The Company is a leader in the design, manufacture and distribution of compact equipment for construction and agriculture applications. Its compact equipment and related attachments are primarily used in a variety of earthmoving and material handling applications where space, mobility and manpower are at a premium. The Company also provides financing for its dealers and their customers. The Company believes its products are recognized as providing quality, reliability and performance to a loyal and growing customer base. It also believes it is differentiated from other construction equipment manufacturers by its focus on the growing compact equipment market, its extensive compact equipment-focused distribution network, and its ability to offer a broad line of high-quality compact equipment to a wide variety of customers. The Company was founded in 1859 and was incorporated in the State of Wisconsin in 1890.
The Company believes that it has one of the most extensive compact equipment-focused product offerings in North America. Its compact equipment consists of skid loaders, telescopic handlers, compact excavators, compact track loaders, all-wheel-steer loaders, mini-loaders and asphalt pavers. The Company also provides an assortment of related attachments, including pallet forks, augers and backhoes, primarily for skid loaders. While the Company manufactures a majority of the products it sells, it has also proactively established strategic alliances with select European and Asian compact equipment manufacturers to distribute their products under its brand names. These alliances further broaden the Company’s product offering and leverage its distribution network.
The Company markets its products under the Gehl, Mustang and Edge brand names through its network of independent dealers located primarily in North America and Europe. The Company’s dealers, which number in excess of 650 in North America along with approximately 115 distributors in the rest of the world, sell its compact equipment and attachments to contractors, sub-contractors, owner operators, rental stores, farmers, landscapers and municipalities. Many of these dealers also operate their own rental fleets. Over time, the Company has cultivated and built what it considers to be one of the largest independent compact equipment distribution networks in North America. Most of the Company’s largest competitors require their dealers to carry their full line of large and small equipment which may not be ideally suited for that dealer’s local market and customer base. The Company attempts to differentiate itself by offering dealers a comprehensive compact equipment offering and allowing them to carry only the products which optimize their overall product portfolio for their individually served markets. It also supports its dealer network by providing floor plan, retail and rental fleet financing. It believes the combination of its product offering and financing support provides a significant opportunity to continue to expand sales to existing dealers and attract additional dealers in new territories.
The Company manufactures its products at two facilities located in Yankton and Madison, South Dakota, and it has selling and distribution facilities in Illinois, Minnesota, Wisconsin and Germany. Also, under a license agreement with Manitou BF S.A., the world’s largest manufacturer of telescopic handlers, the Company has the rights to manufacture and distribute select models of Manitou telescopic handlers under the Gehl brand name for sale in the United States.
Discontinued Operations
In March 2006, the Company decided to discontinue the manufacturing and distribution of its agricultural implement products. The agricultural implement business included one manufacturing facility and related manufacturing machinery and equipment. The reduction in headcount totaled 140 employees, which included both manufacturing and administrative positions related to the agricultural implement business. As a result of this action, the Consolidated Financial Statements and related notes have been restated to present the results of the agricultural implement product line as discontinued operations.
The discontinuation of the agricultural implement product line resulted in an after-tax charge to the Company’s earnings for the year ended December 31, 2006 of $7.8 million, or $0.63 per diluted share. The after-tax charge reflects a reduction from the second quarter 2006 estimate of $9.0 million, or $0.73 per diluted share, due to higher than expected proceeds from the sale of machinery and equipment associated with the discontinued operations. The after-tax charge is comprised of non-cash asset impairment charges of $5.9 million related to agricultural implement field and factory inventory and certain property, plant and equipment, and cash charges related to severance and other employee termination costs of $1.9 million.
The Company has reflected the results of its agricultural implements product line as discontinued operations in the Consolidated Statements of Income and prior periods have been restated. Summary results of operations for the agricultural implements product line were as follows (in thousands):
| Years ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2006 |
2005 |
2004 | ||||||||
| Net sales | $ | 10,489 | $ | 31,255 | $ | 36,361 | |||||
| Pretax loss from discontinued operations | (1,190 | ) | (525 | ) | (1,031 | ) | |||||
| Pretax loss on disposal of discontinued operations | (11,996 | ) | -- | -- | |||||||
| Income tax benefit | 4,615 | 187 | 341 | ||||||||
| Loss from discontinued operations | $ | (8,571 | ) | $ | (338 | ) | $ | (690 | ) | ||
The assets of the agricultural implements product line are reflected as net assets of discontinued operations in the Consolidated Balance Sheets and were as follows (in thousands):
| December 31, |
2006 |
2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Accounts receivable, net | $ | 1,331 | $ | 17,237 | ||||
| Inventories | 587 | 4,459 | ||||||
| Property, plant, and equipment, net | 1,865 | 6,349 | ||||||
| Assets of discontinued operations, net | $ | 3,783 | $ | 28,045 | ||||
Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes the standards for reporting information about operating segments in financial statements. Historically the Company had two operating and reportable segments, construction equipment and agricultural equipment. The products in the historical agricultural equipment segment included material handling equipment (skid loaders, telescopic handlers, compact excavators, compact track loaders and all-wheel-loaders) and agricultural implement products for haymaking, forage harvesting, feedmaking and manure handling. In the first quarter of 2006, the Company re-evaluated its operating and reportable segments in connection with the discontinuation of the manufacturing and distribution of its agricultural implement product line and determined that it now has only one operating and reportable segment. Sales of material handling equipment that were previously included in the agricultural equipment segment and sales that were previously included in the construction equipment segment are now combined for both internal and external reporting purposes.
