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 materials processing machinery and aerial work platforms. We design, build and support products used in construction, maintenance, manufacturing, energy, recycling, minerals and materials management applications. Certain Terex products and solutions enable customers to reduce their environmental impact including electric and hybrid offerings that deliver quiet and emission-free performance, products that support renewable energy, and products that aid in the recovery of useful materials from various types of waste. Our products are manufactured in North 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) Materials Processing (“MP”) and (ii) Aerial Work Platforms (“AWP”). 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”) expenses and operating profit, as well as the net sales, gross profit, SG&A expenses 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 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 2022 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 2022 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. 28 Non-GAAP measures we also use include Net Operating Profit After Tax (“NOPAT”) as adjusted, annualized effective tax rate as adjusted and cash and cash equivalents 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. 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. We remain focused on executing our multi-year growth plan and continue to invest in new technologies and products across our businesses. Our strategic operational priorities of execution, innovation and growth continue to strengthen our operations and allow us to capitalize on the strong demand in our end-markets. We are leveraging our business operating systems to navigate supply challenges and labor constraints while working to mitigate material cost inflation. Company-wide investments in new product development and continued deployment of digital customer and dealer solutions are important to help to deliver long-term growth. In the quarter, we expanded the capabilities of our growing environmental business in the MP segment with the acquisition of a company that designs and creates robots that pick, sort and recycle waste material. Our performance in the third quarter reflected continued, strong, global customer demand in our businesses and good execution by our team members in a dynamic and challenging environment. Net sales of $1.1 billion were up 13% year-over-year, 21% on a foreign exchange neutral basis, as end-markets remained strong. Gross margins increased by 320 basis points in the quarter as the team implemented cost take out plans and pricing actions helped to offset cost increases. The year-over-year gross margin increase was in both our segments. Despite the high inflationary environment, SG&A spending as a percentage of net sales was essentially flat year-over-year at 10.4% of net sales, reflecting focused cost management. Operating margin of 10.8% was up 330 basis points year-over-year and up 120 basis points sequentially driven by prudent cost management and the improvement in price cost dynamics. Overall, third quarter financial performance demonstrated continued, strong execution and focus on delivering for our customers and dealers despite global supply chain disruptions, significant inflationary pressures and foreign exchange rate volatility. The global operating environment has remained difficult and unpredictable with increases in commodity prices, energy costs and logistics adversely impacting the Company. In addition, the weakening of the Euro and British Pound against the U.S. Dollar had a meaningful negative impact on our results in the quarter. Although these headwinds have constrained our growth, we are aggressively managing these challenges. We have continued to take pricing actions which has been necessary to mitigate rising costs in both segments. As a result of these actions, we anticipate being price cost neutral for all of 2022. MP had a strong quarter with net sales up 9% from the prior year period, 20% on a foreign exchange neutral basis, driven by price realization and strong customer sentiment across multiple end-markets and geographies. The MP businesses continue to benefit from strong equipment utilization rates and dealers looking to replenish their inventory and rental fleets. Our mobile crushing and screening businesses are benefiting from the strength of aggregates demand for infrastructure and sand for silicon used in semiconductors. Growth of environmental and waste recycling solutions is driving demand for our wood processing, biomass and recycling equipment. The strength of construction and infrastructure spending is driving demand for our cement products in the U.S. Our material handlers are benefiting from diversification into waste, scrap, port and timber applications. The strength of commodity prices is driving demand for our pick and carry cranes in Australia. MP has been aggressively managing all elements of cost resulting in a 14.6% operating margin for the quarter. We are encouraged by MP’s total backlog (including deliveries beyond 12 months) of $1.2 billion, which is up 14% compared to the prior year period’s total backlog of $1.1 billion. AWP’s third quarter 2022 net sales were up 16% compared to the prior year period and increased 22% on a foreign exchange neutral basis, primarily due to price realization necessary to mitigate rising costs and higher demand driven by fleet replacement and end-market growth for aerial work platforms. Utility product growth was strong in North America. Construction, infrastructure, and industrial applications are driving demand for Genie products. Examples of such applications for Genie products include data centers, warehouses and manufacturing facilities. In addition, the fundamentals of the North American and European replacement cycle are strong as fleets age and customers have strong utilization rates. Globally, increased adoption continues to improve labor efficiency and jobsite safety. Our Utilities business is benefiting from electric grid expansion across the U.S. AWP delivered operating margins of 9.6% in the quarter driven by strict expense management and disciplined pricing actions. AWP’s end market strength is demonstrated by its total backlog (including deliveries beyond 12 months) of $2.7 billion, which is up 44% compared to the prior year period’s total backlog of $1.9 billion. 