TEREX CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION Terex is a global manufacturer of aerial work platforms and materials processing machinery. We design, build and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Our products are manufactured in North and South America, Europe, Australia and Asia and sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. We report our business in the following segments: (i) Aerial Work Platforms (“AWP”) and (ii) Materials Processing (“MP”). Further information about our reportable segments appears below and in Note B – “Business Segment Information” in the Notes to Condensed Consolidated Financial Statements. Non-GAAP Measures In this document, we refer to various GAAP ( United States (“U.S.”) generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors consider, such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Non-GAAP measures we may use include translation effect of foreign currency exchange rate changes on net sales, gross profit, selling, general & administrative (“SG&A”) costs and operating profit, as well as the net sales, gross profit, SG&A costs and operating profit excluding the impact of acquisitions and divestitures. As changes in foreign currency exchange rates have a non-operating impact on our financial results, we believe excluding effects of these changes assists in assessment of our business results between periods. We calculate the translation effect of foreign currency exchange rate changes by translating current period results using rates that the comparable prior periods were translated at to isolate the foreign exchange component of fluctuation from the operational component. Similarly, impact of changes in our results from acquisitions and divestitures not included in comparable prior periods may be subtracted from the absolute change in results to allow for better comparability of results between periods. We calculate a non-GAAP measure of free cash flow. We define free cash flow as Net cash provided by (used in) operating activities, plus (minus) increases (decreases) in Terex Financial Services (“TFS”) finance receivables consisting of sales-type leases and commercial loans (“TFS Assets”), less Capital expenditures, net of proceeds from sale of capital assets. We believe this measure of free cash flow provides management and investors further useful information on cash generation or use in our primary operations. We discuss forward-looking information related to expected earnings per share (“EPS”) excluding the impact of potential future acquisitions, divestitures, restructuring and other unusual items. Our 2021 outlook for earnings per share is a non-GAAP financial measure because it excludes unusual items. The Company is not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because the Company is unable to predict with a reasonable degree of certainty the exact timing and impact of such items. The unavailable information could have a significant impact on the Company’s full year 2021 GAAP financial results. This forward-looking information provides guidance to investors about our EPS expectations excluding these unusual items that we do not believe are reflective of our ongoing operations. Working capital is calculated using the Condensed Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories, less Trade accounts payable and Customer advances. We view excessive working capital as an inefficient use of resources, and seek to minimize the level of investment without adversely impacting ongoing operations of the business. Trailing three months annualized net sales is calculated using net sales for the most recent quarter end multiplied by four. The ratio calculated by dividing working capital by trailing three months annualized net sales is a non-GAAP measure we believe measures our resource use efficiency. 29 Non-GAAP measures we also use include Net Operating Profit After Tax (“NOPAT”) as adjusted, Income (loss) from operations as adjusted, annualized effective tax rate as adjusted, cash and cash equivalents as adjusted and Stockholders’ equity as adjusted, which are used in the calculation of our after tax return on invested capital (“ROIC”) (collectively the “Non-GAAP Measures”), which are discussed in detail below. 30 Overview Safety remains our top priority; driven by Think Safe – Work Safe – Home Safe. All Terex team members contributed to our effort of continuing to provide products and services for our customers, while maintaining a safe working environment. Our strategic operational priorities of execution, innovation, and growth continue to make excellent progress. We continue to address supply chain disruptions across various supply inputs and product lines. Suppliers and logistics providers are currently working to ramp up and meet our production requirements. Our team members in both reportable segments have worked hard to adapt and maintain production schedules. Our commercial excellence initiatives are demonstrating results, as pricing actions continue to partially offset accelerating cost inflation. Our SG&A as a percent to sales will be below our target of 12.5% for the full-year 2021. We are maintaining strict cost discipline while recognizing that growth in the business will necessitate investment spending. In the third quarter, we started production of telehandlers in Monterrey, Mexico. This action is on track and will reduce the cost of manufacturing our telehandler products for the North American market. We also continue to innovate so our products and services offer the features and benefits that provide