In accounting terms, goodwill is a measure of the market value of a company, beyond the value of its assets. Terex said the recorded value of its construction, roadbuilding and utility products assets exceeded their fair value, due to lower projected results for these business resulting from adverse market conditions.
Over the last quarter, one of the businesses involved in the goodwill impairment saw significant drops in sales: net sales for the construction segment were down 37%, or $202.2m, to $343.9m; the segment made an operating loss in the quarter of $66.8m. In the roadbuilding and utility products segment, net sales were up slightly year-on-year, by $2.8m, or 1.6%, to $182.1m. The segment contributed operating income of $0.4m, an improvement compared to an operating loss of $4.7m in the fourth quarter of 2007.
A year like no other
Terex chairman and chief executive officer Ron DeFeo said, “This past year has been like no other: the first half of the year exhibited robust growth and expansion, while the second half of the year was severely impacted by the global credit crisis and economic deterioration, which drove significant declines in customer demand in our businesses.
“For the full year, net sales increased significantly in our Cranes and Mining businesses, but were offset by the results in our aerial work platforms, construction, and materials processing businesses, which experienced considerable weakness in the second half of the year. Excluding the goodwill impairment charges, our net income for the year was good given the economic environment.
“Although we are disappointed with our current working capital levels, we have taken aggressive actions to adjust our production to meet reduced customer demand. We maintained a strong cash position and ended the year with a solid balance sheet and sufficient liquidity to execute our key business plans.”
“Given the current market conditions, it is difficult to project 2009 performance with a reasonable degree of certainty. However, we are planning for continued softness in demand. We are experiencing increasing levels of cancellations in our backlog for crane and mining products, as well as delays in acceptance of deliveries, as our customers in these areas are not immune to the effects of the global economic downturn.
“Based on what we know today, we expect our net sales for 2009 to decline by 30% to 35% from 2008. The translation effect of foreign currency exchange rate changes is expected to contribute approximately 13% of this decline. Given the uncertainty and volatility in today’s environment, we are not providing earnings guidance until we have better visibility; however, we will continue to take aggressive actions to reduce operating costs and improve our cash flow.”
Aggressively reducing production
Chief operating officer Tom Riordan explained how the group is responding to the downturn: “We are focusing our actions on cash flow generation, and aggressively reducing production levels, incoming material and our cost base. This is balanced with a sharper focus on those initiatives that will complement these activities and improve our long term position.”
“In response to the global credit crisis, the Company began taking actions during the third quarter of 2008, and as the global economy continued to weaken, the Company accelerated its responses. Actions have been taken to slow, and in some cases stop, the production of our products and to reduce the Company’s workforce for those realities. Our strategic supply partners have cooperated well with the rescheduling of incoming material. While input costs, particularly steel, have begun to moderate, we don’t expect to see significant favorable impact until the middle of 2009 due to existing inventory levels. It is a very unfortunate statement, but in excess of 5,000 jobs, including the majority of our temporary workforce, have been or are expected to be eliminated as compared to our June 2008 employment levels.”
In the second half of 2008, the company cut its aerial work platform workforce by 34%, with a further 7% reduction in February 2009. The construction workforce was cut by 8%, production lines were significantly adjusted, and working weeks were shortened. In materials processing, the workforce, including independent contractors, was reduced by 22%. Terex’s roadbuilding workforce was reduced by 18%. The company said production and workforce levels were reduced in the cranes business in early 2009, due to the decreased demand for rough terrain cranes (see Cranes Today February 2009 p13).
Results
The company said, for the full year 2008, the company reported net income of $71.9m, or $0.72 per share, compared to net income of $613.9m, or $5.85 per share, for the full year 2007. The goodwill impairment charges mentioned above reduced net income by $4.60 per share for the full year, and other pre-tax charges totaling $25.8m, primarily related to adjustment of the company’s production levels, decreased full year 2008 net income by $0.18 per share. Net income for 2007 included a $12.5m pre-tax charge related to the early extinguishment of the Company’s 9-1/4% Senior Subordinated Notes, which negatively impacted earnings per share by $0.08.