Sale of Common Stock and Stock Split
On September 26, 2005, the Company completed a public offering of 2,395,000 shares of its common stock at a price to the public of $28.12. The offering included 1,748,125 primary shares sold by the Company and 646,875 secondary shares sold by one selling shareholder, Neuson Finance GmbH. The Company received approximately $46.1 million in net proceeds from the sale of shares in the offering, after deducting underwriting discounts, commissions and expenses. The Company used the net proceeds it received from the offering to repay debt outstanding under its credit facility.
On July 22, 2005, the Company declared a three-for-two common stock split in the form of a 50% stock dividend with a record date of August 10, 2005, and a payment date of August 24, 2005. The purpose of the stock dividend was to create additional market liquidity for the Company’s common stock and, thus, enhance shareholder value. The information in this Annual Report on Form 10-K has been adjusted to reflect the stock split.
Products
The Company markets the following products through its North American dealer and international distribution network:
• Skid Loaders – The Company’s skid loader line consists of a broad range of products offered through the Gehl and Mustang brands, including a model with the largest lift capacity and highest lift height in the industry. The skid loader line features a choice of hand-operated T-bar or joystick controls, hand only or hand and foot controls. The skid loader, with its fixed-wheel four-wheel drive is used for a variety of purposes, including earth moving and material handling duties. The skid loader may also be used with a variety of attachments.
• Telescopic Handlers — The Company’s telescopic handler line consists of a broad range of products offered through the Gehl and Mustang brands. These telescopic handlers are designed to handle heavy loads (up to 12,000 pounds) reaching horizontally and vertically (up to 55 ft.) for use by a variety of customers, including farmers, masons, roofers and building contractors.
• Compact Excavators – The Company’s compact excavator line consists of a broad range of products offered through the Gehl and Mustang brands. The units range in size from 1.5 metric tons to 11.5 metric tons. All units come standard with auxiliary hydraulics. An industry exclusive frame leveling system is offered on a number of models. These units can be equipped with a wide variety of attachments.
• Compact Track Loaders – The Company offers multiple compact track loaders through the Gehl and Mustang brands. With a dedicated rubber track, these machines are especially useful in soft or muddy conditions. They offer low ground pressure and high floatation and are used in landscaping, nursery and general construction applications.
• All-wheel-steer Loaders – The Company offers multiple all-wheel-steer loaders through the Gehl and Mustang brands with either conventional or telescopic booms. The units range from 39 horsepower to 75 horsepower and are used in general construction and by building contractors and material producers.
• Asphalt Pavers – Two models of Power Box pavers are marketed by Gehl. These pavers allow variable paving widths from 4 1/2 to 13 feet and are used for both commercial and municipal jobs such as county and municipal road, sidewalk, golf cart path, jogging and bike trail, parking lot, driveway, trailer court and tennis court paving.
• Mini-loaders – Gehl offers an articulated unit, powered by a 20 horsepower engine. It is one of the few mini-loaders offered in the industry where the operator is seated on the unit. Offered with a wide variety of attachments, the principal applications for this product are landscaping, nursery and material handling.
Through its wholly-owned subsidiary, Compact Equipment Attachments Inc., the Company distributes a wide variety of attachments primarily for use with skid loaders and compact excavators. These attachments include dirt, snow and cement buckets, pallet forks and hydraulically-operated devices such as cold planers, backhoes, brooms, trenchers, snow blowers, industrial grapples, tree diggers, concrete breakers, augers and many others.
