 by $1.4
million relative to the first six months of 2003. The impact of a weaker U.S.
dollar relative to the Euro increased SG&A costs in 2004 relative to 2003 by
$3.8 million, as the majority of the segment's SG&A expense is incurred in Euro.
Restructuring and other charges recorded in SG&A in 2004 totaled $1.0 million,
an increase of $0.5 million for the same period in 2003. These costs in 2004
relate to the completion of the Cork, Ireland aerials facility closure as well
as the consolidation of crane distribution within France.
Income from operations for the six months ended June 30, 2004 totaled $16.6
million, compared to $8.0 million for the same period in 2003. Restructuring and
other costs in 2004 were lower by $8.1 million when compared to the same period
in 2003 and totaled $1.7 million. Profits in the mobile crane business fell
slightly on lower sales volumes in North America. This decline was offset by the
increase in profits realized in the tower crane business. The sale of C&M and
Schaeff Incorporated had an insignificant impact on 2004 profitability when
compared to 2003.
54
TEREX AERIAL WORK PLATFORMS
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 406.1 $ 315.0 28.9%
Gross profit ...................... $ 84.6 20.8% $ 64.4 20.4% 31.4%
SG&A .............................. $ 31.6 7.8% $ 27.7 8.8% 14.1%
Income (loss) from operations ..... $ 53.0 13.1% $ 36.7 11.7% 44.4%
Net sales for the Terex Aerial Work Platforms segment for the six months ended
June 30, 2004 were $406.1 million, an increase of $91.1 million when compared to
the same period in 2003. Sales increased when compared to the first half of 2003
as a result of stronger demand from the rental channel in the United States and
Europe. Rental market demand has increased as rental channel customers are
experiencing increased asset utilization as a result of an improved economy and
continued to buy new equipment to reduce the age of their fleets. The segment
also benefited from increased demand for material handler products.
Gross profit for the Terex Aerial Work Platforms segment for the six months
ended June 30, 2004 was $84.6 million, an increase of $20.2 million when
compared to the same period in 2003. Gross profit for the first half of 2003
included a $0.7 million charge related to certain fair value adjustments to
Genie's inventory values recorded at the time of acquisition; no such charges
were included in 2004 results. Steel cost increases experienced in the first
half of 2004 negatively impacted gross profit in the segment. Gross profit
benefited from the impact of the 29% increase in sales and offset the negative
steel price variances.
SG&A costs for the six months ended June 30, 2004 totaled $31.6 million, an
increase of $3.9 million from the same period in 2003. The increase was due
primarily to higher compensation and related costs arising from higher sales
levels.
Income from operations for the Terex Aerial Work Platforms segment for the six
months ended June 30, 2004 was $53.0 million, an increase of $16.3 million from
the same period in 2003. Income improved as sales volumes grew in the United
States and Europe relative to 2003.
TEREX MINING
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 172.1 $ 152.7 12.7%
Gross profit ...................... $ 28.8 16.7% $ 24.4 16.0% 18.0%
SG&A .............................. $ 20.3 11.8% $ 15.8 10.3% 28.5%
Income (loss) from operations ..... $ 8.5 4.9% $ 8.6 5.6% (1.2)%
Net sales in the Terex Mining segment increased by $19.4 million to $172.1
million in the six months ended June 30, 2004 compared to $152.7 million in the
comparable period in 2003. Excluding the impact of a stronger Euro relative to
the U.S. dollar, sales were essentially unchanged from 2003. Sales in the first
quarter of 2004 were approximately $10 million lower than 2003 due to a
temporary disruption in order activity created by uncertainty surrounding the
attempted sale of the mining truck business. On December 10, 2003, the Company
announced that it had terminated its discussions to sell the mining truck
business. Sales in the second quarter of 2004 were approximately $25 million
higher than in the second quarter of 2003 as a result of higher demand resulting
from an
55
increase in commodity pricing. Order activity increased within the segment as a
result of the continued strength in commodity pricing.
Gross profit increased by $4.4 million in the six months ended June 30, 2004
when compared to the comparable period in 2003 and totaled $28.8 million. Gross
profit increased as a result of a more favorable mix of replacement parts seen
in 2004 compared to 2003, with parts making up 59% of sales in 2004 compared to
42% in 2003. Gross profit also benefited from improved selling margins from new
hydraulic shovels and mining trucks. Included in gross profit for 2004 is a $0.4
million charge for the loss recognized on the sale of a legacy parts business.
The Company decided to exit this line of business to focus on supporting core
Terex products. Gross profit was also negatively impacted by steel costs in the
first half of 2004 when compared to 2003 pricing levels.
SG&A expense increased by $4.5 million in the six months ended June 30, 2004
relative to the comparable period in 2003, to a total of $20.3 million.
Approximately $1.5 million of the increase was due to the impact of foreign
exchange as approximately 82% of the segment's SG&A was incurred in costs other
than U.S. dollars.
Income from operations for the Terex Mining segment was $8.5 million in the six
months ended June 30, 2004, a slight decrease when compared to $8.6 million for
the same period in 2003. Improvements in gross profit were offset by higher SG&A
costs incurred.
