UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 10 - Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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: 50.1 million as of January 31, 2006. The Exhibit Index begins on page 77.
EXPLANATORY NOTE Terex Corporation ("Terex" or the "Company") is filing this Quarterly Report on Form 10-Q late due to the fact that it will be restating its financial statements for the years ended December 31, 2002 and 2003, along with the corresponding interim periods for 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 filings for the interim periods ended March 31, 2004 and June 30, 2004 in Amendments to Quarterly Reports on Form 10-Q/A that will be filed with the SEC substantially contemporaneously herewith. All financial information contained in this Quarterly Report on Form 10-Q gives effect to this restatement. The restatement principally pertains to errors identified by the Company in accounting for, and reconciliation of, certain intercompany imbalances, as well as in the failure of the Company to properly eliminate, in consolidation, all intercompany accounts in accordance with generally accepted accounting principles. Prior to the restatement, the intercompany imbalances were eliminated by affecting the translation adjustment account within accumulated other comprehensive income (loss) within stockholders' equity, rather than the accounts giving rise to the imbalance. The Company's review of prior year financial statements identified other errors in accounting which primarily impacted net sales, cost of goods sold, goodwill, accumulated other comprehensive income, additional paid-in capital and treasury stock, which are also corrected in these restatements. The Company believes that its rapid growth through acquisition, complex transactions and facility closures and reorganizations during the periods in question, and their impacts on such issues as staffing, training, oversight and systems, were factors that contributed to the errors. The accompanying condensed consolidated financial statements and notes thereto set forth herein summarize 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. 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 with respect to this matter. All amounts referenced in this Quarterly Report on Form 10-Q 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 September 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. This Quarterly Report on Form 10-Q, including the financial statements and notes thereto included herein, generally does not reflect subsequent events occurring after September 30, 2004. For a description of subsequent events, this Form 10-Q should be read in conjunction with Terex's filings made subsequent to September 30, 2004, 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. 1
INDEX TEREX CORPORATION AND SUBSIDIARIES GENERAL This Quarterly Report on Form 10-Q filed by Terex Corporation ("Terex" or the "Company") includes financial information with respect to the following subsidiaries of the Company (all of which are wholly-owned) which were guarantors on September 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 September 30, 2004 Condensed Consolidated Financial Statements included in this Quarterly Report. State or other jurisdiction of I.R.S. employer incorporation identification Guarantor or organization number - -------------------------------------------- --------------- --------------- Amida Industries, Inc. South Carolina 57-0531390 Benford America, Inc. Delaware 76-0522879 BL-Pegson USA, Inc. Connecticut 31-1629830 Cedarapids, Inc. Iowa 42-0332910 CMI Dakota Company South Dakota 46-0440642 CMI Terex Corporation Oklahoma 73-0519810 CMIOIL Corporation Oklahoma 73-1125438 EarthKing, Inc. Delaware 06-1572433 Finlay Hydrascreen USA, Inc. New Jersey 22-2776883 Fuchs Terex, Inc. Delaware 06-1570294 Genie Access Services, Inc. Washington 91-2073567 Genie China, Inc. Washington 91-1973009 Genie Financial Services, Inc. Washington 91-1712115 Genie Holdings, Inc. Washington 91-1666966 Genie Industries, Inc. Washington 91-0815489 Genie International, Inc. Washington 91-1975116 Genie Manufacturing, Inc. Washington 91-1499412 GFS National, Inc. Washington 91-1959375 Koehring Cranes, Inc. Delaware 06-1423888 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 2
<TABLE> <CAPTION> Page No. -------- <S> <C> <C> PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements TEREX CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Operations - Three months and nine months ended September 30, 2004 and 2003...................... 4 Condensed Consolidated Balance Sheet - September 30, 2004 and December 31, 2003............ 5 Condensed Consolidated Statement of Cash Flows - Nine months ended September 30, 2004 and 2003....................................... 6 Notes to Condensed Consolidated Financial Statements - September 30, 2004.................. 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 41 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 Unregistered Sales of Equity Securities and Use of Proceeds...................................... 73 Item 3 Defaults Upon Senior Securities.................................................................. 73 Item 4 Submission of Matters to a Vote of Security Holders.............................................. 73 Item 5 Other Information................................................................................ 73 Item 6 Exhibits......................................................................................... 75 SIGNATURES..................................................................................................... 76 EXHIBIT INDEX.................................................................................................. 77 </TABLE> 3
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) <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 2003 2003 2004 Restated 2004 Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales ................................................................ $ 1,252.2 $ 914.7 $ 3,644.1 $ 2,899.2 Cost of goods sold ....................................................... 1,066.0 788.8 3,104.8 2,530.9 ---------- ---------- ---------- ---------- Gross profit ........................................................... 186.2 125.9 539.3 368.3 Selling, general and administrative expenses ............................. (115.0) (90.0) (347.1) (280.2) Goodwill impairment ...................................................... -- -- -- (44.3) ---------- ---------- ---------- ---------- Income from operations ................................................. 71.2 35.9 192.2 43.8 Other income (expense): Interest income ........................................................ 1.8 1.6 4.2 5.4 Interest expense ....................................................... (23.2) (23.3) (69.1) (75.8) Other income (expense) - net ........................................... (1.2) (1.9) 16.2 (6.4) ---------- ---------- ---------- ---------- Income (loss) before income taxes ...................................... 48.6 12.3 143.5 (33.0) (Provision for) benefit from income taxes ................................ (3.9) (2.5) (16.8) 6.8 ---------- ---------- ---------- ---------- Net income (loss) ........................................................ $ 44.7 $ 9.8 $ 126.7 $ (26.2) ========== ========== ========== ========== Per common share: Basic .................................................................. $ 0.91 $ 0.21 $ 2.59 $ (0.55) ========== ========== ========== ========== Diluted ................................................................ $ 0.87 $ 0.20 $ 2.48 $ (0.55) ========== ========== ========== ========== Weighted average number of shares outstanding in per share calculation: Basic ................................................................ 49.3 47.8 49.0 47.5 Diluted .............................................................. 51.3 50.0 51.0 47.5 </TABLE> The accompanying notes are an integral part of these financial statements. 4
TEREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) (in millions, except par value) <TABLE> <CAPTION> December 31, September 30, 2003 2004 Restated -------------- -------------- <S> <C> <C> Assets Current assets Cash and cash equivalents ................................................ $ 392.3 $ 467.5 Trade receivables (net of allowance of $40.0 at September 30, 2004 and $38.3 at December 31, 2003) ......................................... 649.6 509.3 Inventories .............................................................. 1,170.7 1,038.5 Deferred taxes ........................................................... 81.3 78.6 Other current assets ..................................................... 137.0 125.6 -------------- -------------- Total current assets ................................................. 2,430.9 2,219.5 Long-term assets Property, plant and equipment ............................................ 337.3 353.8 Goodwill ................................................................. 638.9 616.7 Deferred taxes ........................................................... 61.0 47.0 Other assets ............................................................. 280.7 317.2 -------------- -------------- Total assets ................................................................. $ 3,748.8 $ 3,554.2 ============== ============== Liabilities and Stockholders' Equity Current liabilities Notes payable and current portion of long-term debt ...................... $ 74.1 $ 86.8 Trade accounts payable ................................................... 767.6 614.9 Accrued compensation and benefits ........................................ 101.5 89.7 Accrued warranties and product liability ................................. 86.7 89.7 Other current liabilities ................................................ 332.8 287.5 -------------- -------------- Total current liabilities ............................................ 1,362.7 1,168.6 Non-current liabilities Long-term debt, less current portion ..................................... 1,143.1 1,274.8 Other .................................................................... 408.7 436.2 Commitments and contingencies Stockholders' equity Common stock, $.01 par value - authorized 150.0 shares; issued 50.7 and 50.0 shares at September 30, 2004 and December 31, 2003, respectively ... 0.5 0.5 Additional paid-in capital ............................................... 838.4 813.5 Accumulated deficit ...................................................... (78.5) (205.2) Accumulated other comprehensive income ................................... 108.7 110.4 Less cost of shares of common stock in treasury - 2.0 and 1.9 shares at September 30, 2004 and December 31, 2003, respectively ................... (34.8) (44.6) -------------- -------------- Total stockholders' equity ........................................... 834.3 674.6 -------------- -------------- Total liabilities and stockholders' equity ................................. $ 3,748.8 $ 3,554.2 ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements. 5
TEREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (in millions) <TABLE> <CAPTION> For the Nine Months Ended September 30, -------------------------------- 2003 2004 Restated -------------- -------------- <S> <C> <C> Operating Activities Net income (loss) .......................................................... $ 126.7 $ (26.2) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation ............................................................. 40.1 40.6 Amortization ............................................................. 11.6 9.5 Impairment charges and asset write downs ................................. -- 65.5 Loss on retirement of debt ............................................... 2.4 1.4 Gain on sale of fixed assets ............................................. (20.5) (2.4) Changes in operating assets and liabilities (net of effects of acquisitions): Trade receivables ...................................................... (108.4) 75.6 Inventories ............................................................ (147.2) 86.6 Trade accounts payable ................................................. 157.2 6.5 Other, net ............................................................. 6.2 (43.0) -------------- -------------- Net cash provided by operating activities ............................ 68.1 214.1 -------------- -------------- Investing Activities Acquisition of businesses, net of cash acquired ............................ (14.6) (8.7) Capital expenditures ....................................................... (21.5) (19.7) Proceeds from sale of assets ............................................... 31.8 4.5 -------------- -------------- Net cash used in investing activities ................................ (4.3) (23.9) -------------- -------------- Financing Activities Principal repayments of long-term debt ..................................... (125.0) (54.5) Proceeds from stock options exercised ...................................... 8.3 1.4 Net borrowings (repayments) under revolving line of credit agreements ...... (6.6) (43.5) Payment of premium on early retirement of debt ............................. -- (2.2) Other, net ................................................................. (15.5) (26.0) -------------- -------------- Net cash used in financing activities ................................ (138.8) (124.8) -------------- -------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ................. (0.2) 13.3 -------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents ......................... (75.2) 78.7 Cash and Cash Equivalents at Beginning of Period ............................. 467.5 352.2 -------------- -------------- Cash and Cash Equivalents at End of Period ................................... $ 392.3 $ 430.9 ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements. 6
TEREX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 (unaudited) (dollar amounts in millions, unless otherwise noted, except per share amounts) NOTE A - BASIS OF PRESENTATION Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Terex Corporation and subsidiaries as of September 30, 2004 and for the three months and nine months ended September 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 nine months ended September 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 September 30, 2004 and December 31, 2003 include $2.8 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 truck business is included as a continuing operation. On July 1, 2004, Terex realigned certain operations in an effort to strengthen its ability to service customers and to recognize certain operational efficiencies. The Materials Processing Group, formerly part of the Terex Roadbuilding, Utility Products and Other Segment, is now consolidated with the Terex Mining Group under the Terex Materials Processing & Mining Segment. The Terex Light Construction and Load King businesses, formerly part of the Terex Roadbuilding, Utility Products and Other Segment, are now part of the Terex Aerial Work Platforms Segment. 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 September 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. 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. 7
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. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." In May 2004, the FASB issued FSP No. 106-2, which superceded FSP No. 106-1. FSP Nos. 106-1 and 106-2 became effective in 2004. FSP No. 106-2 provides guidance to employers that have determined that prescription drug benefits available under their retiree health care benefit plans are at least actuarially equivalent to Medicare Part D. The Company's U.S. postretirement healthcare plans provide for prescription drug benefits for certain participants. Due to the limited number of participants in the Company's postretirement healthcare plans that are affected by the Act, the adoption of FSP Nos. 106-1 and 106-2 did not have a material impact on the Company's financial statements. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. As required by SFAS No. 151, the Company will adopt this new accounting standard on January 1, 2006. The adoption of SFAS No. 151 is not expected to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - - an amendment of APB Opinion No. 29." SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS No. 153, the Company will adopt this new accounting standard effective July 1, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment." SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123R also establishes fair value as the measurement method in accounting for share-based payments to employees. As per SEC Release No. 33-8568, issued in April 2005, Terex will adopt this new accounting standard effective January 1, 2006. Terex expects to transition to the new guidance using the modified prospective method. The adoption of SFAS No. 123R is not expected to have a material impact on the Company's financial statements. 8
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 September 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. The following table summarizes the changes in the consolidated product warranty liability: For the Nine Months Ended September 30, 2004 ------------------ Balance at beginning of period (Restated) ........... $ 69.6 Accruals for warranties issued during the period .... 56.9 Changes in estimates ................................ (0.5) Settlements during the period ....................... (57.7) Foreign exchange effect ............................. (0.2) ------------------ Balance at end of period ............................ $ 68.1 ================== 9
Stock-Based Compensation. At September 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. <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2003 2003 2004 Restated 2004 Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Reported net income (loss) ........................... $ 44.7 $ 9.8 $ 126.7 $ (26.2) Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related income tax effects ... (1.7) (1.0) (5.1) (3.1) ---------- ---------- ---------- ---------- Pro forma net income (loss) .......................... $ 43.0 $ 8.8 $ 121.6 $ (29.3) ========== ========== ========== ========== Per common share: Basic: Reported net income (loss) ....................... $ 0.91 $ 0.21 $ 2.59 $ (0.55) ========== ========== ========== ========== Pro forma net income (loss) ...................... $ 0.87 $ 0.18 $ 2.48 $ (0.62) ========== ========== ========== ========== Diluted: Reported net income (loss) ....................... $ 0.87 $ 0.20 $ 2.48 $ (0.55) ========== ========== ========== ========== Pro forma net income (loss) ...................... $ 0.84 $ 0.18 $ 2.38 $ (0.62) ========== ========== ========== ========== </TABLE> 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: <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Dividend yields ...................................... 0.0% 0.0% 0.0% 0.0% Expected volatility .................................. 51.10% 52.82% 51.10% 52.82% Risk-free interest rates ............................. 4.04% 4.89% 4.04% 4.89% Expected life (in years) ............................. 10.0 10.0 10.0 9.8 Aggregate fair value of options granted .............. $ 0.1 $ 0.6 $ 7.2 $ 5.2 Weighted average fair value at date of grant for options granted ................................. $ 22.33 $ 13.24 $ 22.42 $ 7.99 </TABLE> 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 10
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 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. The following tables set forth the restatement of the Company's previously issued statements of operations for the three and nine months ended September 30, 2003 and the Company's restated balance sheet as of December 31, 2003, on a summary basis. All other information presented in the notes to these financial statements is presented on a restated basis. STATEMENTS OF OPERATIONS: <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, 2003 Ended September 30, 2003 ------------------------ ------------------------ As As Originally As Originally As Reported Restated Reported Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales ............................................ $ 906.3 $ 914.7 $ 2,882.8 $ 2,899.2 Cost of goods sold ................................... $ 772.8 $ 788.8 $ 2,502.9 $ 2,530.9 Gross profit ......................................... $ 133.5 $ 125.9 $ 379.9 $ 368.3 Goodwill impairment .................................. $ -- $ -- $ (51.3) $ (44.3) Selling, general and administrative expenses.......... $ (89.1) $ (90.0) $ (279.2) $ (280.2) Income from operations ............................... $ 44.4 $ 35.9 $ 49.4 $ 43.8 Other income (expense) - net ......................... $ (1.9) $ (1.9) $ (6.5) $ (6.4) Income (loss) before income taxes .................... $ 20.8 $ 12.3 $ (27.5) $ (33.0) (Provision for) benefit from income taxes ............ $ (5.9) $ (2.5) $ 2.6 $ 6.8 Net income (loss) .................................... $ 14.9 $ 9.8 $ (24.9) $ (26.2) Per common share: Basic: ............................................. $ 0.31 $ 0.21 $ (0.52) $ (0.55) Diluted: ........................................... $ 0.30 $ 0.20 $ (0.52) $ (0.55) </TABLE> 11
