SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 F O R M 10 - Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 1-10702 Terex Corporation (Exact name of registrant as specified in 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Number of outstanding shares of common stock: 10.3 million as of September 30, 1995. The Exhibit Index appears on page 20. INDEX TEREX CORPORATION AND SUBSIDIARIES Page No. PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Statements of Operations -- Three months and nine months ended September 30, 1995 and 1994 3 Condensed Consolidated Balance Sheets -- September 30, 1995 and December 31, 1994 4 Condensed Consolidated Statements of Cash Flows -- Nine months ended September 30, 1995 and 1994 5 Notes to Condensed Consolidated Financial Statements -- September 30, 1995 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II OTHER INFORMATION Item 1 Legal Proceedings 18 Item 5 Other Information 18 Item 6 Exhibits and Reports on Form 8-K 18 SIGNATURES 19 PART 1. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TEREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 Net sales $ 283,304 $ 207,063 $ 766,789 $ 573,350 Cost of goods sold 252,490 184,282 690,529 515,889 Gross profit 30,814 22,781 76,260 57,461 Engineering, selling and administrative expenses: Third parties 23,001 16,657 61,401 53,574 Related parties --- --- --- 2,245 Total engineering, selling and administrative expenses 23,001 16,657 61,401 55,819 Severance and exit costs --- --- 3,478 4,549 Income (loss) from operations 7,813 6,124 11,381 (2,907) Other income (expense): Interest income 574 83 1,073 400 Interest expense (11,834) (7,855) (28,416) (23,298) Gain on sale of Fruehauf stock --- 4,255 1,032 24,361 Gain on sale of Drexel business --- --- --- 4,742 Property impairment charge --- --- (3,000) --- Amortization of debt issuance costs (619) (598) (1,672) (1,835) Other income (expense) - other (3,702) (818) (6,352) (8) Income (loss) before income taxes and extraordinary items (7,768) 1,191 (25,954) 1,455 Income tax provision (18) 18 (133) (816) Income (loss) before extraordinary items (7,786) 1,209 (26,087) 639 Extraordinary losses on retirement of debt --- (164) (7,452) (397) NET INCOME (LOSS) (7,786) 1,045 (33,539) 242 Less preferred stock accretion (1,853) (1,517) (5,200) (4,341) Income (loss) applicable to common stock $ (9,639) $ (472) $(38,739) $ (4,099) PER COMMON AND COMMON EQUIVALENT SHARE: Primary: Income (loss) before extraordinary items $ (0.93) $ (0.03) $ (3.02) $ (0.36) Extraordinary items --- (0.02) (0.73) (0.04) Net income (loss) $ (0.93) $ (0.05) $ (3.75) $ (0.40) Fully diluted: Income (loss) before extraordinary items $ (0.93) $ (0.03) $ (3.02) $ (0.36) Extraordinary items --- (0.02) (0.73) $ (0.04) Net income (loss) $ (0.93) $ (0.05) $ (3.75) $ (0.40) Weighted average common shares outstanding including dilutive securities (See Exhibit 11.1) Primary (in millions) 10.3 10.3 10.3 10.3 Fully diluted (in millions) 10.3 10.3 10.3 10.3 The accompanying notes are an integral part of these financial statements. TEREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 1995 1994 ASSETS Current assets Cash and cash equivalents $ 12,482 $ 9,727 Cash securing letters of credit 3,695 6,688 Trade receivables (less allowance of $9,486 at September 30 and $6,114 at December 31) 147,210 91,717 Net inventories 248,666 164,245 Other current assets 18,279 5,775 Total current assets 430,332 278,152 Property, plant and equipment - net 111,817 86,160 Goodwill - net 70,343 5,222 Debt issuance costs - net 15,110 3,382 Other assets 18,332 28,700 Total assets $ 645,934 $ 401,616 LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities Notes payable $ 6,575 $ 2,078 Current portion of long-term debt 12,298 25,806 Trade accounts payable 146,464 112,213 Accrued compensation and benefits 16,226 10,823 Accrued warranties and product liability 38,488 27,629 Accrued interest 16,426 8,969 Accrued income taxes 3,827 1,328 Other current liabilities 62,951 32,732 Total current liabilities 303,255 221,578 Long-term debt less current portion 337,039 162,987 Accrued warranties and product liability - long-term 35,110 31,846 Accrued pension 18,562 16,456 Other long-term liabilities 13,635 7,225 Total liabilities 707,601 440,092 Minority interest, including redeemable preferred stock of a subsidiary (liquidation preference $26,051, subject to adjustment) (Note B) 10,028 --- Redeemable convertible preferred stock (liquidation preference $39,083 at September 30 and $36,578 at December 31) 22,462 17,262 Commitments and contingencies (Note E) Stockholders' investment Warrants to purchase common stock 17,240 17,564 Common stock, $.01 par value - authorized 30,000,000 shares; issued and outstanding 10,359 at September 30 and 10,303 at December 31 104 103 Additional paid-in capital 40,451 40,127 Accumulated deficit (147,872) (108,395) Pension liability adjustment (1,778) (1,778) Unrealized holding gain on equity securities 938 1,825 Cumulative translation adjustment (3,240) (5,184) Total stockholders' investment (94,157) (55,738) Total liabilities and stockholders' investment $ 645,934 $ 401,616 The accompanying notes are an integral part of these financial statements. TEREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) For the Nine Months Ended September 30, 1995 1994 OPERATING ACTIVITIES Net loss $(33,539) $ 242 Adjustments to reconcile net loss to cash used in operating activities: Depreciation 13,265 10,053 Amortization 7,873 3,207 (Gain) loss on sale of property, plant and equipment (173) (115) Gain on sale of Fruehauf stock (1,032) (24,361) Gain on sale of Drexel business --- (4,742) Property impairment charge 3,000 --- Other 337 (647) Changes in operating assets and liabilities: Restricted cash 2,993 (781) Trade receivables (15,504) (18,201) Net inventories (4,598) (1,043) Trade accounts payable (20,553) 15,488 Accrued compensation and benefits 4,866 1,616 Accrued warranties and product liability 2,275 3,251 Accrued interest 7,571 (5,842) Accrued income taxes 537 242 Other 4,737 3,883 Net cash used in operating activities (27,945) (17,750) INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (92,429) --- Capital expenditures (7,128) (9,853) Proceeds from sale of property, plant and equipment 872 483 Proceeds from refinancing note receivable --- 1,000 Proceeds from sale of Fruehauf stock 2,714 24,916 Proceeds from sale of Drexel business --- 10,289 Other 185 535 Net cash from (used in) investing activities (95,786) 27,370 FINANCING ACTIVITIES Net borrowings under revolving line of credit agreements 42,107 11,916 Principal repayments of long-term debt (153,947) (28,275) Issuance of long-term debt, net of issuance costs 239,800 --- Other (446) (124) Net cash from (used in) financing activities 127,514 (16,483) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,028) 435 NET DECREASE IN CASH AND CASH EQUIVALENTS 2,755 (6,428) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,727 (9,183) CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,482 $ 2,755 The accompanying notes are an integral part of these financial statements. TEREX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, unless otherwise denoted) September 30, 1995 NOTE A -- BASIS OF PRESENTATION Basis of Presentation. The accompanying condensed consolidated financial statements of Terex Corporation and subsidiaries as of September 30, 1995 and for the three and nine months ended September 30, 1995 and 1994 have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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 generally accepted accounting principles. The accompanying condensed consolidated balance sheet as of December 31, 1994, has been derived from the audited consolidated balance sheet as of that date. The condensed consolidated financial statements include the accounts of Terex Corporation and its majority owned subsidiaries ("Terex" or the "Company"). All material intercompany balances, transactions and profits have been eliminated. The equity method is used to account for investments in affiliates in which the Company has an ownership interest between 20% and 50%. Investments in affiliates in which the Company has an ownership interest of less than 20% are accounted for on the cost method or at fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In the opinion of management, all adjustments considered necessary for a fair presentation have been made. Such adjustments consist only of those of a normal recurring nature. Operating results for the three and nine months ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. NOTE B -- REFINANCING AND ACQUISITION On May 9, 1995, the Company completed the refinancing of substantially all of its outstanding debt (the "Refinancing") and, through Terex Cranes, Inc. ("Terex Cranes"), a newly formed subsidiary, completed the acquisition of substantially all of the outstanding stock of P.P.M., S.A. and Legris Industries, Inc. (together, "PPM") (the "PPM Acquisition"). PPM designs, manufactures and markets mobile cranes and container stackers primarily in North America and Western Europe. The Refinancing included the private placement to institutional investors of $250,000 of 13.25% Senior Secured Notes due May 15, 2002 (the "New Senior Secured Notes"), repayment of the Company's old senior secured notes and senior subordinated notes, totaling approximately $152,600 principal amount, and entry into a new Credit Facility to replace the Company's existing lending facility in the U. S. Until such time as the Company completes an exchange of the New Senior Secured Notes for an equivalent issue of registered notes, or a shelf registration statement for the New Senior Secured Notes is effective, the interest rate on the New Senior Secured Notes will be 13.75%. The Indenture for the New Senior Secured Notes places certain limits on the Company's ability to incur additional indebtedness; permit the existence of liens; issue, pay dividends on or redeem equity securities; utilize the proceeds of asset sales; consolidate, merge or transfer assets to another entity; and enter into transactions with affiliates. In connection with the issuance of the New Senior Secured Notes, the Company issued 1,000,000 stock appreciation rights ("SAR") entitling the holders to receive cash or Terex Corporation common stock, at the option of the Company, in an amount equal to the average closing sale price of the common stock for 60 trading days prior to the date of exercise less $7.288 for each SAR. The Company's new Credit Facility provides that the Company will be able to borrow (in the form of revolving loans and up to $15,000 in outstanding letters of credit) up to $100,000, subject to borrowing base limitations. The Credit Facility is secured by substantially all of the Company's domestic receivables and inventory. The amount of borrowings is limited to the sum of the following: (i) 75% of the net amount of eligible receivables, as defined, of the Company's U.S. businesses other than Clark Material Handling Company ("CMHC"), plus (ii) 70% of the net amount of CMHC eligible receivables, plus (iii) the lesser of 45% of the value of eligible inventory, as defined, or 80% of the appraised orderly liquidation value of eligible inventory, less (iv) any availability reserves established by the lenders. The new Credit Facility expires May 9, 1998 unless extended by the lenders for one additional year. At the option of the Company, revolving loans may be in the form of prime rate loans bearing interest at the rate of 1.75% per annum in excess of the prime rate and eurodollar rate loans bearing interest at the rate of 3.75% per annum in excess of the adjusted eurodollar rate. Approximately $92,612 of the proceeds of the New Senior Secured Notes was used for the PPM Acquisition, including the repayment of certain indebtedness of PPM required to be repaid in connection with the acquisition. In addition, the Company estimates that the acquisition costs incurred will total approximately $3,000. The remainder of the purchase price consisted of the issuance of redeemable preferred stock of Terex Cranes having an aggregate liquidation preference of 127 million French francs (approximately $26,051), subject to adjustment. The purchase price is subject to adjustment calculated by reference to the consolidated net asset value of PPM as determined by an audit as of the date of closing. The preferred stock does not bear a dividend and, accordingly, the Company has valued this stock at approximately $8,840 (discounted at 15%). The Company has not yet reached agreement with the sellers about the amount of purchase price adjustment but, based on work performed, the Company believes that the amount of the preferred stock could ultimately be reduced. The PPM Acquisition is being accounted for using the purchase method, with the purchase price allocated to the assets acquired and liabilities assumed based upon their respective estimated fair values at the date of acquisition. The excess of purchase price over the net assets acquired (approximately $65,864) is being amortized on a straight-line basis over 15 years. The estimated fair values of assets and liabilities acquired in the PPM Acquisition are summarized as follows: Cash $ 974 Accounts receivable 33,816 Inventories 69,107 Other current assets 11,866 Property, plant and equipment 20,516 Other assets 268 Goodwill 65,864 Accounts payable and other current liabilities (84,458) Other liabilities (13,501) $ 104,452 The Company is in the process of obtaining certain evaluations, estimations, appraisals and actuarial and other studies