value to our customers. We are investing in our connected assets and digital capabilities to better serve customers. We are also investing in the business for future growth through organic and inorganic opportunities. In the third quarter, the MP team completed a bolt-on acquisition, purchasing a heavy duty trommels business that broadens our product offerings. We also recently launched a new product line, Terex Recycling Systems, which will focus on construction, demolition, commercial and industrial waste applications. We continued to deliver strong results as customer demand remained robust during the quarter. Revenues of $1.0 billion were up 30% compared to the prior year period. However, revenues were approximately 9% below our expectations due to supply chain challenges limiting our production output, especially within AWP. Our operating margins and earnings per share (“EPS”) in the quarter improved significantly versus the prior year period, but were also lower than our prior expectations as a result of the revenue shortfall, inflationary cost pressures and supply chain challenges impacting the efficiency of our manufacturing operations. Freight and logistics have also been a growing issue with delays and increased costs. The availability of containers, ships and increasing offload times are impacting our production and delivery schedules. AWP’s third quarter 2021 sales increased 29% compared to last year, driven by continued strong demand in all our global markets. For our Genie business globally, rental rates are improving, used equipment pricing is strong and fleet utilization remains robust which are all positive signs of a recovering aerials rental industry. We are also beginning to see positive indicators for non-residential investment. The utilities market also improved significantly with demand strong across its end-markets of tree care, rental, and investor-owned utilities. We are also experiencing strong growth in our Utilities parts and services business. AWP delivered significantly improved operating margins in the quarter, driven by increased production and aggressively managing all costs. This improvement was despite the current global supply chain dynamics which impacted our operations in AWP in the quarter through reduced efficiency in our manufacturing facilities as well as higher material, logistics and labor costs. We expect end market demand to remain strong through the remainder of 2021 and into 2022 as demonstrated by our backlog for the segment, which is up 257% compared to the prior year period. As we have already contracted with AWP customers for nearly all of our remaining 2021 revenue, most of the benefit of customer price increases we have been implementing, as an offset to inflationary pressures will not be realized until 2022. MP had another excellent quarter with sales up 35% compared to last year driven by strong customer sentiment across all end-markets and geographies. MP has been aggressively managing all elements of cost as end-markets improve resulting in a 14% operating margin. We expect global demand for crushing and screening equipment to continue to grow. Broad-based economic growth, construction activity and aggregates consumption are the primary market drivers. We are also seeing strong markets for the concrete mixer truck, material handling and environmental businesses. Customer sentiment continues to improve and we are encouraged by our backlog for the segment, which is up 253% compared to the prior year period. We expect MP to be impacted by supply chain constraints and inflationary cost pressures, net of price realization, but not to the same extent as AWP. In the third quarter of 2021, our largest market remained North America, which represented 55% of our global sales. As compared to the prior year period, our sales were up significantly in every major geography: up 31% in North America, up 33% in Western Europe and up 15% in Asia Pacific. We continue to focus on cash generation and liquidity. The strong, positive free cash flow of $43 million in the three months ended September 30, 2021 demonstrates the hard work of our team members to tightly manage net working capital. As of September 30, 2021, we had $1.2 billion in available liquidity, with no near-term debt maturities. Our strong liquidity position 31 and cash generation allowed us to prepay an additional $150 million of term loans in October, which is in addition to the $279 million of term loans prepaid earlier in 2021. We are committed to continuing to strengthen Terex’s balance sheet, while maintaining flexibility to execute on our organic and inorganic growth plans. We believe we have ample liquidity to meet our business plans. See “Liquidity and Capital Resources” for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels, as well as a reconciliation of net cash provided by (used in) operating activities to free cash flow. We have seen our end-markets remain robust over the course of the third quarter and we expect continued global end-market strength over the remainder of 2021 and into 2022. However, our full-year outlook is limited as a result of the availability of components from our supply chain. As a result, we have updated our outlook for the balance of 2021 and currently expect 2021 EPS to be between $2.75 and $2.85, on net sales of approximately $3.85 billion. 