BALANCE SHEET: <TABLE> <CAPTION> As of December 31, 2003 ------------------------ As Originally As Reported Restated ---------- ---------- <S> <C> <C> Trade receivables ............................................................... $ 540.2 $ 509.3 Inventories ..................................................................... $ 1,009.7 $ 1,038.5 Current deferred taxes .......................................................... $ 53.9 $ 78.6 Other current assets ............................................................ $ 122.7 $ 125.6 Total current assets ............................................................ $ 2,194.0 $ 2,219.5 Property, plant and equipment ................................................... $ 370.1 $ 353.8 Goodwill ........................................................................ $ 603.5 $ 616.7 Deferred taxes .................................................................. $ 238.9 $ 47.0 Other Assets .................................................................... $ 317.3 $ 317.2 Total assets .................................................................... $ 3,723.8 $ 3,554.2 Trade accounts payable .......................................................... $ 608.6 $ 614.9 Accrued compensation and benefits ............................................... $ 94.5 $ 89.7 Accrued warranties and product liability ........................................ $ 88.5 $ 89.7 Other current liabilities ....................................................... $ 281.0 $ 287.5 Total current liabilities ....................................................... $ 1,159.4 $ 1,168.6 Non-current liabilities - other ................................................. $ 412.9 $ 436.2 Additional paid-in capital ...................................................... $ 795.1 $ 813.5 Retained earnings (accumulated deficit) ......................................... $ 41.9 $ (205.2) Cumulative translation adjustment ............................................... $ 79.6 $ 140.0 Accumulated other comprehensive income .......................................... $ 57.0 $ 110.4 Cost of shares of common stock in treasury ...................................... $ (17.8) $ (44.6) Total stockholders' equity ...................................................... $ 876.7 $ 674.6 Total liabilities and stockholders' equity ...................................... $ 3,723.8 $ 3,554.2 </TABLE> Net cash from operating activities, financing activities and investing activities for the nine months ended September 30, 2003 did not change from previously issued results. The impact of the restatement on individual line items within operating activities are reflected in the consolidated statement of cash flows for the nine months ended September 30, 2003. The cumulative effect of the restatement of the Company's previously filed financial statements was to reduce retained earnings as of December 31, 2003 and 2002 by $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) ($185.7) and $6.7, respectively. Total stockholders' equity as of December 31, 2003 and 2002 decreased by $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 $4.7 for the three months and $6.4 during the nine months ended September 30, 2003 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 for the three months and $0.3 during the nine months ended September 30, 2003 not being recorded as expenses. Light Construction (Aerial Work Platforms Segment): The Company failed to timely and accurately reconcile certain intercompany imbalances, which resulted in errors in the recording of intercompany transactions and, as a result, costs totaling $0.7 for the three months and $2.0 during the nine months ended September 30, 2003 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 12
appropriateness of the accrued liability. As a result, costs totaling $1.8 were not recorded as expenses for the three months and $2.1 during the nine months ended September 30, 2003. Other Intercompany Imbalances and Other Items: The Company's various business units buy and sell products and services from each other in the normal course of operations. Errors were identified as a result of not reconciling intercompany activity in a timely manner between certain business units. Other errors, not specifically related to intercompany activity, were identified during the review and were corrected in the restatement. These errors related mainly to the reconciliation of certain accruals and foreign currency adjustments. As a result of these aggregate errors, expenses were not recorded totaling $0.3 for the three months and $1.0 during the nine months ended September 30, 2003. 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 in revenue of $8.4 for the three months and $16.4 for the nine months ended September 30, 2003. As a result of these adjustments, there was an increase in pre-tax income of $1.1 in the three months and $2.5 in the nine months ended September 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 $2.1 in the three months ended September 30, 2003. In addition, expenses totaling $3.2 were not recorded in the nine months ended September 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 $32.3 as of December 31, 2003 and ($0.6) as of December 31, 2002. In addition, the reconciliation of intercompany imbalances described in the previous paragraphs affected the translation adjustment within stockholders' equity. Retirement and Other Benefit Plans: During the Company's review of its foreign defined benefit plans in 2004, an error was identified in the application of SFAS No. 87, "Employers' Accounting for Pensions." The Company did not record the minimum pension liability adjustment for these plans to other comprehensive income (net of taxes) within stockholders' equity and other non-current liabilities. The net result of correcting this error was a reduction in other comprehensive income (net of taxes) as of December 31, 2003 totaling $6.9. In addition, non-current liabilities increased as of December 31, 2003 by $9.8. 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. 13
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 September 30, 2004 by $1.7 million. Based on the profitability of the Company in 2004 and significant, profitable backlog generated in early 2005, the valuation allowance was reversed in the quarter ended December 31, 2004. The Company's reassessment began with an analysis of the Company's cumulative three-year historical U.S. pre-tax earnings. As of December 31, 2003, the Company had a cumulative three-year historical U.S. pre-tax loss, which is considered significant objective evidence that a valuation allowance may be required, unless there existed objective evidence of a significant magnitude that would indicate that it is more likely than not that the U.S. deferred tax assets would be realized. It was determined that only the evidence that was available as of the time of the filing of the original financial statements could be used in this assessment. During the Company's evaluation of other evidence available as of the original issuance date of the December 31, 2003 financial statements, several items were considered, including the cyclical nature of the Company's industry, the impact of its restructuring activities, the goodwill impairment in the Company's Roadbuilding, Utility Products and Other segment, profitable U.S. acquisitions (mainly Genie Holdings, Inc. and its affiliates and Advance Mixer, Inc.) made during the three-year period but not available for the whole period, the timeframe of expiration of the Company's net operating loss carry-forwards, the favorable impact of the Company's debt reduction activities, and the indication of an industry recovery based on trends in non-residential construction spending and rental channel capital expenditure projections. The Company concluded that the weight of the objective negative evidence available at the time of the original financial statement filing (without the benefit of current hindsight) could not be overcome by these other factors, and therefore a valuation allowance was recorded at December 31, 2003 in the restated financial statements. NOTE C - ACQUISITIONS AND DIVESTITURES Acquisitions On September 7, 2004, the Company completed the acquisition of Noble CE, LLC and its Mexican subsidiary ("Noble CE"). Noble CE, with its manufacturing facility located in Mexico, designs, fabricates and assembles forklift products, pull scrapers and water tanks, and performs fabrication work for other businesses. In connection with the acquisition, the Company paid $5.0 cash, subject to post-closing adjustment based upon the finalization of the closing date balance sheet. Noble CE is included in the Terex Materials Processing & Mining segment. The operating results of Noble CE, now known as Terex Mexico, are included in the Company's consolidated results of operations since September 7, 2004. On 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 14
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 Terex 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. ATC is included in the Terex Roadbuilding, Utility Products and Other segment. On December 19, 2003, the Company completed the acquisition of substantially all of the assets comprising the business of Compass Equipment Leasing ("CEL") and Asplundh Canada. Both businesses rent digger 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. 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 Materials Processing & Mining segments prior to their sale and resulted in a loss of $2.3 recorded in cost of goods sold. In addition, the Company entered into a 10 year non-compete agreement with the purchaser of these businesses for a $0.8 promissory note. In 2002, the Company acquired an interest in Crane & Machinery, Inc. ("C&M"), which distributed, rented and serviced crane products, including those products manufactured by the Company. During 2002, the Company acquired from an unaffiliated financial institution outstanding loans in the amount of approximately $5.9 owed by C&M to that financial institution, and C&M was obligated to make payments to the Company pursuant to the terms of such loans. The results of C&M were consolidated in the Company's financial results from December 31, 2002 through November 10, 2003. On November 10, 2003, the Company sold its interest in C&M, and obtained a third party guarantee of the loans payable by C&M to the Company, as well as a pledge of the assets of C&M as security for the payment of such loans. As a result, the Company ceased to consolidate C&M's results as of November 10, 2003. In addition, on November 10, 2003, the Company sold substantially all of the assets of its Schaeff Incorporated subsidiary (a manufacturer of forklifts) to C&M, in consideration of C&M assuming approximately $3.1 of Schaeff Incorporated's indebtedness to the Company, with such indebtedness secured by the guarantee and pledge described above. The results of Schaeff Incorporated and C&M were included in the Terex Cranes segment prior to the November 10, 2003 transactions. 15
NOTE D - GOODWILL Beginning goodwill balances have been reclassified to conform with changes made to the Company's reportable segments. An analysis of changes in the Company's goodwill by business segment is as follows: <TABLE> <CAPTION> Terex Terex Terex Roadbuilding, Aerial Materials Utility Terex Terex Work Processing Products and Construction Cranes Platforms & Mining Other Total ------------ ---------- ---------- ---------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2003 (restated) .... $ 325.8 $ 98.6 $ 71.3 $ 41.6 $ 79.4 $ 616.7 Acquisitions ............................... -- -- 13.4 -- 9.0 22.4 Foreign exchange effect and other ......... 0.9 (0.8) 1.1 -- (1.4) (0.2) ------------ ---------- ---------- ---------- ------------- ---------- Balance at September 30, 2004 .............. $ 326.7 $ 97.8 $ 85.8 $ 41.6 $ 87.0 $ 638.9 ============ ========== ========== ========== ============= ========== </TABLE> In April and October 2004 the Company made an $8.5 and $4.4 cash payment, respectively, to the previous owners of Genie Holdings, Inc. and its affiliates ("Genie"). The payments were related to a contingent purchase price adjustment, and was based on the collection of certain trade receivables which were outstanding on the acquisition date. The October 2004 payment was earned and accrued for during the third quarter of 2004. Genie is included in the Terex Aerial Work Platforms segment. 16
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into two types of derivatives: hedges of fair value exposures and hedges of cash flow exposures. Fair value exposures relate to recognized assets or liabilities and firm commitments, while cash flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities or forecasted transactions. The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and uses certain financial instruments to manage its foreign currency, interest rate and fair value exposures. To qualify a derivative as a hedge at inception and throughout the hedge period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in earnings currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not engage in trading or other speculative use of financial instruments. The Company uses forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates on third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Euro, the British Pound, the Czech Koruna and the Australian Dollar. When using options as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The effective portion of unrealized gains and losses associated with forward contracts and the intrinsic value of option contracts are deferred as a component of accumulated other comprehensive income 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 September 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 September 30, 2004 was a loss of $3.7, which is recorded in other current liabilities. These swap agreements have been designated as, and are effective as, cash flow hedges of outstanding debt instruments. During the three months and nine months ended September 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 September 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 September 30, 2004 was a gain of $2.4, which is recorded in other non-current assets. These swap agreements have been designated as, and are effective as, fair value hedges of outstanding debt instruments. During December 2002, the Company exited an interest rate swap agreement in the notional amount of $100.0 with a 2011 maturity that converted fixed rate interest payments into variable rate interest payments. The Company received $5.6 upon exiting this swap agreement. These gains are being amortized over the original maturity and, netted against the market value of the swap agreements held at September 30, 2004, are offset by a $6.8 addition in the carrying value of the long-term obligations being hedged. 17
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 September 30, 2004, the Company had $285.7 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 September 30, 2004 was a net gain of $4.5. At September 30, 2004, $276.6 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 nine months ended September 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. At September 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 an asset of $9.1 and as a liability of $6.0. 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 Accumulated Other Comprehensive Income are as follows: <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2003 2003 2004 Restated 2004 Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Balance at beginning of period ....................... $ 4.4 $ (3.8) $ 6.5 $ 2.1 Additional gains ..................................... 0.3 6.5 5.6 2.7 Amounts reclassified to earnings ..................... (4.2) (1.3) (11.6) (3.4) ---------- ---------- ---------- ---------- Balance at end of period ............................. $ 0.5 $ 1.4 $ 0.5 $ 1.4 ========== ========== ========== ========== </TABLE> The estimated amount of existing pre-tax net gains for derivative contracts in accumulated other comprehensive income as of September 30, 2004 that is expected to be reclassified into earnings during the twelve month period ending September 30, 2005 is $2.3. 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 concluded that it is more cost-effective to outsource the activities that have been performed previously at the Loeningen facility. The closure of this facility will reduce employment by approximately 40 employees and will be completed by December 31, 2005. As of September 30, 2004, all of the employees have ceased working for the Company. The cash impact of the program will be approximately $2, excluding any proceeds that may be received from the sale of the facility. The results of Atlas Terex are reported in the Terex Construction segment. The Loeningen closure is expected to generate annual cost savings of approximately $1 when fully implemented. 18
Also in the second quarter of 2004, the Company recorded a charge of $4.3 in cost of goods sold for restructuring related to the closure of its Atlas Terex truck-mounted crane facility in Hamilton, Scotland. The charge is a result of the Company's decision to consolidate production at the Atlas Terex facility in Delmenhorst, Germany, which already manufactures truck-mounted cranes. The consolidation will lower the Company's cost structure for this business and better utilize manufacturing capacity. As a result of the restructuring, the Company has accrued for a headcount reduction of approximately 90 employees at the Hamilton facility, which will be completed by December 31, 2005. As of September 30, 2004, two individuals remain employed by the Company. The cash impact of the program will be approximately $1.7, excluding any proceeds that may be received from the sale of the facility. The Hamilton facility closing is expected to reduce annual operating expenses by approximately $5 when fully implemented. In addition, during the second quarter of 2004, the Company established a restructuring program, recorded in cost of goods sold, to move its pump manufacturing business from its B.L. Pegson facility in Coalville, England to another Terex Construction segment component manufacturing facility in Scotland. The non-cash charge to cost of goods sold was $0.3. The Company anticipates it will complete the relocation of this manufacturing line by December 31, 2004 in order to free needed capacity at the B.L. Pegson facility for crushing equipment production. B. L. Pegson is included in the Terex Construction segment. In the second quarter of 2004, the Company created a restructuring program to reduce the number of installation facilities in its Terex Utilities South business unit from four facilities to three facilities. Headcount related to this program was reduced by 20 employees. The Company recorded a $0.3 charge to cost of goods sold related to this program. This charge consists of $0.2 cash and a $0.1 non-cash component. This program was substantially complete at September 30, 2004. Terex Utilities South is 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 completed at September 30, 2003. Booms for the Terex-RO product were already being produced in the Waverly facility; accordingly, no production problems were anticipated in connection with this consolidation. Terex-RO is included in the Terex Cranes segment. The Company recorded a charge of $0.9 in the first quarter of 2003 for the exit of all activities at its EarthKing e-commerce subsidiary. The $0.9 charge is for non-cash closure costs and has been recorded in cost of goods sold. EarthKing was included in the Terex Roadbuilding, Utility Products and Other segment. The program was completed as of September 30, 2003. Additionally, during the first quarter of 2003, the Company wrote down certain investments it held in technology businesses related to its EarthKing subsidiary. These investments were no longer economically viable, as these businesses were unsuccessful in gaining customer 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 19