for purposes of determining certain values. The Company has also estimated costs related to plans to integrate the activities of PPM into the Company, including plans to terminate excess employees, exit certain activities and consolidate and restructure certain functions. The Company may revise the estimates as additional information is obtained. The operating results of PPM are included in the Company's consolidated results of operations since May 9, 1995. The following pro forma summary presents the consolidated results of operations as though the Company completed the PPM Acquisition on January 1, 1994, after giving effect to certain adjustments, including amortization of goodwill, interest expense and amortization of debt issuance costs on the debt issued in the Refinancing: Pro Forma for the Nine Months ended Year ended September 30, 1995 December 31, 1994 Net sales $831,629 $966,476 Loss from operations (5,122) (12,904) Loss before extraordinary items (51,297) (19,321) Loss before extraordinary items, per share $(5.55) $(2.45) The pro forma information is not necessarily indicative of what the actual results of operations of the Company would have been for the periods indicated, nor does it purport to represent the results of operations for future periods. NOTE C -- INVENTORIES Net inventories consist of the following: September 30, December 31, 1995 1994 Finished Equipment $ 55,676 $ 26,812 Replacement parts 88,381 68,932 Work-in-process 25,351 13,520 Raw materials and supplies 82,171 57,894 251,579 167,158 Less: Excess of FIFO inventory value over LIFO cost (2,913) (2,913) Net inventories $ 248,666 $ 164,245 NOTE D -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: September 30, December 31, 1995 1994 Property $ 10,733 $ 8,335 Plant 44,575 32,249 Equipment 102,884 83,419 158,192 124,003 Less: Accumulated depreciation (46,375) (37,843) Net property, plant and equipment $ 111,817 $ 86,160 NOTE E -- LITIGATION, CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company is subject to a number of contingencies and uncertainties including product liability claims, self-insurance obligations, tax examinations and other contingencies. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any cost to the Company. However, management does not believe that these contingencies and uncertainties will, in the aggregate, have a material 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 nonhazardous wastes in the normal course of its operations. As a result, the Company is subject to a wide range of federal, state, local and foreign environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act, that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for hazardous and nonhazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances. Compliance with such laws and regulations has, and will, require expenditures by the Company on a continuing basis. On August 28, 1995, the Company announced that its Chairman, Randolph W. Lenz, had retired from his position with the Company and its Board of Directors. In connection with his retirement, the Company (acting through a committee comprised of its independent Directors and represented by independent counsel) and Mr. Lenz have executed a retirement agreement providing certain benefits to Mr. Lenz and the Company. The agreement provides, among other things, for a five-year consulting engagement requiring Mr. Lenz to make himself available to the Company to provide consulting services for certain portions of his time. Mr Lenz, or his designee, will receive a fee for consulting services which will include payments in an amount, and a rate, equal to his 1995 base salary until December 31, 1996. The agreement also provides for the granting of a five-year $1.8 million loan bearing interest at 6.56% per annum which is subject to being forgiven in increments over the five-year term of the agreement upon certain conditions and equity grants having a maximum potential of 200,000 shares of Terex common stock conditioned upon the Company achieving certain financial performance objectives in the future. In contemplation of the execution of this retirement agreement, the Company advanced to Mr. Lenz the principal amount of the forgivable loan. Mr. Lenz has also agreed not to compete with the Company, to vote his Terex shares in the manner recommended by the Company's Board of Directors, not to acquire any additional shares of the Company's common stock, and, except under certain circumstances, not to sell his shares of common stock. The Company recorded a charge of $1.8 million to Other Income/Expense during the three and nine months ended September 30, 1995 in connection with the retirement. The Internal Revenue Service is currently examining the Company's federal tax returns for the years 1987 through 1989. In December 1994, the Company received an examination report from the IRS proposing a substantial tax deficiency based on this examination. The examination report raises a variety of issues, including the Company's substantiation for certain deductions taken during this period, the Company's utilization of certain net operating loss carryovers ("NOL's") and the availability of such NOL's to offset future taxable income. If the IRS were to prevail on all the issues raised, the amount of the tax assessment would be approximately $56,000 plus interest and penalties. If the Company were required to pay a significant portion of the assessment, it could have a material adverse impact on the Company and could exceed the Company's resources. The Company has filed its administrative appeal to the examination report. Although management believes that the Company will be able to provide adequate documentation for a substantial portion of the deductions questioned by the IRS and that there is substantial support for the Company's past and future utilization of the NOL's, the ultimate outcome of this matter is subject to the resolution of significant legal and factual issues. If the Company's positions prevail on the most significant issues, management believes that the amounts due would not exceed amounts previously paid or provided; however, even under such circumstances, it is possible that the Company's NOL's could be reduced to some extent. No additional accruals have been made for any amounts which might be due as a result of this matter because the possible loss ranges from zero to $56,000 plus interest and penalties and the ultimate outcome cannot presently be determined or estimated. As discussed above, Mr. Lenz has retired as Chairman of the Company. Although his retirement agreement places certain restrictions on his ability to sell his shares of Common Stock in the Company, in the event that Mr. Lenz is able to sell a substantial portion of his shares in the Company before December 20, 