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER
Six Months Ended June 30,
----------------------------------------------------
2004 2003
Restated Restated
----------------------- -------------------------
% of Sales % of Sales % Change
---------- ---------- ----------
($ amounts in millions)
Net sales ......................... $ 484.6 $ 323.6 49.8%
Gross profit ...................... $ 62.8 13.0% $ 10.9 3.4% 476.1%
SG&A .............................. $ 51.4 10.6% $ 37.9 11.7% 35.6%
Goodwill impairment ............... $ -- -- $ 44.3 13.7% (100.0)%
Income (loss) from operations ..... $ 11.4 2.4% $ (71.3) (22.0)% (116.0)%
Net sales for the Terex Roadbuilding, Utility Products and Other segment for the
six months ended June 30, 2004 were $484.6 million, an increase of $161.0
million when compared to the same period in 2003. The acquisition of Tatra and
ATC on August 28, 2003 increased sales in the first half of 2004 by
approximately $110 million when compared to the same period in 2003. Sales of
roadbuilding products improved over 2003 levels as a result of higher demand for
concrete mixers. Demand for roadbuilding products is linked to state and federal
spending for road improvements and new construction. Given the current budget
deficits impacting many state and federal governments, demand for roadbuilding
products remains relatively unchanged from prior years. Sales of utility
products were relatively unchanged from 2003 levels. The Terex Light
Construction businesses showed year-over-year improvement in demand, partially
as a result of orders shipped to the Middle East.
Gross profit for the six months ended June 30, 2004 totaled $62.8 million, an
increase of $51.9 million when compared to the same period in 2003. The
acquisition of a majority interest in Tatra and ATC increased gross profit by
approximately $14 million when compared to 2003. Gross profit earned by the
Roadbuilding and Utility Products businesses improved over 2003 levels despite
the negative impact of increases in steel costs experienced during the first six
months of 2004. The Company continues to focus on initiatives to mitigate future
steel price increases including consolidating steel purchasing and selective
price increases. Total restructuring charges incurred during the first half of
2004 were $0.3 million and related to the consolidation of facilities in the
Utility Products business. The consolidation is part of an ongoing effort to
eliminate duplicate facilities resulting from the acquisition of several
distribution businesses over the past two years.
Gross profit for the first six months of 2003 included restructuring and other
charges of $31.3 million, primarily related to activities initiated in response
to poor market conditions for the segment's roadbuilding products. Demand for
roadbuilding products has been dampened by delays in state and federal funding
for road improvement and
56
construction projects. These actions included the exit of certain product-lines
as well as inventory write-downs to reflect expected reduced sales volumes. Also
included in the restructuring and other charges during the six months ended June
30, 2003 was $1.5 million related to the closure of the Company's EarthKing
internet business.
SG&A costs for the segment for the six months ended June 30, 2004 totaled $51.4
million, an increase of $13.5 million when compared to the same period in 2003.
The majority of the increase was due to the acquisition of Tatra and ATC. SG&A
costs also increased due to an unfavorable legal settlement in the Roadbuilding
business and as a result of higher selling and administrative costs in the
Utility Products businesses.
During the second quarter of 2003, the Company determined that the business
performance during the first six months of 2003 in the Roadbuilding reporting
unit would not meet the Company's 2003 performance expectations that were used
when goodwill was last reviewed for impairment as of October 1, 2002. As of that
time, funding for road projects had remained at historically low levels as
federal and state budgets had been negatively impacted by a weak economy and the
war in Iraq. In response to the revised business outlook, management initiated
several changes to address the expected market conditions, including a change in
business management, discontinuance of several non-core products, work force
furloughs and reductions, and an inventory write-down based on anticipated lower
sales volume. Based on the continued weakness in the reporting unit, the Company
initiated a review of the long-term outlook for the reporting unit. The revised
outlook for the reporting unit assumed that funding levels for domestic road
projects would not improve significantly in the short term. In addition, the
outlook assumed that the Company would continue to reduce working capital
invested in the reporting unit to better match revenue expectations.
Based on this review, the Company determined the fair value of the Roadbuilding
reporting unit using the present value of the cash flow expected to be generated
by the reporting unit. The cash flow was determined based on the expected
revenues, after tax profits, working capital levels and capital expenditures for
the reporting unit. The present value was calculated by discounting the cash
flow by the Company's weighted average cost of capital. The Company, with the
assistance of a third-party, also reviewed the market value of the Roadbuilding
reporting unit's tangible and intangible assets. These values were included in
the determination of the carrying value of the Roadbuilding reporting unit.
Based on the revised fair value of the reporting unit, a goodwill impairment of
$44.3 million was recognized during the second quarter of 2003.
Income from operations for the Terex Roadbuilding, Utility Products and Other
segment for the six months ended June 30, 2004 was $11.4 million, compared to a
loss of $71.3 million for the same period in 2003. Income from operations in
2003 included a goodwill impairment charge of $44.3 million. Restructuring and
other costs incurred in the first six months of 2004 were $33.0 million lower
than the $33.3 million incurred in the same period in 2003. The acquisition of
Tatra and ATC improved income from operations by approximately $5.3 million.
Income from operations in the Utility Products and Roadbuilding businesses was
lower than in 2003 as a result of increases in steel costs experienced in 2004
as well as from unfavorable legal settlements seen in the first half of 2004.
NET INTEREST EXPENSE
During the six months ended June 30, 2004, the Company's net interest expense
decreased $5.2 million to $43.5 million from $48.7 million for the prior year
period. Net interest expense declined relative to 2003 as the Company reduced
total outstanding debt by approximately $204 million and increased cash on hand
by approximately $34 million from June 30, 2004. The benefit of lower debt
levels and higher cash balances was partially offset by higher interest rates in
2004 relative to 2003.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the six months ended June 30, 2004 was income
of $17.4 million as compared to an expense of $4.5 million for the prior year
period. The increase in other income relative to 2003 was primarily a result of
the sale of idle facilities recognized in the second quarter of 2004 along with
a favorable settlement reached related to the acquisition of the O&K business.