Net sales were $9.89bn in 2008, an increase of 8.2% from $9.14bn in 2007. The translation effect of foreign currency exchange rate changes accounted for approximately 3% of the increase in net sales and acquisitions contributed approximately 3% of the increase in net sales. The strong full year performance of the cranes and mining businesses were offset by the dramatic decline in demand for many of the Company’s other products during the second half of 2008, largely due to the impact of the rapidly deteriorating global economy.
Terex group net sales were $2.08bn in the fourth quarter of 2008, a decrease of approximately 20% versus the fourth quarter of 2007. Excluding the impacts of foreign currency exchange rate changes and acquisitions, net sales declined approximately 14% in the fourth quarter of 2008 versus the comparable prior year period. Continued weak demand in the aerial work platforms, construction and materials processing businesses primarily drove the decrease in net sales. This was partially offset by higher net sales in the cranes and mining businesses.
Loss from operations was $391.8m in the fourth quarter of 2008, versus income from operations of $239.9m in the fourth quarter of 2007. The fourth quarter of 2008 operating margin was negative 18.9%, versus the prior year’s fourth quarter operating margin of 9.3%. These results include the impact of $459.9m of charges in the fourth quarter of 2008 for goodwill impairments in the construction, roadbuilding and utility products businesses.
Excluding the goodwill impairment charges, income from operations would have been $68.1m, or an operating margin of 3.3%, in the fourth quarter of 2008. On this basis, operating income decreased, versus the comparable prior year period, primarily due to the significant volume reductions in the aerial work platforms and construction segments, as well as higher input costs in all segments, primarily related to steel. Operating margin was also negatively impacted, to a lesser extent, by costs associated with the reduction in production levels and the translation effect of foreign currency exchange rate changes. These negative effects were partially offset by higher operating margin in the cranes segment in the fourth quarter of 2008 versus the prior year.
Net sales for the cranes segment for the fourth quarter of 2008 increased $66.4 million, or 10.0%, to $729.4 million versus the fourth quarter of 2007. Excluding the translation effect of foreign currency exchange rate changes, net sales increased approximately 18%. Favorable pricing and sales volume for high capacity cranes, including crawler cranes, all terrain cranes and rough terrain cranes, more than offset continued softness in boom trucks and highway truck cranes and recent softening in tower cranes.
In the fourth quarter of 2008, cranes operating income increased to $100.9 million as compared to $83.7 million during the comparable period in 2007. This increase was primarily due to increased volume, favorable pricing and product mix.
Cranes segment backlog decreased 4.0% when compared to December 31, 2007 levels, and was flat as compared to September 30, 2008 levels. As of September 30, 2008, Cranes had not accepted firm orders for a variety of crane types, primarily rough terrain cranes that were scheduled for delivery after January 1, 2009. Production volume for which firm orders had not yet been accepted, and therefore not included in backlog at September 30, 2008, approximated $648m. A significant portion of these orders were cancelled during the fourth quarter of 2008 due to customer uncertainty regarding the global economic crisis. Backlog was also negatively impacted by a continued softening in orders for tower cranes.
Threat to liquidity
The company warned that the financial crisis may affect its credit agreements. Terex said it generated $218.8m of cash from operating activities during the fourth quarter of 2008, and had approximately $484m of cash and cash equivalents at December 31, 2008. Despite the positive generation of cash during the fourth quarter, continued deteriorating business conditions in certain of the company’s operating segments and the impact of historical fixed charges incurred on a trailing twelve months basis (for example, interest expense, cash taxes, share repurchases and capital expenditures) may likely cause the company to be in violation of the consolidated fixed charge coverage ratio covenant under its credit agreement as early as the end of the first quarter of 2009.
As a result, the company has initiated discussions with its lead banks seeking to obtain a consent and/or amendment to its credit agreement. The company will endeavour to obtain the consent and/or amendment during the first quarter of 2009 in order to avoid any potential default under the credit agreement. Should the company not be able to obtain such consent or amendment, there could be adverse consequences to the company’s liquidity.