1996, such sale, in combination with the issuance of the Warrants in December 20, 1993 and subject to the effects of other changes in share ownership of the Company, could result in a change in control for tax purposes. Such a change in control for tax purposes could possibly result in a significant reduction in the amount of NOL's available to the Company to offset future taxable income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Prior to the PPM Acquisition on May 9, 1995, the Company operated in two industry segments during the periods presented herein: material handling and heavy equipment. The addition of the PPM business to the Company's existing crane and aerial lift business ("Koehring") has created combined mobile crane operations sufficient in size to constitute a third industry segment referred to herein as "Mobile Cranes." The comparisons presented below have been reclassified to a three segment basis for consistency. The Mobile Cranes segment results for periods prior to May 1995 consist solely of Koehring's operations which were formerly included in the results of the Heavy Equipment Segment. Quarter Ended September 30, 1995 The table below is a comparison of net sales, gross profit, selling, general and administrative expenses, severance and exit costs and income (loss) from operations, by segment, for the three months ended September 30, 1995 and 1994. Three Months Ended September 30, Increase 1995 1994 (Decrease) (in millions of dollars) NET SALES Material Handling $134.5 $ 128.3 $ 6.2 Heavy Equipment 64.8 57.2 7.6 Mobile Cranes 84.0 22.4 61.6 Eliminations --- (0.8) 0.8 Total $283.3 $ 207.1 $ 76.2 GROSS PROFIT Material Handling $ 10.8 $ 10.8 $ --- Heavy Equipment 9.2 8.3 0.9 Mobile Cranes 10.9 3.7 7.2 Eliminations (0.1) --- (0.1) Total $ 30.8 $ 22.8 $ 8.0 ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES Material Handling $ 7.6 $ 9.8 $ (2.2) Heavy Equipment 5.7 5.1 0.6 Mobile Cranes 9.4 1.6 7.8 General/Corporate 0.3 0.2 0.1 Total $ 23.0 $ 16.7 $ 6.3 INCOME (LOSS) FROM OPERATIONS Material Handling $ 3.2 $ 1.0 $ 2.2 Heavy Equipment 3.5 3.2 0.3 Mobile Cranes 1.5 2.1 (0.6) General/Corporate (0.4) (0.2) (0.2) Total $ 7.8 $ 6.1 $ 1.7 Net Sales Sales increased $76.2 million, or approximately 37%, to $283.3 million for the three months ended September 30, 1995 over the comparable 1994 period. Material Handling Segment sales were $134.5 million for the three months ended September 30, 1995, an increase of $6.2 million from $128.3 million in the year earlier period. The sales mix was approximately 21% parts in the three months ended September 30, 1995 compared to 19% in the comparable 1994 period. Machine sales increased 4%, primarily because of increased output resulting from actions taken by management during 1994 and shipments of the new Genesis line. Parts sales from which the Company generally realizes higher margins than machine sales, increased 3% because of improved parts inventory availability. The labor strike at the Company's parts distribution center has not had a material continuing effect on parts sales. Material Handling Segment bookings for the three months ended September 30, 1995 were $111.0 million, a decrease of $23.4 million, or 17%, from the year earlier period, as customer demand, especially in North America, began to soften. Bookings for parts sales for the three months ended September 30, 1995 decreased 4% from the year earlier period. Machine order bookings for the three months ended September 30, 1995 decreased 25% from the year earlier period, reflecting reduced industry demand in the North American markets. Material Handling Segment backlog was $100.1 million at September 30, 1995 compared to $135.9 million at December 31, 1994 and $119.8 million at September 30, 1994. Heavy Equipment Segment sales increased $7.6 million for the three months ended September 30, 1995 from the three months ended September 30, 1994. Machines sales increased 15%, and parts sales increased 4%. The sales mix was approximately 37% parts for the three months ended September 30, 1995 compared to 41% parts for the comparable 1994 period. Heavy Equipment Segment bookings for the three months ended September 30, 1995 were $81.0 million, an increase of $42 million, or 108%, from the year earlier period. Bookings for parts sales, from which the Company generally realizes higher margins than machine sales, decreased 7% from the three months ended September 30, 1994. Machine bookings for the three months ended September 30, 1995 increased $44.0 million from the comparable 1994 period reflecting higher international orders, including a large Australian order received by the Company's Unit Rig business. Heavy Equipment Segment backlog was $55.2 million at September 30, 1995 compared to $67.8 million at December 31, 1994 and $48.2 million at September 30, 1994. Mobile Crane Segment sales were $84.0 million for the three months ended September 30, 1995, an increase of $61.6 million from $22.4 million in the year earlier period reflecting operations of the PPM businesses acquired in May 1995. Mobile Crane Segment backlog was $81.6 million at September 30, 1995, reflecting the additional PPM backlog acquired, compared to $11.7 million at December 31, 1994 and $11.9 million at September 30, 1994. Gross Profit Gross profit for the three months ended September 30, 1995 increased $8.0 million compared to the three months ended September 30, 1994. The Material Handling Segment's gross profit of $10.8 million for the three months ended September 30, 1995 was even with $10.8 million for the prior year's period. The gross profit percentage in the Material Handling Segment was 8% for the three months ended September 30, 1995 and for the comparable 1994 period. Lower overall margins caused by increased material prices and manufacturing inefficiencies related to vendors' continuing inability to meet demand were offset by cost reduction initiatives. The Heavy Equipment Segment's gross profit increased $0.9 million to $9.2 million for the three months ended September 30, 1995 compared to $8.3 million for the comparable 1994 period. The gross profit percentage in the Heavy Equipment Segment decreased to 14% for the three months ended September 30, 1995 from 15% for the three months ended September 30, 1994, reflecting continuing improvements in manufacturing efficiency, offset by a decrease in the sales mix of higher margin parts sales during the three months ended September 30, 1995. Mobile Crane Segment's gross profit increased $7.2 million to $10.9 million for the three months ended September 30, 1995, compared to $3.7 million for the prior year's period, reflecting the PPM Acquisition and improved performance at Koehring. Engineering, Selling and Administrative Expenses Engineering, selling and administrative expenses increased