charges and $0.9 of accruable exit costs. This charge is a result of the Company's decision to consolidate its European Powerscreen business at its facility in Dungannon, Northern Ireland. This consolidation will lower the Company's cost structure for this business and better utilize manufacturing capacity. As a result of the restructuring, the Company has accrued for a headcount reduction of 121 employees at the Kilbeggan facility. As of September 30, 2003, all of the employees had ceased employment with the Company. The program was substantially complete at December 31, 2003, except for obligations under the lease for the facility. The Company ended its lease obligations for the Kilbeggan property during 2005. The Powerscreen Kilbeggan facility is included in the Terex Construction segment. During the three months ended June 30, 2003, $1.8 and $0.1 were recorded in cost of goods sold and selling, general and administrative expenses, respectively. The Kilbeggan facility closing is expected to generate annual cost savings of approximately $3. In addition, during the second quarter of 2003, the Company recorded restructuring charges of $4.7 in the Terex Materials Processing & Mining segment. These restructuring charges were the result of continued poor performance in the Materials Processing businesses 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 moved to another provider. The Company recorded a charge of $4.2 related to the Tulsa closure. The closure was in response to continued weakness in demand for the Company's mining trucks. Demand for mining trucks is closely related to commodity prices, which had been declining in real terms over recent years. Approximately $1.0 of this charge related to severance and other employee related charges, while $2.2 of this charge relates to inventory deemed uneconomical to relocate to other distribution facilities. The remaining $1.0 of the cost accrued related to the Tulsa building closure costs and occupancy costs expected to be incurred after production is ended. Approximately 93 positions have been eliminated as a result of this action. The transfer of production activities was completed prior to December 31, 2002 and the Company is currently marketing the Tulsa property for rental and/or 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 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 Construction 20
business. This restructuring program reduced headcount by 137 positions and was completed as of June 30, 2003. o The consolidation of several Terex Construction segment facilities in the United Kingdom. The Company has consolidated several compact equipment production facilities into a single location in Coventry, England. The Company moved the production of mini-dumpers, rollers, soil compactors and loader backhoes into the new facility. The Company recorded a charge of $7.2, of which $6.1 was for severance and $1.1 was for the costs associated with exiting the facilities. The consolidation has reduced total employment by 269 and was completed during 2003. o The exit of certain heavy equipment businesses related to mining products. During the fourth quarter of 2002, the Company conducted review of its rental equipment businesses in both its Materials Processing & Mining and Construction segments. The Company's review indicated that it was not economical to continue its mining equipment rental business due to the high cost of moving mining equipment between customers and given the continued weak demand for mining products. In addition, the Company decided to rationalize large scraper offering in its Mining group given the weak demand related mining products. The Company recorded a charge of $6.9 associated with the write down of inventory. The Company completed this process during 2004. o The exit of certain non-core tower cranes produced by the Terex Cranes segment under the Peiner brand in Germany. The European tower crane business had been negatively impacted by reduced demand from large rental customers who were undergoing financial difficulties. This resulted in reduced demand and deterioration in margins recognized in the tower crane business. The Company conducted a review of its offering of tower cranes produced under the Peiner brand and eliminated certain models that overlap with models produced at Gru Comedil S.r.l., the Company's tower crane facility in Italy. The Company recorded a charge of $3.9, of which $1.0 was for severance and $2.9 for inventory write-downs on discontinued product lines. The program 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. The following table sets forth the components and status of the restructuring charges recorded in the nine months ended September 30, 2004 that related to productivity and business rationalization: <TABLE> <CAPTION> Employee Termination Asset Facility Costs Disposals Exit Costs Other Total ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Accrued restructuring charges at December 31, 2003 ................ $ 0.1 $ -- $ 1.4 $ 1.3 $ 2.8 Restructuring charges ............. 3.9 4.6 1.0 -- 9.5 Cash expenditures ................. (3.2) -- (1.4) (0.9) (5.5) Non-cash charges .................. -- (4.6) -- -- (4.6) ------------ ------------ ------------ ------------ ------------ Accrued restructuring charges at September 30, 2004 ............... $ 0.8 $ -- $ 1.0 $ 0.4 $ 2.2 ============ ============ ============ ============ ============ </TABLE> In the aggregate, the restructuring charges described above incurred during the nine months ended September 30, 2004 and 2003 were included in cost of goods sold ($8.2 and $11.5) and selling, general and administrative expenses ($1.3 and $1.4), respectively. During the first and third quarters of 2004, the Company recorded period charges of $2.7 and $0.9, respectively, to cost of goods sold related to programs begun in 2003 and 2004. These period charges related primarily to inventory write-downs and the effect of changes in foreign exchange and were consistent with the initial restructuring plans established by the Company. 21
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 three, four and five axle cranes produced at the Company's Montceau, France facility. The Company determined that the products produced under the PPM brand were similar to products produced by Demag and has opted to eliminate these PPM models in favor of the similar Demag products, which the Company believes have superior capabilities. As a result, employment levels in Montceau were reduced. As of June 30, 2003, 102 employees had ceased employment with the Company. In addition, the Company also recognized a loss in value on the affected PPM branded cranes inventory in France and Spain. The Company recorded a charge of $15.3, of which $5.4 was for severance, $9.6 was associated with the write down of inventory and $0.3 was for claims related to exiting the sales function of the discontinued products. This program was completed during the second quarter of 2003. o The closure of the Company's existing crane distribution center in Germany. Prior to the acquisition of Demag, the Company distributed mobile cranes under the PPM brand from a facility in Dortmund, Germany. The acquisition of Demag provided an opportunity to consolidate distribution and reduce the overall cost to serve customers in Germany. The Company recorded a charge of $2.5, of which $0.7 was for severance, $1.2 was for inventory write-downs, and $0.6 for lease termination costs. Eleven employees were terminated as a result of these actions. As of June 30, 2003, all of the employees had ceased employment with the Company. 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, June 30, 2004, and September 30, 2004, the Company recorded an additional $0.8, $0.2, and $0.3, 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. 22
The following table sets forth the components and status of the restructuring charges recorded in the nine months ended September 30, 2004 that relate to addressing product, channel and production overlaps created by the acquisition of the Demag and Genie businesses: <TABLE> <CAPTION> Employee Termination Asset Facility Costs Disposals Exit Costs Other Total ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Accrued restructuring charges at December 31, 2003 ................ $ 1.0 $ -- $ 0.6 $ -- $ 1.6 Restructuring charges ............. -- 0.9 -- -- 0.9 Cash expenditures ................. (0.5) -- (0.6) -- (1.1) Non-cash charges .................. -- (0.9) -- -- (0.9) ------------ ------------ ------------ ------------ ------------ Accrued restructuring charges at September 30, 2004 ............... $ 0.5 $ -- $ -- $ -- $ 0.5 ============ ============ ============ ============ ============ </TABLE> In the aggregate, the restructuring charges described above incurred during the nine months ended September 30, 2004 and 2003 were included in cost of goods sold totaling $0.9 and $0.0, respectively. NOTE G - INVENTORIES Inventories consist of the following: December 31, September 30, 2003 2004 Restated -------------- -------------- Finished equipment ..................... $ 380.0 $ 395.2 Replacement parts ...................... 270.0 250.6 Work-in-process ........................ 266.8 187.4 Raw materials and supplies ............. 253.9 205.3 -------------- -------------- Inventories ............................ $ 1,170.7 $ 1,038.5 ============== ============== NOTE H - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, September 30, 2003 2004 Restated -------------- -------------- Property ............................... $ 47.1 $ 51.7 Plant .................................. 239.3 222.5 Equipment .............................. 257.6 245.0 -------------- -------------- 544.0 519.2 Less: Accumulated depreciation ......... (206.7) (165.4) -------------- -------------- Net property, plant and equipment ...... $ 337.3 $ 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. 23
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 September 30, 2004, TFSH had total assets of $252.7, consisting primarily of financing receivables and lease related equipment, and total liabilities of $232.6, 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 September 30, 2004, the maximum exposure to loss under these guarantees was approximately $15. 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 $85 at September 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, conditional sales contracts, and short-term rental agreements. At the time a sales-type lease is consummated, the Company records the gross finance receivable, unearned finance income and the estimated residual value of the leased equipment. Unearned finance income represents the excess of the gross minimum lease payments receivable plus the estimated residual value over the 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 $12.6 at September 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 September 30, 2004, representing a contingent liability under the limited recourse provisions. 24
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 $35.0 credit risk and a $42.0 residual value risk at September 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 <TABLE> <CAPTION> For the Three Months Ended September 30, (in millions, except per share data) --------------------------------------------------------------------------- 2003 2004 Restated ------------------------------------ ------------------------------------ Income Per-Share Income Per-Share (Loss) Shares Amount (Loss) Shares Amount ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share Net income (loss) .................. $ 44.7 49.3 $ 0.91 $ 9.8 47.8 $ 0.21 Effect of dilutive securities: Stock options ...................... -- 2.0 -- 1.3 Shares held by deferred compensation plan ................. -- -- -- 0.6 Contingently issuable shares for acquisitions .................... -- -- -- 0.3 ---------- ---------- ---------- ---------- Net income (loss) .................... $ 44.7 51.3 $ 0.87 $ 9.8 50.0 $ 0.20 ========== ========== ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> For the Nine Months Ended September 30, (in millions, except per share data) --------------------------------------------------------------------------- 2003 2004 Restated ------------------------------------ ------------------------------------ Income Per-Share Income Per-Share (Loss) Shares Amount (Loss) Shares Amount ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share Net income (loss) .................. $ 126.7 49.0 $ 2.59 $ (26.2) 47.5 $ (0.55) Effect of dilutive securities: Stock Options ...................... -- 2.0 -- -- ---------- ---------- ---------- ---------- Net income (loss) .................... $ 126.7 51.0 $ 2.48 $ (26.2) 47.5 $ (0.55) ========== ========== ========== ========== ========== ========== </TABLE> Had the Company recognized income (versus a loss) from continuing operations before cumulative effect of change in accounting principle in the nine months ended September 30, 2003, diluted shares outstanding would have increased by 1.0 million for the assumed exercise of stock options, 0.6 million for the effect of Common Stock held 25
by the Company's deferred compensation plan and 0.4 million for the Company's contingent obligation to make additional payments for the acquisition of Genie. Options to purchase 4 thousand, 154 thousand, 895 thousand and 1,360 thousand shares of Common Stock were outstanding during the three months and nine months ended September 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 280 thousand and 426 thousand shares for the three months and nine months ended September 30, 2003, respectively, are not included in the computation of diluted earnings per share. At September 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 nine months ended September 30, 2004. NOTE M - INCOME TAXES The effective tax rate for the three months and nine months ended September 30, 2004 was 8.0% and 11.7%, 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 ended September 30, 2004 is higher than the prior year's effective tax rate 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, while the 2004 period included the successful resolution of a tax audit covering multiple reporting periods and release of valuation allowances based on the profitability of our businesses in certain jurisdictions. The effective tax rate for the nine months ended September 30, 2004 was also higher than the prior year's effective tax rate due to the impact of the U.S. valuation allowance mentioned above and the strong financial performance of the Company's Fermec business, which 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 effective tax rate for the three and nine months ended September 30, 2003 was 20.3% and 20.6%, respectively, as compared to the effective rate of (346.9%) for the year ended December 31, 2003. The higher effective tax rate during the first three quarters of 2003 was primarily due to the impact of the U.S. valuation allowance mentioned above, partially offset by a goodwill impairment related to the Company's Roadbuilding and Materials Processing units 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 third quarter of 2004, the Company prepaid $50.0 of term debt under its bank credit facility and recorded a related non-cash charge of $1.0. During the second quarter of 2004, the Company prepaid $75.0 of term debt under its bank credit facility and recorded a related non-cash charge of $1.5. The non-cash charges 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). 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 26
resulting from debt and equity securities classified as available for sale. Total non-stockowner changes in equity were as follows. <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2003 2003 2004 Restated 2004 Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income (loss) .................................... $ 44.7 $ 9.8 $ 126.7 $ (26.2) Other comprehensive income (loss): Translation adjustment ............................. 39.0 10.8 4.4 61.7 Pension liability adjustment ....................... (0.2) (0.1) (0.1) (0.4) Derivative hedging adjustment ...................... (3.9) 5.2 (6.0) (0.7) ---------- ---------- ---------- ---------- Comprehensive income (loss) .......................... $ 79.6 $ 25.7 $ 125.0 $ 34.4 ========== ========== ========== ========== </TABLE> 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 $97.4 at September 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 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, 27
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 September 30, 2004, the Company's maximum exposure to such credit guarantees was $276.7. 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 $42.0 at September 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 September 30, 2004, the Company's maximum exposure to buyback guarantees was $43.5. 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 $9 for the estimated fair value of all guarantees provided as of September 30, 2004. NOTE Q - RETIREMENT PLANS AND OTHER BENEFITS Pension Plans U.S. Plans - As of September 30, 2004, the Company maintained four defined benefit pension plans covering certain domestic employees (the "Terex Plans"). The benefits for the plan covering the salaried employees are based primarily on years of service and employees' qualifying compensation. Participation in the plan for salaried employees was frozen on or before October 15, 2000, and no participants will be credited with service or earnings following such dates except that participants not fully vested were credited with service for purposes of determining vesting only. The benefits for the plans covering the hourly employees are based primarily on years of service and a flat dollar amount per year of service. It is the Company's policy generally to fund the Terex Plans based on the minimum requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Plan assets consist primarily of common stocks, bonds, and short-term cash equivalent funds. The Company adopted a Supplemental Executive Retirement Plan ("SERP") effective October 1, 2002. The SERP provides retirement benefits to certain senior executives of the Company. Generally, the SERP provides a benefit based on average total compensation earned over a participant's final five years of employment and years of service reduced by benefits earned under any Company retirement program excluding salary deferrals and matching 28
contributions. In addition, benefits are reduced by Social Security Primary Insurance Amounts attributable to Company contributions. The SERP is unfunded. Other Postemployment Benefits The Company has 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 former employees at Cedarapids and Simplicity Engineering. The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," on January 1, 1993. This statement requires accrual of postretirement benefits (such as health care benefits) during the years an employee provides service. Terex adopted the provisions of SFAS No. 106 using the delayed recognition method, whereby the amount of the unrecognized transition obligation at January 1, 1993 is recognized prospectively as a component of future years' net periodic postretirement benefit expense. The unrecognized transition obligation at January 1, 1993 was $4.5. Terex is amortizing this transition obligation over 12 years, the average remaining life expectancy of the participants. <TABLE> <CAPTION> Pension Benefits ---------------------------------------------------- For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 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% </TABLE> <TABLE> <CAPTION> Pension Benefits ---------------------------------------------------- For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Components of net periodic cost: Service cost ....................................... $ 0.3 $ 0.4 $ 1.0 $ 0.7 Interest cost ...................................... 1.8 1.8 5.3 5.3 Expected return on plan assets ..................... (1.8) (1.6) (5.6) (4.9) Amortization of prior service cost ................. 0.1 0.1 0.5 0.4 Recognized actuarial (gain) loss ................... 0.6 0.6 1.7 1.8 ---------- ---------- ---------- ---------- Net periodic cost (benefit) .......................... $ 1.0 $ 1.3 $ 2.9 $ 3.3 ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> Other Benefits ---------------------------------------------------- For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Weighted-average assumptions: Discount rate ...................................... 6.00% 6.75% 6.00% 6.75% Expected return on plan assets ..................... -- -- -- -- Rate of compensation increase ...................... -- -- -- -- </TABLE> 29
<TABLE> <CAPTION> Other Benefits ---------------------------------------------------- For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Components of net periodic cost: Service cost ....................................... $ -- $ -- $ 0.1 $ 0.1 Interest cost ...................................... 0.2 0.2 0.6 0.5 Amortization of prior service cost ................. 0.1 -- 0.1 0.1 Amortization of transition obligation .............. 0.1 -- 0.2 0.2 Recognized actuarial (gain) loss ................... 0.1 0.1 0.4 0.2 ---------- ---------- ---------- ---------- Net periodic cost (benefit) ........................ $ 0.5 $ 0.3 $ 1.4 $ 1.1 ========== ========== ========== ========== </TABLE> The Company plans to contribute approximately $3 to its U.S. defined benefit pension plans in 2004. During the three months and nine months ended September 30, 2004, the Company contributed $0.7 and $2.5, 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. <TABLE> <CAPTION> Pension Benefits --------------------------------------------------------- For the For the Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> 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% </TABLE> <TABLE> <CAPTION> Pension Benefits ---------------------------------------------------- For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Components of net periodic cost: Service cost ....................................... $ 1.0 $ 1.0 $ 3.0 $ 2.9 Interest cost ...................................... 3.1 2.8 9.2 8.3 Expected return on plan assets ..................... (1.1) (0.9) (3.3) (2.8) Recognized actuarial (gain) loss ................... -- 0.1 0.2 0.5 ---------- ---------- ---------- ---------- Net periodic cost (benefit) ........................ $ 3.0 $ 3.0 $ 9.1 $ 8.9 ========== ========== ========== ========== </TABLE> The Company plans to contribute approximately $10 to its international defined benefit pension plans in 2004. During the three months and nine months ended September 30, 2004, the Company contributed $2.0 and $6.8, 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 30