Marketing and Distribution
The Company markets its compact equipment in North America through approximately 650 independent dealers and internationally through approximately 115 distributors. The Company markets its attachments through its dealer network as well as through non-Gehl or Mustang dealers, catalogs and its Compact Equipment Attachments Inc. website. The top ten dealers and distributors of compact equipment accounted for approximately 26% of the Company’s consolidated net sales for the year ended December 31, 2006; however, no single dealer or distributor accounted for 10% or more of the Company’s consolidated net sales for that period. Sales of the skid loader product line accounted for approximately 36%, 36% and 37% of the Company’s consolidated net sales in 2006, 2005 and 2004, respectively. Sales of the telescopic handler product line accounted for approximately 33%, 26% and 20% of the Company’s consolidated net sales in 2006, 2005 and 2004, respectively.
The Company believes that maintenance and expansion of its dealer network is important to its ongoing success in the compact equipment market. Various forms of support are provided for its equipment dealers, including sales and service training, and, in the United States and Canada, floor plan financing for its dealers and retail financing for both its dealers and their customers. The equipment dealers in North America are also supported by district sales managers who provide a variety of services, including training, market evaluation, business planning, equipment demonstrations and sales, and regional field service representatives who assist in training and provide routine dealer service support functions, including warranty and service assistance. The Company has a service agreement with a vendor for a centralized parts distribution center located in Belvidere, Illinois.
Industry and Competition
The Company operates principally in the global compact equipment industry. Its equipment is primarily used for earth moving, material handling and paving applications, particularly in projects where space, mobility and manpower are at a premium. Sales in this market are driven by activity in the residential, commercial and industrial construction, recycling and paving industries. The market for compact equipment is particularly dependent on the level of light construction and repair projects such as residential and light commercial building, landscaping and recycling. Job mechanization continues to drive demand in the compact market as construction providers look to replace costly manual labor with compact, affordable, multi-purpose machines.
The Company primarily focuses on seven compact equipment product categories: skid loaders, telescopic handlers, compact excavators, compact track loaders, all-wheel-steer loaders, asphalt pavers and mini-loaders. It also provides an assortment of related attachments, including pallet forks, augers and backhoes, primarily for skid loaders. The Company competes with numerous companies in each of its served markets, primarily based on price, quality, service and distribution. Its compact equipment product lines face competition in all of the Company’s markets. In general, each line competes with a small group of seven to twelve different companies, some of which are larger than the Company.
The primary markets for the Company’s compact equipment outside of North America are in Europe, Australia, Latin America, the Middle East and the Pacific Rim. The Company believes it is a significant competitor in the skid loader market in most of these markets.
Backlog
The backlog of unfilled equipment orders (which orders are subject to cancellation in certain circumstances) as of December 31, 2006 was $54.4 million versus $186.3 million at December 31, 2005. Virtually all orders in the backlog at December 31, 2006 are expected to be shipped in 2007. The decrease in the backlog is primarily due to a change in the order writing program from 2005 when the program ended in December versus 2006 when the program was extended into January of 2007. In addition, the available industry manufacturing capacity and available inventory in the market at December 31, 2006 resulted in fewer orders due to a decrease in lead times.
Floor Plan and Retail Financing
Floor Plan Financing
The Company, as is typical in its industries, generally provides floor plan financing for its dealers. Products shipped to dealers under the Company’s floor plan financing program are recorded by the Company as sales and the dealers’ obligations to the Company are reflected as accounts receivable.
The Company provides interest-free floor plan financing to its dealers for equipment for varying periods of time generally up to six months. Dealers who sell products utilizing floor plan financing are required to make immediate payment for those products to the Company upon sale or delivery to the retail customer. At the end of the interest-free period, if the equipment remains unsold to retail customers, the Company generally charges interest to the dealer at approximately 3% above the prime rate or, on occasion, provides an interest-free extension of up to three months upon payment by the dealer of a curtailment of 25% of the original invoice price to the dealer. This type of floor plan equipment financing accounts for approximately 74% of the Company’s dealer accounts receivable, with all such floor planned receivables required to be secured by a first priority security interest in the equipment sold.
Retail Financing
The Company also provides retail financing primarily to facilitate the sale of equipment to end users. Additionally, a number of dealers purchase equipment which is held for rental to the public. The Company also provides rental fleet financing to such dealers in connection with these purchases. Retail financing in the United States is provided by the Company primarily through Gehl Finance, the Company’s finance division. Retail financing is provided in Canada by a third party at rates subsidized by the Company.