32 ROIC ROIC and other Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Stockholders’ equity for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from operations by one minus the annualized effective tax rate. In the calculation of ROIC, we adjust Income (loss) from operations, annualized effective tax rate, and Stockholders’ equity to remove the effects of the impact of certain transactions in order to create a measure that is useful to understanding our operating results and the ongoing performance of our underlying business without the impact of unusual items as shown in the tables below. Cash and cash equivalents is adjusted to include amounts recorded as held for sale. Furthermore, we believe returns on capital deployed in TFS do not represent our primary operations and, therefore, TFS Assets and results from operations have been excluded from the Non-GAAP Measures. Debt is calculated using amounts for Current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters’ adjusted NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters’ ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital. Terex management and Board of Directors use ROIC as one measure to assess operational performance, including in connection with certain compensation programs. We use ROIC as a metric because we believe it measures how effectively we invest our capital and provides a better measure to compare ourselves to peer companies to assist in assessing how we drive operational improvement. We believe ROIC measures return on the amount of capital invested in our primary businesses, excluding TFS, as opposed to another metric such as return on stockholders’ equity that only incorporates book equity, and is thus a more accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Stockholders’ equity provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC at September 30, 2021 was 16.7%. Amounts described below are reported in millions of U.S. dollars, except for the annualized effective tax rates. Amounts are as of and for the three months ended for the periods referenced in the tables below. Sep '21 Jun '21 Mar '21 Dec '20 Sep '20 Annualized effective tax rate as adjusted (1) 18.8 % 18.8 % 18.8 % 18.2 % Income (loss) from operations as adjusted $ 74.9 $ 117.3 $ 55.4 $ 30.6 Multiplied by: 1 minus annualized effective tax rate 81.2 % 81.2 % 81.2 % 81.8 % Adjusted net operating income (loss) after tax $ 60.8 $ 95.2 $ 45.0 $ 25.0 Debt $ 893.4 $ 894.2 $ 979.2 $ 1,173.8 $ 1,174.5 Less: Cash and cash equivalents as adjusted (558.2) (547.5) (577.8) (670.1) (512.6) Debt less Cash and cash equivalents as adjusted 335.2 346.7 401.4 503.7 661.9 Stockholders’ equity as adjusted 1,036.1 1,014.1 917.4 805.3 735.4 Debt less Cash and cash equivalents plus Stockholders’ equity as adjusted $ 1,371.3 $ 1,360.8 $ 1,318.8 $ 1,309.0 $ 1,397.3 (1) The annualized effective tax rate for Dec’20 represents the actual full year 2020 effective tax rate. September 30, 2021 ROIC 16.7 % NOPAT as adjusted (last 4 quarters) $ 226.0 Average Debt less Cash and cash equivalents plus Stockholders’ equity as adjusted (5 quarters) $ 1,351.4 33 Three months ended 9/30/21 Three months ended 6/30/21 Three months ended 3/31/21 Three months ended 12/31/20 Reconciliation of income (loss) from operations: Income (loss) from operations as reported $ 74.2 $ 122.5 $ 61.5 $ 31.6 Adjustments: (Income) loss from TFS 0.7 (5.2) (6.1) (1.0) Income (loss) from operations as adjusted $ 74.9 $ 117.3 $ 55.4 $ 30.6 As of 9/30/21 As of 6/30/21 As of 3/31/21 As of 12/31/20 As of 9/30/20 Reconciliation of Cash and cash equivalents: Cash and cash equivalents - continuing operations $ 553.2 $ 542.2 $ 572.9 $ 665.0 $ 508.3 Cash and cash equivalents - assets held for sale 5.0 5.3 4.9 5.1 4.3 Cash and cash equivalents as adjusted $ 558.2 $ 547.5 $ 577.8 $ 670.1 $ 512.6 Reconciliation of Stockholders’ equity: Stockholders’ equity as reported $ 1,050.7 $ 1,033.9 $ 946.1 $ 921.5 $ 852.7 TFS Assets (3.7) (8.3) (21.4) (113.9) (115.8) Effects of adjustments, net of tax: (Income) loss from TFS (10.9) (11.5) (7.3) (2.3) (1.5) Stockholders’ equity as adjusted $ 1,036.1 $ 1,014.1 $ 917.4 $ 805.3 $ 735.4 Nine Months Ended September 30, 2021 Income (loss) from continuing operations before income taxes (Provision for) benefit from income taxes Income tax rate Reconciliation of annualized effective tax rate: As reported $ 195.5 $ (36.0) 18.4 % Effect of adjustments: Tax related — (0.8) As adjusted $ 195.5 $ (36.8) 18.8 % 34 RESULTS OF OPERATIONS Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020 Consolidated Three Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 993.8 — $ 765.6 — 29.8 % Gross profit $ 178.5 18.0 % $ 146.3 19.1 % 22.0 % SG&A $ 104.3 10.5 % $ 109.8 14.3 % (5.0) % Income from operations $ 74.2 7.5 % $ 36.5 4.8 % 103.3 % Net sales for the three months ended September 30, 2021 increased $228.2 million when compared to the same period in 2020. The increase in net sales was primarily due to higher demand for aerial work platforms, materials processing equipment, material handlers, telehandlers, utility products and concrete mixer trucks. Changes in foreign exchange rates positively impacted consolidated net sales by approximately $16 million. Customer sentiment in both segments continues to improve as equipment is being utilized and ordered as end-market demand strengthens. Gross profit for the three months ended September 30, 2021 increased $32.2 million when compared to the same period in 2020. The increase was primarily due to higher sales volume and price realization, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. SG&A costs for the three months ended September 30, 2021 decreased $5.5 million when compared to the same period in 2020 primarily due to cost management, including right-sizing our workforce and reduced discretionary spending, taken across all areas of our business. Income from operations for the three months ended September 30, 2021 increased $37.7 million when compared to the same period in 2020. The increase was primarily due to higher sales volume and price realization, partially offset by increases in material, labor and freight costs. 