het 0115 final 01-09-15 · however, china’s gdp growth slowed to 7.3% in the third quarter of...

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 10

Industry Trends ................................................................................................... 11

How the Industry Operates ............................................................................... 15

Key Industry Ratios and Statistics ................................................................... 19

How to Analyze a Capital Goods Company .................................................... 20

Glossary ................................................................................................................ 24

Industry References ........................................................................................... 25

Comparative Company Analysis ...................................................................... 26

This issue updates the one dated July 2014.

Industry Surveys Heavy Equipment & Trucks Jim Corridore, Construction & Farm Machinery and Heavy Trucks Equity Analyst

JANUARY 2015

CONTACTS:

INQUIRIES & CLIENT SUPPORT 800.523.4534 clientsupport@ standardandpoors.com

SALES 877.219.1247 [email protected]

MEDIA Michael Privitera 212.438.6679 [email protected]

S&P CAPITAL IQ 55 Water Street New York, NY 10041MEDIA

Topics Covered by Industry Surveys

Aerospace & Defense

Airlines

Alcoholic Beverages & Tobacco

Apparel & Footwear: Retailers & Brands

Autos & Auto Parts

Banking

Biotechnology

Broadcasting, Cable & Satellite

Chemicals

Communications Equipment

Computers: Commercial Services

Computers: Consumer Services & the Internet

Computers: Hardware

Computers: Software

Electric Utilities

Environmental & Waste Management Financial Services: Diversified

Foods & Nonalcoholic Beverages

Healthcare: Facilities

Healthcare: Managed Care

Healthcare: Pharmaceuticals

Healthcare: Products & Supplies

Heavy Equipment & Trucks

Homebuilding

Household Durables

Household Nondurables

Industrial Machinery

Insurance: Life & Health

Insurance: Property-Casualty

Investment Services

Lodging & Gaming

Metals: Industrial

Movies & Entertainment

Natural Gas Distribution

Oil & Gas: Equipment & Services

Oil & Gas: Production & Marketing

Paper & Forest Products

Publishing & Advertising

Real Estate Investment Trusts

Restaurants

Retailing: General

Retailing: Specialty

Semiconductor & Equipment

Supermarkets & Drugstores

Telecommunications

Thrifts & Mortgage Finance

Transportation: Commercial

Global Industry Surveys

Airlines: Asia

Autos & Auto Parts: Europe

Banking: Europe

Food Retail: Europe

Foods & Beverages: Europe

Media: Europe

Oil & Gas: Europe

Pharmaceuticals: Europe

Telecommunications: Asia

Telecommunications: Europe

S&P Capital IQ Industry Surveys 55 Water Street, New York, NY 10041

CLIENT SUPPORT: 1-800-523-4534

VISIT THE S&P CAPITAL IQ WEBSITE: www.spcapitaliq.com

S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

Copyright © 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS HEAVY EQUIPMENT & TRUCKS / JANUARY 2015 1

CURRENT ENVIRONMENT

Global economic recovery spurs moderate growth in heavy equipment sector

We see the heavy equipment and trucks industry recovering from the economic crisis of 2008–2009, as the world’s leading economies strengthen steadily, albeit at a slow pace. S&P Capital IQ (S&P) predicts that this sector is likely to see moderate growth in 2015.

More positive US economic outlook in 2015 Since the heavy equipment and trucks industry is largely dependent on two primary factors that crippled the global economy—the construction and credit markets—it was one of the industries that was hardest hit by the economic downturn. However, we now see rising global construction expenditure, the housing market is finally recovering, and financial markets are in better shape.

S&P thinks the labor market is also in the midst of a moderate recovery from the major downturn experienced in 2008 and 2009. After shedding 8.7 million workers in those years, the US added a total of 5.3 million workers in 2010 through 2012, and another 2.2 million in 2013. The 74,000 net hirings that took place in December 2013 marked the 39th consecutive month of net staff additions. In November 2014, 321,000 jobs were added. Although the level of worker additions has been more modest than it typically is following a weak economic period, we still think it is encouraging that businesses have continued to add workers over the past four years. Year to date through November 2014, the unemployment rate averaged 6.2%, which is below the 7.4% average in the same period in 2013, and below its cycle peak of 10.0% in October 2009. Standard & Poor’s Economics (which operates separately from S&P Capital IQ) expects that there will be an ongoing growth in real gross domestic product (GDP) through 2015. Based on this forecast, we expect labor markets to continue to improve.

In light of these positive factors, US real GDP grew in 19 of the last 21 quarters beginning in the third quarter of 2009, with only two declines recorded in the first quarter of 2011 and the first quarter of 2014. Due to positive contributions from personal consumption expenditures (PCE), federal government spending, local and state government spending, and residential and nonresidential fixed investment, the real GDP increased at an annual rate of 3.9% in the third quarter of 2014. Imports decreased, hence also contributing to the annual rate increase in GDP, as imports are a subtraction in the calculation of GDP. As of October 2014, Standard & Poor’s Economics estimated a 2.2% growth in real GDP in 2014, compared with increases of 2.2% in 2013 and 2.3% in 2012. For 2015, it forecast a gain of 3.0%.

The European Union (EU) also showed signs of firming in the first quarter of 2014, with real GDP increasing 0.4% (flat from the fourth quarter of 2013). However, real GDP growth in the EU slowed to 0.2% and 0.3% in the second and third quarters of 2014, respectively (on a sequential basis). Meanwhile, China has bounced back following stimulus, with its economy growing at 7.4% and 7.5% in the first and second quarters of 2014, respectively, following economic growth of 7.7% in the fourth quarter of 2013, and 7.8% in the third quarter, the fastest growth rate in 2013. However, China’s GDP growth slowed to 7.3% in the third quarter of 2014 on a year-on-year basis.

HEAVY EQUIPMENT TRENDS MODERATING

The heavy machinery industry encompasses a wide range of industrial businesses. In this Survey, we focus primarily on the largest segments: agricultural and farm machinery, construction machinery, and heavy trucks. The health of the global economy drives demand in each sector to varying degrees. However, because sector-specific factors also drive demand for these products, we discuss each area separately. In assessing the performance of the heavy equipment industry, keep in mind that the major categories do not always move in concert.

2 HEAVY EQUIPMENT & TRUCKS / JANUARY 2015 INDUSTRY SURVEYS

These three main heavy machinery categories started to recover in 2010 and continued until the first half of 2012, after experiencing substantial downturns from late 2008 to the end of 2009. However, due to a variety of factors, conditions across the heavy equipment and trucks sector became more challenging in 2013. We expect construction equipment and trucks to see better days once they get past their current difficulties. We base this opinion on improving construction markets and our outlook for better economic trends. However, we see various industry-specific factors muting farm equipment growth.

Impact of emerging markets The heavy equipment industry is also focusing on emerging markets such as China, India, and Latin America. With the economic situation and overall business performance much more favorable in these areas in recent years than in mature markets such as the US and Europe, demand for heavy machinery in these regions has far eclipsed domestic demand. Comparisons have been more favorable particularly in the construction equipment segment, as emerging markets have been undertaking a large number of projects to develop and/or improve their infrastructure and to industrialize their economies. However, with areas such as China, India, and Brazil slowed somewhat by government actions in 2012–2013, construction equipment sales recently have been much less robust in those regions.

TOTAL CONSTRUCTION SHOWS SIGNS OF RECOVERY

Amid some weakness, the overall construction levels in the US continued to recover in 2013. In 2013, total US private and public construction spending increased 5% from the 2012 level, to $899.9 billion, based on the US Census Bureau data. Construction spending continued to grow in 2014, with total spending of $800.6 billion, year to date through October 2014, representing a 5.8% gain from the recorded spending in the same period in 2013. In light of what we see as continuing recovery in construction markets as a whole, we think that the $788.0 billion spent in 2011 on total construction (which was down 2.1% from the 2010 level) will turn out to be the full-year cycle low. Despite our positive viewpoint on construction trends, we note that the current gains are being compared with very low bases, in light of the extreme weakness prevalent in construction markets in 2009 through 2011. (For more details, see the “Construction put in place in the United States” table.)

Construction spending breakdown Of the $800.6 billion of total US construction spending, year to date through October 2014, the largest proportion was from private residential construction outlays, which amounted to $295.8 billion (36.9% of

Table B01: Construction Put in Place in the US

CONSTRUCTION PUT IN PLACE IN THE UNITED STATES (Annual value, in millions of current dollars)

TYPE OF CONSTRUCTION 1995 2010 2011 2012 2013 *2014TOTAL CONSTRUCTION 548,666 804,561 788,014 861,246 910,764 800,637

Total private construction 408,655 500,595 501,607 581,935 641,146 571,004Residential 228,121 238,819 244,133 280,574 336,209 295,808Lodging 7,131 11,201 8,395 10,197 13,133 12,638Office 22,996 24,368 23,738 27,448 29,785 29,975Commercial 44,096 36,504 39,723 44,312 48,743 45,078Health care 15,259 29,552 28,906 31,429 30,347 23,847Educational 5,699 13,418 14,081 16,625 16,736 13,879Religious 4,348 5,237 4,205 3,819 3,652 2,967Public safety 185 241 205 103 123 142Amusement and recreation 5,886 6,483 6,744 6,217 7,222 6,145Transportation 4,759 9,894 9,537 10,883 11,044 9,583Communication 11,112 17,689 17,536 15,952 17,130 13,044Pow er 22,006 66,117 64,262 86,402 78,549 73,196Sew age and w aste disposal 576 439 520 597 437 231Water supply 670 717 635 373 618 462Manufacturing 35,364 39,778 38,869 46,774 47,226 43,778

Total public construction 140,011 303,966 286,407 279,311 269,618 229,633Note: Figures may not add to totals due to rounding. *Data through October.Source: US Department of Commerce.


total construction spending). Year to date through October 2014, the level of private residential construction increased 5.7% on a year-on-year basis. We think this reflects ongoing strength as we move past the initial stages of a recovery in housing markets. Meanwhile, year to date through October 2014, private nonresidential construction spending amounted to $275.2 billion (34.4% of total construction spending), which amounted to a 10.8% gain from the same period in 2013.

Public construction spending, year to date through October 2014, amounted to $229.6 billion, or 28.3% of construction spending in the period. This total represented a 0.6% increase from the prior-year period. This category seems to be encountering the biggest challenges in starting a recovery. Composed mostly of nonresidential construction, public construction spending remained weak in commercial (22.2%), healthcare (10.1%), and water supply (6.0%). On the other hand, highway and street construction and educational construction, its largest and second largest category, respectively, increased 1.9% and 1.2% from the same period in 2013.

Equipment investment increased 10.9% in the fourth quarter of 2013, after increasing just 0.2% in the third quarter. However, in the first quarter of 2014, equipment investment dipped 1.0%, but recovered to 10.7% in the second quarter. As of October 2014, Standard & Poor’s Economics expected growth in equipment spending to continue for at least the next three years, and forecast annual gains of 6.6% in 2014 and 8.2% in 2015. We attribute the revival in spending to the global economic recovery.

After years of decline, residential construction improved in 2013 and 2014 Trends in the residential segment have shifted dramatically in the past decade. The first several years of the 2000s were a major boom period, with new home sales peaking at 1.28 million in 2005. Subsequently, however, purchases of new homes declined, falling to 485,000 in 2008, 375,000 in 2009, 323,000 in 2010, and 306,000 in 2011. However, trends finally improved in 2012, when new home sales increased 20.3% to 368,000, which continued through 2013 when new home sales increased 16.6% to 429,000 homes. In October 2014, new home sales increased 1.8%, to 458,000 homes.

These sales totals are very encouraging, in our view, and we think that a number of other factors provide further insight into what we see as improving housing markets.

New home inventories. One important factor leading us to believe that new home markets are extending their early-stage gains is the number of new homes available for sale. At the end of October 2014, 212,000 new homes were available for sale in the US, up 15.2% from 184,000 units a year earlier. However, the current level is still substantially below the peak of 572,000 in July 2006. In addition, the October 2014 total amounts to only a 5.6-month supply of homes at current sales levels, which means it has moved below the typical equilibrium level of six months of supply. Overall, we think that the current inventory situation signifies much more attractive trends in new home markets.

Housing starts. Housing starts also appear to have bottomed in April 2009 at 478,000 units at a seasonally adjusted annual rate (SAAR), based on the overall situation in housing markets. We also think that the 554,000 starts recorded in 2009 marked the cycle bottom on an annual basis, following four years of dramatically falling starts from the 2.1 million level recorded in 2005. In fact, since 2009, housing starts have recorded four consecutive years of growth, with the number of starts rising to 924,900 in 2013, which was 19% higher than the 2012 level and a 67% increase from the annual trough of 2009. The improvement continued through the first ten months of 2014, when the number of starts averaged 984,000, a 9.1% gain from the year-earlier period.

Building permits. The number of privately owned housing units authorized by building permits is another important indicator, reviving at a very robust pace. Like housing starts, the level of building permits also seems to have bottomed in 2009 (at 583,000) following a precipitous four-year decline from a prior cycle peak of 2.2 million in 2005. Since bottoming in 2009, the number of building permits issued has risen each year through 2013, when the 990,800 permits issued represented a 19% rise from the 2012 level and a 70% gain from the trough in 2009. Permit totals also remained quite healthy in 2014. In October 2014, building permits were at a SAAR of 1.1 million, up 1.2% on a year-on-year basis. The building permit statistics also seem to point toward ongoing recoveries in both the economy and housing markets.


Sales and inventories of existing homes. The last category to use in evaluating housing markets is the level of existing home sales (defined as single-family, plus condominiums and co-ops). According to the National Association of Realtors (NAR), a professional association that includes individuals involved in residential and commercial real estate in a variety of job categories, existing home sales rose 9.2% in 2013 to 5.1 million units (SAAR) from the year-earlier level, following an increase of 9.4% in 2012 (over 2011). We think that the gain in 2013 indicates a continuing recovery in existing home sales that started in 2011, supported by very low mortgage rates, attractive home prices, and the start of growth in the job market. At the end of October 2014, the NAR reported that existing home sales rose 1.5% to 5.2 million units (SAAR), from the same period in 2013. Since September 2013, sales recorded in October 2014 were the highest annual pace.