57
INCOME TAXES
During the six months ended June 30, 2004, the Company recognized income tax
expense of $12.9 million on income before income taxes of $94.9 million, an
effective rate of 13.6%, as compared to an income tax benefit of $9.3 million on
a loss before income taxes of $45.3 million, an effective rate of 20.5%, in the
prior year period. The effective tax rate for the six months ended June 30, 2004
was higher than the Company's 2003 full year effective tax-rate of (346.9%),
primarily due to 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, partially offset by the
strong financial performance of the Company's Fermec business, where recent
performance indicated that the Company was more likely than not to realize the
benefits of certain tax assets, and, therefore, the valuation allowance held for
this business was released in 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.
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 June 30, 2004, reserves for excess and obsolete inventory
totaled $66.0 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 June 30, 2004, reserves for potentially
uncollectible accounts receivable totaled $36.4 million.
GUARANTEES - The Company has issued guarantees to financial institutions of
customer financing to purchase equipment. 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 made by the
Company 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
58
Company realizing the benefits of any net proceeds in excess of the remaining
payments due to the finance company.
As of June 30, 2004, the Company's maximum exposure to such credit guarantees
was $289.5 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 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 June 30, 2004 was $41.5 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 June 30, 2004, the Company's maximum exposure pursuant to buyback
guarantees was $43.4 million. The Company is able to mitigate the risk of these
guarantees by staggering the timing of the buybacks and through leveraging its
access to the used equipment markets provided by the Company's original
equipment manufacturer status.
The Company recognizes a loss under a guarantee when the Company's obligation to
make payment under the guarantee is probable and the amount of the loss can be
estimated. A loss would be recognized if the Company's payment obligation under
the guarantee exceeds the value the Company can expect to recover to offset such
payment, primarily through the sale of the equipment underlying the guarantee.
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 June 30, 2004.
REVENUE RECOGNITION - Revenue and costs are generally recorded when products are
shipped and invoiced to either independently owned and operated dealers or to
customers.
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:
59
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable;
d) Collectibility is reasonably assured;
e) The Company has no significant obligations for future
performance; and
f) The Company is not entitled to direct the disposition of the
goods, cannot rescind the transaction, cannot prohibit the
customer from moving, selling, or otherwise using the goods in
the ordinary course of business and has no other rights of
holding title that rest with a titleholder of property that is
subject to a lien under the UCC.
In circumstances where the sales transaction requires acceptance by the customer
for items such as testing on site, installation, trial period or performance
criteria, revenue is not recognized unless the following criteria have been met:
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable;
d) Collectibility is reasonably assured; and
e) The customer has given their acceptance, the time period for
acceptance has elapsed or the Company has otherwise objectively
demonstrated that the criteria specified in the acceptance
provisions have been satisfied.
In addition to performance commitments, the Company analyzes factors such as the
reason for the purchase to determine if revenue should be recognized. This
analysis is done before the product is shipped and includes the evaluation of
factors that may affect the conclusion related to the revenue recognition
criteria as follows:
a) Persuasive evidence that an arrangement exists;
b) Delivery has occurred or services have been rendered;
c) The price to the buyer is fixed or determinable; and
d) Collectibility is reasonably assured.
Certain new units may be invoiced prior to the time customers take physical
possession. Revenue is recognized in such cases only when the customer has a
fixed commitment to purchase the units, the units have been completed, tested
and made available to the customer for pickup or delivery, and the customer has
requested that the Company hold the units for pickup or delivery at a time
specified by the customer. In such cases, the units are invoiced under the
Company's customary billing terms, title to the units and risks of ownership
pass to the customer upon invoicing, the units are segregated from the Company's
inventory and identified as belonging to the customer and the Company has no
further obligations under the order.
Revenue from sales-type leases is recognized at the inception of the lease.
Income from operating leases is recognized ratably over the term of the lease.
The Company routinely sells equipment subject to operating leases and the
related lease payments. If the Company does not retain a substantial risk of
ownership in the equipment, the transaction is recorded as a sale. If the
Company does retain a substantial risk of ownership, the transaction is recorded
as a borrowing, the operating lease payments are recognized as revenue over the
term of the lease and the debt is amortized over a similar period.
GOODWILL - Goodwill represents the difference between the total purchase price
paid in the acquisition of a business and the fair value of the assets, both
tangible and intangible, and liabilities acquired by the Company. The Company is
required annually to review the value of its recorded goodwill to determine if
it is potentially impaired. The initial recognition of goodwill, as well as the
annual review of the carrying value of goodwill, requires that the Company
develop estimates of future business performance. These estimates are used to
derive expected cash flow and include assumptions regarding future sales levels,
the impact of cost reduction programs, and the level of working capital needed
to support a given business. The Company relies on data developed by business
segment management as well as macroeconomic data in making these calculations.
The estimate also includes a determination of the 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 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.
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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.
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 June 30, 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 June 30, 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 June 30,
2004. These estimated annual compensation increases are determined by management
every year and are based on historical trends and market indices.