Construction; (ii) Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Materials Processing & 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, vibratory 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 on September 18, 2002. The Terex Aerial Work Platforms segment designs, manufactures and markets aerial work platform equipment, telehandlers, light construction equipment and construction trailers. Products include material lifts, portable aerial work platforms, trailer mounted booms, articulating booms, stick booms, scissor lifts, telehandlers, light towers, trowels, power buggies, generators, arrow boards, construction trailers, related components and replacement parts, and other products. These products are used primarily by customers in the construction and building maintenance industries to build and/or maintain large physical assets and structures. Terex Aerial Work Platforms products currently are marketed principally under the Genie, Terex, Amida, Bartell, Load King, Morrison and Terex Power brand names. The Terex Materials Processing & Mining segment designs, manufactures and markets fixed installation crushing and screening equipment (including crushers, impactors, screens and feeders), 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 Materials Processing & Mining products are marketed principally under the following brand names: Terex, Canica, Cedarapids, Cedarapids/Standard Havens, Jaques, Simplicity, Re-Tech, Royer, Terex Recycling, O&K, Payhauler, and Unit Rig. The Company acquired Noble CE on September 7, 2004. The results of Noble CE are included in the Terex Materials Processing & Mining segment since its date of acquisition. The Terex Roadbuilding, Utility Products and Other segment designs, manufactures and markets, asphalt and concrete equipment (including pavers, plants, mixers, reclaimers, stabilizers and profilers), utility equipment (including digger derricks, aerial devices and cable placers) and on/off road heavy-duty vehicles, as well as related components and replacement parts. These products are used primarily by government, utility and construction customers to build roads, 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, ATC, Bid-Well, CMI Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Tatra 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 Terex Utilities Rental. The Company also leases and rents a variety of heavy equipment to third parties under the Terex Re-Rentals name. The Company, through Terex Financial Services, Inc. ("TFS"), also offers customers loans and leases underwritten by TFS Capital Funding, an affiliate of the General Electric Company, and TFSH, a joint venture of the Company and a European financial 31
institution, to assist in the acquisition of all of the Company's products. On February 14, 2003, the Company acquired Commercial Body and Combatel. On August 28, 2003 the Company acquired an additional 51% of the outstanding shares of Tatra, and acquired a controlling interest in ATC. On April 22, 2004, the Company acquired an additional 10% of the outstanding shares of Tatra for a total of 81% ownership. On June 14, 2004, the Company acquired the one-third interest in ATC previously held by Tatra. The results of 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. 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 nine months ended September 30, 2004 and 2003. Business segment information is presented below: <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 2003 2003 2004 Restated 2004 Restated ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Sales Terex Construction ................................. $ 424.8 $ 308.3 $ 1,298.4 $ 1,005.1 Terex Cranes ....................................... 263.5 238.4 750.2 767.5 Terex Aerial Work Platforms ........................ 235.7 150.7 677.9 493.4 Terex Materials Processing & Mining ................ 159.7 90.8 391.5 297.3 Terex Roadbuilding, Utility Products and Other ..... 191.1 126.5 579.7 368.5 Eliminations/Corporate ............................. (22.6) -- (53.6) (32.6) ---------- ---------- ---------- ---------- Total ............................................ $ 1,252.2 $ 914.7 $ 3,644.1 $ 2,899.2 ========== ========== ========== ========== Income (Loss) from Operations Terex Construction ................................. $ 20.2 $ 11.0 $ 58.0 $ 43.4 Terex Cranes ....................................... 7.9 0.8 24.5 8.7 Terex Aerial Work Platforms ........................ 29.4 16.9 84.6 54.3 Terex Materials Processing & Mining ................ 9.1 5.0 21.0 (23.2) Terex Roadbuilding, Utility Products and Other ..... 4.6 2.9 10.3 (32.2) Eliminations/Corporate ............................. -- (0.7) (6.2) (7.2) ---------- ---------- ---------- ---------- Total ............................................ $ 71.2 $ 35.9 $ 192.2 $ 43.8 ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> December 31, September 30, 2003 2004 Restated -------------- -------------- <S> <C> <C> Identifiable Assets Terex Construction ............................... $ 1,518.2 $ 1,433.8 Terex Cranes ..................................... 897.5 903.6 Terex Aerial Work Platforms ...................... 554.5 487.0 Terex Materials Processing & Mining .............. 627.7 575.4 Terex Roadbuilding, Utility Products and Other ... 554.2 472.0 Corporate ........................................ 1,659.0 1,803.7 Eliminations ..................................... (2,062.3) (2,121.3) -------------- -------------- Total .......................................... $ 3,748.8 $ 3,554.2 ============== ============== </TABLE> 32
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 "10-3/8% Notes"). On December 17, 2001, the Company sold and issued $200 aggregate principal amount of 9-1/4% Senior Subordinated Notes due 2011 (the "9-1/4% Notes"). 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 September 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 National, Inc., Koehring Cranes, Inc., O&K Orenstein & Koppel, Inc., Payhauler Corp., Powerscreen Holdings USA Inc., Powerscreen International LLC, Powerscreen North America Inc., Powerscreen USA, LLC, 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. 33
TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales .............................. $ 88.1 $ 441.8 $ 790.2 $ (67.9) $ 1,252.2 Cost of goods sold ................... 79.7 381.5 672.7 (67.9) 1,066.0 ------------ ------------ ------------ ------------ ------------ Gross profit ........................... 8.4 60.3 117.5 -- 186.2 Selling, general & administrative expenses ............. (8.4) (37.5) (69.1) -- (115.0) ------------ ------------ ------------ ------------ ------------ Income (loss) from operations .......... -- 22.8 48.4 -- 71.2 Interest income ...................... 0.5 0.4 0.9 -- 1.8 Interest expense ..................... (20.1) (0.9) (2.2) -- (23.2) Income (loss) from equity investees ........................... 65.4 -- -- (65.4) -- Other income (expense) - net ......... (5.6) 0.1 4.3 -- (1.2) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes ...... 40.2 22.4 51.4 (65.4) 48.6 Benefit from (provision for) income taxes .......................... 4.5 0.3 (8.7) -- (3.9) ------------ ------------ ------------ ------------ ------------ Net income (loss) ...................... $ 44.7 $ 22.7 $ 42.7 $ (65.4) $ 44.7 ============ ============ ============ ============ ============ </TABLE> 34
TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2003 (RESTATED) (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales .............................. $ 70.4 $ 321.8 $ 566.7 $ (44.2) $ 914.7 Cost of goods sold ................... 66.8 318.8 447.4 (44.2) 788.8 ------------ ------------ ------------ ------------ ------------ Gross profit ........................... 3.6 3.0 119.3 -- 125.9 Selling, general & administrative expenses ............. (4.8) (30.2) (55.0) -- (90.0) ------------ ------------ ------------ ------------ ------------ Income (loss) from operations .......... (1.2) (27.2) 64.3 -- 35.9 Interest income ...................... 0.3 (0.2) 1.5 -- 1.6 Interest expense ..................... (21.1) 0.1 (2.3) -- (23.3) Income (loss) from equity investees ........................... 45.4 -- -- (45.4) -- Other income (expense) - net ......... (10.4) 8.0 0.5 -- (1.9) ------------ ------------ ------------ ------------ ------------ Income before income taxes ............. 13.0 (19.3) 64.0 (45.4) 12.3 Benefit from (provision for) income taxes .......................... (3.2) (0.8) 1.5 -- (2.5) ------------ ------------ ------------ ------------ ------------ Net income (loss) ...................... $ 9.8 $ (20.1) $ 65.5 $ (45.4) $ 9.8 ============ ============ ============ ============ ============ </TABLE> TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales .............................. $ 273.1 $ 1,305.6 $ 2,232.0 $ (166.6) $ 3,644.1 Cost of goods sold ................... 248.6 1,131.8 1,891.0 (166.6) 3,104.8 ------------ ------------ ------------ ------------ ------------ Gross profit ........................... 24.5 173.8 341.0 -- 539.3 Selling, general & administrative expenses ............. (24.1) (110.5) (212.5) -- (347.1) ------------ ------------ ------------ ------------ ------------ Income (loss) from operations .......... 0.4 63.3 128.5 -- 192.2 Interest income ...................... 1.0 (0.3) 3.5 -- 4.2 Interest expense ..................... (29.3) (14.7) (25.1) -- (69.1) Income (loss) from equity investees ........................... 152.2 -- -- (152.2) -- Other income (expense) - net ........... -- (0.6) 16.8 -- 16.2 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes ...... 124.3 47.7 123.7 (152.2) 143.5 Benefit from (provision for) income taxes .......................... 2.4 (0.3) (18.9) -- (16.8) ------------ ------------ ------------ ------------ ------------ Net income (loss) ...................... $ 126.7 $ 47.4 $ 104.8 $ (152.2) $ 126.7 ============ ============ ============ ============ ============ </TABLE> 35
TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2003 (RESTATED) (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales .............................. $ 215.3 $ 1,038.3 $ 1,791.2 $ (145.6) $ 2,899.2 Cost of goods sold ................... 200.1 970.5 1,505.9 (145.6) 2,530.9 ------------ ------------ ------------ ------------ ------------ Gross profit ........................... 15.2 67.8 285.3 -- 368.3 Selling, general & administrative expenses ............. (24.6) (92.7) (162.9) -- (280.2) Goodwill impairment .................. (3.7) (40.6) -- -- (44.3) ------------ ------------ ------------ ------------ ------------ Income (loss) from operations .......... (13.1) (65.5) 122.4 -- 43.8 Interest income ...................... 0.8 2.2 2.4 -- 5.4 Interest expense ..................... (35.8) (13.6) (26.4) -- (75.8) Income (loss) from equity investees ........................... 16.2 -- -- (16.2) -- Other income (expense) - net ......... (15.7) 7.1 2.2 -- (6.4) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes ...... (47.6) (69.8) 100.6 (16.2) (33.0) Benefit from (provision for) income taxes .......................... 21.4 (4.0) (10.6) -- 6.8 ------------ ------------ ------------ ------------ ------------ Net income (loss) ...................... $ (26.2) $ (73.8) $ 90.0 $ (16.2) $ (26.2) ============ ============ ============ ============ ============ </TABLE> 36
TEREX CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2004 (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex Owned Guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Assets Current assets Cash and cash equivalents .......... $ 90.2 $ 4.8 $ 297.3 $ -- $ 392.3 Trade receivables - net ............ 23.0 166.0 460.6 -- 649.6 Intercompany receivables ........... 19.7 139.9 39.7 (199.3) -- Net inventories .................... 81.7 314.9 757.3 16.8 1,170.7 Other current assets ............... 44.3 23.1 150.9 -- 218.3 ------------ ------------ ------------ ------------ ------------ Total current assets ............. 258.9 648.7 1,705.8 (182.5) 2,430.9 Property, plant & equipment - net .... (0.1) 92.2 245.2 -- 337.3 Investment in and advances to (from) subsidiaries ................. 1,099.0 (418.4) (342.9) (337.7) -- Goodwill - net ....................... 13.3 232.5 393.1 -- 638.9 Other assets - net ................... (44.9) 180.7 205.9 -- 341.7 ------------ ------------ ------------ ------------ ------------ Total assets ........................... $ 1,326.2 $ 735.7 $ 2,207.1 $ (520.2) $ 3,748.8 ============ ============ ============ ============ ============ Liabilities and stockholders' equity (deficit) Current liabilities Notes payable and current portion of long-term debt $ 0.1 $ 25.7 $ 48.3 $ -- $ 74.1 Trade accounts payable ............. 39.1 175.1 553.4 -- 767.6 Intercompany payables .............. 16.8 38.6 143.9 (199.3) -- Accruals and other current liabilities ....................... 62.9 100.1 358.0 -- 521.0 ------------ ------------ ------------ ------------ ------------ Total current liabilities ........ 118.9 339.5 1,103.6 (199.3) 1,362.7 Long-term debt, less current portion ............................. 272.6 332.0 538.5 -- 1,143.1 Other long-term liabilities .......... 100.4 40.2 268.1 -- 408.7 Stockholders' equity ................. 834.3 24.0 296.9 (320.9) 834.3 ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity ................................ $ 1,326.2 $ 735.7 $ 2,207.1 $ (520.2) $ 3,748.8 ============ ============ ============ ============ ============ </TABLE> 37
TEREX CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003 (RESTATED) (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> 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 ============ ============ ============ ============ ============ </TABLE> 38
TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN MILLIONS) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided by (used in) operating activities .................. $ (65.8) $ 101.6 $ 32.3 $ -- $ 68.1 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Acquisition of business, net of cash acquired ............................ (0.6) (11.5) (2.5) -- (14.6) Capital expenditures ................. (0.4) (5.8) (15.3) -- (21.5) Proceeds from sale of assets ......... -- 1.8 30.0 -- 31.8 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities .............. (1.0) (15.5) 12.2 -- (4.3) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Principal repayments of long-term debt ................................ -- (66.2) (58.8) -- (125.0) Proceeds from stock options exercised ........................... 8.3 -- -- -- 8.3 Net borrowings (repayments) under revolving line of credit agreements .......................... -- (3.3) (3.3) -- (6.6) Other ................................ -- (14.6) (0.9) -- (15.5) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities .............. 8.3 (84.1) (63.0) -- (138.8) ------------ ------------ ------------ ------------ ------------ Effect of exchange rates on cash and cash equivalents ...................... -- -- (0.2) -- (0.2) ------------ ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ...................... (58.5) 2.0 (18.7) -- (75.2) Cash and cash equivalents, beginning of period ............................. 148.7 2.8 316.0 -- 467.5 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 90.2 $ 4.8 $ 297.3 $ -- $ 392.3 ============ ============ ============ ============ ============ </TABLE> 39
TEREX CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN MILLIONS) (RESTATED) <TABLE> <CAPTION> Wholly- Non- Terex owned guarantor Intercompany Corporation Guarantors Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided by (used in) operating activities ................... $ 42.9 $ 23.3 $ 147.9 $ -- $ 214.1 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Acquisition of business, net of cash acquired ............................. -- (8.7) -- -- (8.7) Capital expenditures .................. (0.9) (3.5) (15.3) -- (19.7) Proceeds from sale of assets .......... -- 1.6 2.9 -- 4.5 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities ............... (0.9) (10.6) (12.4) -- (23.9) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Principal borrowings (repayments) of long-term debt ....................... (53.0) (0.5) (1.0) -- (54.5) Proceeds from stock options exercised ............................ 1.4 -- -- -- 1.4 Net borrowings (repayments) under revolving line of credit agreements .. -- (2.5) (41.0) -- (43.5) Payment of premium on early retirement of debt ................... (2.2) -- -- -- (2.2) Other ................................. -- (10.6) (15.4) -- (26.0) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ............... (53.8) (13.6) (57.4) -- (124.8) ------------ ------------ ------------ ------------ ------------ Effect of exchange rates on cash and cash equivalents ....................... -- -- 13.3 -- 13.3 ------------ ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ....................... (11.8) (0.9) 91.4 -- 78.7 Cash and cash equivalents, beginning of period ................................. 134.0 6.2 212.0 -- 352.2 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period ................................. $ 122.2 $ 5.3 $ 303.4 $ -- $ 430.9 ============ ============ ============ ============ ============ </TABLE> NOTE T - SUBSEQUENT EVENTS On December 31, 2004, the Company completed the acquisition of the Reedrill division of Metso Corporation ("Reedrill"). Reedrill, headquartered in Sherman, Texas, is a manufacturer of surface drilling equipment for use in the mining, construction and utility industries. In connection with the acquisition, the Company paid $38.6 cash, subject to post-closing adjustments based upon the finalization of the closing date balance sheet. Reedrill is included in the Terex Materials Processing & Mining segment, and operating results of Reedrill will be included in the Company's consolidated results of operations beginning January 1, 2005. Effective January 1, 2006, Terex realigned certain operations in an effort to strengthen its ability to service customers and to recognize certain organizational efficiencies. The Mobile Crushing and Screening Group, consisting of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the Terex Construction Segment, now will be consolidated within the Terex Materials Processing & Mining Segment. The European telehandlers business of TerexLift, formerly part of the Terex Construction Segment, now will be part of the Terex Aerial Work Platforms Segment. The segment discussions included herein do not reflect this realignment. Terex will be presenting segment reporting effective January 1, 2006 giving effect to this reorganization. The Company acquired Halco Holdings Limited and its affiliates ("Halco") on January 24, 2006, for approximately 8.4 million British Pounds in cash, plus assumption of certain capitalized leases and pension liabilities. Halco is headquartered in Halifax, United Kingdom, with operations also in the United States, Ireland and Australia. Halco designs, manufactures and distributes down-the-hole drill bits and hammers for drills. The results of Halco will be included in the Terex Materials Processing & Mining Segment from its date of acquisition. 40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. 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, 41