Inventory trends are getting better (just as those cited earlier in this section for new homes), along with what we view as recovering sales trends for existing homes. The NAR reported that total existing home inventory amounted to 2.22 million units at the end of October 2014, representing 5.1 months of supply at current sales levels. These inventory levels are far below the record high of 4.04 million units in July 2007, and the more recent high of 4.0 million units, or 10.9 months of supply, in September 2010. The reduction of inventory is also leading to the start of a recovery in home prices. However, we note that a continued upturn in pricing should at some point lead to an upturn in the number of existing homes available for sale. Yet, in evaluating overall trends, we think that existing home sales and inventory trends seem to be two more factors indicating a recovery of US housing markets.

Nonresidential construction shows signs of growth Although results continue to lack consistency, nonresidential construction trends have also showed some signs of improvement, following a challenging period over the last few years. This area remained strong for a longer period than housing, with high levels of spending on projects in the manufacturing and infrastructure areas. However, with the major downturn in the global economy that started in 2008, spending in nonresidential turned much weaker starting in late 2008, particularly in the infrastructure, lodging, office, and commercial areas. This led to declines in nonresidential construction spending after the peak in September 2008.

Nonresidential construction spending showed signs of stabilization in 2011 through 2012, as economic trends grew more favorable, but trends deteriorated slightly in 2013. Nonresidential construction (public and private combined) in 2013 amounted to $562.1 billion, a 1.5% decline from the 2012 total, caused mostly by a 10.8% reduction in power construction. However, year to date through October 2014, nonresidential construction grew 6.2% to $500.5 billion, on a year-to-year basis, boosted mostly by a 16.0% and 24.3% increase in spending on power construction, and conservation and development, respectively.

Construction spending forecasts In 2013, residential construction spending posted a 13.8% gain. In April 2014, Standard & Poor’s Economics forecast that this would mark the start of an extended upturn. In that regard, it forecast a 13.7% increase in residential construction spending in 2014, followed by robust gains of 18.9% in 2015. These estimates reflect our belief that after a lengthy and pronounced downturn through 2011, new home markets are in the process of a solid and extended revival. In assessing the size of these gains, however, one should keep in mind that they are in comparison to a very depressed base.

After sharp downturns in 2009 and 2010, nonresidential construction spending managed to post a modest gain of 2.1% in 2011 and at a more robust pace of 12.7% in 2012, though it declined 1.5% in 2013. As of October 2014, Standard & Poor’s Economics forecast a 3.7% gain in 2014 and a 14.1% increase in 2015.

Based on its economic and construction forecasts, Standard & Poor’s Economics expects the recovery in equipment investment, which has been occurring since the second half of 2009, to continue in subsequent periods. As of October 2014, Standard & Poor’s Economics forecast a 6.6% rise in that category in 2014 and 8.2% in 2015.


CHALLENGES IN FARMING MARKETS THREATEN STRONG GAINS IN AG EQUIPMENT

The US Department of Agriculture (USDA) projected in November 2014 that net farm income would fall 23.4% from the $126.5 billion forecast in 2013 to $96.9 billion in 2014. The 2014 forecast is the lowest since 2010, but still $14.5 billion above the previous 10-year average. The projected drop in net farm income is a result of lower crop cash receipts, a change in the value of crop inventories, and reduced government farm payments. This forecasted income level would compare with an estimated increase of 28.6%, to $126.5 billion in 2013.

The farm income forecast calls for farm cash receipts to decline by 0.4% in 2014, to $402.1 billion. This includes a forecast for a 12.3% decline in crop receipts to $193.4 billion, and a 14.0% increase in livestock receipts, to $208.7 billion, due to higher milk prices. The decline in crop receipts reflects an outlook for lower corn and soybean receipts.

The projected 3.8% decline in government payments is a result of the elimination of direct payments under the Agricultural Act of 2014 and uncertainty regarding enrollment and payments in 2014. Total production expenses were expected to increase 1.1% to

$370.0 billion. These challenges in the farming markets have a negative impact on the agricultural (AG) equipment sector.

After total expenses rose 9.6% to $342.4 billion in 2012, total expenses increased 2.8% to a record high of $352.0 billion in 2013. This increase was largely driven by large increases in seed purchases (4.8%), pesticide expenditures (4.3%), and feed purchases (3.1%). Consequently, total expenses were projected to further increase to $370.0 billion in 2014, up 5.1% compared to the prior-year period. Some of the categories with expected large increases in expenses include livestock and poultry purchases (28.0%), labor expenses (6.6%), petroleum fuel and oil expenditures (4.2%) fertilizer, lime, and soil conditioner (3.7%).

Farm equipment forecast Starting around mid-2012, drought conditions in the US brought uncertain conditions to farm and farm equipment markets. While the drop seen in the supply of crops such as corn and soybeans

brought sharp rises in the prices of these commodities, we think the reduced crop size was accompanied by a drop in sales volume. In 2013, trends in farm markets were decent, although factors such as an expected higher level of crop harvests brought lower crop prices. Overall, we think sales of farm equipment were modestly stronger in 2013, followed by a somewhat softer demand in 2014 and 2015.

TABLE B04– FARM INCOME

FARM INCOME

2011 2012 2013 2014F 2011- 12 2012- 13 2013- 14F

CASH INCOME STATEMENT

Cash receipts 371.1 407.8 403.6 402.1 9.9 (1.0) (0.4)

Crops 205.8 236.4 220.6 193.4 14.9 (6.7) (12.3)

Livestock 165.3 171.4 183.0 208.7 3.7 6.8 14.0Government payments 10.4 10.6 11.0 10.6 2.1 3.5 (3.8)Farm-related income 26.1 28.5 31.5 26.2 8.9 10.8 (17.0)

Gross cash income 407.6 446.9 446.2 438.9 9.6 (0.2) (1.6)Cash expenses 277.7 305.9 311.3 330.7 10.2 1.8 6.2

Net cash income 129.9 141.0 134.9 108.2 8.5 (4.3) (19.8)

FARM INCOME STATEMENT

Gross cash income 407.6 446.9 446.2 438.9 9.6 (0.2) (1.6)Non-money income 22.8 20.2 22.7 24.1 (11.6) 12.5 6.3Value of inventory change (8.9) (27.6) 7.1 4.3 NA NA NA

Gross farm income 421.5 439.5 476.0 467.3 4.3 8.3 (1.8)Total production expenses 312.5 341.1 350.2 370.0 9.1 2.6 5.7

Net farm income 109.0 98.4 126.5 96.9 (9.7) 28.6 (23.4)

F-Forecast.Source: USDA Economic Research Service.

- - - - - - - - INCOME (BIL. $) - - - - - - - - - - - - - - - - % CHANGE - - - - - - - -

Table B02: FARM EQUIPMENT EXPENDITURES

FARM EQUIPMENT EXPENDITURES(In millions of dollars)

OTHER

YEAR TRACTORS TRUCKS MACHINERY TOTAL

2014F 11,010 4,029 14,878 29,9182013 10,884 4,616 14,706 30,2062012 10,834 4,473 13,253 28,5602011 8,028 3,837 10,788 22,6532010 6,768 3,387 8,797 18,9522009 5,773 3,663 7,827 17,2632008 7,007 4,077 9,894 20,9782007 5,390 3,962 7,246 16,5982006 4,683 3,555 6,158 14,3962005 5,149 4,308 7,138 16,5962004 6,028 4,452 6,995 17,4752003 4,976 4,244 5,936 15,1562002 4,006 3,873 5,771 13,6502001 3,696 4,048 6,050 13,794F-Forecast valuesSource: US Department of Agriculture.


STRONG RECOVERY IN HEAVY-DUTY TRUCK MARKET HAS STALLED

From 2007 through 2009, North American sales of Class 8 commercial vehicles (over 33,000 pounds) declined sharply. A recovery started in 2010, and annual sales rose through 2012. Since bottoming at 126,909 units in 2009, North American Class 8 truck sales rebounded through 2012 to 271,359 units. However, sales declined on a year-to-year basis in each month from September 2012 through August 2013 due to economic uncertainties and financing challenges for smaller and less capitalized truckers, which resulted in slower order trends. This string of declines was broken as purchases increased in three of the last four months of 2013. However, annual sales declined 8.2% in 2013 to 248,973 units. Finally, year to date through October 2014, sales increased 12.6% to 233,573 units—an improvement from the 10.5% decline in the prior-year period.

Despite these challenges, we see firmer economic conditions and easier comparisons aiding sales trends as we move into 2015. The period of improved sales that started in 2010 seemed to be related to the recovering global economy, which had been boosting freight volumes and rates. In addition, ACT research highlighted that at an age of 6.7 years as of late 2010, the North American Class 8 fleet was the oldest it had been in the 32 years for which ACT has data; fleet ages are not believed to have changed by much since that time. Thus, it appears as if a large part of the sales recovery centered on the need to replace aging equipment. Prior to this recovery, the major downturn was mostly due to the extreme softness experienced at that time in both North American and global economies. In addition, prior to the downturn, most truckers had well-stocked fleets, as they had been experiencing very solid operating results and had plentiful cash to update and/or expand their fleets. On top of that, a considerable amount of pre-buying had taken place prior to the start of new Environmental Protection Agency (EPA) emission standards, which has been phased in since the start of 2007. Subsequently, demand dropped dramatically between 2007 and 2009, with the 126,909 Class 8 units sold in 2009 representing a 66% decline from the prior cycle peak of 368,791 trucks in 2006.

The major Class 8 downturn in 2009 (down 39% from 207,303 trucks sold in 2008) took place despite a new EPA emissions mandate that started in 2010, as only a limited number of vehicle pre-buys seemed to take place during the year. That performance was atypical of many prior mandates, which have usually boosted sales. We attribute the lack of pre-buying to the exceptionally weak economy at that time, along with the belief (which has turned out to be true) that the new engines would deliver better fuel economy, in contrast to new engines under prior mandates.

Heavy-duty truck forecast Class 8 orders remained above 20,000 units for eight consecutive months through June 2013, which is far ahead of the order levels posted in the six prior months (when they ranged from 12,925 units to 17,988), according to ACT Research. However, orders fell below the 20,000 mark in July, August, and September 2013, before bouncing back to 26,215 in October, although backlog fell slightly in that month. Annual retail sales of Class 8 vehicles declined 8.2% in 2013 to 248,973 units.

Year to date through October 2014, Class 8 sales increased 12.6% to 233,573 units. Strong net orders fueled the double-digit growth in sales, with net orders increasing 37.5% to 295,238 units in the same

Table B05: RETAIL SALES OF MEDIUM- & HEAVY-DUTY TRUCKS, BY WEIGHT CLASS

RETAIL SALES OF MEDIUM- & HEAVY-DUTY TRUCKS, BY WEIGHT CLASS

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - UNITS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - % OF TOTAL - - - - - - - - - - - - - - - -

GROSS VEHICLE WEIGHT 2010 2011 2012 2013 *2014 2010 2011 2012 2013 *2014

Medium-duty trucks, total 79,327 111,697 128,887 134,547 123,118 34.1 31.6 32.2 35.1 34.516,001–19,500 lbs. 33,641 45,825 58,823 63,985 56,965 14.5 13.0 14.7 16.7 16.019,501–33,000 lbs. 45,686 65,872 70,064 70,562 66,153 19.7 18.6 17.5 18.4 18.5

Heavy-duty trucks(over 33,000 lbs.) 153,129 242,019 271,359 248,973 233,573 65.9 68.4 67.8 64.9 65.5

Total North American Med. & heavy truck sales 232,456 353,716 400,246 383,520 356,691 100.0 100.0 100.0 100.0 100.0

*Data through October.Source: ACT Research.


period. This level of net orders is a vast improvement on the 14.3% growth in 2013. Unit sales of Class 8 trucks appear likely to rise modestly in 2015.

IMPACT OF GOVERNMENT REGULATIONS

A number of government regulations and legislation have influenced the heavy equipment and trucks sector. These factors will likely continue to have an effect on results in various categories in coming periods.

Highway bill The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) is one of the government bills that has influenced construction equipment spending. The bill, which expired on September 30, 2009 (but continued because of numerous extensions over several years) was a six-year, $286.4 billion bill that funded highway and transit projects nationwide. In July 2012, following several years of delays, the US government implemented a new $105 billion transportation bill, which provides financing for highway, bridge, and public transportation projects for a 27-month period.

A Bloomberg article published on May 15, 2014 reported that starting July 2014, the Highway Trust Fund will be unable to sustain all its bills and will be down to $1 billion by the end of September. An interruption in funding would affect more than 112,000 construction projects and almost 700,000 workers over a year, according to a White House analysis. In response, in July 2014, the House passed a bill to fund highway spending, with the intention to keep the Highway Trust Fund afloat until May 2015. President Obama signed into law this $10.8 billion funding package in August 2014.

Additionally, the Obama Administration has proposed a four-year, $302-billion reauthorization plan called the Grow America Act. This Act attempts to improve the transportation system, transportation safety, and investment in transportation. Consequently, in May 2014, the Senate Environment and Public Works Committee passed a bipartisan bill reauthorizing transportation spending for six years.

First-time homebuyer tax credit The construction equipment industry, which depends on the health of construction markets, was affected by the $8,000 tax credit available for first-time homebuyers under the American Recovery and Reinvestment Act (ARRA) of 2009. Initially, the credit applied to purchases of principal residences from January 1 through November 30, 2009. It was available to single taxpayers earning up to $75,000 and married (jointly filing) taxpayers earning up to $150,000, and was adjusted downward for taxpayers earning above those amounts.