The Company maintains arrangements with third parties pursuant to which the Company sells retail and rental fleet finance contracts through an asset securitization program and limited recourse arrangements. The finance contracts require periodic installments of principal and interest over periods of up to 66 months; interest rates are based on market conditions. The majority of these contracts have maturities of 12 to 60 months. The Company continues to service the finance contracts it sells, including cash collections. For additional discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet Arrangements — Sales of Finance Contracts Receivable,” included in Part II, Item 7 of this Form 10-K and Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of this Form 10-K.
Employees
As of December 31, 2006, the Company had 855 employees, of which 500 were hourly employees and 355 were salaried employees. Related to the discontinued operations at the West Bend, Wisconsin facility, two remaining employees are covered by a collective bargaining agreement with the United Steelworkers Union (formerly the United Paperworkers International Union and formerly P.A.C.E) which expired on December 15, 2006. None of the Company’s other employees are represented by unions. There have been no labor-related work stoppages at the Company’s facilities during the past thirty-three years.
Manufacturing and Sourcing
The Company manufactures its products at two efficient and flexible manufacturing facilities located in South Dakota. In 2002, the Company successfully completed a plant rationalization that consolidated its manufacturing facilities from five locations into three and improved its operating margins significantly and in April 2006, the Company discontinued the manufacturing and distribution of agricultural implements at its facility in West Bend, Wisconsin. In 2006, the Company began a second expansion of its Yankton, South Dakota facility that will increase its manufacturing space by 28,100 square feet in addition to the expansion completed in 2005 that increased the facility’s size by 53,200 square feet. The Company has further enhanced its manufacturing capabilities through significant investments in painting systems, as well as laser cutting, robotic welding and other metal forming technologies. The Company believes its ongoing investment in operational efficiency enhances its competitive cost position and operating margins.
The Company has established key strategic relationships with leading compact equipment manufacturers to market their products through the Company’s distribution network under the Gehl and Mustang brands. In July 2004, the Company announced a strategic alliance with the French company Manitou BF S.A. to manufacture and distribute select models of its market-leading compact telescopic handlers in the United States. In 1999, the Company entered into a distribution arrangement covering North and South America with Neuson Kramer Baumaschinen AG, an Austrian and German manufacturer of compact excavators and all-wheel-steer loaders. The Company also has a strategic alliance with Takeuchi Mfg. Co., Ltd. based in Japan to distribute compact track loaders in North and South America. In addition, most of the products in the Company’s wide assortment of attachments are sourced from other leading manufacturers. The Company has actively expanded its attachment offering in response to the growing demand for product versatility. The Company periodically assesses its sourcing relationships and believes these relationships allow the Company to capitalize on its partners’ expertise to provide a broad offering of top-quality compact equipment and attachments.
Research and Development
The Company attempts to maintain and strengthen its market position through internal new product development and incremental improvements to existing products. The Company’s research and development is devoted to developing new products that meet specific customer needs and to devising incremental improvements to existing products. Research and development performed by the Company includes the designing and testing of new and improved products as well as the fabrication of prototypes. The Company expended approximately $2.8 million, $2.6 million and $2.5 million on research and development for the years ended December 31, 2006, 2005 and 2004, respectively.
Patents and Trademarks
The Company possesses rights under a number of domestic and foreign patents and trademarks relating to its products and business. While the Company considers the patents, trademarks and service marks important in the operation of its business, including Gehl®, Gehl Finance®, Mustang®, ADVANTAGE™, Dynalift®, EDGE®, Hydraloc™, Powerview®, Power Protection Plan® and Select-A-Boom™, the business of the Company is not dependent, in any material respect, on any single patent or trademark or group of patents or trademarks.
Available Information
The Company’s filings with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d) of the Exchange Act, are made available free of charge through the Corporate Governance section of the Company’s Internet website at www.gehl.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website at www.sec.gov , at the SEC s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC s Public Reference Room at 1-800-732-0330. The Company also makes available, free of charge, its Ethics Policy, Corporate Governance Guidelines, committee charters and other information related to the Company on the Company’s Internet website or in printed form upon request.
Item 1A. Risk Factors
You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition or results from operations could be materially and adversely affected and you may lose all or part of your investment.
We operate in cyclical industries, which could adversely affect our growth and results of operations.
Our business depends upon general activity levels in the construction and agricultural industries. Historically, these industries have been cyclical. As a result, our operating profits are susceptible to a number of industry-specific factors, including:
• prevailing levels of construction, especially housing starts, and levels of industrial production;
• public spending on infrastructure;
• market interest rates;
• volatility of sales to rental companies;
• real estate values;
• consumer confidence;
• changes in farm income and farmland value;
• the level of worldwide farm output and demand for farm products;
• commodity prices;
• energy prices;
• government agricultural policies and subsidies;
• animal diseases and crop pests; and
• weather.