29 In the third quarter, our largest market remained North America, which represented approximately 58% of our global sales. As compared to the prior year period, sales were up double digits in every major geography except for Asia Pacific which was down although essentially flat on a foreign exchange neutral basis. We continued to execute our disciplined capital allocation strategy in the third quarter. We are making strategic investments in our businesses and continuing to return capital to shareholders. Our strong balance sheet has allowed us to return approximately $120 million of cash to shareholders in the first nine months of 2022. We generated $53 million of free cash flow in the quarter, consistent with our sequential improvement goals, but below our expectations as inventory levels remained high in the third quarter. We continue to maintain ample liquidity and as of September 30, 2022, we had $658 million in available liquidity, with no near-term debt maturities. 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. As a result of our strong performance in the third quarter, we are increasing our outlook for 2022 EPS to between $4.00 and $4.20, on net sales of approximately $4.3 billion. We continue to operate in a highly uncertain environment with supply chain challenges, inflationary pressures, foreign exchange rate volatility, geopolitical uncertainty, and restrictive COVID-19 policies in China, so results can change, positively or negatively. 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 annualized effective tax rate to reflect management’s expectation of the full year effective tax rate to create a measure that is more useful to understanding our operating results and the ongoing performance of our underlying business as shown in the tables below. Cash and cash equivalents is adjusted to include amounts recorded as held for sale. Furthermore, 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. Our 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 businesses and is an 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, 2022 was 19.0%. 30 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 '22 Jun '22 Mar '22 Dec '21 Sep '21 Annualized effective tax rate as adjusted (1) 20.0 % 20.0 % 20.0 % 17.6 % Income (loss) from operations $ 120.8 $ 103.9 $ 74.5 $ 69.8 Multiplied by: 1 minus annualized effective tax rate 80.0 % 80.0 % 80.0 % 82.4 % Adjusted net operating income (loss) after tax $ 96.6 $ 83.1 $ 59.6 $ 57.5 Debt $ 826.5 $ 828.2 $ 740.3 $ 674.1 $ 893.4 Less: Cash and cash equivalents as adjusted (231.7) (253.3) (218.4) (266.9) (558.2) Debt less Cash and cash equivalents as adjusted 594.8 574.9 521.9 407.2 335.2 Stockholders’ equity 1,034.7 1,048.9 1,114.1 1,109.6 1,050.7 Debt less Cash and cash equivalents as adjusted plus Stockholders’ equity $ 1,629.5 $ 1,623.8 $ 1,636.0 $ 1,516.8 $ 1,385.9 (1) The annualized effective tax rate for Dec ’21 represents the actual full year 2021 effective tax rate. September 30, 2022 ROIC 19.0 % NOPAT as adjusted (last 4 quarters) $ 296.8 Average Debt less Cash and cash equivalents as adjusted plus Stockholders’ equity (5 quarters) $ 1,558.4 As of 9/30/22 As of 6/30/22 As of 3/31/22 As of 12/31/21 As of 9/30/21 Reconciliation of Cash and cash equivalents: Cash and cash equivalents - continuing operations $ 231.7 $ 253.3 $ 218.4 $ 266.9 $ 553.2 Cash and cash equivalents - assets held for sale — — — — 5.0 Cash and cash equivalents as adjusted $ 231.7 $ 253.3 $ 218.4 $ 266.9 $ 558.2 Nine Months Ended September 30, 2022 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 $ 260.8 $ (52.6) 20.2 % Effect of adjustments: Tax related — 0.5 As adjusted $ 260.8 $ (52.1) 20.0 % 31 RESULTS OF OPERATIONS Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021 Consolidated Three Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,120.5 — $ 993.8 — 12.7 % Gross profit $ 237.1 21.2 % $ 178.5 18.0 % 32.8 % SG&A expenses $ 116.3 10.4 % $ 104.3 10.5 % 11.5 % Income from operations $ 120.8 10.8 % $ 74.2 7.5 % 62.8 % Net sales for the three months ended September 30, 2022 increased $126.7 million when compared to the same period in 2021. The increase in net sales was primarily due to price realization, necessary to mitigate rising costs, across all segments and healthy demand for our products across multiple businesses. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately $78 million. Gross profit for the three months ended September 30, 2022 increased $58.6 million when compared to the same period in 2021. The increase was primarily due to price realization, favorable mix and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. SG&A expenses for the three months ended September 30, 2022 increased $12.0 million when compared to the same period in 2021 primarily due to higher personnel costs and increased engineering and selling costs, partially offset by the positive impact of changes in foreign exchange rates. SG&A expenses were slightly lower as a percent of sales when compared to the same period in 2021. Income from operations for the three months ended September 30, 2022 increased $46.6 million when compared to the same period in 2021. The increase was primarily due to price realization, favorable mix and incremental margin on higher sales volume which more than offset cost increases and the negative impact of changes in foreign exchange rates. Materials Processing Three Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 457.9 — $ 418.7 — 9.4 % Income from operations $ 66.8 14.6 % $ 57.1 13.6 % 17.0 % Net sales for the MP segment for the three months ended September 30, 2022 increased $39.2 million when compared to the same period in 2021 primarily due to price realization, necessary to mitigate rising costs, and healthy demand for our products across multiple businesses in spite of the negative impact of changes in foreign exchange rates of approximately $43 million. Income from operations for the three months ended September 30, 2022 increased $9.7 million when compared to the same period in 2021 primarily due to price realization, favorable mix and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. 32 Aerial Work Platforms Three Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 662.6 — $ 572.5 — 15.7 % Income from operations $ 63.5 9.6 % $ 34.9 6.1 % 81.9 % Net sales for the AWP segment for the three months ended September 30, 2022 increased $90.1 million when compared to the same period in 2021 primarily due to price realization, necessary to mitigate rising costs, and higher demand that was driven by fleet replacement and end-market growth for aerial work platforms in all major geographies and utility products in North America, partially offset by lower telehandlers sales in North America and lower demand in China. Net sales were negatively impacted by changes in foreign exchange rates of approximately $35 million. Income from operations for the three months ended September 30, 2022 increased $28.6 million when compared to the same period in 2021 primarily due to price realization, favorable mix and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. Corporate and Other / Eliminations Three Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ — — $ 2.6 — (100.0) % Loss from operations $ (9.5) * $ (17.8) * 46.6 % * Not a meaningful percentage Net sales include financing activities of Terex Financial Services (“TFS”), governmental sales and elimination of intercompany sales activity among segments. The net sales decrease is primarily attributable to higher intercompany sale eliminations and lower TFS revenue. Loss from operations for the three months ended September 30, 2022 decreased $8.3 million when compared to the same period in 2021 . The decrease in operating loss is primarily due to changes in foreign exchange costs absorbed by our operating segments, partially offset by higher technology investment and personnel costs. Interest Expense, Net of Interest Income During the three months ended September 30, 2022, our interest expense, net of interest income, was $12.4 million, or $0.7 million higher when compared to the same period in 2021 primarily due to an increase in our weighted average interest rate on revolving credit amounts, partially offset by higher interest income in the current year period. 33 Other Income (Expense) – Net Other income (expense) – net for the three months ended September 30, 2022 and 2021 was expense of $1.0 million and $1.1 million, respectively. Income Taxes During the three months ended September 30, 2022, we recognized income tax expense of $25.6 million on income of $107.4 million, an effective tax rate of 23.8%, as compared to income tax expense of $13.9 million on income of $61.4 million, an effective tax rate of 22.6%, for the three months ended September 30, 2021. The higher effective tax rate for the three months ended September 30, 2022 when compared with the three months ended September 30, 2021 is primarily due to higher tax related to the geographic distribution of income partially offset by lower U.S. tax on foreign income. Gain (Loss) on Disposition of Discontinued Operations - net of taxes During the three months ended September 30, 2021, we recognized a gain on disposition of discontinued operations - net of tax of $0.6 million primarily related to the sale of our mobile cranes business. Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021 Consolidated Nine Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 3,200.1 — $ 2,896.7 — 10.5 % Gross profit $ 635.8 19.9 % $ 585.5 20.2 % 8.6 % SG&A expenses $ 336.6 10.5 % $ 327.3 11.3 % 2.8 % Income from operations $ 299.2 9.3 % $ 258.2 8.9 % 15.9 % Net sales for the nine months ended September 30, 2022 increased $303.4 million when compared to the same period in 2021. The increase in net sales was primarily due to price realization, necessary to mitigate rising costs, across all segments and healthy demand for our products across multiple businesses. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately $161 million. Gross profit for the nine months ended September 30, 2022 increased $50.3 million when compared to the same period in 2021. The increase was primarily due to price realization, favorable mix and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. SG&A expenses for the nine months ended September 30, 2022 increased $9.3 million when compared to the same period in 2021 primarily due to higher personnel costs and increased engineering and selling costs, partially offset by the positive impact of changes in foreign exchange rates. SG&A expenses were lower as a percent of sales when compared to the same period in 2021. Income from operations for the nine months ended September 30, 2022 increased $41.0 million when compared to the same period in 2021. The increase was primarily due to price realization, favorable mix and incremental margin on higher sales volume which more than offset cost increases and the negative impact of changes in foreign exchange rates. 