INCOME TAXES - At June 30, 2004, the Company had deferred tax assets of $10.6
million, net of valuation allowances. The income tax expense was $12.9 million
for the six months ended June 30, 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 and obligations, respectively 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.
61
A significant portion of the Company's deferred tax assets are comprised of net
operating losses ("NOLs") generated in the United States by the Company. The
Company has had a history of generating tax losses in the United States and has
accumulated NOLs of $418.1 million as of December 31, 2003. During the fourth
quarter of 2003, and during subsequent quarterly 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 subsequent periods.
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
subsequent quarterly periods, 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. During the second quarter of 2004, the strong financial
performance of the Company's Fermec business' indicated that it was more likely
than not that the Company would realize the benefits of certain tax assets, and,
therefore, the valuation allowance held for this business was released, reducing
the Company's income tax provision for the three months ended June 30, 2004 by
$14.0 million.
Considerable judgments are required in establishing deferred tax valuation
allowances and in assessing possible exposures related to tax matters. Tax
returns are subject to audit and local taxing authorities could challenge tax
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 $454.5 million at June 30, 2004. In addition, the
Company had $228.1 million available for borrowing under its revolving credit
facilities at June 30, 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
62
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 second quarter of 2004 and 2003, the Company sold, without
recourse, accounts receivable approximating 18% and 22% of its second quarter
revenue in 2004 and 2003, respectively, to provide additional liquidity.
The Company is reducing inventory requirements by sharing, throughout the
Company, many of the best practices and lean manufacturing processes that
various of its business units have 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 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
typically 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 six months ended June 30, 2004, the Company
used approximately $20 million of cash for working capital. The Company defines
working capital as the sum of accounts receivable and inventories, less accounts
payable. Despite this, during the first six months of 2004, the Company was able
to generate $78.4 million of cash from operations. This cash inflow was due
primarily to improved operating profitability of the Company.
To help fund its traditional seasonal cash pattern, the Company maintains a
significant cash balance and a revolving line of credit in addition to term
borrowings from its bank group. The Company maintains a bank credit facility
that
63
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. On June 30, 2004, the Company prepaid $75 million of
principal amount of its bank term loans, and on July 21, 2004, the Company
prepaid an additional $50 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 4.25% at
June 30, 2004.
During 2003, the Company changed its debt profile by using cash generated from
operations to reduce its debt, extending the maturities of its term debt and
thereby reducing the rate of interest on its debt. On June 30, 2003, the Company
redeemed $50 million of its 8-7/8% Senior Subordinated Notes due 2008 (the
"8-7/8% Notes"). On November 25, 2003, the Company sold and issued $300 million
of its 7-3/8% Senior Subordinated Notes due 2014 (the "7-3/8% Notes") using the
proceeds plus $119 million of available cash to prepay the remaining $200
million outstanding principal amount of its 8-7/8% Notes and $200 million plus
accrued interest of its bank term loans.
The Company manages its interest rate risk by maintaining a balance between
fixed and floating rate debt through interest rate derivatives. Over the long
term, the Company believes this balance will produce lower interest cost than a
purely fixed rate mix without substantially increasing risk.
At the same time that it issued its 7-3/8% Notes, the Company negotiated an
amendment to certain of the financial covenants under its bank credit
facilities, described above, to extend the rate at which the pro forma
consolidated leverage ratio and the pro forma consolidated senior secured debt
leverage ratio are reduced in 2004 and 2005.
The Company continues to review its alternatives to improve its capital
structure and to reduce debt service costs through a combination of debt
refinancing, issuing equity, asset sales and the sale of non-strategic
businesses. The Company's ability to access the capital markets to raise funds,
through the sale of equity or debt securities, is subject to various factors,
some specific to the Company and others related to 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
64
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
Net cash provided by operations for the six months ended June 30, 2004 was $78.4
million. Approximately $20 million of cash was used for working capital purposes
during the six months ended June 30, 2004 in connection with the second quarter
selling season. Net cash provided by operations decreased by $105.2 million in
the six months ended June 30, 2004 when compared to the same period in 2003.
During the first six months of 2003, the Company generated approximately $131.3
million from the reduction of working capital. A significant portion of the
working capital reduction in the first six months of 2003 was due to
improvements realized at Demag, which was acquired in August 2002 with a high
level of working capital.
Net cash used in investing activities in the six months ended June 30, 2004 was
$1.3 million, as compared to a net use of $19.3 million in the six months ended
June 30, 2003. This change is a result of the Company's receipt of $24.0 million
as proceeds from the sale of excess assets during the first six months of 2004
and the reduced number and size of acquisitions completed in the first six
months of 2004 when compared to the same period in 2003.
Cash used in financing activities was $86.8 million in the six months ended June
30, 2004, compared to cash used in financing activities in the six months ended
June 30, 2003 of $107.4 million. During the six months ended June 30, 2004, the
Company used $75.0 million to prepay a portion of its bank term loans and it
generated $5.5 million from the exercise of stock options. In the six months
ended June 30, 2003, the Company utilized cash from operations to reduce its
debt by approximately $90 million.
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
Customers of the Company from time to time may fund the acquisition of the
Company's equipment through third-party finance companies. In certain instances,
the Company may provide a credit guarantee to the finance company, by which the
Company agrees to make payments to the finance company should the customer
default. The maximum liability of the Company is limited to the remaining
payments due to the finance company at the time of default. In the event of
customer default, the Company is generally able to dispose of the equipment with
the Company realizing the benefits of any net proceeds in excess of the
remaining payments due to the finance company.