The US Congress extended the first-time homebuyer tax credit in November 2009. To take advantage of this extension, a buyer needed to have a contract in place before May 1, 2010, and the purchase of the home had to close before July 1 (later extended to September 30). In addition to the $8,000 credit for first-time buyers, the extension also included a new $6,500 maximum tax credit for move-up buyers who had lived in their residence for a minimum of five of the last eight years. The credit also phased out at much higher income levels, starting when single filers reached $125,000 of adjusted gross income (with no credit received when income exceeds $145,000), and when married filers reached $225,000 of adjusted gross income (with no credit when it exceeds $245,000). As of 2014, there is no federal program providing first-time homebuyer tax credit for homes purchased later than 2010. However, there are state-based programs for first-time homebuyers. For example, in New York, the State of New York Mortgage Agency (SONYMA) has five mortgage programs, one of which is the low interest rate mortgage program for first-time homebuyer.

We originally thought that the tax credit had played a part in the stabilization of residential housing markets, but now feel that the ultimate impact of the measure is difficult to gauge. It appears that the credit may have changed the timing of home purchases. To a much lesser extent, the financial benefit may have enabled some buyers to buy homes that they would otherwise not have been able to buy.

We think that the sharply rising proportion of first-time buyers during the period that the credit was in effect best illustrates the impact of the homebuyer tax credit. In March and April 2010 (the last two months


when the extended tax credit was in effect), first-time homebuyers accounted for 48% and 49%, respectively, of all purchasers, eclipsing the prior monthly record of 47% in October 2009 (which was just prior to the expiration of the original tax credit). Before the housing crisis, first-time homebuyers typically accounted for 20% of all purchasers. Though we think the tax credit played a part in the much higher proportion of first-time homebuyers, we also think that statistics were influenced by difficulties that potential move-up buyers were having in selling their old houses. Nevertheless, the NAR reported that in a 12-month period ending in June 2014, 33% of homebuyers were first-time homebuyers, down from 38% in the prior-year period.

EPA emissions standards The US Environmental Protection Agency’s (EPA) Clean Diesel Trucks, Buses, and Fuel: Heavy-Duty Engine and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements (the “2007 Heavy-Duty Highway Rule” or HD 2007), an emissions-control program for heavy-duty highway vehicles and the diesel fuel they use, has influenced the level of Class 8 truck purchases since 2007. HD 2007 mandated that emissions of particulate matter needed to be 90% lower than 2004 levels, and that emissions of nitrogen oxides (NOx) had to be over 40% lower. The new standards started being phased in with the 2007 model year, with full compliance required in 2010. Under the final standard, engines are required to emit no more than 0.2 grams per brake horsepower hour (g/bhp-hr) of NOx and 0.14 g/bhp-hr of non-methane hydrocarbons. Depending on certain factors, a change in emissions standards often increases demand for noncompliant engines before the new regulations take effect. A pre-buy typically reduces demand in the year when regulations go into effect. The primary reason for pre-buying is that engines based on new requirements tend to be more expensive. Another factor is uncertainty about the performance of the new engines, and the costs of running and maintaining them.

Higher costs and lower fuel economy related to the 2007 compliance requirements caused a major pre-buy in 2006. However, unfavorable industry conditions and only nominal worries about the new engines resulted in very limited pre-buying activity before the 2010 regulations went into effect.

Moving beyond the 2007 Heavy-Duty Highway Rule, in August 2011, the EPA and the National highway Traffic Safety Administration (NHTSA) put forward the first program, the Heavy-Duty National Program, which aims to reduce greenhouse gas (GHG) emissions of heavy-duty trucks and buses. Under this program, the EPA and NHTSA adopted standards for CO2 emissions and fuel consumption of heavy-duty engines and vehicles. For heavy-duty pickup trucks alone, the EPA and the NHTSA proposed separate gasoline and diesel truck standards, which phase in starting in the 2014 model year through the 2018 model year. By

2018, the agencies estimate a per-vehicle reduction in GHG emissions of 17% and 12% for diesel vehicles and gasoline vehicles, respectively.

Biomass fuel legislation The Renewable Fuel Program (RFS) of the Energy Policy Act of 2005 provided a comprehensive program for 2007 through 2012 and beyond. The policy mandated a sharp rise in renewable fuel use in gasoline to 7.5 billion gallons by 2012.

The Energy Independence and Security Act (EISA) of 2007 expanded the RFS to require that 36 billion gallons of ethanol and other fuels be blended into gasoline, diesel, and jet fuel by 2022. Ethanol production in the US has increased in recent years, from 1.6 billion gallons in 2000 to an estimated 13.3 billion gallons

Chart H04: US CORN USED IN FUEL PRODUCTION

0

5

10

15

20

25

30

35

40

45

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1987 91 95 99 03 07 11 F15 F19 F2023

Other corn usage (left scale)

Fuel alcohol use (left scale)

% of corn production used for fuel (right scale)

US CORN USED IN FUEL PRODUCTION

F-Forecast.Source: US Economic Research Service.

(Millions of bushels) (%)


in 2013, up slightly from 13.2 billion gallons in 2012. Year to date through September 2014, ethanol production reached 10.6 billion gallons, up 9.3% from 9.7 billion gallons in the prior-year period.

In 2012, 43.1% of all corn produced in the US in 2012 was used in fuel production. Widespread drought in 2012 prompted governors of eight states to petition the EPA to waive requirements for blending corn-based ethanol into gasoline. According to the group, the requirement was driving up food costs, and was particularly affecting livestock producers. However, in November 2012, the EPA rejected these petitions, claiming that a waiver of the mandate would only reduce corn prices by 1%. In 2013, the percentage of corn produced in the US that was used in fuel production dropped to 35.0%. This was expected to decline further to 34.4% in 2014.

Nevertheless, despite the large increases in ethanol production and the use of corn in it in recent years, we see both slowing in coming years. We base this forecast on the belief that only moderate growth will be seen in overall gasoline consumption in the US.


INDUSTRY PROFILE

Heavy equipment trends vary by market

The heavy machinery industry is large and diverse. For the purposes of this Survey, S&P Capital IQ (S&P) focuses on two main sectors: agricultural and farm equipment; and construction machinery and heavy trucks.

AGRICULTURAL AND FARM EQUIPMENT

Three companies dominate the global agricultural and farm equipment industry: Deere & Co., AGCO Corp., and Kubota Corp.

In 2013, these three major agricultural and farm equipment companies posted revenues totaling $27.3 billion, representing a 4.3% gain from $26.2 billion in 2012. On that recovery in revenues, they also recorded a 6.3% increase in operating profits to $4.6 billion. Of that group, Deere’s $21.8 billion of agricultural and farm equipment revenues and $4.1 billion of operating profits topped the list in both categories. Year to date through September 2014, these three companies posted $19.3 billion revenues, with Deere amassing an 81.6% share. (See the “Heavy Equipment Revenues & Net Income” table.)

Trends in agricultural and farm equipment were robust in 2011, as strong demand and weather-related supply disruptions led to much higher crop prices. The industry faced greater challenges in 2012 due to drought conditions in the US. Economic uncertainties and other weather issues (such as wet weather) provided challenges in 2013. (For details, see “Challenges in farming markets threaten strong gains in AG equipment” in the “Current Environment” section of this Survey.)

CONSTRUCTION MACHINERY AND HEAVY TRUCKS

Based on the combined revenues of the world’s eight largest construction machinery and heavy trucks manufacturers, the global earthmoving equipment industry generated revenues of $92.1 billion in 2013, down 1.2% from $93.3 billion in the prior year. Of that group, Daimler AG had the largest sales base, at $38 billion. (See the “Heavy equipment revenues & net income” table for more details.) The major construction machinery and heavy trucks

Table B06: HEAVY EQUIPMENT REVENUES AND NET INCOME, BY SEGMENT

HEAVY EQUIPMENT REVENUES & NET INCOME(Ranked by revenues as of the first nine months of 2014)

OPERATING REVENUES PROFIT*

--------- (MIL. $) --------- -------- (MIL. $) --------COMPANY 2013 2014ʬ 2013 2014ʬAGRICULTURAL AND FARM EQUIPMENTDeere‡ 21,821 15,717 4,062 1,776 AGCO 2,758 1,865 326 188 Kubota† 2,704 1,675 250 285 CONSTRUCTION MACHINERY AND HEAVY TRUCKSDaimler 37,983 31,633 527 465 Caterpillar 20,219 16,655 1,886 1,659 Paccar 7,138 7,409 514 656 Volvo 9,247 6,861 196 273 Navistar 6,798 6,939 (615) (440) Terex 2,592 5,520 153 353 Komatsu† 5,769 2,781 655 362 Scania 2,394 1,211 322 162 *Before taxes. ʬData through the f irst nine months of the f iscal year.†Fiscal year ended March of the follow ing year hence, data is for six months only (April-September). ‡Fiscal year ended October.All values signify results of operations w ithin the Americas and/orNorth America and related industry only. Estimated using verticalf inancial analysis and annual average USD exchange rate.Source: Company reports; S&P Capital IQ estimates.

Chart H02: CONSTRUCTION SPENDING

(40)

(30)

(20)

(10)

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *2014

Private Nonresidential Private Residential Public

*Data through October.Source: US Department of Commerce.

CONSTRUCTION SPENDING(Year-to-year percent change)


companies also experienced $3.6 billion of operating profits in 2013, down 26.1% from $4.9 billion in 2012. Year to date through September 2014, the major construction machinery and heavy truck companies reached revenues of $79.0 billion, and operating profits of $3.5 billion.

Trends have been mixed in the industry over the past few years. For details, see “Total construction shows signs of recovery” in the “Current Environment” section of this Survey.

In reviewing the construction machinery and heavy trucks group, one should also keep in mind that the largest manufacturers are true global conglomerates, operating in virtually every country on the planet.

These manufacturers also produce other industrial machinery, such as agricultural equipment, and energy and mining equipment; and they provide other services, such as logistics, remanufacturing, part manufacturing, and maintenance services. The largest companies in this sector also have financial-service subsidiaries that can provide financing solutions to both the client company and its customers.

INDUSTRY TRENDS

In the heavy machinery industry, demand drivers and business economics can vary from one sector to another. Nevertheless, industry sectors also share a number of trends and themes: consolidation, expanding use of captive finance subsidiaries, focus on productivity, ever-growing demands from customers to improve value and service, and e-commerce initiatives. We talk about the common trends first and then discuss certain industry-specific factors that have been influencing heavy equipment purchases.

THE BIG GETS BIGGER

In many heavy machinery sectors, the long-term consolidation trend continues to play a significant role. With a high fixed-cost

business model based on manufacturing-volume leverage and marginal cost of production, bigger is generally better, and markets for the largest categories are already highly concentrated. Nevertheless, opportunities remain for smaller acquisitions that would allow leading manufacturers to expand their product lines or sales territories through dealer networks.

Many large participants in these industries have begun evaluating these businesses from a portfolio-management perspective, as they consider their operating subsidiaries to be components of a business portfolio. Hence, they actively manage their portfolios to optimize capital resources and to provide the most favorable returns to investors. These companies often make acquisitions to round out product lines or to deepen market penetration, and restructure or divest lagging units that cannot provide acceptable returns.

Chart H01: FARM EQUIPMENT EXPENDITURES & FARM INCOME

Chart H03: CLASS 8 TRUCK RETAIL SALES

50

100

150

200

250

300

350

400

450

1998 2000 2002 2004 2006 2008 2010 2012 2014*

CLASS 8 TRUCK RETAIL SALES(Thousands of units, annual rate)

*Data through October. Source: ACT Research.

0

100

200

300

400

500

600

0

5

10

15

20

25

30

1990 93 96 99 02 05 08 11 2014F

Farm machinery expenditures (right scale)

Gross farm income (left scale)

F-Forecast.Source: US Department of Agriculture.

FARM EQUIPMENT EXPENDITURES & FARM INCOME (In billions of dollars)


Expanding operations Driven by the highly cyclical nature of the heavy equipment and truck markets, many manufacturers have started looking to other areas in an attempt to generate reliable earnings streams, greater sustainable income growth, and higher returns. Many of the larger companies have expanded their operations to include captive finance subsidiaries—divisions that provide financing to dealers and customers, intended to facilitate the purchase and/or lease of a company’s equipment. As a result, the big manufacturers now offer service-related operations, such as leasing, financing, and maintenance. Industry observers expect that the increasing reluctance of trucking companies to own trucks, which rapidly depreciate, should accelerate demand for truck leasing in the future.

Although leasing and financing are generally much more profitable businesses than manufacturing, they also shift more of the financial risk from the dealer/customer to the equipment manufacturer. Furthermore, leasing and financing operations generally require heavy machinery makers to take on large amounts of debt, primarily to finance the purchase of equipment that is going to be leased or sold. Other financing activities may include

using various types of hedging instruments and off balance-sheet arrangements; these, too, can raise equipment makers’ financial risk profiles.

For example, only 7% of Caterpillar Inc.’s net income was derived from its financial services division in 2008, but as of the third quarter of 2014, the company attributed 13% of its net income to the said division. In addition, Caterpillar and Paccar Inc. amassed more than 40% of their net income from their financial services division in 2009. (See the accompanying table “Estimated percentage of consolidated net income derived from financial services divisions” for individual companies’ earnings contributions from financing activities.)

Risks of non-core operations In light of the growing significance of non-core operations at heavy machinery and truck companies, particularly their finance units, we think it is important to consider some of the risks associated with these operations. We think these heavy equipment makers have a particular need to manage risk exposure wisely because of the heavily cyclical nature of their primary businesses. In assessing the risks of these financial units, credit and residual value risk merit special attention, in our view. With respect to the latter, we view residual value guarantees (RVGs) as an aggressive kind of financing arrangement, where the finance company retains the majority of the risk.