35 Aerial Work Platforms Three Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 572.5 — $ 445.0 — 28.7 % Income from operations $ 34.9 6.1 % $ 13.3 3.0 % 162.4 % Net sales for the AWP segment for the three months ended September 30, 2021 increased $127.5 million when compared to the same period in 2020 primarily due to higher demand driven by fleet replacement and end-market growth for aerial work platforms and telehandlers in North America and Western Europe and utility products in North America. Income from operations for the three months ended September 30, 2021 increased $21.6 million when compared to the same period in 2020 primarily due to higher sales volume and price realization, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. Materials Processing Three Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 418.7 — $ 311.3 — 34.5 % Income from operations $ 57.1 13.6 % $ 40.3 12.9 % 41.7 % Net sales for the MP segment for the three months ended September 30, 2021 increased $107.4 million when compared to the same period in 2020 primarily due to robust end-market demand for materials processing equipment in Asia-Pacific and North America, material handlers in Western Europe and North America, cranes in Australia and concrete mixer trucks in North America. Income from operations for the three months ended September 30, 2021 increased $16.8 million when compared to the same period in 2020 primarily due to higher sales volume and price realization, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. 36 Corporate and Other / Eliminations Three Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 2.6 — $ 9.3 — (72.0) % Loss from operations $ (17.8) * $ (17.1) * (4.1) % * Not a meaningful percentage Net sales include on-book financing activities of TFS, governmental sales and elimination of intercompany sales activity among segments. The net sales decrease is primarily attributable to lower TFS revenue, partially offset by increased governmental sales. Loss from operations for the three months ended September 30, 2021 increased $0.7 million when compared to the same period in 2020 . The increase in operating loss is primarily due to lower revenue, partially offset by SG&A cost management. Interest Expense, Net of Interest Income During the three months ended September 30, 2021, our interest expense, net of interest income, was $11.7 million, or $3.3 million lower than the same period in the prior year due to a decrease in average borrowings and lower rates. Other Income (Expense) – Net Other income (expense) – net for the three months ended September 30, 2021 was expense of $1.1 million, or a $0.5 million increase in expense when compared to the same period in the prior year. The increase was primarily due to foreign exchange translation losses in the current year period. Income Taxes During the three months ended September 30, 2021, we recognized income tax expense of $13.9 million on income of $61.4 million, an effective tax rate of 22.6%, as compared to income tax benefit of $1.1 million on income of $20.9 million, an effective tax rate of (5.3)%, for the three months ended September 30, 2020. The higher effective tax rate for the three months ended September 30, 2021 when compared with the three months ended September 30, 2020 is primarily due to U.S. tax on foreign income, the 2020 benefit of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and geographic mix. Gain (Loss) on Disposition of Discontinued Operations - net of taxes During the three months ended September 30, 2021 and 2020, we recognized a gain (loss) on disposition of discontinued operations - net of tax of $0.6 million and $(16.1) million, respectively. The loss in the prior year period primarily related to a settlement on cash, debt, working capital and certain other items related to our prior disposition of our mobile cranes business. 37 Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020 Consolidated Nine Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 2,896.7 — $ 2,289.7 — 26.5 % Gross profit $ 585.5 20.2 % $ 390.1 17.0 % 50.1 % SG&A $ 327.3 11.3 % $ 353.3 15.4 % (7.4) % Income from operations $ 258.2 8.9 % $ 36.8 1.6 % 601.6 % Net sales for the nine months ended September 30, 2021 increased $607.0 million when compared to the same period in 2020. The increase in net sales was primarily due to higher demand for aerial work platforms, materials processing equipment, material handlers, concrete mixer trucks and cranes. Changes in foreign exchange rates positively impacted consolidated net sales by approximately $99 million. Customer sentiment in both segments continues to improve as equipment is being utilized and ordered as end-market demand strengthens. Gross profit for the nine months ended September 30, 2021 increased $195.4 million when compared to the same period in 2020. The increase was primarily due to higher sales volume, improved manufacturing efficiency, price realization and the positive impact of changes in foreign exchange rates, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. SG&A costs for the nine months ended September 30, 2021 decreased $26.0 million when compared to the same period in 2020 primarily due to cost management, including right-sizing our workforce and reduced discretionary spending, taken across all areas of our business. Income from operations for the nine months ended September 30, 2021 increased $221.4 million when compared to the same period in 2020. The increase was primarily due to higher sales volume, improved manufacturing efficiency, SG&A cost management, price realization and the positive impact of changes in foreign exchange rates, partially offset by increases in material, labor and freight costs. 