34 Materials Processing Nine Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,391.3 — $ 1,237.7 — 12.4 % Income from operations $ 210.8 15.2 % $ 178.3 14.4 % 18.2 % Net sales for the MP segment for the nine months ended September 30, 2022 increased $153.6 million when compared to the same period in 2021 primarily due to robust end-market demand for aggregates in all major geographies, material handlers in Western Europe and North America, cranes in Asia-Pacific and North America, and environmental equipment in North America and Western Europe, as well as price realization necessary to mitigate rising costs. Net sales were negatively impacted by changes in foreign exchange rates of approximately $90 million. Income from operations for the nine months ended September 30, 2022 increased $32.5 million when compared to the same period in 2021 primarily due to incremental margin on higher sales volume, favorable mix and price realization, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. Aerial Work Platforms Nine Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,811.8 — $ 1,644.4 — 10.2 % Income from operations $ 142.2 7.8 % $ 126.7 7.7 % 12.2 % Net sales for the AWP segment for the nine months ended September 30, 2022 increased $167.4 million when compared to the same period in 2021 primarily due to price realization, necessary to mitigate rising costs, and higher demand that was driven by fleet replacement and end-market growth for aerial work platforms in all major geographies and utility products in North America, partially offset by lower demand in China and lower telehandlers sales in North America. Net sales were negatively impacted by changes in foreign exchange rates of approximately $71 million. Income from operations for the nine months ended September 30, 2022 increased $15.5 million when compared to the same period in 2021 primarily due to price realization, favorable mix and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates. 35 Corporate and Other / Eliminations Nine Months Ended September 30, 2022 2021 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ (3.0) — $ 14.6 — (120.5) % Loss from operations $ (53.8) * $ (46.8) * (15.0) % * Not a meaningful percentage Net sales include 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 and higher intercompany sales eliminations. Loss from operations for the nine months ended September 30, 2022 increased $7.0 million when compared to the same period in 2021. The increase in operating loss is primarily due to a gain on the sale of the on book finance receivables and a finance receivable reserve release in the prior period and the negative impact of changes in foreign exchange rates, a provision for litigation settlement on former product lines and restructuring charges in the current period, partially offset by the changes in foreign exchange costs absorbed by our operating segments and lower SG&A expenses. Interest Expense, Net of Interest Income During the nine months ended September 30, 2022, our interest expense, net of interest income, was $33.7 million, or $4.0 million lower when compared to the same period in 2021 due to a decrease in average borrowings and lower interest income, partially offset by an increase in our weighted average interest rate on revolving credit amounts in the current year period. 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, 2022 was an expense of $4.6 million, compared to income of $2.7 million in the same period in the prior year. The increase in expense was primarily due to foreign exchange transaction losses in the current year compared to gains in the prior year and mark-to-market losses recorded on an equity investment in the current year compared gains recorded the same period in the prior year. Income Taxes During the nine months ended September 30, 2022, we recognized income tax expense of $52.6 million on income of $260.8 million, an effective tax rate of 20.2%, as compared to income tax expense of $36.0 million on income of $195.5 million, an effective tax rate of 18.4%, for the nine months ended September 30, 2021. The higher effective tax rate for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021 is primarily due to higher tax related to the geographic distribution of income and lower favorable discrete benefits partially offset by lower U.S. tax on foreign income in the current year period. Gain (Loss) on Disposition of Discontinued Operations - net of taxes During the nine months ended September 30, 2022 and 2021, we recognized a gain (loss) on disposition of discontinued operations - net of tax of $(0.4) million and $2.6 million, respectively. The loss in the current year period primarily related to the sale of our mobile cranes business. The gain in the prior year primarily related to the sales of our MHPS and mobile crane businesses. 36 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, 2022, we had cash and cash equivalents of $232 million and undrawn availability under our revolving line of credit of $426 million, giving us total liquidity of approximately $658 million. During the nine months ended September 30, 2022, our liquidity decreased by approximately $209 million from December 31, 2021 primarily due to share repurchases, capital expenditures, acquisitions, investments, term loan prepayment and dividends, partially offset by cash generated from operations which includes the adverse impact of higher working capital. 