Mississippi distribution facility. The increased level of activity and complexity contributed to errors in the timely and accurate reconciliation of certain intercompany imbalances, resulting in cost not being recorded. o Beginning in 2000, the Company began the integration of several operations in its Light Construction business. During the second half of 2002, the Company initiated facility consolidations in its Light Construction business. During the transition and related turnover of employees as well as at other times, there was a failure to complete intercompany reconciliations in a timely manner, which led to errors in accounting for, and recording of, costs. o As part of the review and subsequent correction of an imbalance in intercompany notes, errors in the accounting for costs associated with warranty and inventory charges were identified as having been improperly offset against intercompany amounts at the Company's German mining operations. o Errors were made in the timely reconciliation of transactions between the Company's various business units, which buy and sell products and services from each other in the normal course of their operations. In addition, other errors, not specifically related to intercompany activity, were identified during the review and were corrected in the restatement. These errors related mainly to the timely reconciliation of certain accruals (including in the compact and heavy equipment businesses in the Company's Construction segment), foreign currency adjustments, and the disposition of a foreign sales distribution business. These errors occurred mainly in the Construction and Cranes segments. o In connection with the January 14, 2002 acquisition by the Company of the Schaeff Group of Companies, a German manufacturer of compact construction equipment and a full range of scrap material handlers, an error was made in the recording of the Company's investment, which led to an overstatement of goodwill and stockholders' equity. o Management has also determined that the accounting treatment of certain of its goodwill related to foreign acquisitions did not meet the requirements of SFAS No. 52, "Foreign Currency Translation." At the time these foreign acquisitions were completed, mainly in 1999 and 2002, the Company valued goodwill at the historic exchange rate, and the Company has consistently applied this accounting treatment. The Company has now determined that it should have translated goodwill each period to reflect changes in the foreign currency exchange rate. o Management has also identified an error with respect to the Company's foreign defined benefit plans. The Company did not record the minimum pension liability adjustment for these plans to other comprehensive income (net of taxes) within stockholders' equity and other non-current liabilities. Management also determined that it was not properly accounting for its equity based compensation. The Company did not record the Company's common stock held in a rabbi trust (at cost) as treasury stock within stockholders' equity and a corresponding liability within non-current liabilities. In addition, the Company should have reclassified the non-current liability established through December 31, 2003 to additional paid-in capital within stockholders' equity and reclassified other equity based compensation from current liabilities to additional paid-in capital within stockholders' equity. o Management has determined that adjustments to the timing of revenue recognition of certain arrangements are required, including in three particular transactions in 2000 and 2001, two involving United Rentals, 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 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. 42
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 for further information on the Company's actions. All amounts presented below have been adjusted to reflect the restatement. RESULTS OF OPERATIONS Terex is a diversified global manufacturer of a broad range of equipment primarily for the construction, infrastructure and surface mining industries. The Company operates in five business segments: (i) Terex Construction; (ii) Terex Cranes; (iii) Terex Aerial Work Platforms; (iv) Terex Materials Processing & 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, vibratory screens 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, telehandlers, light construction equipment and construction trailers. Products include material lifts, portable aerial work platforms, trailer mounted booms, articulating booms, stick booms, scissor lifts, telehandlers, light towers, trowels, power buggies, generators, arrow boards, construction trailers, related components and replacement parts, and other products. These products are used primarily by customers in the construction and building maintenance industries to build and/or maintain large physical assets and structures. Terex Aerial Work Platforms products currently are marketed principally under the Genie, Terex, Amida, Bartell, Load King, Morrison and Terex Power brand names. The Terex Materials Processing & Mining segment designs, manufactures and markets fixed installation crushing and screening equipment (including crushers, impactors, screens and feeders), 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 Materials Processing & Mining products are marketed principally under the following brand names: Terex, Canica, Cedarapids, Cedarapids/Standard Havens, Jaques, Simplicity, Re-Tech, Royer, Terex Recycling, O&K, Payhauler, and Unit Rig. The Company acquired Noble CE, LLC and its Mexican subsidiary ("Noble CE") on September 7, 2004. The results of Noble CE are included in the Terex Materials Processing & Mining segment since its date of acquisition. The Terex Roadbuilding, Utility Products and Other segment designs, manufactures and markets, asphalt and concrete equipment (including pavers, plants, mixers, reclaimers, stabilizers and profilers), utility equipment (including digger derricks, aerial devices and cable placers) and on/off road heavy-duty vehicles, as well as related 43
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, ATC, Bid-Well, CMI Johnson Ross, CMI Terex, CMI-Cifali, Grayhound, Hi-Ranger, Tatra 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 Terex Utilities Rental. The Company also leases and rents a variety of heavy equipment to third parties under the Terex Re-Rentals name. The Company, through Terex Financial Services, Inc. ("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. Subsequent Events Effective January 1, 2006, Terex realigned certain operations in an effort to strengthen its ability to service customers and to recognize certain organizational efficiencies. The Mobile Crushing and Screening Group, consisting of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the Terex Construction Segment, now will be consolidated within the Terex Materials Processing & Mining Segment. The European telehandlers business of TerexLift, formerly part of the Terex Construction Segment, now will be part of the Terex Aerial Work Platforms Segment. The segment discussions included herein do not reflect this realignment. Terex will be presenting segment reporting effective January 1, 2006 giving effect to this reorganization. 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 third quarter of 2004, the Company experienced strong growth over the prior year, despite operational challenges arising from increased steel costs and supplier issues. For the three months and nine months ended September 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 third quarter of 2004 grew 37% over the same period in the prior year. 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 September 30, 2004 was approximately $840 million, an increase of approximately $412 million, or 96%, from the level of backlog at September 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, continued economic recovery and rising commodity prices lead the Company to be optimistic about the near term performance of its Aerial Work Platforms and Materials Processing & 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 44
beneficial impact on the Company's performance. The negative impact of steel cost increases has been a significant factor in the operating performance of the Company in 2004. Actions to increase customer pricing and leverage the Company's overall purchase volumes are being taken to mitigate the negative impact on future performance. An 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 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 has begun to position itself for improved collaboration across its businesses. 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. RESTRUCTURING During 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 Materials Processing & Mining and Terex Roadbuilding, Utility Products and Other segments. The Company's programs have been designed to minimize the impact of any program on future operating results and the Company's liquidity. To date, these restructuring programs have not 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 SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2003 TEREX CONSOLIDATED <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 1,252.2 $ 914.7 36.9% Gross profit ......................... $ 186.2 14.9% $ 125.9 13.8% 47.9% SG&A ................................. $ 115.0 9.2% $ 90.0 9.8% 27.8% Income (loss) from operations ........ $ 71.2 5.7% $ 35.9 3.9% 98.3% </TABLE> Net sales for the three months ended September 30, 2004 totaled $1,252.2 million, an increase of $337.5 million when compared to the same period in 2003. The impact of a weaker U.S. dollar relative to foreign currencies, mainly the British Pound and the Euro, increased sales by 5.2% when compared to the third quarter of 2003. The acquisition of a majority interest in Tatra and ATC on August 28, 2003 increased sales by approximately $36 million when compared to the third 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 Materials 45
Processing & 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 mainly in the concrete mixing truck and utility businesses. 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 increased from 2003 levels, mainly in the tower crane and boom truck markets, after adjusting for foreign exchange movements and the sale of the Crane & Machinery, Inc. ("C&M") distribution business and the Schaeff Incorporated fork-lift business in the fourth quarter of 2003. During the third quarter of 2004, the Company continued 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 impact of TIP. Gross profit for the three months ended September 30, 2004 totaled $186.2 million, an increase of $60.3 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 that negatively affected operating results during the third 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 $6.1 million when compared to 2003. During the third quarter of 2004, the Company recorded restructuring and other charges, included in gross profit, of $0.9 million, a reduction of $0.4 million when compared to 2003. Restructuring and other costs incurred in 2003 related primarily to actions taken to consolidate production facilities in the Terex Cranes segment. Restructuring and other costs incurred in 2004 related primarily to consolidation of the compact equipment parts business in the Terex Construction segment. Total selling, general and administrative costs ("SG&A") increased for the three months ended September 30, 2004 by $25.0 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 $5 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 $3.8 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 third quarter of 2004. As a percentage of sales, SG&A fell to 9.2% in the third quarter of 2004 from 9.8% in the third quarter of 2003. Income from operations increased by $35.3 million for the three months ended September 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 due to increased sales resulting from an improving economy in the United States and Europe. Income from operations improved in the Terex Materials Processing & Mining segment as a result of increased demand driven by improved commodity price levels. Income from operations in the Terex Cranes segment improved due to volume leverage, partially offset by continued competitive pricing on certain products and steel cost increases. Income from operations was positively impacted by the acquisition of Tatra and ATC, net of the impact of the sale of C&M and Schaeff Incorporated, by approximately $2.2 million. TEREX CONSTRUCTION <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 424.8 $ 308.3 37.8% Gross profit ......................... $ 56.4 13.3% $ 36.8 11.9% 53.3% SG&A ................................. $ 36.2 8.5% $ 25.8 8.4% 40.3% Income (loss) from operations ........ $ 20.2 4.8% $ 11.0 3.6% 83.6% </TABLE> 46
Net sales in the Terex Construction segment increased by $116.5 million for the three months ended September 30, 2004 when compared to the same period in 2003 and totaled $424.8 million. A weaker U.S. dollar relative to the British Pound and the Euro increased sales by approximately 8% when compared to the third 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, improved cross marketing of the product line to key customers 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 scrap-handling equipment. Sales of Fuchs scrap handling products have benefited from recent increases in the price of steel. Gross profit increased to $56.4 million for the three months ended September 30, 2004, an increase of $19.6 million when compared to 2003 results for the same period. Gross profit was negatively impacted by continued increases in steel costs as well as an increase in the value of the British Pound and Euro relative to the U.S. dollar when compared to 2003. These unfavorable items were offset by the favorable impact of higher sales volumes and parts pricing. Restructuring and other charges recorded in gross profit during the third quarter of 2004 totaled $1.1 million. These charges include costs from previously announced restructuring activities, the close out of a restructuring project and costs associated with the consolidation of the compact equipment parts distribution business. SG&A costs for the three months ended September 30, 2004 totaled $36.2 million, an increase of $10.4 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 third quarter of 2003. Additionally, sales and marketing costs associated with the volume growth contributed to the increase. Income from operations for the three months ended September 30, 2004 totaled $20.2 million, an increase of $9.2 million when compared to $11.0 million for the same period in 2003. Income from operations grew in the compact equipment and crushing and screening businesses as a result of improved volume, which helped to offset steel cost increases. Charges related to restructuring and related costs were $1.1 million in the third quarter of 2004, an increase of $0.6 million when compared to the third quarter of 2003. TEREX CRANES <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 263.5 $ 238.4 10.5% Gross profit ......................... $ 32.6 12.4% $ 21.1 8.9% 54.5% SG&A ................................. $ 24.7 9.4% $ 20.3 8.5% 21.7% Income (loss) from operations ........ $ 7.9 3.0% $ 0.8 0.3% 887.5% </TABLE> Net sales for the Terex Cranes segment for the three months ended September 30, 2004 increased by $25.1 million and totaled $263.5 million when compared to $238.4 million for the same period in 2003. The effect of a weaker U.S. dollar relative to the Euro positively impacted sales by approximately 6% when compared to 2003. Sales of tower cranes, small all-terrain cranes and stacker products improved when compared to the third quarter of 2003. Net sales also increased due to price increases introduced earlier in 2004 in reaction to increasing cost pressures. Gross profit for the three months ended September 30, 2004 increased by $11.5 million relative to the same period in 2003 and totaled $32.6 million. Gross profit from the mobile crane and tower crane businesses in the three months ended September 30, 2004 improved over 2003 levels, as a result of increased volume more than offsetting the 47
impact of steel cost increases experienced during 2004. Included in the third quarter of 2004 gross profit is the closeout of a previous restructuring project, which contributed a benefit of $0.2 million. During the third quarter of 2003, a charge of $1.3 million was recorded, primarily related to the costs associated with the closure and sale of the Terex-RO boom truck facility. SG&A costs for the three months ended September 30, 2004 totaled $24.7 million, an increase of $4.4 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, increased investment in new product engineering and administrative costs and the effect of the increase in the value of the Euro relative to the U.S. dollar experienced since the third quarter of 2003. During the third quarter of 2003, the Company recorded a net charge of $0.2 million related to the closeout of a prior restructuring project. Income from operations for the three months ended September 30, 2004 totaled $7.9 million, an increase of $7.1 million when compared to $0.8 million for the same period in 2003. Total restructuring charges recorded during the third quarter of 2004 was income of $0.2 million, a reduction of $1.7 million from the prior year. Operating profit in 2004 benefited from strong demand for the segment's tower cranes and increased volume in other products, although the impact of increased steel costs partially offset this income improvement. TEREX AERIAL WORK PLATFORMS <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 235.7 $ 150.7 56.4% Gross profit ......................... $ 45.8 19.4% $ 33.1 22.0% 38.4% SG&A ................................. $ 16.4 7.0% $ 16.2 10.7% 1.2% Income (loss) from operations ........ $ 29.4 12.5% $ 16.9 11.2% 74.0% </TABLE> Net sales for the Terex Aerial Work Platforms segment for the three months ended September 30, 2004 were $235.7 million, an increase of $85.0 million when compared to the same period in 2003. Sales increased when compared to the third 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 and address increased utilization of their existing 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, utilizing the overall Genie sales and marketing approach through the same rental distribution channels. Light construction products also contributed to the sales growth over the prior year as demand for generators and light towers accelerated to address the aftermath of severe weather experienced in the southeast portion of the United States. Gross profit for the three months ended September 30, 2004 was $45.8 million, an increase of $12.7 million when compared to the same period in 2003. While, gross profit as a percentage of sales benefited from increased sales, this was more than offset by higher steel costs and the maintenance of annual price level commitments to many of the segment's customers. SG&A costs for the three months ended September 30, 2004 were $16.4 million, an increase of $0.2 million when compared to the same period in 2003. Increased sales costs from higher volume levels were largely offset by a reduction in bad debt expense over the comparable period in 2003. Income from operations for the three months ended September 30, 2004 was $29.4 million, an increase of $12.5 million when compared to the same period in 2003.The increase was due to higher sales volumes, offset somewhat by the impact of increased steel costs. 48
TEREX MATERIALS PROCESSING & MINING <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 159.7 $ 90.8 75.9% Gross profit ......................... $ 23.2 14.5% $ 17.4 19.2% 33.3% SG&A ................................. $ 14.1 8.8% $ 12.4 13.7% 13.7% Income (loss) from operations ........ $ 9.1 5.7% $ 5.0 5.5% 82.0% </TABLE> Net sales in the Terex Materials Processing & Mining segment increased by $68.9 million to $159.7 million in the third quarter of 2004 compared to $90.8 million in the comparable period in 2003. The increase in sales is 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. Demand for tracked crusher and stationary vibratory screener product lines was also strong. Gross profit increased by $5.8 million in the three months ended September 30, 2004 when compared to the comparable period in 2003 and totaled $23.2 million. Gross profit improved as a result of the increased volume and higher margins earned on the sale of new machines. This improvement was partially offset by increased steel costs and relatively flat parts volume experienced during the third quarter of 2004 when compared to a year ago. SG&A expense increased by $1.7 million in the third quarter of 2004 relative to the comparable period in 2003, to $14.1 million. The increase in SG&A was mainly due to higher selling costs associated with the 75.9% increase in net sales. Income from operations for the Terex Materials Processing & Mining segment was $9.1 million in the third quarter of 2004, or 5.7% of sales, an increase of $4.1 million from $5.0 million in the comparable period in 2003. The increase was a result of higher demand for the segment's products resulting primarily from improved commodity pricing relative to 2003, offset to some degree by increased steel costs. 49
TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Net sales ............................ $ 191.1 $ 126.5 51.1% Gross profit ......................... $ 25.8 13.5% $ 17.4 13.8% 48.3% SG&A ................................. $ 21.2 11.1% $ 14.5 11.5% 46.2% Income (loss) from operations ........ $ 4.6 2.4% $ 2.9 2.3% 58.6% </TABLE> Net sales for the Terex Roadbuilding, Utility Products and Other segment for the three months ended September 30, 2004 were $191.1 million, an increase of $64.6 million when compared to the same period in 2003. The acquisition of Tatra and ATC on August 28, 2003 increased sales in the third quarter of 2004 by approximately $36 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 mixing trucks and asphalt pavers. Gross profit for the three months ended September 30, 2004 totaled $25.8 million, an increase of $8.4 million when compared to the same period in 2003. The acquisition of Tatra and ATC accounted for approximately $8.1 million of the gross profit in the third quarter of 2004. Gross profits were significantly impacted in this largely United States based segment by steel cost increases, as steel is a major material component for many of this group's products. Weak end markets in the roadbuilding and utility areas have increased the difficulty in securing price increases to offset increasing component cost levels. SG&A costs for the segment for the three months ended September 30, 2004 totaled $21.2 million, an increase of $6.7 million when compared to the same period in 2003. The majority of the increase was due to the acquisition of Tatra and ATC. Income from operations for the Terex Roadbuilding, Utility Products and Other segment for the three months ended September 30, 2004 was $4.6 million, an increase of $1.7 million when compared to the same period in 2003. The change reflects the acquisitions of Tatra and ATC partially offset by a weak end market in the roadbuilding and utility businesses and the impact of increased steel costs. NET INTEREST EXPENSE During the three months ended September 30, 2004, the Company's net interest expense decreased $0.3 million to $21.4 million from $21.7 million for the prior year period. The decline was due to the overall decrease in the Company's level of debt in the third quarter of 2004 as compared to the same period in 2003, offset by higher average interest rates. OTHER INCOME (EXPENSE) - NET Other income (expense) - net for the three months ended September 30, 2004 was a net expense of $1.2 million as compared to a net expense of $1.9 million for the prior year period. During the third quarter of 2004, the Company disposed of certain buildings and equipment which resulted in a $1.5 million gain. In addition, the Company recognized $0.4 million in income related to foreign exchange. Also during the third quarter of 2004, the Company recognized a net expense of $1.0 million on the accelerated amortization of debt acquisition costs, arising from the early retirement of $50 million in bank debt during the quarter. 50
INCOME TAXES During the three months ended September 30, 2004, the Company recognized income tax expense of $3.9 million on income before income taxes of $48.6 million, an effective rate of 8.0%, as compared to income tax expense of $2.5 million on income before income taxes of $12.3 million, an effective rate of 20.3%, in the prior year period. The effective tax rate for the three months ended September 30, 2004 was higher than the Company's 2003 full year effective tax rate of (346.9%), primarily due to the impact of a valuation allowance recorded in 2003 for certain U.S. net deferred tax assets, as it was determined that it was more likely than not that the assets would not be realized. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2003 TEREX CONSOLIDATED <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 3,644.1 $ 2,899.2 25.7% Gross profit ......................... $ 539.3 14.8% $ 368.3 12.7% 46.4% SG&A ................................. $ 347.1 9.5% $ 280.2 9.7% 23.9% Goodwill impairment .................. $ -- -- $ 44.3 1.5% (100.0)% Income (loss) from operations ........ $ 192.2 5.3% $ 43.8 1.5% 338.8% </TABLE> Net sales for the nine months ended September 30, 2004 totaled $3,644.1 million, an increase of $744.9 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 Materials Processing & Mining products through the first nine months of 2004 grew significantly relative to 2003, reflecting strong commodity prices, which in turn have increased mining activity. Sales in the Terex Cranes segment were relatively unchanged from 2003, as increased tower crane activity was offset by declining volume of used crane sales and reductions in the sale of new mobile cranes. 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 nine months of 2004 by approximately $132 million when compared to the nine months ended September 30, 2003. Finally, the impact of a weaker U.S. dollar relative to the British Pound and the Euro increased sales by approximately 6% when compared to the first nine months of 2003. Gross profit for the nine months ended September 30, 2004 totaled $539.3 million, an increase of $171.0 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 nine months 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 nine months of 2004 were lower by $34.2 million when compared to 2003 and totaled $10.8 million. SG&A expenses increased for the nine months ended September 30, 2004 by $66.9 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 25% 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 nine months of 2004. The acquisitions of the Tatra and ATC businesses accounted for approximately 20% of the increase in SG&A. During the first nine months of 2004, restructuring and other costs in SG&A 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 51
charge, which totaled $44.3 million, are described below in the Terex Materials Processing & Mining segment and the Terex Roadbuilding, Utility Products and Other segment discussions. Income from operations increased by $148.4 million for the nine months ended September 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, restructuring and other charges included in income from operations fell by $40.5 million and totaled $12.4 million. In June 2003, an aggregate $44.3 million charge related to goodwill impairment was included in income from operations in the Terex Roadbuilding, Utility Products and Other segment and the Terex Materials Processing & Mining segment. TEREX CONSTRUCTION <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 1,298.4 $ 1,005.1 29.2% Gross profit ......................... $ 170.5 13.1% $ 131.0 13.0% 30.2% SG&A ................................. $ 112.5 8.7% $ 87.6 8.7% 28.4% Income (loss) from operations ........ $ 58.0 4.5% $ 43.4 4.3% 33.6% </TABLE> Net sales in the Terex Construction segment increased by $293.3 million for the nine months ended September 30, 2004 when compared to the same period in 2003 and totaled $1,298.4 million. A weaker U.S. dollar relative to the British Pound and the Euro increased sales by approximately 9% when compared to the first nine months of 2003. Excluding the impact of foreign exchange, sales grew relative to 2003 in the compact equipment businesses as well as in the crushing and screening businesses. Sales grew marginally over 2003 levels in the heavy equipment business, primarily, as a result of increased steel prices driving demand 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 benefits provided by 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 crushing equipment. Gross profit increased to $170.5 million for the nine months ended September 30, 2004, an increase of $39.5 million when compared to 2003 results for the same period. Gross profit in 2004 included restructuring and other costs of $9.6 million, an increase of $7.5 million when compared to the same period in 2003. During the first nine months 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 consolidated the compact equipment parts distribution activities and recognized costs related to a pre-acquisition credit guarantee provided on two large hydraulic shovels sold in the United Kingdom. During the first nine months 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 nine months 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 nine months ended September 30, 2004 totaled $112.5 million, an increase of $24.9 million when compared to the same period in 2003. Approximately 32% 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 nine months of 2004 52
were $0.6 million, similar to 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 nine months ended September 30, 2004 totaled $58.0 million, an increase of $14.6 million when compared to $43.4 million for the same period in 2003. Total restructuring and other costs for the first nine months totaled $10.2 million compared to $2.7 million in 2003. Income from operations improved in the compact equipment and crushing and screening businesses relative to 2003 as a result of improved sales volumes. Income from operations fell in the heavy equipment business relative to 2003 as a result of a higher than average mix of U.S. dollar denominated sales. TEREX CRANES <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 750.2 $ 767.5 (2.3)% Gross profit ......................... $ 95.5 12.7% $ 69.8 9.1% 36.8% SG&A ................................. $ 71.0 9.5% $ 61.1 8.0% 16.2% Income (loss) from operations ........ $ 24.5 3.3% $ 8.7 1.1% 181.6% </TABLE> Net sales for the Terex Cranes segment for the nine months ended September 30, 2004 decreased by $17.3 million and totaled $750.2 million when compared to $767.5 million for the same period in 2003. The sale of Schaeff Incorporated and C&M in the fourth quarter of 2003 reduced sales by $13.8 million when compared to 2003. The impact of a weaker U.S. dollar relative to the British Pound and Euro increased sales by approximately 7% relative to 2003 levels. Sales declined relative to 2003 primarily as a result of lower sales of used cranes and mobile cranes. Gross profit for the nine months ended September 30, 2004 increased by $25.7 million relative to the same period in 2003 and totaled $95.5 million. The sale of the Schaeff Incorporated and C&M businesses reduced gross profit by $2.5 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 nine months of 2004 totaled $0.5 million, a reduction of $10.1 million when compared to 2003. Restructuring and other charges in 2004 related 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 nine months ended September 30, 2004 totaled $71.0 million, an increase of $9.9 million over the same period in 2003. The sale of Schaeff Incorporated and C&M reduced SG&A costs in the first nine months of 2004 by $1.9 million relative to the first nine 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 $4.8 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 $0.3 million for the same period in 2003. These costs in 2004 related 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 nine months ended September 30, 2004 totaled $24.5 million, compared to $8.7 million for the same period in 2003. Restructuring and other costs in 2004 were lower by $9.8 million when compared to the same period in 2003 and totaled $1.5 million. Profits in the mobile crane business were negatively impacted by increased steel costs. This decline was partially offset by the increase in profits realized in the tower crane business. The sale of C&M and Schaeff Incorporated had an impact of $0.5 million on 2004 profitability when compared to 2003. 53
TEREX AERIAL WORK PLATFORMS <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 677.9 $ 493.4 37.4% Gross profit ......................... $ 137.1 20.2% $ 101.5 20.6% 35.1% SG&A ................................. $ 52.5 7.7% $ 47.2 9.6% 11.2% Income (loss) from operations ........ $ 84.6 12.5% $ 54.3 11.0% 55.8% </TABLE> Net sales for the Terex Aerial Work Platforms segment for the nine months ended September 30, 2004 were $677.9 million, an increase of $184.5 million when compared to the same period in 2003. Sales increased when compared to the first nine months 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 nine months ended September 30, 2004 was $137.1 million, an increase of $35.6 million when compared to the same period in 2003. Gross profit for the first nine months 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 nine months of 2004 negatively impacted gross profit in the segment. Gross profit benefited from the impact of the 37% increase in sales which offset the negative steel price variances. SG&A costs for the nine months ended September 30, 2004 totaled $52.5 million, an increase of $5.3 million from the same period in 2003. The increase was due primarily to higher compensation and related costs arising from increased sales levels. Income from operations for the Terex Aerial Work Platforms segment for the nine months ended September 30, 2004 was $84.6 million, an increase of $30.3 million from the same period in 2003. Income improved as sales volumes grew in the United States and Europe relative to 2003, partially offset by steel cost increases. TEREX MATERIALS PROCESSING & MINING <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 391.5 $ 297.3 31.7% Gross profit ......................... $ 61.3 15.7% $ 35.8 12.0% 71.2% SG&A ................................. $ 40.3 10.3% $ 35.8 12.0% 12.6% Goodwill impairment .................. $ -- -- $ 23.2 7.8% (100.0)% Income (loss) from operations ........ $ 21.0 5.4% $ (23.2) (7.8)% (190.5)% </TABLE> Net sales in the Terex Materials Processing & Mining segment increased by $94.2 million to $391.5 million in the nine months ended September 30, 2004, compared to $297.3 million in the comparable period in 2003. Sales in the nine months of 2004 increased significantly over the comparable period in 2003 in both hydraulic shovels and mining trucks, primarily as a result of higher demand caused by increases in commodity pricing. 54
Gross profit increased by $25.5 million in the nine months ended September 30, 2004 when compared to the comparable period in 2003 and totaled $61.3 million. Gross profit increased as a result of a significant increase in the volume of new equipment sales and a modest increase in parts volume. 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 nine months of 2004 when compared to 2003 pricing levels. Gross profit for the nine months of 2003 included restructuring and other costs of $14.2 million mainly related to activities in the Materials Processing business, including the exit of certain product lines as well as inventory write-downs to reflect expected reduced sales volumes. SG&A costs increased by $4.5 million in the nine months ended September 30, 2004 relative to the comparable period in 2003, to a total of $40.3 million. Approximately $2.3 million of the increase was due to the impact of foreign exchange, with the remainder mainly due to increased sales and marketing costs associated with increased volume. During the second quarter of 2003, the Company recognized a goodwill impairment charge with respect to its Roadbuilding reporting unit, as described in more detail below under "Terex Roadbuilding, Utility Products and Other." At that time, the Materials Processing business was included in the Roadbuilding reporting unit. Of the overall goodwill impairment of $44.3 million, $23.2 million related to the Materials Processing business. As a result of the realignment of the Company's segments during the quarter ended September 30, 2004, the Materials Processing business is now consolidated in the Terex Materials Processing & Mining segment, and, as a result, this portion of the goodwill impairment charge is now included in this segment's results. Income from operations for the Terex Materials Processing & Mining segment was $21.0 million in the nine months ended September 30, 2004, an increase of $44.2 million from 2003. Improvements in gross profit were partially offset by higher SG&A costs incurred. In addition, a $23.2 million goodwill impairment charge reduced 2003 income from operations. TEREX ROADBUILDING, UTILITY PRODUCTS AND OTHER <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------- 2003 2004 Restated ----------------------- ----------------------- % of Sales % of Sales % Change ---------- ---------- ---------- ($ amounts in millions) <S> <C> <C> <C> <C> <C> Net sales ............................ $ 579.7 $ 368.5 57.3% Gross profit ......................... $ 72.4 12.5% $ 30.4 8.2% 138.2% SG&A ................................. $ 62.1 10.7% $ 41.5 11.3% 49.6% Goodwill impairment .................. $ -- -- $ 21.1 5.7% (100.0)% Income (loss) from operations ........ $ 10.3 1.8% $ (32.2) (8.7)% (132.0)% </TABLE> Net sales for the Terex Roadbuilding, Utility Products and Other segment for the nine months ended September 30, 2004 were $579.7 million, an increase of $211.2 million when compared to the same period in 2003. The acquisitions of Tatra and ATC on August 28, 2003 increased sales in the first nine months of 2004 by approximately $145 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 mixing trucks. 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. Gross profit for the nine months ended September 30, 2004 totaled $72.4 million, an increase of $42.0 million when compared to the same period in 2003. The acquisition of a majority interest in Tatra and ATC increased gross profit by approximately $21 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 55
first nine months of 2004. Total restructuring charges incurred during the first nine months 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 nine months of 2003 included restructuring and other charges of $17.0 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 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 nine months ended September 30, 2003 was $0.9 million related to the closure of the Company's EarthKing e-commerce business. SG&A costs for the segment for the nine months ended September 30, 2004 totaled $62.1 million, an increase of $20.6 million when compared to the same period in 2003. The majority of the increase was due to the acquisitions 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 (which at the time included the Roadbuilding business and the Materials Processing business) would not meet the Company's 2003 performance expectations that were used when goodwill was last reviewed for impairment as of October 1, 2002. Funding for road projects had remained at historically low levels as federal and state budgets had been negatively impacted by a weak economy and the war in Iraq. In response to the revised business outlook, management initiated several changes to address the expected market conditions, including a change in business management, discontinuance of several non-core products, work force furloughs and reductions, and an inventory write-down based on anticipated lower sales volume. Based on the continued weakness in the reporting unit, the Company initiated a review of the long-term outlook for the reporting unit. The revised outlook for the reporting unit assumed that funding levels for domestic road projects would not improve significantly in the short term. In addition, the outlook assumed that the Company would continue to reduce working capital invested in the reporting unit to better match revenue expectations. Based on this review, the Company determined the fair value of the Roadbuilding reporting unit using the present value of the cash flow expected to be generated by the reporting unit. The cash flow was determined based on the expected revenues, after tax profits, working capital levels and capital expenditures for the reporting unit. The present value was calculated by discounting the cash flow by the Company's weighted average cost of capital. The Company, with the assistance of a third-party, also reviewed the market value of the Roadbuilding reporting unit's tangible and intangible assets. These values were included in the determination of the carrying value of the Roadbuilding reporting unit. Based on the revised fair value of the reporting unit, a goodwill impairment of $44.3 million was recognized during the nine months ended September 30, 2003. Of this, $21.1 million related to the Roadbuilding business and is included in the Terex Roadbuilding, Utility Products and Other segment, while $23.2 million related to the Materials Processing business and is now included in the Terex Materials Processing & Mining segment. Income from operations for the Terex Roadbuilding, Utility Products and Other segment for the nine months ended September 30, 2004 was $10.3 million, compared to a loss of $32.2 million for the same period in 2003. Income from operations in 2003 included a goodwill impairment charge of $21.1 million. Restructuring and other costs incurred in the first nine months of 2004 were $16.7 million lower than the $17.0 million incurred in the same period in 2003. The acquisitions of Tatra and ATC improved income from operations by approximately $8 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. 56