to $23.0 million for the three months ended September 30, 1995 from $16.7 million for the three months ended September 30, 1994, reflecting the PPM Acquisition in May 1995. Material Handling Segment engineering, selling and administrative expenses decreased to $7.6 million for the three months ended September 30, 1995 from $9.8 million for the comparable 1994 period, primarily as a result of severance actions taken by management during the second half of 1994 and the first half of 1995. Heavy Equipment Segment engineering, selling and administrative expenses increased to $5.7 million for the three months ended September 30, 1995 from $5.1 million for the comparable 1994 period primarily due to costs associated with a new parts sales office and a new U.K. dealership. Mobile Crane Segment engineering, selling and administrative expenses increased to $9.4 million for the three months ended September 30, 1995 from $1.6 million for the comparable 1994 period, reflecting the PPM Acquisition in May 1995. Income (Loss) from Operations The Material Handling Segment income from operations of $3.2 million for the three months ended September 30, 1995 represents a $2.2 million improvement over the $1.0 million income in the comparable 1994 period. As discussed above, increased sales and reduced costs contributed to the increase in income from operations for the three months ended September 30, 1995. Heavy Equipment Segment income from operations increased by $0.3 million to $3.5 million for the three months ended September 30, 1995 from $3.2 million in the comparable 1994 period, primarily due to increased sales. Mobile Crane Segment income from operations of $1.5 million for the three months ended September 30, 1995 decreased by $0.6 million over the comparable 1994 period, primarily due to losses of the PPM businesses acquired in May 1995. On a consolidated basis, the Company realized operating income of $7.8 million for the three months ended September 30, 1995, compared to operating income of $6.1 million for the comparable 1994 period. Other Income (Expense) Net interest expense increased to $11.2 million for the three months ended September 30, 1995 from $7.7 million in the comparable 1994 period as a result of incremental borrowings associated with the PPM Acquisition in May 1995. The Company realized gains in the three months ended September 30, 1994 of $4.3 million from the sale of shares of common stock of its former subsidiary, Fruehauf Trailer Corporation ("Fruehauf"). The Company owns 250,000 shares of Fruehauf common stock which it received in settlement of certain obligations of Fruehauf. The Company recorded a charge of $1.8 million in the three months ended September 30, 1995 for payments related to the retirement of its former chairman, as described more fully in "Item 5 -- Other Information" in Part II of this form 10-Q. The balance of the provision for income taxes generally represents taxes withheld on foreign royalties and dividends, and the fluctuation in the provision for income tax is due to fluctuations in these items. Nine Months Ended September 30, 1995 The table below is a comparison of net sales, gross profit, selling, general and administrative expenses, severance and exit costs, and income (loss) from operations, by segment, for the nine months ended September 30, 1995 and 1994. Nine Months Ended September 30, Increase 1995 1994 (Decrease) (in millions of dollars) NET SALES Material Handling $404.4 $ 335.7 $ 68.7 Heavy Equipment 190.5 173.1 17.4 Mobile Cranes 172.7 66.9 105.8 Eliminations (0.8) (2.3) 1.5 Total $766.8 $ 573.4 $ 193.4 GROSS PROFIT Material Handling $ 26.7 $ 22.4 $ 4.3 Heavy Equipment 26.4 24.6 1.8 Mobile Cranes 23.2 10.4 12.8 Total $ 76.3 $ 57.4 $ 18.9 ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES Material Handling $ 24.6 $ 33.2 $ (8.6) Heavy Equipment 17.1 15.7 1.4 Mobile Cranes 18.7 4.9 13.8 General/Corporate 1.0 2.0 (1.0) Total $ 61.4 $ 55.8 $ 5.6 SEVERANCE AND EXIT COSTS Material Handling $ 3.5 $ 4.3 $ (0.8) Heavy Equipment --- 0.2 (0.2) Total $ 3.5 $ 4.5 $ (1.0) INCOME (LOSS) FROM OPERATIONS Material Handling $ (1.4) $ (15.1) $ 13.7 Heavy Equipment 9.3 8.7 0.6 Mobile Cranes 4.5 5.5 (1.0) General/Corporate (1.0) (2.0) 1.0 Total $ 11.4 $ (2.9) $ 14.3 Net Sales Sales increased $193.4 million to $766.8, or approximately 34%, for the nine months ended September 30, 1995 over the comparable 1994 period. Material Handling Segment sales were $404.4 million for the nine months ended September 30, 1995, an increase of $68.7 million from $335.7 million in the year earlier period. The sales mix was approximately18% parts in the nine months ended September 30, 1995 compared to 20% in the comparable 1994 period. Machine sales increased 22%, primarily because of increased output resulting from actions taken by management during 1994 and shipments of the new Genesis line. Parts sales increased 7% because of improved parts inventory availability partially offset by the adverse effects of a labor strike at the Company's parts distribution center during the second quarter. The strike has not had a material continuing effect on parts sales. Material Handling Segment bookings for the nine months ended September 30, 1995 were $368.7 million, an increase of $59.8 million, or 19%, from the year earlier period, on strong customer demand early in the year for the new Genesis line. Bookings for parts sales for the nine months ended September 30, 1995, from which the Company generally realized higher margins than machine sales, increased 6% from the year earlier period. Machine order bookings for the nine months ended September 30, 1995 increased 17% from the year earlier period, reflecting the favorable acceptance of the Company's new Genesis line of IC trucks, introduced in December 1994. Material Handling Segment backlog was $100.1 million at September 30, 1995 compared to $135.9 million at December 31, 1994 and $119.8 million at September 30, 1994. Heavy Equipment Segment sales increased $17.4 million for the nine months ended September 30, 1995 from the nine months ended September 30, 1994. Machines sales increased 9%, and parts sales increased 10%. The sales mix was approximately 35% parts for the nine months ended September 30, 1995 compared to 35% parts for the comparable 1994 period. Heavy Equipment Segment parts sales were also adversely affected by the strike at the parts distribution center early in the period, to a lesser degree than the Material Handling Segment. Heavy Equipment Segment bookings for the nine months ended September 30, 1995 were $171.3 million, an increase of $12.3 million, or 8%, from the year earlier period. Bookings for parts sales, from which the Company generally realizes higher margins than machine sales, increased 12% from the nine months ended September 30, 