As of June 30, 2004, the Company's maximum exposure to such credit guarantees
was $289.5 million, including total credit guarantees issued by Demag and Genie
of $194.4 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 $41.5 million
at June 30, 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
65
conditions generally pertain to the functionality and state of repair of the
machine. As of June 30, 2004, the Company's maximum exposure pursuant to buyback
guarantees was $43.4 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 June 30, 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 TFSH,
Genie's ownership interest in TFSH was reduced to forty percent (40%) in
exchange for consideration of $1.2 million from the joint venture partner, and
Genie transferred its interest to another Company subsidiary. In addition, the
scope of TFSH's operations was broadened, as it was granted the right to
facilitate the financing of all of the Company's products sold in Europe.
As of June 30, 2004, TFSH had total assets of $170.7 million, consisting
primarily of financing receivables and lease related equipment, and total
liabilities of $154.3 million, consisting primarily of debt issued by the joint
venture partner. The Company has provided guarantees related to potential losses
arising from shortfalls in the residual values of financed equipment or credit
defaults by the joint venture's customers. As of June 30, 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 a result of the capital account balance requirements
for TSFH, in June 2004 the Company contributed an additional $1.9 million in
cash to TFSH.
As defined by FASB Interpretation No. 46 ("FIN 46R"), TFSH is a Variable
Interest Entity ("VIE"). For entities created prior to February 1, 2003, FIN 46R
requires the application of its provisions effective the first reporting period
after March 15, 2004. Based on the legal and operating structure of TFSH, the
Company has concluded that it is not the primary beneficiary of TFSH and that it
does not control the operations of TFSH. Accordingly, the Company will not
consolidate the results of TFSH into its consolidated financial results. The
Company applies the equity method of accounting for its investment in TFSH.
Sale-Leaseback Transactions
The Company's rental business typically rents equipment to customers for periods
of no less than three months. To better match cash outflows in the rental
business to cash inflows from customers, the Company finances the equipment
through a series of sale-leasebacks which are classified as operating leases.
The leaseback period is typically 60 months in duration. At June 30, 2004, the
historical cost of equipment being leased back from the financing companies was
$89.2 million and the minimum lease payment for the remainder of 2004 will be
approximately $9 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
66
specifically identified committed and forecasted cash flows in foreign
currencies using forward currency sale or purchase contracts. At June 30, 2004,
the Company had foreign exchange contracts with a notional value of $270.8
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 June 30, 2004, the floating rates
ranged between 4.33% and 5.60%.
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 the
proceedings are at a preliminary stage, and it is not presently possible to
estimate the amount or timing of any cost to the Company. However, the Company
does not believe that these contingencies and uncertainties will, in the
aggregate, have a material adverse effect on the Company. When it is probable
that a loss has been incurred and possible to make reasonable estimates of the
Company's liability with respect to such matters, a provision is recorded for
the amount of such estimate or for the minimum amount of a range of estimates
when it is not possible to estimate the amount within the range that is most
likely to occur.
The Company generates hazardous and non-hazardous wastes in the normal course of
its manufacturing operations. As a result, Terex is subject to a wide range of
federal, state, local and foreign environmental laws and regulations. These laws
and regulations govern actions that may have adverse environmental effects, such
as discharges to air and water, and also require compliance with certain
practices when handling and disposing of hazardous and non-hazardous wastes.
These laws and regulations also impose liability for the costs of, and damages
resulting from, cleaning up sites, past spills, disposals and other releases of
hazardous substances, should any of such events occur. No such incidents have
occurred which required the Company to pay material amounts to comply with such
laws and regulations. Compliance with such laws and regulations has required,
and will continue to require, the Company to make expenditures. The Company does
not expect that these expenditures will have a material adverse effect on its
business or profitability.
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 June 30, 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
67
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.
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 June 30,
2004, the Company had foreign currency contracts with a notional value of $270.8
million. The fair market value of these arrangements, which represents the cost
to settle these contracts, was an asset of approximately $7 million at June 30,
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 June 30,
2004, approximately 47% of the Company's debt was floating rate debt and the
weighted average interest rate for all debt was approximately 7%.
At June 30, 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 $1 million at
June 30, 2004.
At June 30, 2004, the Company had approximately $279 million of interest rate
swaps that converted fixed rates to floating rates. The floating rates ranged
between 4.33% and 5.60% at June 30, 2004. The fair market value of these
arrangements, which represent the cost to settle these contracts, was a
liability of approximately $4 million.
68
At June 30, 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 June 30,
2004 would have increased interest expense by approximately $1 million in the
six months ended June 30, 2004.
COMMODITIES RISK
Principal materials used by the Company in its various manufacturing processes
include steel, castings, engines, tires, hydraulic cylinders, drive trains,
electric controls and motors, and a variety of other commodities and fabricated
or manufactured items. The Company's performance may be impacted by extreme
movements in material costs and from availability of these materials. In
particular, during the first six months of 2004, the Company has been affected
by increases in the cost of steel. Steel is a major material component for many
of the Company's products, so as the cost of steel has increased, the cost to
manufacture these products has increased. The cost of steel has increased, and
the availability of steel has decreased, in response to higher demand caused by
a recovering end-market and higher consumption of steel by emerging economies
such as China. The Company experienced an increase in steel costs of
approximately $18 million during the second quarter of 2004.
