Westport, Conn.-based Terex Corp. last week announced net income for the third quarter of 2008 of $93.8 million, or $0.96 per share, compared to net income of $151.5 million, or $1.45 per share, for the third quarter of 2007, a decrease in earnings per share of 33.8 percent. These results include a $10.1 million after-tax, or $0.10 per share, charge related to a crane repair program, and charges associated with reductions in headcount of $2.2 million after-tax, or $0.02 per share. All per-share amounts are on a fully diluted basis.
Net sales in the third quarter of 2008 grew 14.5 percent, to $2.5 billion, versus the comparable period in 2007. The increase in net sales versus the prior-year period was favorably impacted by acquisitions and by the translation effect of foreign currency exchange rate changes. Excluding these effects, net sales increased 6.0 percent in the third quarter of 2008 versus the prior-year period, driven primarily by strong performance in both the Cranes and Materials Processing & Mining segments, partially offset by lower net sales in the Aerial Work Platforms and Construction segments.
“While we continue to make progress on our improvement initiatives, the current environment is challenging, marked by a continued global credit crisis and worsening economic conditions, particularly in the U.S. and Western Europe,” said Ron DeFeo, Terex chairman and CEO. “Input costs continue to present challenges for us, although we expect these to moderate over time. At this time, our price increases have not yet fully offset our total material cost increases. We are taking aggressive actions to better position the company for the expected reduced net sales levels of the next 12 months, in particular in the AWP, Construction, and Materials Processing businesses. At the same time, we are continuing to invest in developing markets and our improvement initiatives, as well as increasing Cranes and Mining capabilities to meet the growing demand in those areas.
“We expect 2009 net sales, including the effect of announced acquisitions, to be similar to 2008 full-year net sales, driven by continued strong results in Cranes and Mining, offset by lower net sales in AWP, Materials Processing and Construction.The Cranes and Mining businesses continue to grow, in particular in developing markets, where we expect current positive trends to continue. Beginning in the fourth quarter of 2008, for the next 12 months we expect net sales for AWP to be down 30 to 40 percent, for Materials Processing to be down 15 to 20 percent and for Construction to be down 25 to 35 percent versus the prior 12-month period. In light of these overall expectations, we have taken or initiated several actions to properly size our organization and production levels. Additionally, we have further heightened our focus on cash generation during this time of uncertain access to credit.”
Tom Riordan, Terex president and chief operating officer, added, “We are taking a series of actions to aggressively reduce costs and inventories in the businesses listed below. We expect that by early 2009 we will achieve working capital levels closer to 22 percent of trailing three-month annualized net sales, versus the approximately 25-percent level we experienced at the end of the third quarter.”
In the third quarter, Terex reduced its global workforce by 6 percent compared to June 2008 in the AWP segment. In the fourth quarter, the company expects a further 18-percent workforce reduction, compared to June 2008, to better align its cost structure with expected customer demand. Additionally, temporary shutdowns of the company’s manufacturing facilities were implemented in the third quarter and will continue to be used to reduce production output. Terex says it will re-evaluate its team member levels in the first quarter of 2009 based on customer order rates and production levels.
Net sales for the AWP segment for the third quarter of 2008 decreased 8.9 percent, to $513.5 million, versus the third quarter of 2007. Excluding the translation effect of foreign currency exchange rate changes, net sales decreased approximately 12 percent.
AWP customers in North America and Western Europe significantly slowed their purchases during the third quarter of 2008 due to the softening in construction activity and uncertainty regarding the global economy. Management expects that many AWP customers in these markets are reducing or deferring their capital spending as they age their fleets in the short term, but that they will resume normal fleet capital spending patterns sometime over the next nine to 18 months.
Demand for aerial work platforms in developing markets remains strong, particularly in Latin America and Asia. Demand from the rental channel has been increasing in China and Korea, for example, and Australia remains strong due to demand from the mining sector. However, growth in developing markets has not yet reached sufficient scale to offset the weakness in the developed markets, resulting in adjustments to production and staffing for the segment. Additionally, production expansion plans are being slowed. The previously announced AWP production facility in China is continuing to be developed, albeit at a slower pace.
In the Construction segment third-quarter actions included adjusting production lines to short-time work weeks and reducing 141 team members to match current market demand. Further reductions are expected to occur over the next three to six months to adjust the team member levels to meet expected customer demand. The company says it expects a further 17-percent workforce reduction across its worldwide operations.
Net sales for the Construction segment for the third quarter of 2008 increased 4.9 percent to $474.2 million versus the third quarter of 2007. Excluding the translation effect of foreign currency exchange rate changes of approximately $16 million and acquisition-related net sales during the third quarter of 2008 of approximately $49 million, net sales decreased approximately 10 percent versus the prior-year period.
Commercial construction remains weak in North America and continues to weaken in Western Europe, resulting in lower net sales for compact construction equipment. Developing market demand remains strong, particularly in Africa, the Middle East and Eastern Europe, but is not of significant scope to offset the weakness in developed markets. Large infrastructure and mining projects continue to demand rigid-frame dump trucks.
