Terex Corporation 10-Q Summary: Period Ended June 30, 1999
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the three and six months ended June 30, 1999, for Terex Corporation, a manufacturer of construction and mining equipment. The Company operates through two primary segments: Terex Lifting and Terex Earthmoving. As of August 5, 1999, there were 27.5 million shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 1999 | Six Months Ended June 30, 1999 |
|---|---|---|
| Net Sales | $448.1 | $871.4 |
| Gross Profit | $76.7 | $147.6 |
| Operating Income | $47.0 | $87.5 |
| Net Income | $30.4 | $56.4 |
| Diluted EPS | $1.30 | $2.45 |
| Cash and Equivalents | $104.7 (Balance Sheet) | $104.7 (Balance Sheet) |
| Long-Term Debt | $639.5 (Balance Sheet) | $639.5 (Balance Sheet) |
| Operating Cash Flow | N/A | ($39.6) Used |
Margins (Six Months 1999): Gross Margin was 16.9%; Operating Margin was 10.0%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34% ($114.6 million) for the quarter and 47% ($277.3 million) for the six months compared to 1998. Growth was driven by both organic expansion and acquisitions made in 1998.
- Profitability: Operating income rose 42% for the quarter and 54% for the six months. Net income for the six months turned from a loss of $3.3 million in 1998 to a profit of $56.4 million in 1999. The 1998 loss included a $38.3 million extraordinary loss on debt retirement not present in 1999.
- Segment Performance: Terex Lifting sales grew 38% (quarter) and 35% (six months). Terex Earthmoving sales grew 24% (quarter) and 63% (six months), significantly aided by a large order from Coal India.
- Liquidity: Cash and cash equivalents increased from $25.1 million at year-end 1998 to $104.7 million at June 30, 1999, primarily due to financing activities.
Outlook, Risks, and Unusual Items
Subsequent Acquisitions: Following the reporting period, Terex announced offers to acquire Powerscreen International plc (approx. $294 million) and Cedarapids, Inc. ($170 million). These deals are expected to be financed through new debt and cash on hand.
IRS Audit Contingency: The Company is under audit by the IRS for tax years 1987-1989. The IRS has proposed a deficiency of approximately $56 million plus penalties ($12.8 million) and interest ($120.9 million). Terex disputes the findings and has not recorded a reserve, estimating the loss range from zero to the full amount. Management believes the outcome will not have a material adverse effect, though a significant payment could impact liquidity.
Year 2000 (Y2K) and Euro: The Company is addressing Y2K compliance for its own systems and acquired entities, with estimated costs under $5 million. It is also assessing the impact of the Euro currency conversion on its European operations.
Legal Proceedings: In April 1999, Terex consented to an SEC administrative cease and desist order regarding historical reporting matters without admitting wrongdoing. No monetary sanctions were imposed.
Investor Verification Checklist
- IRS Audit Outcome: Verify the status of the 1987-1989 tax audit and any potential liability exceeding the current unreserved estimate.
- Acquisition Financing: Confirm the terms and closing of the Powerscreen and Cedarapids acquisitions and the resulting impact on leverage ratios.
- Working Capital Trends: Monitor the $108 million investment in working capital during the first half of 1999 to ensure it does not strain future operating cash flows.
- Debt Service: Review the Company's ability to service increased debt levels following the $100 million note issuance in March 1999 and subsequent acquisition financing.