Credit risk. The possibility of incurring a financial loss due to a borrower’s failure to meet a contractual debt obligation, or credit risk, is a significant consideration for captive finance subsidiaries, in our view. Within the highly cyclical heavy machinery industry, suppliers and customers tend to be affected by similar macroeconomic conditions, and both usually face a certain degree of financial stress at or near the trough of the cycle. Therefore, in order to reduce the likelihood of incurring a significant financial loss, it is important that a heavy machinery company maintain disciplined underwriting standards on its loan and lease agreements throughout the entire cycle.

Residual value risk. Broadly defined, residual value risk is the risk that, at the end of a contract, the fair market value of the equipment that is sold or leased will be less than the residual value that the finance company estimated at the time the contract originated. In the event that the equipment is worth less than the calculated residual value, the finance company may be forced to record a write-down for the difference. Residual value risk relates primarily to contracts involving buy-back or trade-in commitments, RVGs, or operational lease contracts.

TABLE B03— ESTIMATED PERCENTAGE OF CONSOLIDATED NET INCOME DERIVED FROM FINANCIAL SERVICES DIVISION

ESTIMATED PERCENTAGE OF CONSOLIDATED NET INCOMEDERIVED FROM FINANCIAL SERVICES DIVISION*

FISCAL

COMPANY YEAR 2008 2009 2010 2011 2012 2013 2014†

Caterpillar Dec. 7 43 9 5 5 10 13Deere Oct. 14 14 14 14 12 13 10Paccar Dec. 15 48 23 16 15 15 15Volvo Dec. 9 † 1 4 9 28 NA *Results reflect an estimated percentage as calculated.†Based on data as of third quarter.Source: Company reports; S&P Capital IQ estimates.


Residual value guarantees. A fairly aggressive kind of financing arrangement, RVGs essentially provide the dealer/customer with a put option on the equipment, while the finance company retains the majority of the risk. In general, when equipment is sold subject to an RVG, the finance company receives the full amount of the sales price from the dealer/customer. The finance company then establishes a liability for the amount of the RVG obligation, and the rest of the proceeds are recorded as deferred lease revenue on a straight-line basis over the life of the RVG contract. At the end of the contract period, if the dealer/customer decides to return the equipment to the finance company, the finance company is obligated to purchase the used equipment at the guaranteed value. If the RVG exceeds the current fair market value of the equipment, the finance company may be forced to dispose of the used equipment at a loss.

During the late 1990s, aggressive use of RVG contracts by certain heavy-duty truck makers and dealers, largely in an attempt to gain market share, resulted in a flood of used vehicles on the market a few years later. This rapid increase in supply depressed the prices of used vehicles in the market and ultimately led to a significant number of lessors incurring substantial residual value write-downs.

Additional servicing operations In order to exploit an already captive customer base, and lower the cost of obtaining additional revenue streams as well as smooth a company’s earnings cycle, a mushrooming number of heavy machinery makers are offering other integrated services. These services include spare parts production, remanufacturing services, logistical services, and consultancy services. Integrated services generally are higher-margined than normal product manufacturing, have a lower fixed-cost basis, and are less prone to economic cycles.

ENHANCED PRODUCTIVITY

In our view, a common characteristic among many of the more successful heavy machinery companies is a relentless focus on enhancing productivity. While there are various ways to achieve increased productivity, many corporations have embraced a philosophy known as Six Sigma.

The term Six Sigma can mean different things to different companies. However, we view it simply as a disciplined approach to process improvement. Six Sigma uses a five-step model known as DMAIC (define, measure, analyze, improve, control) for improving a process. In the define stage, the problem is defined and an improvement goal is established. The measure stage uses various data analysis techniques to measure the existing process (i.e., to establish a baseline) and to identify quantitative metrics for measuring progress toward the goal. During the analyze stage, potential ways of achieving the desired goal are explored. In the improve phase, the new process is implemented. Finally, in the control stage, systems designed to control the new process are institutionalized.

To varying degrees within their organizations, many companies have embraced Six Sigma, but in an effort to improve the productivity of their entire supply chain, some companies, such as Caterpillar, are looking beyond their own facilities and have begun working with suppliers to identify ways of doing things better.

MAXIMIZING VALUE FOR THE CUSTOMER

Similar to consumer goods manufacturers, heavy machinery firms are hearing more customers demand value for their money. For buyers of capital goods, value is measured in terms of return on investment (ROI). Maximizing ROI is not simply a matter of paying low prices for purchased equipment; it involves the efficiency of the equipment as well. Customers will often pay higher prices for equipment that has fewer breakdowns, provides more output per day, or requires less downtime for routine maintenance than competing brands. Again, it all comes down to productivity.

Heavy machinery makers have undertaken a number of strategies to meet customers’ demands. For instance, they have applied sophisticated electronics to mechanical systems in order to enhance productivity, increase precision, facilitate maintenance, and provide operators with more complete information on the equipment’s operating status.


E-business initiatives The Internet has changed the way that many heavy machinery manufacturers conduct business. Customer demand for transparent pricing and convenience is one incentive. In addition, new avenues of revenue growth, as well as the potential for cost savings and productivity improvements, have driven heavy machinery makers to set up Internet-based product and information exchanges (much like producers across most industries).

Internet-based applications also help some manufacturers and dealers to customize and configure orders. As a result of the capabilities of many applications that are part of company sites, they can help, in many cases, to reduce compatibility issues and to deliver the final product at a faster pace.

That said, companies that make sophisticated and hard-to-duplicate industrial goods should not be significantly affected by Internet price competition, in our view. Customers are willing to pay premium prices for highly engineered precision equipment, and usually want one-on-one consultations with the manufacturer or vendor.

Make it simple Another way to satisfy customers is through reducing the complexity of heavy machinery—this often improves the equipment’s quality and reliability, while cutting the cost of buying and operating it. Simplification can take several forms. It usually involves minimizing the number of parts or components used in assembling a piece of equipment. The fewer the number of parts, the greater the likelihood that the equipment will be built right the first time, and the less likelihood that it might break. Simplification can also involve limiting the variations and types of equipment produced on individual assembly lines, which has been shown to improve efficiency and lower the incidence of defects in the output.

INDUSTRY-SPECIFIC INFLUENCES

Aside from the factors, discussed earlier, that influence all areas of the heavy equipment and trucks industry, there are certain issues that have an impact on specific sectors of the industry.

Infrastructure spending has a significant influence on the construction equipment sector. For a good part of the decade prior to the economic downturn of 2008–2009, a general theme among developed countries was to “balance their books” by cutting back on public works programs. These actions have now created a strong need to update, maintain, and build infrastructure. CIBC World Markets Inc., the investment banking subsidiary of Canadian Imperial Bank of Commerce, released a report in November 2013 highlighting that economic and social infrastructure needs take about 3.5% of global GDP spending, and would require an increase in investment to 4.1% in order to maintain historical asset valuation. The report also estimated the cost of updating the world’s infrastructure at $57 trillion–$67 trillion by 2030. This translates to $3.0–$3.4 trillion a year, which excludes spending required to improve or repair existing assets. CIBC also noted that the US must increase spending on infrastructure from 2.6% of its GDP to 3.6%, whereas Brazil and Mexico must double and triple expenditures, respectively. Additionally, the report estimated that an investment of 8% of GDP is needed in the Latin American and Caribbean region to increase the standard of living to that of East Asia, while East Asia needs to increase its spending to 6.9% to increase its standard of living to that of Japan.

Many industry-specific factors also influence sales of Class 8 heavy-duty trucks (more than 33,000 pounds). In this sector, fleet operators typically order new trucks after taking into account both their financial strength and the demand outlook for their services. The cyclical nature of demand is clearly visible in the annualized unit sales results of Class 8 heavy-duty trucks (as shown in the “Class 8 truck retail sales” chart in the “Industry Profile” section of this Survey).

Annualized sales had reached an all-time record of 408,600 units in December 2006, before the financial crisis. That robust total had been driven by strong carrier profitability, ongoing replacement demand because of an aging motor fleet, and a significant amount of pre-buying ahead of changes to emissions regulations in 2007. However, as a clear example of the industry’s extreme cyclicality, sales in early 2009 fell to their lowest level in 13 years—only a little over two years after sales reached a record high. The weakness reflected a combination of a reduced need for trucks because of the major 2006 pre-buy, as well as the very negative impact of the severe economic downturn experienced since late 2007. From the early part of


2010, heavy truck sales started a strong uptrend, before experiencing challenging conditions again toward the end of 2012 and the first quarter of 2013. This led to a 6.9% sales decline in 2013. Nevertheless, year to date through October 2014, unit sales of Class 8 heavy-duty trucks rose 12.6% to 2.8 million.

HOW THE INDUSTRY OPERATES

Manufacturers in the heavy-duty machinery industry rely on their technological expertise and market reputations for survival. Their products are crucial to their customers, often determining the customers’ business success or failure.

The manufacture of heavy-duty machinery typically requires months, and selling it can take many more months—sometimes years. Before purchasing such equipment, customers usually undertake detailed analyses of such factors as price, reliability, quality, productivity, life-cycle operating costs, in-service performance, and aftermarket service. Purchase decisions are typically reviewed by several layers of management within a firm and sometimes by its board of directors. Ultimately, the customer’s decision to purchase this capital-intensive equipment from a specific manufacturer involves a long-term commitment that can generate a lucrative revenue stream for the manufacturer.

Riding the cycles The heavy-duty machinery industry comprises highly cyclical businesses whose fortunes tend to lag those of the global economy. Typically, increases in heavy-duty machinery spending stem from customers’ decisions to replace aging equipment or to add capacity. Among the factors involved in the decision to replace aging equipment are an overall cost/benefit analysis of maintaining the old equipment versus buying new, the outlook for markets served, and the impact of government regulations.

Capacity increases or decreases in industries that buy heavy equipment are driven primarily by capacity utilization rates and projections of future demand and profits. When capacity utilization rates are high and demand growth is anticipated, companies will typically purchase additional machinery and equipment. Conversely, when capacity utilization rates are low and management expects little or no long-term pick-up in demand levels, companies will forgo purchases of heavy-duty machinery. Within this general context, however, the various segments of the heavy-duty machinery industry (which include construction equipment, farm equipment, and heavy trucks) exhibit differences and particularities.

CONSTRUCTION EQUIPMENT

Construction equipment manufacturers produce a broad line of heavy-duty off-road vehicles that are used in the construction of highways and buildings, as well as in mining, forestry, and landfill operations. These machines facilitate the recovery and movement of heavy payloads. Equipment typically produced by these manufacturers includes vehicles such as tractors, loaders, excavators, backhoe loaders, off-road trucks, scrapers, graders, pavers, log loaders, feller bunchers, skidders, and land compactors. These categories include some of the largest pieces of machinery in the world, designed to perform some of the most physically demanding tasks.

The particular segments that the industry serves influence demand for construction equipment. The largest factors are related to residential, nonresidential, and public construction, which comprise new housing, buildings, roads, highways, dams, and other major construction projects undertaken by both the government and private industry.

As with heavy trucks and agricultural equipment, distribution of construction equipment relies on dealer networks supported by the manufacturers, which finance sales and leases. Unique to the construction equipment sector, however, are dealer-owned rental fleets. This equipment is leased to construction and maintenance companies that need it for relatively brief periods.

Types of construction equipment Most construction equipment can be segmented into one of the following broad categories:


Earthmoving machinery. This segment encompasses a broad range of equipment used to excavate and transport earth for purposes of building construction. It includes crawler dozers, loaders, wheel loaders and dozers, scrapers, graders, hydraulic excavators and backhoes, trenchers, pipe layers, and off-highway trucks. Building construction (residential, commercial, industrial, and institutional) is by far the leading source of demand for earthmoving equipment. Road construction, repair, and maintenance also account for a portion of earthmoving equipment sales.

Excavators and cranes. Used on virtually all types of construction projects, excavators range from small backhoes that can be mounted on a tractor or other prime mover to large walking draglines and power shovels used in major surface-mining projects. Because power shovels have relatively long and useful lives, replacement parts account for a significant portion of shovel makers’ total sales.

The major markets for cranes include bridge, highway, and large commercial and industrial construction projects. Heavy cranes are increasingly employed in offshore oil drilling and production platforms. As with power shovels, replacement parts are an important supplement to original equipment sales for the manufacturers. Most makers of heavy-lift cranes also produce hydraulic cranes.

Underground mining machinery. This category comprises essentially three types of machinery: conventional equipment, continuous miners, and longwall systems. The latter two are used primarily in the underground production of coal. Conventional equipment includes cutters, drills, loaders, shuttle cars, conveyors, and roof bolters. The continuous miner removes coal from the face of a seam and loads it into cars on conveyors, averting the need for cutting machines, drills, or explosives. This system improves both mine productivity and worker safety. Longwall mining machines shear coal from the face of a seam in long slices and move it to the surface via conveyors. In mines where coal seams are thick enough and where the estimated mine life justifies the capital investment, this equipment can substantially improve productivity.

Other construction equipment. This category includes asphalt and concrete pavers; mixing, spreading, and finishing machines for asphalt and concrete; compactors, with both highway and landfill applications; air compressors and air tools; pumps; hoists; and rock-crushing and screening equipment. Many earthmoving equipment companies are also active in this area.

Heavy-duty machinery engines Engines for heavy-duty machinery are manufactured for a variety of applications. In general, however, they are classified as either on-highway (heavy- and medium-duty trucks) or off-highway (construction and farm equipment). The industry is highly concentrated, heavily regulated, and influenced by the same factors as the end markets it serves. Primary participants in the on-highway segment include Caterpillar Inc., Cummins Inc. (formerly Cummins Engine Co.), Navistar International Corp., Volvo, and Daimler AG. Manufacturers of off-highway engines include Caterpillar, Cummins, Deere & Co., and Ford Power Products.