NET INTEREST EXPENSE During the nine months ended September 30, 2004, the Company's net interest expense decreased $5.5 million to $64.9 million from $70.4 million for the prior year period. Net interest expense declined relative to 2003, as the Company reduced total outstanding debt. The benefit of lower debt levels was partially offset by higher interest rates in 2004 relative to the comparable 2003 period. OTHER INCOME (EXPENSE) - NET Other income (expense) - net for the nine months ended September 30, 2004 was income of $16.2 million as compared to an expense of $6.4 million for the prior year period. The increase in other income relative to 2003 was primarily a result of the sale of idle facilities in 2004 along with a favorable settlement reached related to the acquisition of the O&K mining business. INCOME TAXES During the nine months ended September 30, 2004, the Company recognized income tax expense of $16.8 million on income before income taxes of $143.5 million, an effective rate of 11.7%, as compared to an income tax benefit of $6.8 million on a loss before income taxes of $33.0 million, an effective rate of 20.6%, in the prior year period. The effective tax rate for the nine months ended September 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 the strong financial performance of the Company's Fermec and other businesses, where recent performance indicated that the Company was more likely than not to realize the benefits of certain tax assets, and, therefore, the valuation allowances held for these businesses were released in 2004, and successful resolution of a tax audit covering multiple reporting periods. 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 September 30, 2004, reserves for excess and obsolete inventory totaled $70.5 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 September 30, 2004, reserves for potentially uncollectible accounts receivable totaled $40.0 million. 57
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 Company realizing the benefits of any net proceeds in excess of the remaining payments due to the finance company. As of September 30, 2004, the Company's maximum exposure to such credit guarantees was $276.7 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 September 30, 2004 was $42.0 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 September 30, 2004, the Company's maximum exposure pursuant to buyback guarantees was $43.5 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 $9 million for the estimated fair value of all guarantees provided as of September 30, 2004. The Company recognizes a loss under a guarantee when the Company's obligation to make payment under the guarantee is probable and the amount of the loss can be estimated. A loss would be recognized if the Company's payment obligation under the guarantee exceeds the value the Company can expect to recover to offset such payment, primarily through the sale of the equipment underlying the guarantee. REVENUE RECOGNITION - Revenue and costs are generally recorded when products are shipped and invoiced to either independently owned and operated dealers or to customers. Revenue generated in the United States is recognized when title and risk of loss pass from the Company to its customers which occurs upon shipment when terms are FOB shipping point (which is customary for the Company) and upon delivery when terms are FOB destination. The Company also has a policy requiring it to meet certain criteria in order to recognize revenue, including satisfaction of the following requirements: a) Persuasive evidence that an arrangement exists; b) The price to the buyer is fixed or determinable; c) Collectibility is reasonably assured; and d) The Company has no significant obligations for future performance. 58
In the United States, the Company has the ability to enter into a security agreement and receive a security interest in the product by filing an appropriate Uniform Commercial Code ("UCC") financing statement. However, a significant portion of the Company's revenue is generated outside of the United States. In many countries outside of the United States, as a matter of statutory law, a seller retains title to a product until payment is made. The laws do not provide for a seller's retention of a security interest in goods in the same manner as established in the UCC. In these countries, the Company retains title to goods delivered to a customer until the customer makes payment so that the Company can recover the goods in the event of customer default on payment. In these circumstances, where the Company only retains title to secure its recovery in the event of customer default, the Company also has a policy which requires it to meet certain criteria in order to recognize revenue, including satisfaction of the following requirements: a) Persuasive evidence that an arrangement exists; b) Delivery has occurred or services have been rendered; c) The price to the buyer is fixed or determinable; d) Collectibility is reasonably assured; e) The Company has no significant obligations for future performance; and f) The Company is not entitled to direct the disposition of the goods, cannot rescind the transaction, cannot prohibit the customer from moving, selling, or otherwise using the goods in the ordinary course of business and has no other rights of holding title that rest with a titleholder of property that is subject to a lien under the UCC. In circumstances where the sales transaction requires acceptance by the customer for items such as testing on site, installation, trial period or performance criteria, revenue is not recognized unless the following criteria have been met: a) Persuasive evidence that an arrangement exists; b) Delivery has occurred or services have been rendered; c) The price to the buyer is fixed or determinable; d) Collectibility is reasonably assured; and e) The customer has given their acceptance, the time period for acceptance has elapsed or the Company has otherwise objectively demonstrated that the criteria specified in the acceptance provisions have been satisfied. In addition to performance commitments, the Company analyzes factors such as the reason for the purchase to determine if revenue should be recognized. This analysis is done before the product is shipped and includes the evaluation of factors that may affect the conclusion related to the revenue recognition criteria as follows: a) Persuasive evidence that an arrangement exists; b) Delivery has occurred or services have been rendered; c) The price to the buyer is fixed or determinable; and d) Collectibility is reasonably assured. Certain new units may be invoiced prior to the time customers take physical possession. Revenue is recognized in such cases only when the customer has a fixed commitment to purchase the units, the units have been completed, tested and made available to the customer for pickup or delivery, and the customer has requested that the Company hold the units for pickup or delivery at a time specified by the customer. In such cases, the units are invoiced under the Company's customary billing terms, title to the units and risks of ownership pass to the customer upon invoicing, the units are segregated from the Company's inventory and identified as belonging to the customer and the Company has no further obligations under the order. Revenue from sales-type leases is recognized at the inception of the lease. Income from operating leases is recognized ratably over the term of the lease. The Company routinely sells equipment subject to operating leases and the related lease payments. If the Company does not retain a substantial risk of ownership in the equipment, the transaction is recorded as a sale. If the Company does retain a substantial risk of ownership, the transaction is recorded as a borrowing, the operating lease payments are recognized as revenue over the term of the lease and the debt is amortized over a similar period. GOODWILL - Goodwill represents the difference between the total purchase price paid in the acquisition of a business and the fair value of the assets, both tangible and intangible, and liabilities acquired by the Company. The Company is required annually to review the value of its recorded goodwill to determine if it is potentially impaired. The initial recognition of goodwill, as well as the annual review of the carrying value of goodwill, requires that the Company develop estimates of future business performance. These estimates are used to derive expected cash flow and include assumptions regarding future sales levels, the impact of cost reduction programs, and the level of working capital needed to support a given business. The Company relies on data developed by business segment management as well as macroeconomic data in making these calculations. The estimate also includes a determination of the 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. 59
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. 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 September 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 September 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 September 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 September 30, 2004, the Company had deferred tax assets of $14.4 million, net of valuation allowances. The income tax expense was $16.8 million for the nine months ended September 30, 2004. The 60
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. 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 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 third quarter of 2004, the Company realized the successful resolution of a tax audit covering multiple reporting periods and the release of valuation allowances based on the profitability of its businesses in certain jurisdictions, reducing the Company's income tax provision for the three months ended September 30, 2004 by $6.4 million. 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. 61
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 $392.3 million at September 30, 2004. In addition, the Company had $228.6 million available for borrowing under its revolving credit facilities at September 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 to reduce its investment in working capital. During 2003, the Company's focus shifted from a largely acquisition oriented growth approach to improving its operating performance. The Company recently initiated a series of programs, collectively known as TIP, aimed at improving operating earnings and net income as a percentage of sales and at reducing the relative level of working capital needed to operate the business. The Company is improving its liquidity through the collection of receivables in a more timely manner. Consistent with past practice, each quarter the Company sells receivables to various third party financial institutions through a series of established pre-arranged facilities. The discontinuance of these facilities could negatively impact the Company's liquidity. During the third quarter of 2004 and 2003, the Company sold, without recourse, accounts receivable approximating 20% and 23% of its third 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. During the nine months ended September 30, 2004, the Company used $98.4 million of cash for working capital. The Company defines working capital as the sum of accounts receivable and inventories, less 62
accounts payable. During the first nine months of 2004, the Company was able to generate $68.1 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 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 4.21% at September 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. 63
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 reports with the SEC, and the Company's 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 nine months ended September 30, 2004 was $68.1 million. Net cash provided by operations decreased by $146.0 million in the nine months ended September 30, 2004 when compared to the same period in 2003. Working capital, as a percent of trailing three months annualized sales, decreased to a level of 21% at the end of the third quarter of 2004 compared to 26% at the end of the third quarter of 2003. Approximately $98 million of cash was used for working capital purposes during the nine months ended September 30, 2004. During the first nine months of 2003, the Company generated approximately $169 million from the reduction of working capital. A significant portion of the working capital reduction in the first nine 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 nine months ended September 30, 2004 was $4.3 million, as compared to a net use of $23.9 million in the nine months ended September 30, 2003. This change is a result of the Company's receipt of $31.8 million as proceeds from the sale of excess assets during the first nine months of 2004 and the reduced number and size of acquisitions completed in the first nine months of 2004 when compared to the same period in 2003. Cash used in financing activities was $138.8 million in the nine months ended September 30, 2004, compared to cash used in financing activities in the nine months ended September 30, 2003 of $124.8 million. During the nine months ended September 30, 2004, the Company used $125.0 million to prepay a portion of its bank term loans and it generated $8.3 million from the exercise of stock options. In the nine months ended September 30, 2003, the Company utilized cash from operations to pay down its long term debt and revolving credit facilities by approximately $98 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 September 30, 2004, the Company's maximum exposure to such credit guarantees was $276.7 million, including total credit guarantees issued by Demag and Genie of $202.0 million and $35.1 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. 64
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 $42.0 million at September 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 conditions generally pertain to the functionality and state of repair of the machine. As of September 30, 2004, the Company's maximum exposure pursuant to buyback guarantees was $43.5 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 $9 million for the estimated fair value of all guarantees provided as of September 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 September 30, 2004, TFSH had total assets of $252.7 million, consisting primarily of financing receivables and lease related equipment, and total liabilities of $232.6 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 September 30, 2004, the maximum exposure to loss under these guarantees was approximately $15 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 65
equipment through a series of sale-leasebacks which are classified as operating leases. The leaseback period is typically 60 months in duration. At September 30, 2004, the historical cost of equipment being leased back from the financing companies was approximately $77 million and the minimum lease payment for the remainder of 2004 will be approximately $4 million. CONTINGENCIES AND UNCERTAINTIES FOREIGN CURRENCIES AND INTEREST RATE RISK The Company's products are sold in over 100 countries around the world and, accordingly, revenues of the Company are generated in foreign currencies, while the costs associated with those revenues are only partly incurred in the same currencies. The major foreign currencies, among others, in which the Company does business, are the Euro, the British Pound, the Australian Dollar and the Czech Koruna. The Company may, from time to time, hedge specifically identified committed and forecasted cash flows in foreign currencies using forward currency sale or purchase contracts. At September 30, 2004, the Company had foreign exchange contracts with a notional value of $285.7 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 rates ranging from 6.52% to 7.02% 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 September 30, 2004, the floating rates ranged between 4.97% and 6.14%. 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 66
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 September 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 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. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." In May 2004, the FASB issued FSP No. 106-2, which superceded FSP No. 106-1. FSP Nos. 106-1 and 106-2 became effective in 2004. FSP No. 106-2 provides guidance to employers that have determined that prescription drug benefits available under their retiree health care benefit plans are at least actuarially equivalent to Medicare Part D. The Company's U.S. postretirement healthcare plans provide for prescription drug benefits for certain participants. Due to the limited number of participants in the Company's postretirement healthcare plans that are affected by the Act, the adoption of FSP Nos. 106-1 and 106-2 did not have a material impact on the Company's financial statements. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production 67
overheads to the costs of conversion be based on the normal capacity of production facilities. As required by SFAS No. 151, the Company will adopt this new accounting standard on January 1, 2006. The adoption of SFAS No. 151 is not expected to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - - an amendment of APB Opinion No. 29." SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS No. 153, the Company will adopt this new accounting standard effective July 1, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment." SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123R also establishes fair value as the measurement method in accounting for share-based payments to employees. As per SEC Release No. 33-8568, issued in April 2005, Terex will adopt this new accounting standard effective January 1, 2006. Terex expects to transition to the new guidance using the modified prospective method. The adoption of SFAS No. 123R is not expected to have a material impact on the Company's financial statements. 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. Dollar 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 September 30, 2004, the Company had foreign currency contracts with a notional value of $285.7 million. The fair market value of these arrangements, which represents the cost to settle these contracts, was an asset of approximately $5 million at September 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 September 30, 2004, approximately 37% of the Company's debt was floating rate debt and the weighted average interest rate for all debt was approximately 7%. At September 30, 2004, the Company had approximately $100 million of interest rate swaps fixing interest rates ranging from 6.52% to 7.02% 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 $4 million at September 30, 2004. At September 30, 2004, the Company had approximately $279 million of interest rate swaps that converted fixed rates to floating rates. The floating rates ranged between 4.97% and 6.14% at September 30, 2004. The fair market value of these arrangements, which represent the cost to settle these contracts, was an asset of approximately $2 million. 68
At September 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 average floating interest rates at September 30, 2004 would have increased interest expense by approximately $1 million in the nine months ended September 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 nine 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 that negatively affected operating results through cost of goods sold by approximately $36 million during the first nine months 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. Various of the Company's operations are implementing price increases and/or surcharges directly intended to offset increases in prices of steel and other components. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures In connection with the preparation of this Quarterly Report on Form 10-Q, 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 September 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 September 30, 2004 because of the material weaknesses discussed below and because the Company was unable to file this Quarterly Report on Form 10-Q, 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 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 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 September 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 September 30, 2004 and prior to filing this Form 69
