Acquired Company Leads Terex Units In Cutting Fat

BY KEVIN HARLIN
INVESTOR'S BUSINESS DAILY

The vaunted Japanese manufacturing system calls for improving operations by reducing waste, or "muda." That notion was deeply ingrained at Genie Industries, a maker of aerial work lifts. But Ron DeFeo thought the whole idea might be, well, muda.

His company, Terex, a maker of construction and mining equipment, bought the Redmond, Wash.-based firm in 2002.

Terex had replaced managers at its previous acquisitions. But this time, DeFeo, Terex’s chairman and chief executive, decided to leave the Genie team in place. Still, he wasn’t sure Terex had much to learn from Genie’s lean manufacturing approach.

"As you look at any business, as an outsider looking in, you become a little skeptical as to whether this environment is really what they say it is," he said. He no longer doubts it.

Terex has staked out a niche in the heavy-equipment industry that avoids giants like Caterpillar. Here, its Excavator scoops up the dirt.

Terex Aerial Work Platforms, as Genie is now known, became one of the company’s top performers. DeFeo says his entire company now embraces the concept. Terex's other four business units aren’t as far along as the aerial division, though DeFeo expects to improve margins by 2 to 3 percentage points as other divisions come up to speed.

For instance, the entire company is shifting toward building more equipment to order rather than keeping large fleets of inventory on hand.

"They have helped become our university and our laboratory for it," DeFeo said about Genie.

Westport, Conn.-based Terex is the third-largest maker of cranes, earthmovers and other giant Tonka style construction equipment, behind better known rivals Caterpillar and Komatsu.

Its secret is to be a niche player. About 70% of what it sells, such as cranes and rock crushers, are things Caterpillar doesn’t.

Outsourcing
It also focuses on assembly, outsourcing most of the internal components, such as engines and hydraulics.

Such a highly choreographed supply chain has its downside. The company is far more supplier-dependent than it once was. Its backlog has grown as some suppliers’ couldn’t keep up.

But DeFeo said that can be an advantage. During downturns, Terex’s capital isn’t tied up in plants, building parts for equipment it can’t sell.

"In our kind of business, where the markets do go up and down, I’d rather have that kind of flexibility," he said.

Now is no down time, though.

The company posted $1.17 earnings per share in the first quarter, up 48% from a year ago, and 10% more than analysts surveyed by Thomson Financial expected. The $2 billion in sales was 19% above last year’s first quarter.

Terex, a one-time division of General Motors, saw annual revenue grow an average of 28% in the past 11 years. Much of that growth came from dozens of acquisitions.

But the $75 million Genie deal in 2002 and the $146 million purchase of Demag Mobile Cranes that same year were the company’s last big purchases.

Since then, it has focused on bringing a disjointed amalgam of dozens of brands and operations around the world under the Terex name.

Even without big acquisitions, the company managed growth of about 25% in the past few years.

It lost 6 cents a share in 2003, as it made that transition, and dealt with economic slowdown. Since then it has recovered, posting $4.10 per share last year on $7.6 billion in sales.

Analysts surveyed by Thomson Financial expect $5.54 a share for ’07.

Steve Barger, analyst with KeyBanc Capital Markets, wrote in a research note that the company has "established considerable operational creditability" as it shifted from acquirer to operating company.

In 2004, the company passed $5 billion in sales and promised $6 billion for 2006. Now, the goal is 12 by 12 in 10. That is, it wants $12 billion in sales with a 12% operating margin by 2010. The company calls it its stretch goal.

Robert McCarthy, an analyst with Robert Baird, thinks a 12% margin is doable, though he thinks the company will need more acquisitions to hit the revenue mark.

"We suspect that incremental acquisition activity could help offset a more challenging organic growth environment should end markets soften," he wrote in a client note.

The company is still shopping for smaller deals. A year ago, it bought a half stake in Sichuan Changjiang Engineering Crane in China, giving it greater access to that market and lower cost suppliers.

Acquisitions
DeFeo said he expects future acquisitions to be similar, adding geography, rather than business lines, to the company.

And while the worldwide market is strong now, DeFeo said there are pockets of weakness.

Slumping home construction in the U.S. has slowed sales of Terex concrete mixers. Coal miners in the U.S. were buying less equipment as well.

A weak dollar and growth in Europe gave Terex and makers of big-ticket items a boost.

The company is predicting only about 6% growth a year in its American business through 2010, vs. 8% in Europe. It sees 28% growth in the rest of the world, led by China, India and Brazil.

In April, Terex began producing some lift models in Italy to speed delivery to customers there.

But China, Brazil and other less developed nations show the most promise.

People there are demanding better roads, more reliable power and other basic infrastructure. That means more demand for trucks, cranes and bulldozers.

"A couple of billion people want what you and I have," DeFeo said. "They have access to the Internet. They see the way the world is."

Investor’s Business Daily www.investors.com @ Copyright 2007

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Investors Business Daily - May 2007 (494k)