AGRICULTURAL EQUIPMENT

Producers of agricultural equipment manufacture the machinery farmers use to cultivate land and to plant and harvest crops. This equipment includes tractors, plows, cultivators, sprayers, spreaders, combine harvesters, balers, and assorted implements attached to the tractors and combines for tending crops. Most producers of motorized agricultural equipment also manufacture construction and industrial machinery, such as logging equipment and general-purpose tractors.

The most important segments of the agricultural equipment sector have become concentrated after much consolidation in the 1980s. Today, the remaining large players are looking overseas to extend their reach into new markets. Many are entering developing areas of the world, as well as Eastern Europe, via acquisitions and joint ventures.

In addition, over the past decade, a new market has begun to emerge for these companies in the under-40-horsepower tractor market. Purchasers of these smaller tractors include homeowners, turf and land caretakers, commercial contractors, public agencies, rental businesses, golf courses, hobby and part-time farmers, and industrial plants.


Competitive pressures affect the fortunes of agricultural equipment makers. These pressures largely result from wide swings in crop prices and in farmers’ income. When crop prices and farm incomes decline, demand for agricultural equipment usually dips as well. During periods of weakness, prices deteriorate as equipment manufacturers attempt to maintain sales and output. Eventually, they slow production and lay off workers. In North America, agricultural equipment is purchased or leased by individual farmers and farm cooperatives. The National Agricultural Statistics Service of the US Department of Agriculture (USDA) estimated that there were 2.10 million farms in the US in 2013 (latest available), down seven thousand farms from 2012. There were also about 206,000 Canadian farms in 2011 (latest available), down 10.3% from the prior census total in 2006.

Operations and characteristics of agricultural equipment businesses Agricultural equipment producers establish and support networks of dealers who maintain inventories of popular models and equipment. In addition, farm equipment makers finance sales and leases. Most agricultural equipment is sold out of inventory.

The variables for a tractor include engine size and power, the number of drive axles, the type of tires, and such amenities as air conditioning and audio equipment. Combines are somewhat more customized for each client, depending on the specific application and the combination of farm implements required to perform the tasks. Characteristics that help determine the way a tractor or combine is outfitted include the size and quality of the land farmed, the crop planted, and the climate of the region where the equipment will be used.

Government subsidies prop up farm income Demand for farm equipment closely reflects fluctuations in farmers’ incomes. In years that follow good harvests and favorable prices, farmers tend to reinvest their profits in new equipment. However, farmers’ incomes can fluctuate wildly, due to the vagaries of the economy, weather, and volatile crop prices.

For decades, the US government and the European Union (EU) countries have implemented various farmer aid programs, in an effort to try to stabilize volatile farm incomes. During leaner years, the level of government support can range from 30% to more than 50% of farmers’ annual income. These programs primarily comprise subsidies, which farmers receive if they cannot generate returns greater than production costs; price supports, which guarantee purchases of crops at preset prices; and set-aside programs, which essentially pay farmers not to grow crops.

The problem with subsidies and price supports is that they typically exacerbate supply and demand imbalances. These programs encourage farmers to plant more crops, even when prices are low, because the government guarantees payments. This scenario ultimately can lead to gluts in grain supply, dramatically increasing the likelihood of chronically weak grain prices and tepid long-term growth in farm income.

In the US, Congress eliminated most subsidy and set-aside programs in 1996, in an effort to wean the farming industry from government payments. However, this was a time when farmers were enjoying a rare period of strong worldwide demand and crop prices, and the subsequent farm depression in the late 1990s brought the subsidy issue back to the forefront. As a result, Congress and President George W. Bush resurrected these subsidy programs by passing the Farm Security and Rural Investment Act (known as the US Farm Bill) in May 2002.

The Food, Conservation, and Energy Act of 2008, went into effect in October 2007. The bill called for farm subsidies totaling $307 billion over five years and expired in September 2012. As of mid-December 2013, a subsequent bill had yet to be passed, but congressional deliberations continued. The Senate approved a 10-year farm bill in June 2013 that would cost some $955 billion if it were enacted. However, an ultimate resolution remained uncertain, as shortly after that, the House of Representatives rejected its own $940 billion bill. A conference agreement was reached in January 2014 and a new farm law, the Agricultural Act of 2014 (2014 Farm Act), was signed on February 7, 2014. The 2014 Farm Act includes provisions for reshaping the structure of farm commodity support, expanding crop insurance coverage, consolidating conservation programs, reauthorizing and revising nutrition assistance, and extending authority to appropriate funds for many USDA discretionary programs through 2018.


In the EU, subsidies have been commonplace for a number of years. Under the Common Agricultural Policy (CAP), the EU equivalent of the US Farm Bill, support payments total approximately $55 billion a year and account for close to 50% of the European Union’s annual budget.

Government regulations not a big factor Government regulation has not severely constrained the agricultural equipment market in terms of equipment design. For instance, the US Environmental Protection Agency (EPA) has not yet implemented emission regulations for agricultural and other off-highway vehicles, although such regulations have been contemplated from time to time and will probably be put in place eventually.

These regulations are not likely to cause difficulties for the industry, however, in that they would mostly affect the diesel engines employed in farm equipment. Because farmers buy most of this equipment with government money, which is guaranteed, it is easier for manufacturers to pass along costs associated with developing compliant engines. In addition, the US Farm Bill allocated funds for farmers to buy cleaner-running engines.

HEAVY TRUCKS

Leading heavy-duty truck manufacturers model their operations around the industry’s cyclicality and the need to customize products. They focus on the design and assembly of truck platforms, and they rely on suppliers of parts and components to design and produce the various mechanical, electronic, interior, and exterior systems that are assembled to make a vehicle. This practice lets the truck manufacturer or assembler maintain the lowest possible fixed-cost base, and it gives customers greater flexibility to outfit vehicles as they desire.

What customers want Heavy trucks are highly customized vehicles, manufactured to suit the end user. Buyers have traditionally selected the “hard parts”—engines and transmissions (power trains), axles, suspensions, wheels, tires, brake systems, seating, and other interior and exterior features—based on the purpose and route the truck is to serve. Considerations include the distance traveled per trip, geographical region, road topography, and cargo type. For example, for long-haul shipments where speed of delivery is a priority, carriers may prefer a comfortable truck with a large fuel tank. In the case of heavy-load shipments where weight limitations are a consideration, a carrier may choose to go with a lighter truck and a smaller fuel tank.

Today, customizing extends to sophisticated electronics systems, such as antilock brakes, crash avoidance warning systems, and tracking and communications devices enabled by the global positioning satellite (GPS) system. A customer may decide to add these electronic features to boost the operating efficiency of its fleet, to improve safety and reliability, or to satisfy regulatory mandates.

Despite the high degree of customization, the product life cycle of heavy trucks is quite long. Basic vehicle redesigns occur as infrequently as once a decade; when they happen, they are primarily the result of breakthroughs that permit more efficient truck design through improvements in aerodynamics or weight reductions in components made by assemblers. Interim efficiency improvements come primarily from gains achieved by component suppliers, especially in the power train and axle categories.

Concentration and competition The heavy truck industry is a concentrated field, with just four major competitors in the Class 5–8 segment of the North American truck market. (Class 5–7 vehicles, known as medium-duty trucks, are from 16,001 pounds to 33,000 pounds, and Class 8 vehicles, known as heavy-duty trucks, are above 33,000 pounds.) Participants are Freightliner (a division of Daimler AG), Volvo Trucks North America Inc., Paccar Inc., and Navistar International Corp. Industry concentration also extends to the component level.

Despite this concentration, price competition tends to be intense over the course of the industry’s business cycle. This is partly because customers closely compare competing trucks and the combinations of components on competing vehicles. Price competition varies in intensity, depending upon the desirability of a particular order. Customers gain bargaining power by virtue of the size of their potential orders and their own financial soundness.


Unlike the domestic automobile industry, the heavy truck industry has not faced significant foreign competition. Due to different geographical terrain and local needs, Class 8 trucks are not manufactured in many foreign countries. Outside the US, two factors favor the use of smaller trucks: goods typically move relatively short distances and narrow city streets cannot accommodate large trucks. Thus, import competition in North America has not been a factor in the Class 8 market. (We note that some foreign manufacturers, such as Daimler AG and Volvo, participate in the US heavy truck market, though they have done so by acquiring manufacturers rather than establishing completely new truck brands.) However, in the medium-duty segment (Class 5–7), foreign truck producers have made inroads in the US market.

Orders and distribution Customer orders help to determine manufacturers’ production plans and profit outlook. Most production is customer-specified—that is, it consists of trucks made to order. Thus, a manufacturer’s order backlog is critical in determining its production line rates and employment levels. Given the high level of training that workers need to produce these specialized vehicles, advanced planning is required. Truck manufacturers monitor the backlog to determine how many workers are needed and how many will need to be trained.

During periods of economic weakness, truck orders slow as fleet operators usually find themselves with excess capacity—that is, idle trucks. In the transportation business, this is called unused equipment. During such periods of excess capacity, fleet operators often cancel or defer pending truck orders. Instead of replacing aging trucks, fleet operators repair them, thus extending their useful lives. To conserve cash during prolonged financial crunches, fleet operators sometimes cannibalize idled trucks for spare parts.

Truck makers establish and support networks of independently owned dealers. These dealers stock sample vehicles and maintain inventories for sale to independent truck operators—individuals who typically operate a single vehicle at a time, which they buy out of inventory. Dealers are also responsible for gathering orders and passing them through to the manufacturer.

Most dealers are affiliated with a single manufacturer. The manufacturer typically supports the dealer’s sales and marketing efforts (with cash payments, marketing strategies and materials, and the like), provides wholesale financing of dealers’ inventory, and offers sales and lease financing to retail customers. Manufacturers also give discounts, rebates, and other marketing subsidies to stimulate sales when necessary.

Regulation The US government regulates the truck industry through its safety and emissions laws. Truck manufacturers must comply with these mandates, and parts and components suppliers are often required to do so as well. Regulations concerning such items as brake systems usually force a truck maker and its systems producers to work closely together to achieve compliance. Emissions regulations are primarily the province of the engine manufacturers, which often keep truck makers apprised of regulatory and production developments.

KEY INDUSTRY RATIOS AND STATISTICS

Unit sales. For industries that sell discrete products such as construction equipment, agricultural equipment, and heavy trucks, the level of unit sales is a meaningful statistic. By tracking unit sales over time, volume demand for a particular product can be determined without having to adjust for inflation, as must be done with dollar revenues. One limitation of unit sales figures, however, is that they do not reveal whether a particular item sold is equivalent in terms of value and productivity to a unit sold earlier. Unit sales figures for capital goods industries are generally available from industry associations and individual companies on a monthly basis.

CONSTRUCTION EQUIPMENT

Construction spending. The US Census Bureau, a data-gathering agency within the US Department of Commerce, tracks construction spending on a monthly basis. It divides the data into residential, nonresidential, and public construction categories, and then into narrower categories that can be tracked for guidance on industry conditions. The Census Bureau disseminates construction spending data 60 days after


the close of each month. Spending for residential, nonresidential, and public construction totaled $910.8 billion in 2013, up 5.7% from $861.2 billion in 2012. Year to date through October 2014, construction spending totaled $800.6 billion, up 5.8% from the same period in 2013.

AGRICULTURAL EQUIPMENT

Cash farm income. A key economic statistic for agricultural equipment makers is cash farm income: the aggregate net income from all individuals and companies engaged in agriculture. How much money farmers make has a direct influence on their equipment spending plans. Naturally, farmers tend to spend more to upgrade and replace farm equipment in prosperous times, and delay farm equipment purchases during lean times. Cash farm income statistics are provided on an annual basis by the Economic Research Service unit of the US Department of Agriculture (USDA).

Grain production and prices. Production levels of crops such as corn, soybeans, and wheat directly affect prices and, thus, farm income—the primary demand driver of farm equipment purchases. The USDA’s National Agricultural Statistics Service reports crop prices in its monthly Agricultural Prices publication.

HOW TO ANALYZE A CAPITAL GOODS COMPANY

Heavy-duty machinery companies derive the bulk of their revenues from the manufacture, sale, and servicing of productive equipment used in a variety of industries. Although each category in which they participate has its own particular nuances, there are many similarities in operations and in performance measures.

The industry sectors covered by this publication are largely involved in the manufacture of products that are customer-specified to some degree. Many of the products are manufactured in batch or specific job orders. Customers typically order these products in a competitive bidding process, combined with detailed negotiations. Following, we discuss the analytical elements that are common to all of the capital goods industry groups, then the specific factors for each of the industry categories.

ANALYZING THE INCOME STATEMENT

Analysis of a company’s income statement provides the data needed to measure operating performance over a particular period. Analysis of longer-term results reveals trends in sales and profits over the course of a business cycle.

Sales and revenues Generally accepted accounting principles (GAAP) require companies to recognize a sale when a product is shipped or a service is rendered. In the case of construction equipment, agricultural equipment, and heavy trucks, manufacturers record sales when their products are shipped to independent dealers or to end users.

On occasion, manufacturers of large custom-built machinery or equipment will receive long-term contracts to manufacture highly specific equipment. These companies normally record sales on a percentage-of-completion basis, reflecting the portion of the sales contract that they have fulfilled. Among product categories, such contracts are typically used for the sale of mining equipment, material-handling equipment (such as the overhead cranes used in shipyards), and shipbuilding.

Recording revenues when products such as heavy trucks are shipped is a fairly straightforward process. However, accounting for percentage-of-completion contracts can be tricky because of the inherent flexibility in measuring the mileposts of a contract. Under the percentage-of-completion accounting method, sales and profits recognized on individual contracts or jobs are based on a project’s overall expected profitability. They are also subject to adjustment upon completion of the projects. For example, if a contract is expected to result in X dollars of income, when the job is Y% complete, Y% of X dollars would be recognized as profit.


The danger with this kind of accounting is that it recognizes profits before they are realized. If cost overruns occur late in a project, a charge to earnings may be required to reflect the job’s lower actual profit. Thus, relying on conservative profit estimates can increase the likelihood that any adjustment will be a favorable one.