38 Aerial Work Platforms Nine Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,644.4 — $ 1,370.6 — 20.0 % Income from operations $ 126.7 7.7 % $ 2.4 0.2 % * * Not a meaningful percentage Net sales for the AWP segment for the nine months ended September 30, 2021 increased $273.8 million when compared to the same period in 2020 primarily due to higher demand driven by fleet replacement and end-market growth for aerial work platforms in North America, Western Europe and China. Net sales were positively impacted by the effects of foreign exchange rate changes of approximately $46 million. Income from operations for the nine months ended September 30, 2021 increased $124.3 million when compared to the same period in 2020 primarily due to higher sales volume, improved manufacturing efficiency, price realization, SG&A cost management and the positive effects of foreign exchange rate changes, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. Materials Processing Nine Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,237.7 — $ 890.5 — 39.0 % Income from operations $ 178.3 14.4 % $ 88.7 10.0 % 101.0 % Net sales for the MP segment for the nine months ended September 30, 2021 increased $347.2 million when compared to the same period in 2020 primarily due to robust end-market demand for materials processing equipment in all major geographies, material handlers in North America and Western Europe, concrete mixer trucks in North America and cranes in Australia. Net sales were positively impacted by the effects of foreign exchange rate changes of approximately $54 million. Income from operations for the nine months ended September 30, 2021 increased $89.6 million when compared to the same period in 2020 primarily due to higher sales volume, improved manufacturing efficiency, price realization and the positive effects of foreign exchange rate changes, partially offset by material, labor and freight cost inflation due to disruptions in the supply chain. 39 Corporate and Other / Eliminations Nine Months Ended September 30, 2021 2020 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 14.6 — $ 28.6 — (49.0) % Loss from operations $ (46.8) * $ (54.3) * 13.8 % * Not a meaningful percentage Net sales include on-book financing activities of TFS, governmental sales and elimination of intercompany sales activity among segments. The net sales decrease is primarily attributable to lower TFS revenue, partially offset by lower intercompany sales eliminations. Loss from operations for the nine months ended September 30, 2021 decreased $7.5 million when compared to the same period in 2020. The decrease in operating loss is primarily due to a gain on the sale of the on-book finance receivables, SG&A cost management and a reserve release in the current period as well as a specific finance receivable reserve for one customer in the prior year period, partially offset by lower revenue. Interest Expense, Net of Interest Income During the nine months ended September 30, 2021, our interest expense, net of interest income, was $37.7 million, or $9.8 million lower than the same period in the prior year due to a decrease in average borrowings and lower rates. Loss on Early Extinguishment of Debt During the nine months ended September 30, 2021, we recorded a loss on early extinguishment of debt of $27.7 million related to refinancing of a significant portion of our capital structure and prepayment of term loans. Other Income (Expense) – Net Other income (expense) – net for the nine months ended September 30, 2021 was income of $2.7 million, or a $2.8 million increase in income when compared to the same period in the prior year. The increase in income was due to mark-to-market gains recorded on an equity investment in the current year period compared to losses recorded in the prior year period, partially offset by a positive post-closing adjustment in 2020 related to the settlement of our U.S. defined benefit pension plan in 2018. Income Taxes During the nine months ended September 30, 2021, we recognized income tax expense of $36.0 million on income of $195.5 million, an effective tax rate of 18.4%, as compared to income tax benefit of $4.9 million on loss of $10.8 million, an effective tax rate of 45.4%, for the nine months ended September 30, 2020. The lower effective tax rate for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 is primarily due to geographic mix and the 2020 benefit of the CARES Act, partially offset by U.S. tax on foreign income. Income (Loss) from Discontinued Operations Loss from discontinued operations - net of tax for the nine months ended September 30, 2020 was $1.3 million related to operations of our mobile cranes business. Gain (Loss) on Disposition of Discontinued Operations - net of taxes During the nine months ended September 30, 2021 and 2020, we recognized a gain (loss) on disposition of discontinued operations - net of tax of $2.6 million and $(21.1) million, respectively. The gain in the current year period primarily related to our prior dispositions of our mobile cranes and MHPS businesses. The loss in the prior year primarily related to a settlement on cash, debt, working capital and certain other items related to the prior disposition of our mobile cranes business. 