As a result of these and other factors, including related effects on us and our customers’ access to and cost of credit and dealer inventory management, a downturn in demand for our products can occur suddenly, resulting in excess inventories, under-utilized production capacity and reduced sales prices for our products. These downturns may be prolonged and may result in lower net sales and earnings. Equipment manufacturers, including us, have responded to downturns in the past by reducing production and discounting product prices. These actions have resulted in restructuring charges and lower earnings for us in past affected periods. In the event of future downturns, we may take similar actions.
Our dependence on, and the price and availability of, raw materials and component parts may adversely affect our profits.
We are exposed to fluctuations in market prices for commodities, such as steel and rubber, as well as component parts, including engines. In recent years, the prices of various raw materials and component parts have increased significantly, and we have been unable to avoid exposure to global price fluctuations and supply limitations, such as occurred in 2005 and 2006 with the cost and availability of steel and related products. In addition, our products are designed to work with particular components. As a result, our products, in certain cases, rely on a single source of supply for certain components. If we are unable to purchase the raw materials and components we require or are unable to pass on price increases to our customers, our future profitability may be adversely affected.
The construction and agricultural industries in which we operate are competitive, and competitors’ offerings of new products or services or lower prices could result in a decrease in our net sales and earnings.
We compete with global full-line suppliers (including Caterpillar Inc., Deere & Company, Case Construction Equipment and Komatsu Ltd.) with a presence in every market and a broad range of products as well as with product line specialists (including Oshkosk Truck Corp. (JLG), Ingersoll-Rand Company (Bobcat) and Takeuchi Mfg. Co. Ltd.). Some of our competitors are larger than us and have greater financial, manufacturing, marketing and distribution resources. Competitive pricing, product initiatives and other actions taken by our competitors could cause us to lose customers or force us to decrease our sales prices, resulting in lower net sales and earnings.
We source some of our products from third parties and any interruption in the supply of these products could adversely affect our net sales and profitability.
We source compact excavators, all-wheel-steer loaders and compact track loaders from third-party foreign suppliers. Any interruption in the supply of these products or any material increase in prices could adversely affect our net sales and profitability. We are exposed to foreign currency risk with respect to the prices of these products. Any material change in the value of the United States dollar versus other currencies could adversely impact our net sales and profitability.
Our success depends in part on the introduction of new products, and the failure to introduce new products on a timely basis could adversely affect our net sales and profitability.
Our long-term results depend upon our ability to secure, introduce and market new products successfully. Our success in this area will depend on a number of factors, including our ability to develop new products internally or source new products from third-party suppliers, product quality, competition, customer acceptance of new products and the strength of our dealer networks. Any difficulties in developing or identifying and sourcing new products, any manufacturing delays or problems with new product launches, or any increased warranty costs from new products could adversely affect our operating results. The introduction of new products could also result in a decrease in revenues from our existing products. The internal development and refinement of products also consumes a substantial amount of capital. We may need more capital for product development and refinement than is available to us, which could adversely affect our net sales and profitability.
Cyclical and structural declines in the demand for products we offer may cause us to undertake product line and facility rationalization initiatives that could result in restructuring charges and lower net sales and earnings.
The construction and agricultural industries are continually evolving and undergoing cyclical and structural changes that impact the demand for the products we offer. We have historically reviewed these cyclical and structural changes in demand and have taken action to rationalize our product offerings and production facilities in light of market conditions. We expect to continue these reviews and to take appropriate action based on future conditions. Those actions could result in restructuring charges and lower net sales and earnings.
During March 2006, we decided to discontinue the manufacturing and distribution of our agricultural implement products. As a result, we have recorded a $5.9 million after-tax non-cash impairment charge related to agricultural implement field and factory inventory and certain property, plant and equipment and a $1.9 million after-tax cash charge related to severance and other termination costs. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Discontinued Operations.” If we incur additional unanticipated expenses associated with the discontinuation of our implement product line, then our net income could be adversely affected in future periods.
Our leverage could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions.
At times, we may incur indebtedness that is substantial relative to our shareholders’ equity. Our indebtedness has important consequences. For example, it could:
• make it difficult for us to fulfill our obligations under our credit agreement;
• make it more challenging for us to obtain additional financing to fund our business strategy, debt service requirements, capital expenditures and working capital;
• increase our vulnerability to interest rate changes and general adverse economic and industry conditions;
• require us to dedicate a substantial portion of our cash flow from operations to service indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate activities;
• limit our flexibility in planning for, or reacting to, changes in our business and markets; and
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