Another caveat is that companies have wider latitude to “manage” earnings under this kind of accounting, by recognizing more or less profit in a given accounting period. In periods when overall profits are higher than expected, a company might recognize lower profit on individual contracts, which would hold earnings at a desired level. Conversely, when business is slow, profits that had been deferred might be recognized as an increase in reported earnings. This enables the company to report an orderly earnings increase that meets investors’ expectations.

Gross profit margin Gross profit margin (or gross margin) measures a company’s profitability before selling, general, and administrative (SG&A) expenses and interest expense. To calculate gross margin, subtract the cost of goods and services sold from sales, and divide the result by sales. It is one of the clearest performance measures of a company’s operations because it excludes the impact that a company’s financial structure has on its ultimate profitability.

Gross profit margins can lend important insight into trends in market pricing, product mix, and costs of raw materials and labor. In addition, they can enable the analyst to discern the impact of raw material and labor costs on the business. Tracked over time, gross margins can provide a reliable read on a company’s productivity, particularly in the case of companies that disclose unit sales. If unit sales are known, the analyst can calculate per-unit revenue and gross profit by dividing sales and gross profit, respectively, by the number of units sold.

For heavy-duty machinery companies, trends in gross profit margin may vary widely from one sector to the next. For instance, heavy truck makers typically have a high level of fixed costs, and hence a high break-even point. Once the break-even point is passed, they enjoy substantial profits per unit sold. They will therefore have wide swings in gross profit margin over the course of an economic cycle.

SG&A expense SG&A expense represents the selling costs and general and administrative expenses of a company. Companies with large direct sales forces and branch offices throughout their covered regions are likely to have higher SG&A expenses as a percentage of sales. However, in return, they are also more likely to have a knowledgeable sales force and greater penetration of their target markets, which could yield improved sales results. In contrast, companies that rely more upon independent dealers (who also sell competing products) tend to incur lower selling costs, with the potential trade-off of a less knowledgeable sales force and/or nonexclusive arrangements.

Other costs The remaining items in the income statement tend to be heavily influenced by a company’s particular financial and operating structure. Interest expense is a function of a company’s capital structure, while taxes can be heavily influenced by the geographic location of a company’s operating subsidiaries, or the parent company’s state or country of domicile.

ANALYZING THE BALANCE SHEET

Analysts should look at a company’s balance sheet to determine its financial strength or potential weakness. Changes in the working capital ratio—the ratio of current assets to current liabilities—will show whether the company is using more or less cash than usual for normal operations and whether the business has potential liquidity issues. A build-up in accounts receivable as a percentage of sales may indicate problems with customers’ bill payments, or especially easy purchase terms offered to them, while growth in the inventory-to-sales ratio can foretell a slowdown in production levels or asset write-offs.

Most companies in the heavy-duty machinery universe will use some amount of debt to finance operations and capital expenditure requirements. However, too much debt can elevate the risk of investing in the


shares of a company, as a greater proportion of cash that the company generates has to go toward interest payments, rather than being retained in the business for further growth. The debt-to-capital (D/C) ratio indicates the extent to which a company finances its operations and capital expenditures through borrowings that must be paid back in the future. In the heavy-duty machinery universe, most companies aim to achieve a D/C ratio in the range of 30% to 50%.

ANALYZING THE CASH FLOW STATEMENT: FREE CASH FLOW

Perhaps one of the most telling aspects of a company’s financial condition is the amount of free cash flow (FCF) that it is able to generate. For the purposes of this Survey, we define FCF as cash from operations, less net capital expenditures. FCF reflects the amount of money from normal operations that is available to fund acquisitions, pay down debt, repurchase shares, or distribute as dividends.

KEY INDICATORS

Key indicators of a heavy-duty machinery company’s current health and future prospects include new orders and order backlogs, the book-to-bill ratio, and unit volume and production line rates.

New orders and order backlogs In reviewing new orders and order backlog, an analyst should be keenly aware of how a company calculates its data. When examining orders, it is necessary to know whether the company is disclosing gross, firm, or net orders, whether backlogs represent firm or funded backlogs, or if the company has increased the backlog’s worth by including the value of options or potential follow-on orders.

In its most general sense, the term “backlog” represents the accumulation of unshipped orders. However, there are different kinds of backlog. Gross orders represent the value of new orders that the firm has received. Net orders represent gross orders minus the value of any cancellations. Some orders are “firm and funded” (meaning that the customer has already made an initial deposit and will pay the balance upon shipment) and thus cannot be cancelled. Others are unfunded, such as contracts with government bodies that must authorize funds for financing the purchases. While a higher backlog can be indicative of an upswing in demand, backlog should not be viewed in isolation; a higher backlog without a corresponding increase in new orders may indicate production problems.

Occasionally, a company will call its backlog a “total backlog” and include the value of all optional parts of a contract. In such cases, two figures are usually disclosed—the firm backlog and the total backlog. For example, if a heavy truck firm received orders for 300 trucks, of which 100 were firm orders and 200 were options on orders, the firm backlog would be 100 trucks, while the total backlog would be 300 trucks.

A company’s policy for recognizing orders often depends on the customer involved or the specifics of a contract. For instance, it is common for companies that receive multiyear government contracts to recognize in the backlog only the portion of the contract that is funded in the current government fiscal year. The portion of the order pertaining to future years may be recognized only when funds are appropriated by the government organization.

Book-to-bill ratio The book-to-bill ratio compares the value of a company’s new unfilled orders (bookings) with the value of its products sold or services provided (billings) typically on a quarterly or annual basis. This ratio can be calculated for durable goods orders and construction orders. A ratio above one indicates that the company has received more orders than it is able to fill out of current production. Conversely, a ratio less than one means that the company received fewer orders than it is able to fill. A ratio equal to one indicates that the orders received equal the amount that the company is able to fill.

Unit volume and production line rates Unit volume is a common measure of growth in the construction equipment, agricultural equipment, and heavy-duty truck industries. Tracking the number of units ordered, built, or sold makes comparisons easy over a long time period without having to adjust for inflation, as must be done when examining dollar


values for these industries. Production line rates and, more directly, expected changes in line rates can be used to prepare an estimate of future revenues.

VALUATION MEASURES

There are several different methods that can be used to determine the proper valuation of a heavy equipment company’s stock. For companies in this subindustry, these metrics include price-to-earnings (P/E) and price-to-sales (P/S) ratios, and discounted cash flow (DCF) analysis.

Price-to-earnings ratio The price-to-earnings (P/E) ratio takes a company’s current stock price and divides it by the earnings per share recorded in a four-quarter period. Typically, the best way to examine a company’s P/E valuation is to look at earnings in the following year (based on earnings forecasts) to determine whether a stock is under-, over-, or properly valued.

However, earnings performances fluctuate widely for many of the highly cyclical heavy equipment companies. Hence, the analyst usually needs to determine what part of the business cycle the company is in, and then to look at its typical valuation at similar stages of prior cycles. For instance, if a company is in what is believed to be the middle part of an earnings upturn, the analyst should look back at prior up cycles and see what the range of P/E multiples were in that period to determine where the company’s stock price should now trade. Of course, when using that method, the analyst must also determine if there have been any major changes in the subindustry’s and/or company’s competitive position since the last business upturn, and adjust accordingly.

Although it might seem counterintuitive, the most appealing time to invest in heavy equipment companies is when they have very high or no P/E ratios, which occurs at the end of a cycle downturn or in the early stages of an upturn. At the same time, they are least attractive as investments when they have very low P/E multiples, which typically occurs when earnings are at or near a peak at the latter stages of business upturns.

Price-to-sales ratio The price-to-sales (P/S) ratio is calculated by taking the company’s market capitalization (stock price times number of outstanding shares) and dividing by a four-quarter period of revenues. As is the case for the P/E ratio, the most useful method of determining a P/S ratio is to utilize expected sales in the coming year (based on forecasts) to calculate the metric.

In our view, the P/S ratio can be a valuable metric to use when the company being evaluated is going through a period of losses—a common problem in the very cyclical subindustry. Like the P/E ratio, P/S ratios should be compared with those at similar stages of prior cycles.

Discounted cash flow Discounted cash flow (DCF) analysis is another method that can be effective in determining the proper valuation for a company whose earnings performances are very volatile. This method takes free cash flow projections over an extended period and discounts them to arrive at a present value. (Free cash flow is calculated by taking net income plus depreciation and amortization, minus changes in working capital and capital expenditures.)

After determining the company’s net present value, the company is typically considered an attractive investment if its stock price is currently below the amount calculated as its net present value. The use of this method enables the analyst to smooth out the cyclical trend of earnings in the heavy equipment area.


GLOSSARY

Class 8 trucks—Heavy-duty trucks weighing more than 33,000 pounds.

Combine—Harvesting machine for cutting and threshing grain in the field.

Crane—A machine for hoisting and moving heavy objects by means of cables attached to a movable boom.

Crop—Cultivated produce of the ground, while growing or when gathered.

Ethanol—An alcohol obtained from the fermentation of sugars and starches or by chemical synthesis. It is the intoxicating ingredient of alcoholic beverages, and is used as a solvent in explosives and as an additive to or replacement for petroleum-based fuels.

Excavator—A power-driven machine for digging, moving, or transporting loose gravel, sand, or soil.

Existing home sales—The number of previously owned homes that are sold in a given period.

Housing starts—The number of housing units on which construction has begun during a given time period. The start of construction is defined as the beginning of excavation for the building’s foundation. Reported monthly, housing starts are usually expressed at a seasonally adjusted annual rate (SAAR).

Infrastructure—The fundamental facilities and systems serving a country, city or area, including transportation and communications systems, factories, roads, power plants, and schools.

Livestock—The horses, cattle, sheep, and other animals kept or raised on a farm or ranch.

Net farm income—The farm operators’ share of income from the sector’s production activities.

Pre-buy—Purchase of established models of products prior to the release of new models. Often takes place in the case of Class 8 trucks because new engines have typically been more expensive and delivered worse fuel economy.

Tractor—A powerful vehicle with a gasoline or diesel engine and large rear wheels or endless belt treads, which is used for pulling farm machinery and hauling loads.


INDUSTRY REFERENCES

PERIODICALS

Construction Equipment http://www.constructionequipment.com Monthly; covers the construction equipment industry.

Engineering News-Record http://enr.construction.com Weekly; covers engineering and construction.

Machinery Outlook http://www.machineryoutlook.com Monthly; covers the diversified machinery group.

Ward’s Automotive Reports Ward’s Automotive Yearbook http://wardsauto.com Weekly and annual publications, respectively, covering auto and truck manufacturing.

World Agricultural Supply and Demand Estimates (WASDE) Report http://www.usda.gov/oce/commodity/wasde Monthly publication of the USDA’s National Agricultural Statistics Service; provides various agricultural statistics and forecasts.

TRADE ASSOCIATIONS

Association of Equipment Manufacturers (AEM) http://www.aem.org Trade organization representing manufacturers of agricultural, construction, mining, forestry, and utility equipment, plus suppliers of related products and services. It provides statistics and addresses safety, technical, and public policy issues equipment, plus suppliers of related products and services.

National Association of Realtors http://www.realtor.org America’s largest trade association, whose 1.2 million members are involved in all aspects of the residential and commercial real estate industries.

RESEARCH FIRMS AND INSTITUTIONS

Americas Commercial Transportation Research Co., LLC (ACT Research) http://www.actresearch.net Independent commercial vehicle research organization that publishes five monthly reports covering the North American medium and heavy truck and trailer markets, and maintains supporting databases; also publishes special reports and white papers.

Food and Agricultural Policy Research Institute (FAPRI) http://www.fapri.missouri.edu Independent, nonprofit agricultural forecasting organization at the University of Missouri.

GOVERNMENT AGENCIES

Bureau of Labor Statistics (BLS) http://www.bls.gov/data The federal government’s principal fact-finding group in labor economics and statistics; part of the US Department of Labor.

The Federal Reserve System http://www.federalreserve.gov Government organization that supervises and regulates banks, conducts US monetary policy, and provides services to the US government and the public.

US Census Bureau http://www.census.gov Part of the US Department of Commerce; collects US population and economic data.