In the absence of labor strikes or other unusual circumstances, substantially
all materials are normally available from multiple suppliers. Current and
potential suppliers are evaluated on a regular basis on their ability to meet
the Company's requirements and standards. The Company actively manages its
material supply sourcing, and may employ various methods to limit risk
associated with commodity cost fluctuations and availability. With respect to
the recent increases in the cost of steel, for example, the Company continues to
design and implement plans to mitigate the impact, including the use of
alternate suppliers, leveraging the Company's overall purchase volumes to obtain
favorable costs, and increasing the price of the Company's products.
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 June 30,
2004, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
under the 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 June 30,
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
There were no changes in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the Company's fiscal quarter ended June 30, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting except as described below.
(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 June 30, 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 June 30, 2004.
69
o The Company did not maintain effective controls over its
financial reporting process due to an insufficient complement of
personnel with a level of accounting knowledge, experience and
training in the application of generally accepted accounting
principles commensurate with the Company's financial reporting
requirements. Specifically, this control deficiency directly
contributed to the material weaknesses described below, as well
as resulting in errors in the timing of revenue recognition of
certain transactions and not maintaining effective controls over
the Company's acquisition accounting, primarily resulting in
errors in accruing for estimated future legal expenses, assumed
product liabilities and certain asset valuations. This control
deficiency also resulted in errors in net sales, cost of goods
sold, goodwill, accounts receivable, accrued warranties and
product liability and other non-current liabilities resulting in
restatements of the 2000, 2001, 2002 and 2003 annual
consolidated financial statements, the consolidated financial
statements for the interim periods in 2003 and the first two
quarters of 2004. This control deficiency further resulted in
audit adjustments at two of the Company's operating locations to
the cost of sales and inventory accounts in the 2004 annual
consolidated financial statements due to the Company not
maintaining effective controls over its accounting for
inventory; specifically, the reconciliation of parts and
finished goods inventory accounts and the costing of internally
transferred parts and work in process inventory were not
sufficient to ensure the completeness and accuracy of those
accounts.
o The Company did not maintain effective controls over the
recording and elimination of its intercompany accounts. As a
result of an internal investigation into the Company's
intercompany accounting practices, management determined that
the Company did not maintain effective controls over the proper
accounting for and monitoring of the recording of its
intercompany transactions. This control deficiency resulted in
management's failure to detect the improper recording of
elimination entries related to intercompany transactions,
resulting in restatements of the 2000, 2001, 2002 and 2003
annual consolidated financial statements, the consolidated
financial statements for the interim periods in 2003 and the
first two quarters of 2004. This control deficiency primarily
impacted cost of goods sold, accounts payable, goodwill and
cumulative translation adjustment.
o The Company did not maintain effective controls over its
accounting for income taxes, including income taxes payable,
deferred income tax assets and liabilities and the related
income tax provision. Specifically, the Company did not maintain
effective controls over the accuracy and completeness of the
components of the income tax provision calculations and related
deferred income taxes and income taxes payable, and over the
monitoring of the differences between the income tax basis and
the financial reporting basis of assets and liabilities to
effectively reconcile the differences to the reported deferred
income tax balances. This control deficiency resulted in
restatements of the 2000, 2001, 2002 and 2003 annual
consolidated financial statements, the consolidated financial
statements for the interim periods in 2003 and the first two
quarters of 2004 as well as audit adjustments to the 2004 annual
consolidated financial statements.
o The Company did not maintain effective controls over its
accounting for goods received but not yet invoiced. The
Company's processes, procedures and controls at two of the
Company's operating locations, including reconciliation and
review related to the completeness and accuracy of its goods
received not invoiced liability, were ineffective. The goods
received not invoiced account at the two locations was not
adequately documented and differences were not adequately
analyzed between detailed account listings and amounts recorded
in the general ledger. This control deficiency resulted in
restatement adjustments to the 2003 annual consolidated
financial statements, as well as the consolidated financial
statements for the interim periods in 2003 and the first two
quarters of 2004. In addition, the control deficiency resulted
in audit adjustments at one of these locations to the cost of
sales and goods received not invoiced liability accounts in the
2004 annual consolidated financial statements.
o The Company did not maintain effective controls over its
accounting for goodwill denominated in foreign currencies. The
Company's processes, procedures and controls related to certain
asset valuations, in addition to the translation of certain
goodwill accounts denominated in a currency other than U.S.
dollars, were not sufficient to ensure that goodwill was
accurately recorded in accordance with generally accepted
accounting principles. This control deficiency resulted in
restatements of the 2000, 2001, 2002 and 2003 annual
consolidated financial statements, the consolidated financial
statements for the interim periods in 2003 and the first two
quarters of 2004, as well as adjustments to the 2004
70
annual consolidated financial statements. This control
deficiency primarily affected goodwill and accumulated other
comprehensive income.
o The Company did not maintain effective controls over its
accounting for certain of its retirement and other benefit
plans. Specifically, the Company's processes, procedures and
controls related to the use of actuarial information in the
determination of its minimum pension liability for foreign
defined benefit plans were not sufficient to ensure that such
liability was accurately recorded. In addition, the Company's
processes, procedures and controls related to the accounting for
the Company's common stock component of its deferred
compensation plan were not effective. This control deficiency
resulted in restatements of the 2000, 2001, 2002 and 2003 annual
consolidated financial statements, the consolidated financial
statements for the interim periods in 2003 and the first two
quarters of 2004, as well as adjustments to the 2004
consolidated financial statements. This control deficiency
primarily impacted other long-term liability, accumulated other
comprehensive income, additional paid-in capital and treasury
stock.