40 LIQUIDITY AND CAPITAL RESOURCES We are focused on generating cash and maintaining liquidity (cash and availability under our revolving line of credit) for the efficient operation of our business. At September 30, 2021, we had cash and cash equivalents of $558.2 million and undrawn availability under our revolving line of credit of $600 million, giving us total liquidity of approximately $1.2 billion. Cash generated from operations during the nine months ended September 30, 2021, the expiration of a $150 million minimum liquidity requirement and proceeds of approximately $99 million from the sale of finance receivables allowed us to maintain liquidity at a level consistent with December 31, 2020 while reducing outstanding debt by approximately $282 million and investing in our strategic priorities. Our main sources of funding are cash generated from operations, including cash generated from the sale of receivables, loans from our bank credit facilities and funds raised in capital markets. We have no significant debt maturities until 2024 and we have increased our focus on internal cash flow generation. Our actions to maintain liquidity include disciplined management of costs and working capital. We believe these measures will provide us with adequate liquidity to comply with our financial covenants under our bank credit facility, continue to support internal operating initiatives and meet our operating and debt service requirements for at least the next 12 months from the date of issuance of this quarterly report. See Part I, Item 1A. – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 for a detailed description of the risks resulting from our debt and our ability to generate sufficient cash flow to operate our business. Our ability to generate cash from operations is subject to numerous factors, including the following: • The duration and depth of the global economic uncertainty resulting from COVID-19. • As our sales change, the amount of working capital needed to support our business may change. • Many of our customers fund their purchases through third-party finance companies that extend credit based on the credit-worthiness of customers and expected residual value of our equipment. Changes either in customers’ credit profile or used equipment values may affect the ability of customers to purchase equipment. There can be no assurance that third-party finance companies will continue to extend credit to our customers as they have in the past. • Our suppliers extend payment terms to us primarily based on our overall credit rating. Deterioration in our credit rating may influence suppliers’ willingness to extend terms and in turn accelerate cash requirements of our business. • Sales of our products are subject to general economic conditions, weather, competition, translation effect of foreign currency exchange rate changes, and other factors that in many cases are outside our direct control. For example, during periods of economic uncertainty, our customers have delayed purchasing decisions, which reduces cash generated from operations. • Availability and utilization of other sources of liquidity such as trade receivables sales programs. Typically, we have invested our cash in a combination of highly rated, liquid money market funds and in short-term bank deposits with large, highly rated banks. Our investment objective is to preserve capital and liquidity while earning a market rate of interest. We seek to use cash held by our foreign subsidiaries to support our operations and continued growth plans outside and inside the U.S. through funding of capital expenditures, operating expenses or other similar cash needs of these operations. Most of this cash could be used in the U.S., if necessary, without additional tax expense. Incremental cash repatriated to the U.S. would not be expected to result in material foreign, Federal or state tax cost. We will continue to seek opportunities to tax-efficiently mobilize and redeploy funds. 41 We had free cash flow of $42.5 million and $183.4 million for the three and nine months ended September 30, 2021, respectively. The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions): Three Months Ended 9/30/2021 Nine Months Ended 9/30/2021 Net cash provided by (used in) operating activities $ 54.9 $ 324.1 Increase (decrease) in TFS assets (4.6) (110.2) Capital expenditures, net of proceeds from sale of capital assets (7.8) (30.5) Free cash flow $ 42.5 $ 183.4 Pursuant to terms of our trade accounts receivable factoring arrangements, during the nine months ended September 30, 2021, we sold, without material recourse, approximately $359 million of trade accounts receivable to enhance liquidity. During the nine months ended September 30, 2021, we also sold approximately $96 million of sales-type leases and commercial loans. We continue to maintain strong liquidity levels resulting in less utilization of low-cost funding arrangements. Working capital as a percent of trailing three month annualized net sales was 17.4% at September 30, 2021. The following tables show the calculation of our working capital in continuing operations and trailing three months annualized sales as of September 30, 2021 (in millions): Three Months Ended 9/30/2021 Net Sales $ 993.8 x 4 Trailing Three Month Annualized Net Sales $ 3,975.2 As of 9/30/21 Inventories $ 747.7 Trade Receivables 513.4 Trade Accounts Payable (548.7) Customer Advances (19.6) Working Capital $ 692.8 On January 31, 2017, we