TEX

Terex Corporation Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Terex Corporation is a diversified global manufacturer of capital equipment operating in four segments: Aerial Work Platforms, Construction, Cranes, and Materials Processing & Mining. The reporting period reflects severe impacts from the global economic downturn and credit constriction, leading to a strategic realignment of operations and aggressive cost-cutting measures.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Collapse: Net sales declined 44.9% year-over-year, driven by a 45% drop in volume across all segments due to the global recession. Foreign currency translation negatively impacted sales by approximately $194 million.
• Profitability Reversal: The company swung from an operating income of $256.3 million in Q1 2008 to an operating loss of $72.5 million in Q1 2009. This was caused by lower sales volumes, increased unabsorbed overhead due to reduced production, and restructuring charges.
• Segment Performance:
  • Aerial Work Platforms: Sales down 65.6%; Operating loss of $41.0 million (vs. $108.7M income).
  • Construction: Sales down 47.7%; Operating loss of $83.6 million (vs. $4.5M income).
  • Cranes: Sales down 28.9%; Operating income of $25.4 million (vs. $83.6M income).
  • Materials Processing & Mining: Sales down 33.9%; Operating income of $35.7 million (vs. $68.7M income).
• Restructuring: The company incurred $19.1 million in restructuring charges in Q1 2009, reducing headcount by 865 employees across all segments.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects full-year 2009 net sales to decline 40%-45% compared to 2008. They anticipate profitability in the second half of 2009, excluding restructuring charges.
• Liquidity Strategy: The company has suspended its share repurchase program (authorized up to $1.2 billion) to preserve cash. It is aggressively managing working capital, targeting a reduction in inventory levels of over $500 million by year-end 2009.
• Debt Covenants: On February 24, 2009, Terex amended its 2006 Credit Agreement to lower fixed charge coverage ratio thresholds and cap share repurchases. Interest rates on the facility were increased by 100 basis points. The company is currently in compliance.
• Acquisitions: On April 1, 2009, Terex entered a non-binding term sheet to acquire Fantuzzi Industries for approximately €175 million, expected to close in Q2 2009.
• Risks: Significant risks include the depth and duration of the global economic decline, access to credit markets, potential acceleration of debt if covenants are breached, and ongoing SEC and DOJ investigations regarding accounting and pricing practices.

Investor Verification Checklist

• Covenant Compliance: Verify continued compliance with the amended fixed charge coverage ratio and leverage ratio under the 2006 Credit Agreement.
• Inventory Reduction: Monitor the execution of the plan to reduce inventory by $500 million to improve working capital and cash flow.
• Segment Turnaround: Assess the ability of the Aerial Work Platforms and Construction segments to return to profitability given the severe volume declines.
• Legal Contingencies: Track the status of the SEC investigation into accounting practices and the DOJ investigation into pricing practices, as outcomes could be material.
• Goodwill Impairment: Monitor for potential future goodwill impairments, as market capitalization has traded below book value and economic forecasts remain weak.