10-Q, 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 September 30, 2004. o The Company did not maintain effective controls over its financial reporting process due to an insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with the Company's financial reporting requirements. Specifically, this control deficiency directly contributed to the material weaknesses described below, as well as resulting in errors in the timing of revenue recognition of certain transactions and not maintaining effective controls over the Company's acquisition accounting, primarily resulting in errors in accruing for estimated future legal expenses, assumed product liabilities and certain asset valuations. This control deficiency also resulted in errors in net sales, cost of goods sold, goodwill, accounts receivable, accrued warranties and product liability and other non-current liabilities resulting in restatements of the 2000, 2001, 2002 and 2003 annual consolidated financial statements, the consolidated financial statements for the interim periods in 2003 and the first two quarters of 2004. This control deficiency further resulted in audit adjustments at two of the Company's operating locations to the cost of sales and inventory accounts in the 2004 annual consolidated financial statements due to the Company not maintaining effective controls over its accounting for inventory; specifically, the reconciliation of parts and finished goods inventory accounts and the costing of internally transferred parts and work in process inventory were not sufficient to ensure the completeness and accuracy of those accounts. o The Company did not maintain effective controls over the recording and elimination of its intercompany accounts. As a result of an internal investigation into the Company's intercompany accounting practices, management determined that the Company did not maintain effective controls over the proper accounting for and monitoring of the recording of its intercompany transactions. This control deficiency resulted in management's failure to detect the improper recording of elimination entries related to intercompany transactions, resulting in restatements of the 2000, 2001, 2002 and 2003 annual consolidated financial statements, the consolidated financial statements for the interim periods in 2003 and the first two quarters of 2004. This control deficiency primarily impacted cost of goods sold, accounts payable, goodwill and cumulative translation adjustment. o The Company did not maintain effective controls over its accounting for income taxes, including income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Specifically, the Company did not maintain effective controls over the accuracy and completeness of the components of the income tax provision calculations and related deferred income taxes and income taxes payable, and over the monitoring of the differences between the income tax basis and the financial reporting basis of assets and liabilities to effectively reconcile the differences to the reported deferred income tax balances. This control deficiency resulted in restatements of the 2000, 2001, 2002 and 2003 annual consolidated financial statements, the consolidated financial statements for the interim periods in 2003 and the first two quarters of 2004 as well as audit adjustments to the 2004 annual consolidated financial statements. o The Company did not maintain effective controls over its accounting for goods received but not yet invoiced. The Company's processes, procedures and controls at two of the Company's operating locations, including reconciliation and review related to the completeness and accuracy of its goods received not invoiced liability, were ineffective. The goods received not invoiced account at the two locations was not adequately documented and differences were not adequately analyzed between detailed account listings and amounts recorded in the general ledger. This control deficiency resulted in restatement adjustments to the 2003 annual consolidated financial statements, as well as the consolidated financial statements for the interim periods in 2003 and the first two quarters of 2004. In addition, the control deficiency resulted in audit adjustments at one of these locations to the cost of sales and goods received not invoiced liability accounts in the 2004 annual consolidated financial statements. 70
o The Company did not maintain effective controls over its accounting for goodwill denominated in foreign currencies. The Company's processes, procedures and controls related to certain asset valuations, in addition to the translation of certain goodwill accounts denominated in a currency other than U.S. dollars, were not sufficient to ensure that goodwill was accurately recorded in accordance with generally accepted accounting principles. This control deficiency resulted in restatements of the 2000, 2001, 2002 and 2003 annual consolidated financial statements, the consolidated financial statements for the interim periods in 2003 and the first two quarters of 2004, as well as adjustments to the 2004 annual consolidated financial statements. This control deficiency primarily affected goodwill and accumulated other comprehensive income. o The Company did not maintain effective controls over its accounting for certain of its retirement and other benefit plans. Specifically, the Company's processes, procedures and controls related to the use of actuarial information in the determination of its minimum pension liability for foreign defined benefit plans were not sufficient to ensure that such liability was accurately recorded. In addition, the Company's processes, procedures and controls related to the accounting for the Company's common stock component of its 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. 71
o The Company's Chairman and Chief Executive Officer, Chief Financial Officer, General Counsel, Senior Vice President of Human Resources and several others conducted full day mandatory meetings for approximately 350 of the Company's executives on a worldwide basis concerning business practices, the Company's Code of Ethics and Conduct, compliance, full disclosure and other matters. o The Company has provided additional training in the application of U.S. generally accepted accounting principles to financial personnel in the U.S. and internationally. The following are among the specific actions taken by the Company in its internal control over financial reporting processes during the quarter ended March 31, 2004 and subsequently to address the reportable condition, regarding accounting for income taxes, previously disclosed in the Company's Quarterly Report on Form 10-Q for the interim period ended March 31, 2004 and subsequently identified above as a material weakness as of December 31, 2004: o The Company, with the assistance of an outside service provider, established procedures to more effectively and accurately accumulate detailed support for approximately eighty foreign tax basis balance sheets and related processes to identify the deferred tax items. 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 processes) to improve visibility, accuracy and support. o The Company has increased staffing in the tax department. The Company intends to take further actions to remediate the material weaknesses noted above and improve controls overall which actions are intended to prevent this type of situation from occurring in the future including: o Providing enhanced and ongoing training for financial and tax personnel. o Adding additional personnel in key areas throughout the Company's financial organization. o Increasing internal audit capabilities and other oversight to verify compliance with the Company's policies and procedures. o Simplifying the Company's legal and reporting entity structure to facilitate the processing of intercompany transactions and simplify the tax reporting processes. o Implementing a common information technology platform/business management system worldwide for use throughout the Company to facilitate the accounting for and reconciliation of transactions as well as to provide other operational benefits. o Developing an education program providing training to employees on how to handle different types of business issues to promote an open and transparent global business culture where the Company's employees use responsible business practices. The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Company's controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. The Company will continue to develop new policies and procedures and educate and train its employees on its existing policies and procedures in a continual effort to improve its internal control over financial reporting and will take further actions as appropriate. The Company views this as an ongoing project to which it will be devoting significant resources and which will need to be maintained and updated over time. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in certain claims and litigation arising in the ordinary course of business, which are not considered material to the financial operations or cash flow of the Company. For information concerning litigation and other contingencies see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies and Uncertainties." 72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Recent Developments On December 31, 2004, the Company completed the acquisition of the Reedrill division of Metso Corporation ("Reedrill"). Reedrill, headquartered in Sherman, Texas, is a manufacturer of surface drilling equipment for use in the mining, construction and utility industries. In connection with the acquisition, the Company paid $38.6 million cash, subject to post-closing adjustments based upon the finalization of the closing date balance sheet. Reedrill is included in the Terex Materials Processing & Mining segment, and operating results of Reedrill will be included in the Company's consolidated results of operations beginning January 1, 2005. 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 73
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. Effective January 1, 2006, Terex realigned certain operations in an effort to strengthen its ability to service customers and to recognize certain organizational efficiencies. The Mobile Crushing and Screening Group, consisting of the Powerscreen, Finlay and B.L. Pegson businesses and formerly part of the Terex Construction Segment, now will be consolidated within the Terex Materials Processing & Mining Segment. The European telehandlers business of TerexLift, formerly part of the Terex Construction Segment, now will be part of the Terex Aerial Work Platforms Segment. The segment discussions included herein do not reflect this realignment. Terex will be presenting segment reporting effective January 1, 2006 giving effect to this reorganization. The Company acquired Halco Holdings Limited and its affiliates ("Halco") on January 24, 2006, for approximately 8.4 million British Pounds in cash, plus assumption of certain capitalized leases and pension liabilities. Halco is headquartered in Halifax, United Kingdom, with operations also in the United States, Ireland and Australia. Halco designs, manufactures and distributes down-the-hole drill bits and hammers for drills. The results of Halco will be included in the Terex Materials Processing & Mining Segment from its date of acquisition. Forward-Looking Information Certain information in this Quarterly Report includes forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act) regarding future events or the future financial performance of the Company that involve certain contingencies and uncertainties, including those discussed above in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies and Uncertainties." In addition, when included in this Quarterly Report or in documents incorporated herein by reference, the words "may," "expects," "intends," "anticipates," "plans," "projects," "estimates" and the negatives thereof and analogous or similar expressions are intended to identify forward-looking statements. However, the absence of these words does not mean that the statement is not forward-looking. The Company has based these forward-looking statements on current expectations and projections about future events. These statements are not guarantees of future performance. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Such risks and uncertainties, many of which are beyond the Company's control, include, among others: o the Company's business is highly cyclical and weak general economic conditions may affect the sales of its products and its financial results; o the sensitivity of construction, infrastructure and mining activity and products produced for the military to interest rates and government spending; o the ability to successfully integrate acquired businesses; o the retention of key management personnel; o the Company's businesses are very competitive and may be affected by pricing, product initiatives and other actions taken by competitors; o the effects of changes in laws and regulations; o the Company's business is international in nature and is subject to changes in exchange rates between currencies, as well as international politics; o the Company's continued access to capital and ability to obtain parts and components from suppliers on a timely basis at competitive prices; o the financial condition of suppliers and customers, and their continued access to capital; o the Company's ability to timely manufacture and deliver products to customers; o the Company's significant amount of debt and its need to comply with restrictive covenants contained in the Company's debt agreements; o limitations on the Company's ability to access the capital markets using short form SEC documents; o the Company's ability to maintain adequate disclosure controls and procedures, maintain adequate internal controls over financial reporting and file its periodic reports with the SEC on a timely basis; o the investigation of the Company by the SEC; o compliance with applicable environmental laws and regulations; and 74
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 The exhibits set forth on the accompanying Exhibit Index have been filed as part of this Form 10-Q. 75
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) 76
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). 77
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 Form of Restricted Stock Agreement under the Terex Corporation 2000 Incentive Plan between Terex Corporation and participants of the 2000 Incentive Plan (incorporated by reference to Exhibit 10.4 of the Form 8-K Current Report, Commission File No. 1-10702, dated January 1, 2005 and filed with the Commission on January 5, 2005). 10.10 Form of Option Agreement under the Terex Corporation 2000 Incentive Plan between Terex Corporation and participants of the 2000 Incentive Plan (incorporated by reference to Exhibit 10.5 of the Form 8-K Current Report, Commission File No. 1-10702, dated January 1, 2005 and filed with the Commission on January 5, 2005). 10.11 Terex Corporation Supplemental Executive Retirement Plan, effective October 1, 2002 (incorporated by reference to Exhibit 10.9 to the Form 10-K for the year ended December 31, 2002 of Terex Corporation, Commission File No. 1-10702). 10.12 Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Form 10-Q for the quarter ended March 31, 2004 of Terex Corporation, Commission File No. 1-10702). 78
10.13 Summary of material terms of non-CEO 2004 performance targets under the Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission File No. 1-10702, dated October 6, 2005 and filed with the Commission on October 12, 2005). 10.14 Summary of material terms of CEO 2004 performance targets under the Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 of the Form 8-K Current Report, Commission File No. 1-10702, dated October 6, 2005 and filed with the Commission on October 12, 2005). 10.15 Summary of material terms of non-CEO 2005 performance targets under the Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 of the Form 8-K Current Report, Commission File No. 1-10702, dated January 1, 2005 and filed with the Commission on January 5, 2005). 10.16 Summary of material terms of CEO 2005 performance targets under the Terex Corporation 2004 Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission File No. 1-10702 dated March 31, 2005 and filed with the Commission on April 6, 2005). 10.17 Terex Corporation Amended and Restated Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to the Form 10-Q for the quarter ended June 30, 2004 of Terex Corporation, Commission File No. 1-10702). 10.18 Summary of material terms of Terex Corporation Outside Directors' Compensation Program (incorporated by reference to Exhibit 10.2 of the Form 8-K Current Report, Commission File No. 1-10702, dated January 1, 2005 and filed with the Commission on January 5, 2005). 10.19 Amended and Restated Credit Agreement, dated as of July 3, 2002, among Terex Corporation, certain of its Subsidiaries, the Lenders named therein, and Credit Suisse First Boston, as Administrative Agent (incorporated by reference to Exhibit 10.9 to the Form 10-Q for the quarter ended June 30, 2002 of Terex Corporation, Commission File No. 1-10702). 10.20 Incremental Term Loan Assumption Agreement, dated as of September 13, 2002, relating to the Amended and Restated Credit Agreement dated as of July 3, 2002, among Terex Corporation, certain of its subsidiaries, the lenders party thereto and Credit Suisse First Boston, as administrative agent (incorporated by reference to Exhibit 2 of the Form 8-K Current Report, Commission File No. 1-10702, dated September 13, 2002 and filed with the Commission on September 20, 2002). 10.21 Amendment No. 1 and Agreement, dated as of November 25, 2003, to the Amended and Restated Credit Agreement, dated as of July 3, 2002, among Terex Corporation, certain of its Subsidiaries, the Lenders named therein, and Credit Suisse First Boston, as Administrative Agent (incorporated by reference to Exhibit 10.12 to Form S-4 Registration Statement of Terex Corporation, Registration No. 333-112097). 10.22 Amendment No. 2, Waiver and Agreement dated as of October 15, 2005, to the Amended and Restated Credit Agreement, dated as of July 3, 2002, among Terex Corporation, certain of its Subsidiaries, the Lenders named therein and Credit Suisse, as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission File No. 1-10702, dated October 15, 2005 and filed with the Commission on October 17, 2005). 10.23 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation and Credit Suisse First Boston, as Collateral Agent (incorporated by reference to Exhibit 10.14 to the Form 10-K for the year ended December 31, 1998 of Terex Corporation, Commission File No. 1-10702). 10.24 Guarantee Agreement dated as of March 6, 1998 of Terex Corporation, each of the subsidiaries of Terex Corporation listed therein and Credit Suisse First Boston, as Collateral Agent (incorporated by reference to 79
Exhibit 10.15 to the Form 10-K for the year ended December 31, 1998 of Terex Corporation, Commission File No. 1-10702). 10.25 Security Agreement dated as of March 6, 1998 of Terex Corporation, each of the subsidiaries of Terex Corporation listed therein and Credit Suisse First Boston, as Collateral Agent (incorporated by reference to Exhibit 10.16 to the Form 10-K for the year ended December 31, 1998 of Terex Corporation, Commission File No. 1-10702). 10.26 Pledge Agreement dated as of March 6, 1998 of Terex Corporation, each of the subsidiaries of Terex Corporation listed therein and Credit Suisse First Boston, as Collateral Agent (incorporated by reference to Exhibit 10.17 to the Form 10-K for the year ended December 31, 1998 of Terex Corporation, Commission File No. 1-10702). 10.27 Form Mortgage, Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Financing entered into by Terex Corporation and certain of the subsidiaries of Terex Corporation, as Mortgagor, and Credit Suisse First Boston, as Mortgagee (incorporated by reference to Exhibit 10.18 to the Form 10-K for the year ended December 31, 1998 of Terex Corporation, Commission File No. 1-10702). 10.28 Second Amendment to Agreement and Plan of Merger, dated as of April 14, 2004, by and among Terex Corporation, Robert Wilkerson, S. Ward Bushnell and F. Roger Brown and certain limited partnerships (incorporated by reference to Exhibit 10.22 to the Form 10-Q for the quarter ended March 31, 2004 of Terex Corporation, Commission File No. 1-10702). 10.29 Employment and Compensation Agreement, dated as of July 1, 2005, between Terex Corporation and Ronald M. DeFeo (incorporated by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission File No. 1-10702, dated July 1, 2005 and filed with the Commission on July 7, 2005). 10.30 Form of Amended and Restated Change in Control and Severance Agreement between Terex Corporation and certain executive officers (incorporated by reference to Exhibit 10.36 to the Form 10-Q for the quarter ended March 31, 2002 of Terex Corporation, Commission File No. 1-10702). 10.31 Form of Change in Control and Severance Agreement between Terex Corporation and certain executive officers (incorporated by reference to Exhibit 10.35 to the Form 10-K for the year ended December 31, 2002 of Terex Corporation, Commission File No. 1-10702). 10.32 Offer Letter, dated as of January 5, 2006, between Terex Corporation and Colin Robertson (incorporated by reference to Exhibit 10.1 of the Form 8-K Current Report, Commission File No. 1-10702, dated December 30, 2005 and filed with the Commission on January 6, 2006). 10.33 Retirement Agreement dated as of November 13, 2003 between Terex Corporation and Filip Filipov (incorporated by reference to Exhibit 10.29 to Form S-4 Registration Statement of Terex Corporation, Registration No. 333-112097). 10.34 Consulting Agreement dated as of November 13, 2003 between Terex Corporation and Filver S.A. (incorporated by reference to Exhibit 10.30 to Form S-4 Registration Statement of Terex Corporation, Registration No. 333-112097). 10.35 Termination, Severance, General Release and Waiver Agreement between Terex Corporation and Matthys de Beer dated as of February 1, 2004 (incorporated by reference to Exhibit 99.1 of the Form 8-K Current Report, Commission File No. 1-10702, dated February 1, 2004 and filed with the Commission on February 4, 2004). 12 Calculation of Ratio of Earnings to Fixed Charges.* 80
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. 81