entered into a credit agreement. The credit agreement included (i) a $600 million revolving line of credit (the “Revolver”) and (ii) senior secured term loans totaling $600 million with a maturity date of January 31, 2024 (the “Term Loans”). On April 1, 2021, we entered into an amendment and restatement of the credit agreement (as amended and restated, the “Credit Agreement”) which included the following principal changes to the original credit agreement: (i) extension of the term of the Revolver to expire on April 1, 2026, which maturity will spring forward to November 1, 2023 if the $400 million senior secured term loan outstanding is not repaid or the maturity date is not extended, (ii) reinstatement of financial covenants that were waived in 2020, (iii) decrease in the interest rate on the drawn Revolver by 25 basis points and (iv) certain other technical changes, including additional language regarding the potential cessation of the London Interbank Offered Rate (“LIBOR”) as a benchmark rate. See Note J - “Long-Term Obligations” in our Condensed Consolidated Financial Statements for additional information regarding the Credit Agreement. Borrowings under the Credit Agreement at September 30, 2021 were $298.4 million, net of discount, on our Term Loans. During the nine months ended September 30, 2021, we prepaid approximately $279 million of our Term Loans prior to their maturity date to reduce our outstanding debt and lower our leverage. In October 2021, we prepaid an additional $150 million of our Term Loans prior to their maturity date to reduce our outstanding debt and lower our leverage. At September 30, 2021, the weighted average interest rate was 2.75% on our Term Loans. There were no amounts outstanding on the Revolver as of September 30, 2021. 42 In April 2021, we sold and issued $600.0 million aggregate principal amount of Senior Notes Due 2029 (“5% Notes”) at par in a private offering. The proceeds from the 5% Notes, together with cash on hand, were used to fund redemption and discharge of the $600.0 million aggregate principal amount of Senior Notes Due 2025 (“5-5/8% Notes”) in full for $622.9 million, including redemption premiums of $16.9 million and accrued but unpaid interest of $6.0 million. See Note J - “Long-Term Obligations” in our Condensed Consolidated Financial Statements for additional information regarding the 5% Notes and 5-5/8% Notes. We remain focused on expanding customer financing solutions in key markets like the U.S., Europe and China. We also anticipate our continued use of TFS to drive incremental sales by increasing customer financing facilitated through TFS in certain instances. In February 2021, we transferred finance receivables of $89.7 million to a U.S. regional bank, which qualified for sales treatment under ASC 860. We received $99.4 million cash proceeds from the sale and recognized a net gain of $5.6 million. On May 25, 2021, we acquired assets to facilitate manufacturing of certain MP products in China for total cash consideration of approximately $17 million. On July 6, 2021, we acquired a manufacturer of heavy duty aggregate and recycling trommels, apron feeders and conveyor systems based in the Republic of Ireland for total cash consideration of approximately $19 million. This acquisition supports our strategy to expand our material processing offerings in the crushing, screening and environmental industries, with products that complement our existing products. In July 2018, our Board of Directors authorized the repurchase up to $300 million of our outstanding shares of common stock. During the nine months ended September 30, 2021, we did not repurchase shares under this authorization leaving approximately $141 million available for repurchase under this program. In February 2021, our Board of Directors reinstated our quarterly dividend for 2021 and declared a dividend of $0.12 per share in the first, second and third quarters of 2021, which was paid to the Company’s shareholders. In October 2021, our Board of Directors declared a dividend of $0.12 per share, which will be paid to the Company’s shareholders on December 17, 2021. Our ability to access capital markets to raise funds, through sale of equity or debt securities, is subject to various factors, some specific to us and others related to general economic and/or financial market conditions. These include results of operations, projected operating results for future periods and debt to equity leverage. Our ability to access capital markets is also subject to our timely filing of periodic reports with the Securities and Exchange Commission. In addition, terms of our bank credit facilities, senior notes and senior subordinated notes contain restrictions on our ability to make further borrowings and to sell substantial portions of our assets. Cash Flows Cash provided by operations for the nine months ended September 30, 2021 totaled $324.1 million, compared to $88.9 million for the nine months ended September 30, 2020. The increase in cash provided by operations was primarily driven by increased operating profitability and proceeds from the sale of finance receivables. Cash used in investing activities for the nine months ended September 30, 2021 was $73.4 million, compared to $40.0 million for the nine months ended September 30, 2020. The increase in cash used in investing activities in the current period relates primarily to cash used in acquisition and investment activity, partially offset by lower capital expenditures. Cash used in financing activities was $348.7 million for the nine months ended September 30, 