Additionally, each of these control deficiencies could result in a misstatement
of the aforementioned account balances or disclosures that would result in a
material misstatement to the annual or interim consolidated financial statements
that would not be prevented or detected.
Management has determined that each of these control deficiencies constitutes a
material weakness in the Company's internal control over financial reporting.
(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.
71
The following are among the specific actions taken by the Company in its
internal control over financial reporting processes during the quarter ended
March 31, 2004 and subsequently to address the reportable condition, regarding
accounting for income taxes, previously disclosed in the Company's Quarterly
Report on Form 10-Q for the interim period ended March 31, 2004 and subsequently
identified above as a material weakness as of December 31, 2004:
o The Company, with the assistance of an outside service provider,
established procedures to more effectively and accurately
accumulate detailed support for approximately eighty foreign tax
basis balance sheets and related processes to identify the
deferred tax items.
o The Company conducted income tax training sessions with
financial personnel.
o The Company revised its tax provision processes (including a
redesign of U.S. federal and state tax provision processes) to
improve visibility, accuracy and support.
o The Company has increased staffing in the tax department.
The Company intends to take further actions to remediate the material weaknesses
noted above and improve controls overall by 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."
72
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
The following table provides information about purchases by the Company during
the quarter ended June 30, 2004 of Common Stock that is registered by the
Company pursuant to the Exchange Act.
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------
(d) Maximum
(c) Total Number of Number of Shares
Shares Purchased as that May Yet be
Part of Publicly Purchased
(a) Total Number of (b) Average Price Announced Plans or Under the Plans
Period Shares Purchased Paid per Share Programs or Programs
------------------------------ -------------------- -------------------- -------------------- --------------------
April 1, 2004 - April 30, 2004 22,429(1) $ 38.33 -- --
May 1, 2004 - May 31, 2004 -- -- -- --
June 1, 2004 - June 30, 2004 -- -- -- --
-------------------- -------------------- -------------------- --------------------
Total 22,429 $ 38.33 -- --
==================== ==================== ==================== ====================
(1) On April 7, 2004, Ronald M. DeFeo, the Company's Chairman, Chief
Executive Officer and President, delivered 22,429 shares of Common Stock
to the Company in connection with his repayment of a loan made by the
Company to Mr. DeFeo on March 2, 2000. The loan was repaid in full by
Mr. DeFeo, through this Common Stock payment and additional cash
payments, in April 2004.
Item 3. Defaults Upon Senior Securities
Not applicable.
73
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held May 25, 2004, Terex stockholders
holding a majority of the shares of Common Stock outstanding as of the close of
business on March 29, 2004 voted to approve each of the seven proposals included
in the Company's proxy statement as follows:
Affirmative Negative Abstentions Unvoted
----------- ----------- ----------- -----------
Proposal 1: To elect eight directors to hold
office for one year or until their
successors are duly elected and qualified:
Ronald M. DeFeo 45,071,275 967,082 -- --
G. Chris Andersen 45,067,655 970,702 -- --
Don DeFosset 45,463,897 574,460 -- --
William H. Fike 45,463,789 574,568 -- --
Dr. Donald P. Jacobs 45,463,928 574,429 -- --
David A. Sachs 45,067,687 970,670 -- --
J. C. Watts, Jr 45,464,005 574,352 -- --
Helge H. Wehmeier 45,467,671 570,686 -- --
Proposal 2: To ratify the selection of
Pricewaterhouse Coopers LLP as
independent accountants of the Company
for 2004: 45,790,022 236,256 12,079 --
Proposal 3: To approve an amendment to the
Terex Corporation 2000 Incentive Plan
to increase the number of shares of
the Company's common stock available
for grant thereunder: 34,566,358 7,279,672 582,749 3,609,578
Proposal 4: To approve the Terex
Corporation 2004 Annual Incentive
Compensation Plan to meet the
requirements for tax deductibility
under Section 162(m) of the Internal
Revenue Code of 1986, as amended: 43,891,554 1,732,835 413,967 1
Proposal 5: To approve the existing Terex
Corporation Employee Stock Purchase
Plan to comply with newly issued New
York Stock Exchange requirements: 37,720,865 4,294,624 413,290 3,609,578
Proposal 6: To approve the existing Terex
Corporation Deferred Compensation
Plan to comply with newly issued New
York Stock Exchange requirements: 40,483,293 1,468,001 477,485 3,609,578
Proposal 7: To approve the existing
arrangement for compensation of
outside directors of Terex Corporation
to comply with newly issued New York
Stock Exchange requirements: 39,602,918 2,163,674 622,187 3,609,578
Item 5. Other Information
Recent Developments
On May 18, 2004, the Company completed the exchange of $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
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amount of its previously outstanding 7-3/8% Senior Subordinated Notes due 2014,
which the Company issued on November 25, 2003 in a private offering.
On June 30, 2004, the Company prepaid $75.0 million of term debt under its bank
credit facility and recorded a non-cash charge of $1.5 million. The non-cash
charge related to the write-off of unamortized debt acquisition costs.
On July 21, 2004, the Company prepaid $50.0 million of term debt under its bank
credit facility and recorded a non-cash charge of $1.0 million. The non-cash
charge related to the write-off of unamortized debt acquisition costs.