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 free 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, 2021 and Part II, Item 1A. – “Risk Factors” below 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 challenges resulting from supply chain constraints, inflationary pressures, foreign exchange rate volatility, geopolitical uncertainty and restrictive COVID-19 policies. • 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. We had free cash flow of $53.2 million and $25.6 million for the three months ended and nine months ended September 30, 2022, respectively. The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions): Three Months Ended 9/30/2022 Nine Months Ended 9/30/2022 Net cash provided by (used in) operating activities $ 84.9 $ 104.2 Capital expenditures, net of proceeds from sale of capital assets (31.7) (78.6) Free cash flow (use) $ 53.2 $ 25.6 Pursuant to terms of our trade accounts receivable factoring arrangements, during the nine months ended September 30, 2022, we sold, without material recourse, approximately $458 million of trade accounts receivable to enhance liquidity. 37 Working capital as a percent of trailing three month annualized net sales was 20.0% at September 30, 2022. The following tables show the calculation of our working capital and trailing three months annualized sales as of September 30, 2022 (in millions): Three Months Ended 9/30/2022 Net Sales $ 1,120.5 x 4 Trailing Three Month Annualized Net Sales $ 4,482.0 As of 9/30/22 Inventories $ 981.2 Trade Receivables 531.1 Trade Accounts Payable (589.4) Customer Advances (27.2) Working Capital $ 895.7 On January 31, 2017, we entered into a credit agreement which was subsequently amended to include (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. 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 principal outstanding under the $400 million senior secured term loan (the “Original Term Loan”) 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 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, 2022 were $54.9 million, net of discount, on the Original Term Loan and $173.7 million on the Revolver. During the nine months ended September 30, 2022, we prepaid $23.0 million of the amount outstanding on the Original Term Loan prior to its maturity date to reduce our outstanding debt. At September 30, 2022, the weighted average interest rate was 4.67% on the Original Term Loan and 4.01% on the Revolver. 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. On April 22, 2022, we acquired a manufacturer of heavy fabrications based in Northern Ireland to facilitate manufacturing of certain MP products for cash consideration of approximately $6 million. On July 29, 2022, we acquired a manufacturer of volumetric mixers based in Canada to expand our concrete product offering for consideration of approximately $39 million. See Note D - “Acquisitions” in our Condensed Consolidated Financial Statements for additional information regarding these transactions. 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, 2022, we repurchased 2,718,549 shares for $92.0 million under this authorization leaving approximately $47 million available for repurchase under this program. Our Board of Directors declared a dividend of $0.13 per share in the first, second and third quarters of 2022, which were paid to the Company’s shareholders. In October 2022, our Board of Directors declared a dividend of $0.13 per share, which will be paid on December 19, 2022 to the Company’s shareholders of record as of November 10, 2022. 38 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 in operations was $104.2 million and $324.1 million for the nine months ended September 30, 2022 and 2021, respectively. The change in operating cash was primarily driven by proceeds from the sale of finance receivables received in the prior year and higher working capital and incentive compensation payments in the current year. Cash used in investing activities was $124.4 million and $73.4 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in cash used in investing activities relates primarily to higher capital expenditures and investment activity. Cash provided by financing activities was $13.3 million for the nine months ended September 30, 2022, compared to cash used in financing activities of $348.7 million for the nine months ended September 30, 2021. The increase in cash provided by financing activities was primarily due to debt prepayments in the prior year compared to borrowings in the current year, partially offset by share repurchases in the current year. OFF-BALANCE SHEET ARRANGEMENTS Guarantees We may assist customers in their rental, leasing and acquisition of our products by facilitating financing transactions directly between (i) end-user customers, distributors and rental companies and (ii) third-party financial institutions, providing recourse in certain circumstances. The expectation of losses or non-performance is evaluated based on consideration of historical customer assessments, current financial conditions, reasonable and supportable forecasts, equipment collateral value and other factors. Many of these factors, including the assessment of a customer’s ability to pay, are influenced by economic and market factors that cannot be predicted with certainty. Our maximum liability is generally limited to our customer’s remaining payments due to the third-party financial institutions at the time of default. In the event of a customer default, we are generally able to recover and dispose of the equipment at a minimum loss, if any, to us. Reserves are recorded for expected loss over the contractual period of risk exposure. There can be no assurance that our historical experience in used equipment markets will be indicative of future results. Our ability to recover losses experienced from our guarantees may be affected by economic conditions in used equipment markets 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, Indian Rupee, Australian Dollar and Mexican Peso. 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. 39 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. 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. 40