1994. Machine bookings for the nine months ended September 30, 1995 increased 5% from the comparable 1994 period. Heavy Equipment Segment backlog was $55.2 million at September 30, 1995 compared to $67.8 million at December 31, 1994 and $48.2 million at September 30, 1994. Mobile Crane segment sales were $172.7 million for the nine months ended September 30, 1995, an increase of $105.8 million from $66.9 million in the year earlier period due to the PPM Acquisition in May 1995. Mobile Crane Segment backlog was $81.6 million at September 30, 1995, reflecting the additional PPM backlog acquired, compared to $11.7 million at December 31, 1994 and $11.9 million at September 30, 1994. Gross Profit Gross profit of $76.3 million for the nine months ended September 30, 1995 was $18.9 million, or 33%, higher than gross profit of $57.5 million for the nine months ended September 30, 1994. The Material Handling Segment's gross profit increased $4.3 million to $26.7 million for the nine months ended September 30, 1995 compared to $22.4 million for the prior year's period. The gross profit percentage in the Material Handling Segment was 7% for the nine months ended September 30, 1995 and for the comparable 1994 period. Favorable efficiencies due to higher production and sales volumes and the effects of 1994 severance actions were offset by additional costs associated with the start-up of production of the new Genesis product line and manufacturing inefficiencies related to vendors' continuing inability to meet demand. The Heavy Equipment Segment's gross profit increased $1.8 million to $26.4 million for the nine months ended September 30, 1995 compared to $24.6 million for the comparable 1994 period. The gross profit percentage in the Heavy Equipment Segment was 14% for the nine months ended September 30, 1995 and for the nine months ended September 30, 1994. Mobile Crane Segment's gross profit increased $12.8 million to $23.2 million for the nine months ended September 30, 1995, compared to $10.4 million for the prior year's period reflecting the addition of the May through September 1995 results of the PPM businesses. Engineering, Selling and Administrative Expenses Engineering, selling and administrative expenses increased to $61.4 million for the nine months ended September 30, 1995 from $55.8 million for the nine months ended September 30, 1994. Material Handling Segment engineering, selling and administrative expenses decreased to $24.6 million for the nine months ended September 30, 1995 from $33.2 million for the comparable 1994 period, primarily as a result of severance actions taken by management during the second half of 1994. Heavy Equipment Segment engineering, selling and administrative expenses increased to $17.1 million for the nine months ended September 30, 1995 from $15.7 million for the comparable 1994 period as a result of costs associated with the new parts service business. Mobile Crane Segment engineering, selling and administrative expenses increased to $18.7 million for the nine months ended September 30, 1995 from $4.9 million for the comparable 1994 period reflecting the PPM business acquired in May 1995. Corporate administrative expenses in 1994 included a charge of $2.2 million in connection with the termination of a management contract with a related party. Severance and Exit Costs The Company announced personnel reductions totaling approximately 134 employees in the Material Handling Segment's North American operations during the second quarter of 1995 as a continuation of the Company's programs to increase manufacturing efficiency, reduce costs and improve liquidity. The Company recorded a combined charge of $3.5 million in the second quarter of 1995 for severance costs associated with these actions and additional costs associated with the closing of certain administrative and warehouse facilities. During the second quarter of 1994, the Company recorded a charge of $4.5 million principally related to severance costs in the Material Handling Segment's North American and European operations. In June 1994, the Company announced personnel reductions in plant supervision, engineering, marketing and administration totaling approximately 160 employees. The $4.5 million charge represents severance costs associated with these actions. Income (Loss) from Operations The Material Handling Segment loss from operations of $1.4 million for the nine months ended September 30, 1995 represents a $13.7 million improvement over the $15.1 million loss in the comparable 1994 period. As discussed above, increased sales and reduced costs contributed to the improvement in income from operations for the nine months ended September 30, 1995. Heavy Equipment Segment income from operations improved by $0.6 million to $9.3 million for the nine months ended June 30, 1995 from $8.7 million in the comparable 1994 period, primarily as a result of reduced costs, offset by costs associated with the start up of a new parts service business. Mobile Crane Segment income from operations of $4.5 million for the nine months ended September 30, 1995 decreased by $1.0 over the comparable 1994 period, primarily due to losses of the PPM businesses acquired in May 1995. On a consolidated basis, the Company realized operating income of $11.4 million for the nine months ended September 30, 1995, compared to an operating loss of $2.9 million for the comparable 1994 period. Other Income (Expense) Net interest expense increased to $27.3 million for the nine months ended September 30, 1995 from $22.9 million in the comparable 1994 period as a result of incremental borrowings associated with the PPM Acquisition in May 1995. The Company realized gains of $24.4 million. The Company owns 250,000 shares of Fruehauf common stock which it received in settlement of certain obligations of Fruehauf. The Company recorded a charge of $3.0 million in the nine months ended September 30, 1995 to recognize the impairment in value of certain properties held for sale. The Company recorded a charge of $1.8 million in the nine months ended September 30, 1995 for payments related to the retirement of its former chairman in August 1995, as described more fully in "Item 5 -- Other Information" in Part II of this Form 10-Q. The balance of the provision for income taxes generally represents taxes withheld on foreign royalties and dividends, and the fluctuation in the provision for income tax is due to fluctuations in these items. LIQUIDITY AND CAPITAL RESOURCES The Company's businesses are working capital intensive and require funding for purchases of production and replacement parts inventories, capital expenditures for repair, replacement and upgrading of existing facilities as well as financing of receivables from customers and dealers. The Company has significant debt service