US Department of Agriculture (USDA) http://www.usda.gov A cabinet-level department; performs agricultural research and economic analysis.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 10,786.9 9,962.2 8,773.2 A,C 6,896.6 A 6,630.4 8,424.6 3,495.3 11.9 5.1 8.3 309 285 251 197 190DE [] DEERE & CO OCT 37,347.4 35,736.1 31,628.5 A 25,549.6 22,784.4 28,072.6 15,374.6 9.3 5.9 4.5 243 232 206 166 148LNN § LINDSAY CORP AUG 690.8 551.3 478.9 358.4 336.2 475.1 163.4 15.5 7.8 25.3 423 337 293 219 206TWI § TITAN INTERNATIONAL INC DEC 2,163.6 1,820.7 A 1,487.0 A 881.6 727.6 1,036.7 491.7 16.0 15.9 18.8 440 370 302 179 148TTC § TORO CO OCT 2,042.5 1,959.8 1,884.9 1,691.2 1,525.7 1,881.9 1,500.5 3.1 1.7 4.2 136 131 126 113 102

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 933.0 936.3 D 955.7 771.3 738.1 973.7 426.6 8.1 (0.9) (0.3) 219 219 224 181 173CAT [] CATERPILLAR INC DEC 55,656.0 65,875.0 60,138.0 A 42,588.0 32,396.0 51,324.0 22,763.0 9.4 1.6 (15.5) 245 289 264 187 142CMI [] CUMMINS INC DEC 17,321.0 A 17,352.0 A,C 18,060.0 13,236.0 A,C 10,808.0 14,354.0 6,296.0 C 10.6 3.8 (0.2) 275 276 287 210 172FSS § FEDERAL SIGNAL CORP DEC 851.3 803.2 D 795.6 726.5 A,C 752.5 D 958.8 D 1,206.8 A,C (3.4) (2.4) 6.0 71 67 66 60 62JOY [] JOY GLOBAL INC OCT 5,012.7 5,660.9 C 4,403.9 A,C 3,524.3 3,598.3 3,418.9 A,C 1,216.0 15.2 8.0 (11.5) 412 466 362 290 296

OSK † OSHKOSH CORP SEP 7,665.1 D 8,180.9 D 7,584.7 9,842.4 D 5,295.2 D 7,138.3 1,926.0 14.8 1.4 (6.3) 398 425 394 511 275PCAR [] PACCAR INC DEC 17,123.8 17,050.5 16,355.2 10,292.9 8,086.5 14,972.5 8,194.9 7.6 2.7 0.4 209 208 200 126 99TEX † TEREX CORP DEC 7,084.0 7,348.4 6,504.6 A 4,418.2 D 4,043.1 D 9,889.6 3,897.1 6.2 (6.5) (3.6) 182 189 167 113 104TRN † TRINITY INDUSTRIES DEC 4,365.3 3,811.9 A,C 3,075.1 A,C 2,189.1 A,C 2,575.2 3,882.8 1,432.8 11.8 2.4 14.5 305 266 215 153 180WAB † WABTEC CORP DEC 2,566.4 A 2,391.1 A 1,967.6 A 1,507.0 A 1,401.6 A 1,574.7 A 717.9 13.6 10.3 7.3 357 333 274 210 195

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 17,321.0 A 17,352.0 A,C 18,060.0 13,236.0 A,C 10,808.0 14,354.0 6,296.0 C 10.6 3.8 (0.2) 275 276 287 210 172KUBTY KUBOTA CORP -ADR # MAR 14,649.3 12,400.5 12,231.8 11,281.8 9,964.1 11,300.8 8,775.8 5.3 5.3 18.1 167 141 139 129 114MTW MANITOWOC CO DEC 4,048.1 D 3,927.0 D 3,651.9 D 3,141.7 D 3,782.6 4,503.0 A,C 1,570.9 D 9.9 (2.1) 3.1 258 250 232 200 241MTOR MERITOR INC SEP 3,701.0 4,418.0 4,622.0 D 3,590.0 D 4,108.0 D 7,167.0 7,788.0 (7.2) (12.4) (16.2) 48 57 59 46 53CVGI COMMERCIAL VEHICLE GROUP INC DEC 747.7 857.9 832.0 A 597.8 458.6 763.5 287.6 A 10.0 (0.4) (12.8) 260 298 289 208 159

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.


Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 597.2 522.1 583.3 220.5 135.7 400.0 74.4 23.2 8.3 14.4 803 702 784 296 182DE [] DEERE & CO OCT 3,537.3 3,064.7 2,799.9 1,865.0 873.5 2,052.8 643.1 18.6 11.5 15.4 550 477 435 290 136LNN § LINDSAY CORP AUG 70.6 43.3 36.8 24.9 13.8 39.4 12.9 18.5 12.4 63.1 548 336 286 193 107TWI § TITAN INTERNATIONAL INC DEC 35.2 95.6 58.2 (5.9) (24.6) 13.3 (36.7) NM 21.4 (63.2) NM NM NM NM NM TTC § TORO CO OCT 154.8 129.5 117.7 93.2 62.8 119.7 81.6 6.6 5.3 19.5 190 159 144 114 77

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 39.0 33.4 39.9 32.4 3.1 63.1 (29.0) NM (9.2) 16.8 NM NM NM NM NM CAT [] CATERPILLAR INC DEC 3,789.0 5,681.0 4,928.0 2,700.0 895.0 3,557.0 1,099.0 13.2 1.3 (33.3) 345 517 448 246 81CMI [] CUMMINS INC DEC 1,483.0 1,645.0 1,848.0 1,040.0 428.0 755.0 54.0 39.3 14.5 (9.8) 2,746 3,046 3,422 1,926 793FSS § FEDERAL SIGNAL CORP DEC 160.2 22.0 (14.4) (160.7) 17.7 31.3 37.7 15.6 38.6 628.2 425 58 (38) (427) 47JOY [] JOY GLOBAL INC OCT 533.9 767.1 631.0 461.5 454.6 373.1 18.5 40.0 7.4 (30.4) 2,884 4,143 3,408 2,492 2,455

OSK † OSHKOSH CORP SEP 316.3 230.5 273.4 792.9 (1,172.3) 79.3 75.6 15.4 31.9 37.2 418 305 362 1,049 (1,550)PCAR [] PACCAR INC DEC 1,171.3 1,111.6 1,042.3 457.6 111.9 1,017.9 526.5 8.3 2.8 5.4 222 211 198 87 21TEX † TEREX CORP DEC 209.0 103.6 38.6 (215.5) (450.7) 71.9 (25.5) NM 23.8 101.7 NM NM NM NM NM TRN † TRINITY INDUSTRIES DEC 369.2 253.4 142.2 67.6 (137.5) 287.3 (10.0) NM 5.1 45.7 NM NM NM NM NM WAB † WABTEC CORP DEC 292.2 251.7 170.1 123.1 115.1 130.6 22.3 29.4 17.5 16.1 1,313 1,131 765 553 517

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 1,483.0 1,645.0 1,848.0 1,040.0 428.0 755.0 54.0 39.3 14.5 (9.8) 2,746 3,046 3,422 1,926 793KUBTY KUBOTA CORP -ADR # MAR 1,278.5 782.6 746.9 662.4 453.2 490.4 110.4 27.8 21.1 63.4 1,158 709 677 600 411MTW MANITOWOC CO DEC 154.8 101.4 28.0 (65.8) (644.1) 79.6 18.0 24.0 14.2 52.7 858 562 155 (365) (3,571)MTOR MERITOR INC SEP (20.0) 70.0 65.0 (2.0) (1,077.0) (91.0) 140.0 NM NM NM (14) 50 46 (1) (769)CVGI COMMERCIAL VEHICLE GROUP INC DEC (12.4) 50.1 18.6 6.5 (81.5) (206.8) 4.0 NM NM NM (314) 1,263 469 164 (2,057)

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 5.5 5.2 6.6 3.2 2.0 7.4 7.0 9.2 4.2 2.7 16.0 16.2 20.6 8.7 6.2DE [] DEERE & CO OCT 9.5 8.6 8.9 7.3 3.8 6.1 5.9 6.1 4.4 2.2 41.4 44.9 42.8 33.6 15.4LNN § LINDSAY CORP AUG 10.2 7.9 7.7 6.9 4.1 15.2 10.9 10.4 7.9 4.4 20.4 14.8 14.6 11.4 6.9TWI § TITAN INTERNATIONAL INC DEC 1.6 5.2 3.9 NM NM 2.0 7.1 6.5 NM NM 5.5 19.3 17.4 NM NMTTC § TORO CO OCT 7.6 6.6 6.2 5.5 4.1 16.0 14.3 13.4 10.6 7.0 46.1 44.7 43.4 31.6 18.5

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 4.2 3.6 4.2 4.2 0.4 5.3 4.6 5.8 5.2 0.5 7.0 6.2 7.8 6.9 0.7CAT [] CATERPILLAR INC DEC 6.8 8.6 8.2 6.3 2.8 4.3 6.7 6.8 4.4 1.4 19.8 37.4 41.6 27.6 12.1CMI [] CUMMINS INC DEC 8.6 9.5 10.2 7.9 4.0 10.9 13.6 16.7 10.8 4.9 21.0 27.2 36.4 24.6 12.2FSS § FEDERAL SIGNAL CORP DEC 18.8 2.7 NM NM 2.4 25.5 3.3 NM NM 2.2 64.4 13.7 NM NM 5.8JOY [] JOY GLOBAL INC OCT 10.7 13.6 14.3 13.1 12.6 8.9 13.3 14.5 14.7 16.1 19.6 33.9 38.2 42.6 67.5

OSK † OSHKOSH CORP SEP 4.1 2.8 3.6 8.1 NM 6.5 4.7 5.7 16.7 NM 16.0 13.4 18.7 86.2 NMPCAR [] PACCAR INC DEC 6.8 6.5 6.4 4.4 1.4 6.0 6.2 6.6 3.2 0.7 18.8 19.8 19.4 8.7 2.2TEX † TEREX CORP DEC 3.0 1.4 0.6 NM NM 3.1 1.5 0.6 NM NM 10.0 5.3 1.9 NM NMTRN † TRINITY INDUSTRIES DEC 8.5 6.6 4.6 3.1 NM 5.3 4.0 2.4 1.3 NM 16.6 12.9 7.8 3.8 NMWAB † WABTEC CORP DEC 11.4 10.5 8.6 8.2 8.2 11.3 11.2 8.6 7.3 7.4 20.4 21.7 17.5 14.7 16.2

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 8.6 9.5 10.2 7.9 4.0 10.9 13.6 16.7 10.8 4.9 21.0 27.2 36.4 24.6 12.2KUBTY KUBOTA CORP -ADR # MAR 8.7 6.3 6.1 5.9 4.5 6.6 4.3 4.3 4.2 3.1 14.9 9.8 9.6 9.2 7.2MTW MANITOWOC CO DEC 3.8 2.6 0.8 NM NM 3.9 2.5 0.7 NM NM 22.5 18.7 5.8 NM NMMTOR MERITOR INC SEP NM 1.6 1.4 NM NM NM 2.7 2.3 NM NM NA NA NA NA NACVGI COMMERCIAL VEHICLE GROUP INC DEC NM 5.8 2.2 1.1 NM NM 11.8 5.4 2.4 NM NM 126.7 294.1 NA NM

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital


AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 1.6 1.6 1.7 1.6 1.6 18.0 21.8 30.7 13.8 15.5 55.0 69.5 96.7 36.7 43.2DE [] DEERE & CO OCT NA NA NA NA NA 67.4 76.2 70.9 72.3 77.7 NA NA NA NA NALNN § LINDSAY CORP AUG 3.6 3.7 3.2 3.1 3.2 0.0 0.0 1.5 3.4 8.2 0.0 0.0 2.4 6.1 14.9TWI § TITAN INTERNATIONAL INC DEC 2.6 2.1 3.2 5.2 6.4 39.9 40.2 42.3 57.7 58.3 80.1 85.3 81.8 96.0 97.6TTC § TORO CO OCT 1.7 1.6 1.5 1.6 1.8 38.0 41.5 45.6 44.8 41.7 84.5 95.5 129.6 103.2 84.8

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 3.9 3.5 3.2 3.4 3.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0CAT [] CATERPILLAR INC DEC 1.4 1.4 1.3 1.4 1.4 55.7 60.6 64.2 64.1 70.0 242.1 217.3 260.7 208.8 291.4CMI [] CUMMINS INC DEC 2.6 2.3 1.9 1.9 2.1 18.0 9.5 10.7 13.2 14.4 31.7 17.3 19.2 23.4 24.8FSS § FEDERAL SIGNAL CORP DEC 2.0 1.8 1.9 1.4 1.7 19.4 45.5 49.0 40.9 32.7 63.7 129.9 168.1 215.9 141.3JOY [] JOY GLOBAL INC OCT 2.1 1.8 2.1 2.3 2.1 30.2 33.1 40.8 22.3 36.3 86.0 95.0 73.7 29.6 51.2

OSK † OSHKOSH CORP SEP 1.8 1.6 1.5 1.2 1.3 28.3 32.5 36.6 41.7 72.8 75.9 96.5 133.7 269.0 417.5PCAR [] PACCAR INC DEC NA NA NA NA NA 35.7 37.2 27.4 24.2 30.5 NA NA NA NA NATEX † TEREX CORP DEC 2.1 2.2 2.1 2.4 2.5 44.5 45.9 51.7 38.8 53.1 98.7 96.5 104.8 58.4 80.2TRN † TRINITY INDUSTRIES DEC NA NA NA NA NA 48.3 52.6 55.4 49.4 44.7 NA NA NA NA NAWAB † WABTEC CORP DEC 2.3 2.0 2.0 2.3 2.3 20.9 18.9 26.1 28.1 30.2 59.7 58.9 76.9 84.2 93.5

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 2.6 2.3 1.9 1.9 2.1 18.0 9.5 10.7 13.2 14.4 31.7 17.3 19.2 23.4 24.8KUBTY KUBOTA CORP -ADR # MAR 1.7 1.7 1.6 1.8 1.9 24.4 25.8 21.8 23.1 27.9 61.3 65.1 55.9 56.1 63.9MTW MANITOWOC CO DEC 1.1 1.2 1.1 1.1 1.1 60.3 67.8 72.1 73.6 71.1 NM 951.1 NM NM NMMTOR MERITOR INC SEP 1.3 1.3 1.2 1.2 1.0 300.0 868.3 2,021.3 1,491.3 -1,136.8 332.8 385.9 461.2 310.9 NMCVGI COMMERCIAL VEHICLE GROUP INC DEC 2.8 3.1 2.7 2.2 1.8 80.7 79.0 95.1 100.1 130.2 135.1 128.0 129.0 142.1 214.6



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 11 - 8 10 - 7 10 - 5 22 - 11 23 - 10 7 0 0 0 0 0.8 - 0.6 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DE [] DEERE & CO OCT 10 - 9 12 - 9 15 - 9 19 - 11 27 - 12 22 23 23 26 54 2.5 - 2.1 2.6 - 2.0 2.5 - 1.5 2.4 - 1.4 4.6 - 2.0LNN § LINDSAY CORP AUG 17 - 13 24 - 15 29 - 16 36 - 15 42 - 19 9 11 12 16 27 0.7 - 0.5 0.7 - 0.5 0.7 - 0.4 1.1 - 0.4 1.5 - 0.6TWI § TITAN INTERNATIONAL INC DEC 41 - 21 14 - 8 22 - 9 NM- NM NM- NM 3 1 1 NM NM 0.1 - 0.1 0.1 - 0.1 0.2 - 0.1 0.3 - 0.1 0.7 - 0.2TTC § TORO CO OCT 24 - 16 21 - 14 18 - 12 23 - 13 25 - 11 21 20 21 25 34 1.3 - 0.9 1.5 - 1.0 1.8 - 1.2 1.9 - 1.1 3.0 - 1.4