Pricing actions have been taken to offset input cost increases and the recent volatility in steel pricing has begun to moderate, but slowing demand in developed markets has resulted in production cuts and reductions in employment levels. Given the near-term performance, the company will continue to monitor the estimated fair value of the Construction business for purposes of determining whether a goodwill impairment is evidenced.
Net sales for the Cranes segment for the third quarter increased 36.2 percent versus the third quarter of 2007, to $717.4 million. Demand remains strong for larger capacity cranes, particularly larger capacity lattice boom crawler cranes, tower cranes and rough-terrain cranes, driven by global infrastructure and energy projects. The market in North America continues to remain strong for large-capacity cranes, but sales of smaller capacity cranes, including boom trucks and lower capacity truck cranes, remain soft.
Demand is expected to remain strong for the foreseeable future for larger capacity cranes, but due to the uncertain outlook for the global economy, capacity expansion plans are being carefully reviewed, the company said.
In the third quarter, Terex cut production levels in the Material Processing segment by 25 percent of the first-half 2008 run rate and, as a result, reduced its independent contract manufacturing staffing levels. During the fourth quarter of 2008, production levels are projected to be reduced to roughly 50 percent of the first-half 2008 levels, through the use of an extended winter shutdown, a shortened work week, further independent contractor reductions and an expected reduction of 160 team members.
Net sales for the MPM segment for the third quarter increased 25.4 percent versus the third quarter of 2007, to $662.0 million.
Demand for mining equipment remains strong despite the recent softening of commodity pricing, as commodity prices remain well above production costs. The increase in net sales as compared to the comparable period in 2007 is primarily due to higher equipment sales. The company is continuing to adjust its global manufacturing footprint to better meet demand.
The Materials Processing business experienced continued weakness in North America during the third quarter, and demand in Western Europe slowed as the quarter progressed. This weakness was offset by strength in the developing markets, particularly in India, Southeast Asia and Eastern Europe, driven by infrastructure development. As the business moves into the seasonally slow fourth quarter of 2008 and customers remain uncertain about the impact of the global credit crisis, the business’ production and staffing levels are being reduced.
In the Roadbuilding segment Terex reduced the workforce by 98 team members in the third quarter to adjust production levels and resources to meet expected customer demand.
Net sales for the RBUO segment for 3Q08 increased 17.7 percent, to $175.3 million, versus the third quarter of 2007. The Utility Products, Roadbuilding and Government Programs businesses all witnessed net sales growth.
Demand for Utility Products remains favorable from electrical utility customers. Aging utility infrastructure and the replacement cycle of existing equipment is supporting demand. Roadbuilding net sales increased during the third quarter of 2008 as compared to the third quarter of 2007 due to strong sales from the Brazilian operation combined with moderate sales growth in the U.S. This sales growth was partially offset by lower concrete mixer truck sales.
Due to the low level of road building and infrastructure funding in the U.S., the company remains cautious regarding the sales outlook for Roadbuilding, and management continues to execute cost containment strategies within this business. The company will continue to monitor the estimated fair value of the Roadbuilding business for purposes of determining whether goodwill impairment is evidenced.
The company also last week announced that effective in January 2009, it will move the Roadbuilding businesses under the Construction segment and move the Utility Products business under the AWP segment. This will enable Terex to capture market synergies and streamline its cost structure in the U.S.
“We expect that these actions will reduce our long-term cost structure in line with market requirements,” Riordan said.
The company is revising its estimated fourth-quarter 2008 earnings per share guidance to reflect changing market conditions, mainly in North America and Western Europe for the AWP and Construction segments, to between $0.80 and $0.90, resulting in full-year 2008 earnings per share guidance between $5.69 and $5.79. Corresponding full-year 2008 net sales are expected to be between $10.0 and $10.3 billion. These estimates include a total of $0.12 per share in charges through the third quarter 2008 for the crane repair program and headcount reductions. The full-year 2008 guidance does not include additional charges that may be required to implement further cost reduction activities. Management’s previous earnings per share guidance for the fourth quarter was between $1.20 and $1.33 and full-year 2008 earnings per share guidance was between $6.35 and $6.65.
“Given that external access to credit remains uncertain, we must focus on our cash management,” said Phil Widman, Terex senior vice president and chief financial officer. “The adjustments to production levels and curtailment of incoming material in the AWP, Construction and Materials Processing businesses are expected to reduce inventory levels, and we will carefully manage incoming material in Cranes and Mining to match the growth expectations of these businesses. We are delaying certain capital spending projects and are not currently purchasing shares under our previously announced share repurchase program. However, during the third quarter, we repurchased approximately $200 million, or 4.2 million shares, and we remain committed to the share repurchase program when access to the capital markets is clearer.
“With the actions we are taking to reduce costs and maintain liquidity, we expect to have sufficient flexibility to execute our key business plans.”
The company’s acquisition of the port equipment businesses of Fantuzzi Industries S.a.r.l. is awaiting regulatory approval and is expected to close in the fourth quarter of 2008. Total consideration for the transaction is €215 million.
Terex Corp. is a diversified global manufacturer with 2007 net sales of over $9.1 billion. Terex operates in five business segments: Terex Aerial Work Platforms, Terex Construction, Terex Cranes, Terex Materials Processing & Mining, and Terex Roadbuilding, Utility Products and Other.