2021, compared to $80.8 million for the nine months ended September 30, 2020. The increase in cash used in financing activities was primarily due to higher debt repayments, dividend payments and debt extinguishment costs in the current year, partially offset by share repurchases in the prior year. 43 OFF-BALANCE SHEET ARRANGEMENTS Guarantees Our customers may fund the acquisition of our equipment through third-party finance companies. In certain instances, we may provide a credit guarantee to the finance company by which we agree to make payments to the finance company should the customer default. Our maximum liability is generally limited to our customer’s remaining payments due to the finance company at the time of default. The expectation of losses or non-performance is assessed based on consideration of historical customer reviews, current financial conditions, reasonable and supportable forecasts, equipment collateral value and other factors. Reserves are recorded for expected loss over the contractual period of risk exposure. There can be no assurance that our historical credit default experience will be indicative of future results. Our ability to recover losses experienced from our guarantees may be affected by economic conditions in effect at the time of loss. See Note L – “Litigation and Contingencies” in the Notes to Condensed Consolidated Financial Statements for further information regarding our guarantees. CONTINGENCIES AND UNCERTAINTIES Foreign Exchange and Interest Rate Risk Our products are sold in over 100 countries around the world and, accordingly, our revenues are generated in foreign currencies, while costs associated with those revenues are only partly incurred in the same currencies. Primary currencies to which we are exposed are the Euro, British Pound, Chinese Yuan and Australian Dollar. We purchase hedging instruments to manage variability of future cash flows associated with recognized assets or liabilities due to changing currency exchange rates. We manage our exposure to interest rate risk by establishing a mix of indebtedness bearing interest at both floating and fixed rates at inception and maintain a ratio of floating and fixed rates on this mix of indebtedness using interest rate derivatives when necessary. See Note I – “Derivative Financial Instruments” in the Notes to Condensed Consolidated Financial Statements for further information regarding our derivatives and Item 3 “Quantitative and Qualitative Disclosures About Market Risk” for a discussion of the impact changes in foreign currency exchange rates and interest rates may have on our financial performance. Other We are subject to a number of contingencies and uncertainties including, without limitation, product liability claims, workers’ compensation liability, intellectual property litigation, self-insurance obligations, tax examinations, guarantees, class action lawsuits and other matters. See Note L – “Litigation and Contingencies” in the Notes to Condensed Consolidated Financial Statements for more information regarding contingencies and uncertainties, including our proceedings involving a claim in Brazil regarding payment of ICMS tax, penalties and related interest. We are insured for product liability, general liability, workers’ compensation, employer’s liability, property damage, intellectual property and other insurable risks required by law or contract with retained liability to us or deductibles. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any liability. However, we do not believe these contingencies and uncertainties will, individually or in aggregate, have a material adverse effect on our operations. For contingencies and uncertainties other than income taxes, when it is probable a loss will be incurred and possible to make reasonable estimates of our liability with respect to such matters, a provision is recorded for the amount of such estimate or for the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur. 44 We generate hazardous and non-hazardous wastes in the normal course of our manufacturing operations. As a result, we are subject to a wide range of environmental laws and regulations. All of our employees are required to obey all applicable health, safety and environmental laws and regulations and must observe the proper safety rules and environmental practices in work situations. These laws and regulations govern actions that may have adverse environmental effects, such as discharges to air and water, and require compliance with certain practices when handling and disposing of hazardous and non-hazardous wastes. These laws and regulations would also impose liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances, should any such events occur. We are committed to complying with these standards and monitoring our workplaces to determine if equipment, machinery and facilities meet specified safety standards. Each of our manufacturing facilities is subject to an environmental audit at least once every five years to monitor compliance. Also, no incidents have occurred which required us to pay material amounts to comply with such laws and regulations. We are dedicated to ensuring that safety and health hazards are adequately addressed through appropriate work practices, training and procedures. We are committed to reducing injuries and working towards a world-class level of safety practices in our industry. RECENT ACCOUNTING STANDARDS Please refer to Note A – “Basis of Presentation” in the accompanying Condensed Consolidated Financial Statements for a summary of recently issued accounting standards.