Business Context and Reporting Period
Company: Terex Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Terex is a diversified global manufacturer of capital equipment serving construction, infrastructure, quarrying, mining, shipping, and energy industries. As of December 31, 2008, the company operated in five reportable segments: Aerial Work Platforms, Construction, Cranes, Materials Processing & Mining, and Roadbuilding, Utility Products and Other. Effective January 1, 2009, the company realigned operations, consolidating Roadbuilding into Construction and Utility Products into Aerial Work Platforms.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Sales | $9,889.6 million | $9,137.7 million |
| Gross Profit | $1,927.7 million (19.5% margin) | $1,882.0 million (20.6% margin) |
| Income from Operations | $402.6 million (4.1% margin) | $961.4 million (10.5% margin) |
| Net Income | $71.9 million | $613.9 million |
| Diluted EPS | $0.72 | $5.85 |
| Cash and Cash Equivalents | $484.4 million | $1,272.4 million |
| Total Debt (Long-term + Current) | $1,435.8 million | $1,352.0 million |
| Backlog | $2,955.6 million | $4,180.9 million |
Note: 2008 results include a non-cash goodwill impairment charge of $459.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.2% to $9.89 billion, driven by favorable foreign currency translation ($234 million) and acquisitions ($265 million). Excluding these factors, the Cranes and Materials Processing & Mining segments drove growth, while Aerial Work Platforms and Construction declined due to weak demand in North America and Western Europe.
- Profitability Decline: Income from operations dropped 58.1% to $402.6 million. This was primarily due to the $459.9 million goodwill impairment charge (affecting Construction and Roadbuilding segments) and higher SG&A costs. Operating profit in the second half of 2008 decreased approximately 51% compared to the prior year, excluding impairment.
- Backlog Reduction: Total backlog decreased by $1.23 billion (29.3%) to $2.96 billion. The Aerial Work Platforms segment saw the most significant drop ($569.3 million) due to softening demand and customer order deferrals. Currency translation accounted for approximately $366 million of the total decrease.
- Segment Performance:
- Cranes & Materials Processing & Mining: Reported strong growth in sales and operating income.
- Aerial Work Platforms & Construction: Reported significant declines in sales and operating income due to economic downturns in key markets.
Guidance, Outlook, and Risks
2009 Outlook: Management expects 2009 to be a "very challenging year" with continued softness in demand. The company forecasts a 30%-35% decline in overall net sales for 2009 compared to 2008. Specific segment sales declines are projected as follows: Aerial Work Platforms (35%-45%), Construction (25%-35%), Cranes (25%-35%), and Materials Processing & Mining (25%-35%).
Liquidity and Capital Resources:
- The company suspended its share repurchase program to preserve liquidity.
- On February 24, 2009, Terex amended its credit facility to lower the fixed charge coverage ratio covenant threshold due to deteriorating business conditions. The amendment also increased interest rates by 100 basis points.
- Cash generated from operations was $183.7 million in 2008, down from $361.4 million in 2007.
Key Risks and Contingencies:
- Government Investigations: The company is subject to an SEC investigation regarding its accounting and a DOJ investigation into pricing practices in the rock crushing and screening equipment industry. Settlement discussions are ongoing with the SEC.
- Legal Proceedings: An arbitration proceeding was initiated by Fantuzzi Industries in Italy regarding the termination of a port equipment acquisition agreement.
- Economic Sensitivity: The business is highly cyclical and sensitive to government spending, credit market conditions, and commodity prices. Customer financing availability remains a concern.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the $459.9 million impairment charge and the remaining goodwill balance of $457.0 million.
- Credit Facility Covenants: Monitor compliance with the amended fixed charge coverage ratio and leverage ratio covenants, given the increased interest rates and lower thresholds.
- Backlog Cancellations: Assess the rate of order cancellations and deferrals, particularly in the Aerial Work Platforms and Construction segments, as backlog is a leading indicator of future revenue.
- Regulatory Outcomes: Track the resolution of the SEC and DOJ investigations and the Italian arbitration with Fantuzzi Industries for potential financial impact.
- Inventory Levels: Review inventory turnover and reserves ($121.0 million) given the significant increase in inventory levels ($2.23 billion) amidst declining sales.