requirements including semi-annual interest payments on senior debt and monthly interest payments on its credit facility. Net cash of $27.9 million was used in operating activities during the nine months ended September 30, 1995. Net cash used by investing activities was $95.8 million during the nine months ended September 30, 1995 principally due to the PPM Acquisition as described below. Net cash provided by financing activities during the nine months ended September 30, 1995 was $127.5 million, primarily from the Refinancing discussed below. Cash and cash equivalents totaled $12.5 million at September 30, 1995. Factors affecting future liquidity The Company announced personnel reductions totaling approximately 134 employees in the Material Handling Segment's North American operations during the second quarter of 1995 as a continuation of the Company's programs to increase manufacturing efficiency, reduce costs and improve liquidity. The Company recorded a combined charge of $3.5 million in the second quarter of 1995 for severance costs associated with these actions and additional costs associated with the closing of certain administrative and warehouse facilities. As discussed below, the Company has refinanced its senior and subordinated debt, established new credit facilities and borrowed additional funds to complete the PPM Acquisition which will impact future operating results, sources of liquidity and debt service requirements. On May 9, 1995, the Company completed the Refinancing and the PPM Acquisition. The Refinancing included the private placement to institutional investors of $250 million of 13.25% Senior Secured Notes due May 15, 2002 (the "New Senior Secured Notes"), repayment of the Company's old senior secured notes and senior subordinated notes, totaling approximately $152.6 million principal amount, and entry into a new Credit Facility to replace the Company's existing lending facility in the U.S. Until such time as the Company completes an exchange of the New Senior Secured Notes for an equivalent issue of registered notes, or a shelf registration statement for the New Senior Secured Notes is effective, the interest rate on the New Senior Secured Notes will be 13.75%. The Indenture for the New Senior Secured Notes places certain limits on the Company's ability to incur additional indebtedness; permit the existence of liens; issue, pay dividends on or redeem equity securities; utilize the proceeds of assets sales; consolidate, merge or transfer assets to another entity; and enter into transactions with affiliates. In connection with the issuance of the New Senior Secured Notes, the Company issued 1,000,000 stock appreciation rights ("SAR") entitling the holders to receive cash or Common Stock, at the option of the Company, in an amount equal to the average closing sale price of the common stock for 60 trading days prior to the date of exercise less $7.288 for each SAR. Approximately $92.6 million of the proceeds of the New Senior Secured Notes was used for the PPM Acquisition, including the repayment of certain indebtedness of PPM required to be repaid in connection with the acquisition. In addition, the Company estimates that the acquisition costs incurred will total approximately $3.0 million. The remainder of the purchase price consisted of the issuance of redeemable preferred stock of Terex Cranes having an aggregate liquidation preference of 127 million French francs (approximately $26.1 million), subject to adjustment. The purchase price is subject to adjustment calculated by reference to the consolidated net asset value of PPM as determined by an audit as of the date of closing. The preferred stock does not bear a dividend and, accordingly, the Company has valued this stock at approximately $8.8 million (discounted at 15%). The Company has not yet reached agreement with the sellers about the amount of purchase price adjustment but, based on work performed, the Company believes that the amount of the preferred stock could ultimately be reduced. The Company's Credit Facility provides that the Company will be able to borrow (in the form of revolving loans and up to $15 million in outstanding letters of credit) up to $100 million. The Credit Facility is secured by substantially all of the Company's domestic receivables and inventory (including PPM). The amount of borrowings is limited to the sum of the following: (i) 75% of the net amount of eligible receivables, as defined, of the Company's U.S. businesses other than CMHC, plus (ii) 70% of the net amount of CMHC eligible receivables, plus (iii) the lesser of 45% of the value of eligible inventory, as defined, or 80% of the appraised orderly liquidation value of eligible inventory less (iv) any availability reserves established by the lenders. The Credit Facility expires May 9, 1998 unless extended by the lenders for one additional year. At the option of the Company, revolving loans may be in the form of prime rate loans initially bearing interest at the rate of 1.75% per annum in excess of the prime rate and eurodollar rate loans initially bearing interest at the rate of 3.75% per annum in excess of the adjusted eurodollar rate. The Company's debt service obligations for the remainder of 1995 include an interest payment of $17.7 million on November 15, 1995 on the New Senior Secured Notes which amount has been deposited with the Trustee for payment to the holders, as well as interest payments of approximately $0.6 million monthly on the Credit Facility. Management believes that, together with cash generated from operations, the Refinancing provides the Company with adequate liquidity to meet the Company's operating and debt service requirements. The balance outstanding under the Credit Facility as of October 31, 1995 was $60.6 million, and the additional amount the Company could have borrowed was $23.0 million as of that date. Management intends to seek additional working capital financing facilities for the Company's international operations to provide additional liquidity worldwide, but there can be no assurances whether, or under what terms, such additional facilities can be obtained. CONTINGENCIES AND UNCERTAINTIES The Internal Revenue Service is currently examining the Company's federal tax returns for the years 1987 through 1989. In December 1994, the Company received an examination report from the IRS proposing a substantial tax deficiency based on this examination. The examination report raises a variety of issues, including the Company's substantiation for certain deductions taken during this period, the Company's utilization of certain net operating loss carryovers ("NOL's") and the availability of such NOL's to offset future taxable income. If the IRS were to prevail on all the issues raised, the amount of the tax assessment would be approximately $56,000 plus interest and penalties. If the Company were required to pay a significant portion of the assessment, it could have a material adverse impact on the Company and could exceed the Company's resources. The Company has filed its administrative appeal to the examination report. Although management believes that the Company will be able to provide adequate documentation for a substantial portion of the deductions questioned by the IRS and that there is substantial support for the Company's past and future utilization of the NOL's, the ultimate outcome of this matter is subject to the resolution of significant legal and factual issues. If the Company's positions prevail on the most significant issues, management believes that the amounts due would not exceed amounts previously paid or provided; however, even under such circumstances, it is possible that the Company's NOL's could be reduced to some extent. No additional accruals have been made for any amounts which might be due as a result of this matter because the possible loss ranges from zero to $56,000 plus interest and penalties and the ultimate outcome cannot presently be determined or estimated. As discussed below (see "Part II -- Other Information - - -- Item 5"), Mr. Lenz has retired as Chairman of the Company. Although his retirement agreement places certain restrictions on his ability to sell his shares of Common Stock in the Company, in the event that Mr. Lenz is able to sell a substantial portion of his shares in the Company before December 20, 1996, such sale, in combination with the issuance of the Warrants in December 20, 1993 and subject to the effects of other changes in share ownership of the Company, could result in a change in control for tax purposes. Such a change in control for tax purposes could possibly result in a significant reduction in the amount of NOL's available to the Company to offset future taxable income. The Securities and Exchange Commission (the "Commission") in March of 1994 initiated a private investigation, which included the Company and certain of its affiliates, to determine whether violations of certain aspects of the Federal securities laws have taken place. The Company is cooperating with the Commission in its investigation and it is not possible at this time to determine the outcome of the Commission's investigation. The Company is subject to a number of contingencies and uncertainties including product liability claims, self-insurance obligations, tax examinations and guarantees. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any cost to the Company. However, management does not believe that these contingencies and uncertainties will, in the aggregate, have a material 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 nonhazardous wastes in the normal course of its operations. As a result, the Company is subject to a wide range of federal, state, local and foreign environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act, that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for hazardous and nonhazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances. Compliance with such laws and regulations has, and will, require expenditures by the Company on a continuing basis. PART II OTHER INFORMATION Item 1. Legal Proceedings In December 1992, a Class Action complaint was filed against Fruehauf Trailer Corporation ("Fruehauf," a former subsidiary of the Company), the Company, certain of Fruehauf's then officers and directors and certain of the underwriters of the initial public offering of Fruehauf, in the United States District Court for the Eastern District of Michigan, Southern Division, alleging, among other things, violations of certain provisions of the federal securities laws, and seeking unspecified compensatory and punitive damages. The Company has settled the plaintiffs' claims with court approval for the sum of $0.25 million, and thus this litigation is no longer pending with respect to the Company. For information concerning other contingencies see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Contingencies and Uncertainties." Item 5. Other Information On August 28, 1995, the Company announced that its Chairman, Randolph W. Lenz, had retired from his position with the Company and its Board of Directors. In connection with his retirement, the Company (acting through a committee comprised of its independent Directors and represented by independent counsel) and Mr. Lenz have executed a retirement agreement providing certain benefits to Mr. Lenz and the Company. The agreement provides, among other things, for a five-year consulting engagement requiring Mr. Lenz to make himself available to the Company to provide consulting services for certain portions of his time. Mr Lenz, or his designee, will receive a fee for consulting services which will include payments in an amount, and a rate, equal to his 1995 base salary until December 31, 1996. The agreement also provides for the granting of a five-year $1.8 million loan bearing interest at 6.56% per annum which is subject to being forgiven in increments over the five-year term of the agreement upon certain conditions and equity grants having a maximum potential of 200,000 shares of Terex common stock conditioned upon the Company achieving certain financial performance objectives in the future. In contemplation of the execution of this retirement agreement, the Company advanced to Mr. Lenz the principal amount of the forgivable loan. Mr. Lenz has also agreed not to compete with the Company, to vote his Terex shares in the manner recommended by the Company's Board of Directors, not to acquire any additional shares of the Company's common stock, and, except under certain circumstances, not to sell his shares of common stock. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits have been filed as part of this Form 10-Q: Exhibit No. 10 Agreement dated as of November 2, 1995 between Terex Corporation, a Delaware corporation, and Randolph W. Lenz 11.1 Computation of earnings per share 27 Financial data schedule (b) Reports on Form 8-K. Amendment number 1 to a report on Form 8-K dated May 9, 1995 was filed on August 28, 1995. The amendment provided financial statements and pro forma financial information required to be filed in connection with the acquisition of 99.18% of the shares of PPM S.A. and 100% of the capital stock of Legris Industries, Inc. 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 November 14, 1995 /s/ Ralph T. Brandifino Ralph T. Brandifino Senior Vice President and Chief Financial Officer (Principal Financial Officer) EXHIBIT INDEX Exhibit No. 10 Agreement dated as of November 2, 1995 between Terex Corporation, a Delaware corporation, and Randolph W. Lenz 11.1 Computation of Earnings per Share 27 Financial Data Schedule