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.
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
75
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:
During the quarter ended June 30, 2004, the Company filed or
furnished the following Current Reports on Form 8-K:
- A report on Form 8-K was filed on April 7, 2004, announcing a
conference call to be held on April 22, 2004, to review the
Company's first quarter 2004 financial results.
- A report on Form 8-K was furnished on April 21, 2004,
providing
76
the Company's press release reviewing the Company's financial
results for the quarter ended March 31, 2004.
- A report on Form 8-K was filed on April 29, 2004, announcing
the Company's participation in an upcoming conference.
- A report on Form 8-K was filed on May 24, 2004, announcing the
Company's participation in an upcoming conference.
- A report on Form 8-K was filed on June 15, 2004, announcing
that the Board of Directors had elected Paula Cholmondeley to
serve on the Company's Board.
77
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)
78
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Terex Corporation (incorporated
by reference to Exhibit 3.1 to the Form S-1 Registration Statement of
Terex Corporation, Registration No. 33-52297).
3.2 Certificate of Elimination with respect to the Series B Preferred Stock
(incorporated by reference to Exhibit 4.3 to the Form 10-K for the year
ended December 31, 1998 of Terex Corporation, Commission File No.
1-10702).
3.3 Certificate of Amendment to Certificate of Incorporation of Terex
Corporation dated September 5, 1998 (incorporated by reference to
Exhibit 3.3 to the Form 10-K for the year ended December 31, 1998 of
Terex Corporation, Commission File No. 1-10702).
3.4 Amended and Restated Bylaws of Terex Corporation (incorporated by
reference to Exhibit 3.2 to the Form 10-K for the year ended December
31, 1997 of Terex Corporation, Commission File No. 1-10702).
4.1 Indenture, dated as of March 29, 2001, between Terex Corporation and
United States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.12 to the Form 10-Q for the quarter ended March
31, 2001 of Terex Corporation, Commission File No. 1-10702).
4.2 First Supplemental Indenture, dated as of October 1, 2001, between Terex
Corporation and United States Trust Company of New York, as Trustee (to
Indenture dated as of March 29, 2001) (incorporated by reference to
Exhibit 4.15 to the Form 10-Q for the quarter ended September 30, 2001
of Terex Corporation, Commission File No. 1-10702).
4.3 Second Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
March 29, 2001) (incorporated by reference to Exhibit 4.18 to the Form
10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.4 Third Supplemental Indenture, dated as of March 31, 2003, between Terex
Corporation and Bank of New York (as successor to United States Trust
Company of New York), as Trustee (to Indenture dated as of March 29,
2001) (incorporated by reference to Exhibit 4.21 to the Form 10-Q for
the quarter ended March 31, 2003 of Terex Corporation, Commission File
No. 1-10702).
4.5 Fourth Supplemental Indenture, dated as of November 25, 2003, among
Terex Corporation, the Subsidiary Guarantors named therein and The Bank
of New York (as successor to United States Trust Company of New York),
as Trustee (to Indenture dated as of March 29, 2001) (incorporated by
reference to Exhibit 4.5 to the Form 10-K for the year ended December
31, 2003 of Terex Corporation, Commission File No. 1-10702).
4.6 Indenture, dated as of December 17, 2001, between Terex Corporation, the
Guarantors named therein and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.16 to Form S-4 Registration
Statement of Terex Corporation, Registration No. 333-75700).
4.7 First Supplemental Indenture, dated as of September 30, 2002, between
Terex Corporation and Bank of New York (as successor trustee to United
States Trust Company of New York), as Trustee (to Indenture dated as of
December 17, 2001) (incorporated by reference to Exhibit 4.20 to the
Form 10-K for the year ended December 31, 2002 of Terex Corporation,
Commission File No. 1-10702).
4.8 Second Supplemental Indenture, dated as of March 31, 2003, between Terex
Corporation and Bank of New York (as successor to United States Trust
Company of New York), as Trustee (to Indenture dated as of December 17,
2001) (incorporated by reference to Exhibit 4.24 to the Form 10-Q for
the quarter ended March 31, 2003 of Terex Corporation, Commission File
No. 1-10702).
79
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-Q for the quarter ended June
30, 2004 of Terex Corporation, Commission File No. 1-10702).
10.4 1996 Terex Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to Form S-8 Registration Statement of Terex
Corporation, Registration No. 333-03983).
10.5 Amendment No. 1 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.5 to the Form 10-K for the year
ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.6 Amendment No. 2 to 1996 Terex Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Form 10-K for the year
ended December 31, 1999 of Terex Corporation, Commission File No.
1-10702).
10.7 Terex Corporation 1999 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.7 to the Form 10-Q for the quarter ended March
31, 2000 of Terex Corporation, Commission File No. 1-10702).
10.8 Terex Corporation 2000 Incentive Plan, as amended (incorporated by
reference to Exhibit 10.8 to the Form 10-Q for the quarter ended June
30, 2004 of Terex Corporation, Commission File No. 1-10702).
10.9 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 Terex Corporation Amended and Restated Deferred Compensation Plan
(incorporated by reference to Exhibit 10.11 to the Form 10-Q for the
quarter ended June 30, 2004 of Terex Corporation, Commission File No.
1-10702).
10.12 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).
10.13 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
80
Exhibit 2 of the Form 8-K Current Report, Commission File No. 1-10702,
dated September 13, 2002 and filed with the Commission on September 20,
2002).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
81
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.
82