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 23 - 18 28 - 18 23 - 15 26 - 16 NM- NM 17 68 0 0 0 1.0 - 0.8 3.8 - 2.5 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CAT [] CATERPILLAR INC DEC 17 - 14 13 - 9 15 - 9 22 - 12 42 - 15 29 28 24 40 116 2.2 - 1.7 3.2 - 2.1 2.7 - 1.5 3.4 - 1.8 7.7 - 2.7CMI [] CUMMINS INC DEC 18 - 13 15 - 9 13 - 8 21 - 8 24 - 8 28 21 14 17 32 2.2 - 1.6 2.2 - 1.4 1.7 - 1.1 2.0 - 0.8 3.8 - 1.4FSS § FEDERAL SIGNAL CORP DEC 6 - 3 22 - 11 NM- NM NM- NM 26 - 10 0 0 NM NM 67 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.9 - 2.3 6.4 - 2.6JOY [] JOY GLOBAL INC OCT 14 - 10 13 - 7 17 - 10 20 - 9 13 - 3 14 10 12 16 16 1.5 - 1.0 1.5 - 0.7 1.2 - 0.7 1.6 - 0.8 4.6 - 1.2

OSK † OSHKOSH CORP SEP 15 - 9 13 - 7 13 - 5 5 - 3 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.2 - 0.5PCAR [] PACCAR INC DEC 18 - 14 15 - 11 20 - 11 46 - 27 NM- 66 51 50 45 55 174 3.7 - 2.8 4.5 - 3.3 4.1 - 2.2 2.1 - 1.2 2.6 - 1.3TEX † TEREX CORP DEC 23 - 14 30 - 15 NM- 27 NM- NM NM- NM 3 0 0 NM NM 0.2 - 0.1 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TRN † TRINITY INDUSTRIES DEC 12 - 7 11 - 7 22 - 11 32 - 18 NM- NM 11 13 19 38 NM 1.4 - 0.9 1.9 - 1.1 1.8 - 0.9 2.1 - 1.2 5.0 - 1.6WAB † WABTEC CORP DEC 25 - 14 17 - 13 20 - 14 21 - 14 18 - 10 4 3 2 2 2 0.3 - 0.2 0.2 - 0.2 0.2 - 0.1 0.1 - 0.1 0.2 - 0.1

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 18 - 13 15 - 9 13 - 8 21 - 8 24 - 8 28 21 14 17 32 2.2 - 1.6 2.2 - 1.4 1.7 - 1.1 2.0 - 0.8 3.8 - 1.4KUBTY KUBOTA CORP -ADR # MAR 17 - 11 19 - 13 19 - 12 20 - 14 27 - 13 27 30 32 33 38 2.5 - 1.5 2.3 - 1.6 2.6 - 1.7 2.3 - 1.7 3.0 - 1.4MTW MANITOWOC CO DEC 20 - 14 22 - 12 NM- 27 NM- NM NM- NM 7 10 38 NM NM 0.5 - 0.3 0.8 - 0.5 1.4 - 0.3 0.9 - 0.5 3.4 - 0.7MTOR MERITOR INC SEP NM- NM 12 - 5 33 - 7 NM- NM NM- NM NM 0 0 NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 31.3 - 0.8CVGI COMMERCIAL VEHICLE GROUP INC DEC NM- NM 8 - 4 29 - 8 74 - 19 NM- NM NM 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0


20092013 2012 2011 2010


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


AGRICULTURAL & FARM MACHINERY‡AGCO † AGCO CORP DEC 6.14 5.38 6.10 2.38 1.47 23.27 17.03 11.67 19.91 17.22 64.60 - 47.29 54.00 - 38.09 59.81 - 30.11 51.51 - 25.48 33.83 - 14.62DE [] DEERE & CO OCT 9.18 7.72 6.71 4.40 2.07 22.92 13.23 13.97 12.26 8.61 95.60 - 79.50 89.70 - 69.51 99.80 - 59.92 84.85 - 48.33 56.87 - 24.51LNN § LINDSAY CORP AUG 5.50 3.41 2.93 2.00 1.12 23.87 20.11 17.05 13.98 12.49 94.90 - 71.13 80.48 - 52.68 85.87 - 46.03 72.80 - 30.80 47.02 - 20.89TWI § TITAN INTERNATIONAL INC DEC 0.66 2.20 1.40 (0.17) (0.71) 11.45 11.29 8.89 7.69 7.43 27.12 - 14.14 29.95 - 16.86 31.42 - 12.97 19.86 - 7.15 11.45 - 3.04TTC § TORO CO OCT 2.67 2.18 1.88 1.41 0.88 4.20 3.23 2.35 2.65 3.08 63.69 - 42.69 45.18 - 30.00 34.22 - 22.52 32.40 - 18.75 21.94 - 10.12

CONSTRUCTION MACHINERY & HEAVY TRUCKS‡ASTE § ASTEC INDUSTRIES INC DEC 1.72 1.47 1.77 1.44 0.14 24.29 22.96 22.18 20.89 19.12 39.01 - 30.87 40.68 - 26.09 39.97 - 26.53 36.94 - 22.98 33.68 - 18.52CAT [] CATERPILLAR INC DEC 5.87 8.71 7.64 4.28 1.45 16.08 10.04 2.22 11.59 9.61 99.70 - 79.49 116.95 - 78.25 116.55 - 67.54 94.89 - 50.50 61.28 - 21.71CMI [] CUMMINS INC DEC 7.93 8.69 9.58 5.29 2.17 36.09 30.74 25.90 20.85 16.04 141.39 - 103.41 129.51 - 82.20 121.49 - 79.53 111.87 - 44.84 51.65 - 18.34FSS § FEDERAL SIGNAL CORP DEC 2.56 0.35 (0.23) (2.79) 0.36 1.23 (2.02) (3.06) (2.80) (0.89) 15.89 - 7.24 7.63 - 3.73 7.79 - 3.50 10.30 - 4.91 9.30 - 3.73JOY [] JOY GLOBAL INC OCT 5.03 7.25 6.01 4.47 4.44 10.23 5.72 10.83 10.15 4.84 69.19 - 47.83 96.00 - 47.69 103.44 - 57.48 88.21 - 42.45 59.30 - 15.38

OSK † OSHKOSH CORP SEP 3.58 2.52 3.01 8.81 (15.33) 4.07 0.48 (3.11) (6.83) (17.12) 53.70 - 30.80 31.65 - 18.49 40.11 - 14.07 44.57 - 24.63 41.99 - 4.74PCAR [] PACCAR INC DEC 3.31 3.13 2.87 1.25 0.31 18.32 16.15 15.03 J 14.67 J 14.02 J 60.00 - 45.42 48.22 - 35.21 58.75 - 31.57 57.83 - 33.45 40.26 - 20.38TEX † TEREX CORP DEC 1.88 0.94 0.35 (1.98) (4.39) 4.55 2.62 1.18 13.41 10.62 42.36 - 25.60 28.33 - 14.05 38.50 - 9.30 31.35 - 16.79 25.61 - 7.34TRN † TRINITY INDUSTRIES DEC 2.34 1.59 0.88 0.43 (0.90) 13.59 11.32 10.06 9.65 10.22 28.46 - 17.28 18.13 - 10.77 19.08 - 9.55 13.55 - 7.47 9.82 - 3.18WAB † WABTEC CORP DEC 3.05 2.62 1.77 1.28 1.21 4.31 3.17 2.09 1.43 1.11 77.64 - 44.04 44.51 - 33.15 36.22 - 24.69 26.71 - 18.08 21.45 - 11.57

OTHER COMPANIES WITH SIGNIFICANT HEAVY EQUIPMENT & TRUCKS OPERATIONSCMI [] CUMMINS INC DEC 7.93 8.69 9.58 5.29 2.17 36.09 30.74 25.90 20.85 16.04 141.39 - 103.41 129.51 - 82.20 121.49 - 79.53 111.87 - 44.84 51.65 - 18.34KUBTY KUBOTA CORP -ADR # MAR 5.10 3.12 2.96 2.60 1.78 34.97 30.85 30.26 30.16 26.37 88.38 - 55.15 58.69 - 40.61 55.50 - 36.81 51.08 - 37.35 48.69 - 22.51MTW MANITOWOC CO DEC 1.16 0.77 0.21 (0.50) (4.94) (9.04) (10.60) (11.63) (12.06) (12.21) 23.68 - 15.90 16.97 - 9.45 23.23 - 5.76 16.43 - 8.48 12.24 - 2.34MTOR MERITOR INC SEP (0.20) 0.73 0.69 (0.02) (14.86) (13.18) (15.09) (15.07) (15.79) (23.18) 10.49 - 4.11 8.74 - 3.83 22.65 - 4.80 21.77 - 8.90 12.00 - 0.32CVGI COMMERCIAL VEHICLE GROUP INC DEC (0.44) 1.77 0.67 0.25 (3.74) 1.09 1.21 0.19 (0.14) (1.90) 9.96 - 6.55 14.00 - 6.69 19.62 - 5.65 18.52 - 4.69 8.08 - 0.40

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


General Disclaimers S&P Capital IQ’s Industry Surveys Reports (the “Industry Surveys”) have been prepared and issued by S&P Capital IQ and/or one of its affiliates. In the United States and United Kingdom, the Industry Surveys are prepared and issued by Standard & Poor’s Financial Services LLC; in Hong Kong, by Standard & Poor’s Investment Advisory Services (HK) Limited, which is regulated by the Hong Kong Securities Futures Commission; in Singapore, by McGraw Hill Financial Singapore Pte. Limited, which is regulated by the Monetary Authority of Singapore; in Malaysia, by Standard & Poor’s Malaysia Sdn Bhd, which is regulated by the Securities Commission of Malaysia; in Australia, by Standard & Poor’s Information Services (Australia) Pty Ltd, which is regulated by the Australian Securities & Investments Commission; and in Japan, by McGraw Hill Financial Japan KK, which is registered by Kanto Financial Bureau.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisers and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment adviser except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P provides a wide range of services to, or relating to, many organizations, including issuers or underwriters of securities or obligors, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries. As a result, S&P may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address.

The Industry Surveys are not intended to be investment advice and do not constitute any form of invitation or inducement by S&P Capital IQ to engage in investment activity. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Past performance is not necessarily indicative of future results.

For details on the S&P Capital IQ conflict-of-interest policies, please visit: www.spcapitaliq.com/policies

Notice to all Non U.S. Residents: S&P Capital IQ’s Industry Surveys may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or independent intermediaries and/or distributors (the “Intermediaries” or “Distributors”). Intermediaries are not acting as agents or representatives of S&P Capital IQ. In Territories where an Intermediary distributes S&P Capital IQ’s Industry Surveys, the Intermediary, and not S&P Capital IQ, is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or regional regulatory authorities, including laws in connection with the distribution of third-party investment research, licensing requirements, supervisory and record keeping obligations that the Intermediary may have under the applicable laws and regulations of the territories where it distributes the Industry Surveys.

Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject S&P Capital IQ or its affiliates to any registration or licensing requirements in such jurisdiction.

Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is not in a class qualified to receive Industry Surveys (e.g., a qualified person and/or investor), as defined by the local laws or regulations in the country or jurisdiction where the person is domiciled, a citizen or resident of, or the entity is legally registered or domiciled.

S&P Capital IQ’s Industry Surveys are not intended for distribution in or directed to entities, residents or investors in: Albania, Belarus, Bosnia, Burma, Cote d’Ivoire, Croatia, Cuba, Democratic Republic of the Congo, Former Yugoslav Republic of Macedonia, Herzegovina, Iran, Iraq, Kosovo, Lebanon, Libya, Montenegro and Serbia, North Korea, Somali, Sudan, Syria, Taiwan, Yemen and Zimbabwe.

For residents of Australia: Industry Surveys are issued and/or distributed in Australia by SPIS. Any express or implied opinion contained in an Industry Survey is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone. The information in an Industry Survey has not been prepared for use by retail investors and has been prepared without taking account of any particular investor’s financial or investment objectives, financial situation or needs. Before acting on any advice, any investor using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. Investors should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any adviser and any such adviser must accordingly make their own assessment taking into account an individual’s particular circumstances. SPIS holds an Australian Financial Services License Number 258896. Please refer to the SPIS Financial Services Guide for more information at: www.spcapitaliq.com/financialservicesguide

For residents of China: Industry Surveys are not distributed in or directed to residents in The People’s Republic of China. Neither S&P Capital IQ nor its affiliates target investors in China.

For residents of Kuwait: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Kuwait Capital Markets Law (“CML”) and Kuwait Capital Markets Authority (“CMA”) and with all relevant rules and regulations set out in the CML and CMA rule books.

For residents of Malaysia: All queries in relation to Industry Surveys should be referred to Ahmad Halim at [email protected].

For residents of Mexico: S&P Capital IQ is not regulated or supervised by the Mexican National Banking and Securities Commission (“CNBV”). S&P Capital IQ has a licensed rating agency affiliate in Mexico (Standard & Poor’s, S.A. De C.V.), of which S&P maintains firewalls and seeks to avoid conflicts of interest, pursuant to approved policies.

For residents of Qatar: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Qatar Financial Markets Authority or the Qatar Central Bank, and with all relevant rules and regulations set out in the Qatar Financial Markets Authority’s rule book, including third party branded investment research distribution of securities that are admitted for trading on a Qatari securities exchange (Admitted Securities).

Copyright © 2015 Standard & Poor’s Financial Services LLC. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P EUROPE 350 and STARS are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

het 0115 final 01-09-15 · however, china’s gdp growth slowed to 7.3% in the third quarter of...

Documents