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 impact on the environment 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 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 also include translation effect of foreign currency exchange rate changes on net sales, gross profit, selling, general & administrative (“SG&A”) expenses and operating profit. 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. 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 2023 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 2023 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 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. Non-GAAP measures also include Net Operating Profit After Tax (“NOPAT”) and annualized effective tax rate 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. 26 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. Our operations teams executed well during the third quarter of 2023, maintaining their focus on improving deliveries to our customers and continuing with cost reduction and productivity improvement initiatives. Our investments in new product and technologies are important to help enable us to take advantage of sustainability trends such as recycling, electrification and decarbonization. Our permanent Mexico facility continues to advance on time and on budget. In the third quarter of 2023, our team members were focused on increasing production, starting up of our in-house paint system and process improvements at our new facility. Our performance in the third quarter of 2023 reflected strong, global customer demand in our businesses and excellent execution by our team members in a dynamic and challenging environment. Net sales of $1.3 billion were up 15% year-over-year as end-markets remained strong. Gross margins increased by 150 basis points in the quarter as volume, pricing, improved manufacturing efficiencies and expense discipline helped to offset cost increases. SG&A was 10% of sales and decreased by 40 basis points from the prior year period as business investment as well as marketing and engineering costs were coupled with continued expense management. Income from operations of $163 million was up 35% year-over-year. Operating margin of 12.7%, was up 190 basis points compared to the prior year period. This led to EPS increasing 46% to $1.75 in the third quarter of 2023 from our ongoing operations. Overall, third quarter 2023 financial performance demonstrated continued, strong execution and focus on delivering for our customers and dealers despite continued macroeconomic volatility and lingering supply chain constraints. Although supplier on-time delivery has improved, it remains below historical norms. However, we continued to have $20 million of “hospital” inventory at the end of the third quarter, a clear indication of the level of disruption we continue to face. Higher interest rates, inflation and geopolitical uncertainties have had an impact on Europe and we have seen slight softening in that market while demand in North America remains strong. MP had another strong quarter with net sales up 18% from the prior year period, driven by strong demand for our aggregates, environmental and concrete products. The MP businesses also continue to benefit from dealers looking to replenish their inventory and rental fleets. Our mobile crushing and screening businesses are benefiting from the strength of aggregates and recycled materials. Growth of environmental and waste recycling solutions is driving demand for our wood processing, biomass and recycling equipment. MP’s 16.9% operating margin for the quarter, up 230 basis points as compared to the prior year period, was driven by higher sales volume, favorable mix and improved manufacturing efficiencies. Although we are seeing some softness in European order activity, MP’s backlog of $0.9 billion remains healthy, supporting our outlook. AWP’s third quarter 2023 net sales were up 13% compared to the prior year period, primarily driven by improved supply chain, higher demand and price realization necessary to mitigate rising costs. 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 replacement cycle are strong as fleets age and customers have strong utilization rates. Globally, increased adoption of aerial work platforms continues to improve labor efficiency and jobsite safety. While our Utilities business is generally benefiting from electric grid expansion across the U.S., in the third quarter, this business was negatively impacted by inefficiencies due to supply chain issues, trade show expenses, and unfavorable product mix. AWP delivered operating margins of 12.5% in the third quarter of 2023 driven by higher sales volumes, manufacturing efficiencies, cost reduction initiatives and disciplined pricing actions to offset higher costs. AWP continues to have a robust backlog of $2.5 billion. We have started moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico. While these moves are expected to have long-term benefits, we anticipate the moves will result in short-term manufacturing inefficiencies. Lingering supply chain issues are also expected to negatively impact our Utilities business in the fourth quarter. In the third quarter of 2023, our largest market remained North America, which represented approximately 61% of our global sales. As compared to the prior year period, sales were up double digits in North America and up single digits in Western Europe and Asia Pacific. On a foreign currency neutral basis, sales in Western Europe were down slightly. We continued to execute our disciplined capital allocation strategy in the third quarter of 2023 as we made strategic investments in our businesses and we returned capital to shareholders. In July 2023, our Board of Directors approved increasing our quarterly dividend by 13% to $0.17 per share. This follows a 15% increase we announced earlier this year. The 31% increase 27 in our dividend since the start of 2023 reflects our continued confidence in our strong financial position. We generated $106 million of free cash flow in the third quarter, double the free cash flow generated in the prior year period, driven by increased operating profit. We continue to invest in our businesses with year-to-date capital expenditures and investments of $87 million, which was offset by $33 million of proceeds from the sale of our Oklahoma City facility. We continue to maintain ample liquidity and as of September 30, 2023, we had $846 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. Customer demand remains strong for our products and services. However, it is important to realize we are operating in a challenging macroeconomic environment with many variables and geopolitical uncertainties, so results could change, negatively or positively. As a result of the strong execution by our team members in the third quarter and the strength of the customer backlog, we now expect EPS for the full-year of approximately $7.05 on sales of approximately $5.15 billion. Our sales outlook incorporates the latest dialogue with our customers and our suppliers and our current supply chain expectations. Subsequent Event On October 12, 2023, John L. Garrison Jr. notified our Board of Directors of his intention to retire as Chairman, CEO and as a member of the Board, effective January 1, 2024. Mr. Garrison will continue as a consultant for Terex from January 1, 2024 through June 30, 2024. The Board has appointed Simon Meester, the current President AWP, to succeed Mr. Garrison as President and CEO, effective January 1, 2024. Mr. Meester has also been appointed a member of the Board effective January 1, 2024. Mr. Meester will not be a member of any committees of the Board. 28 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. 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’ 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. 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. 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, 2023 was 29.2%. 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 '23 Jun '23 Mar '23 Dec '22 Sep '22 Annualized effective tax rate as adjusted (1) 20.0 % 20.0 % 20.0 % 18.1 % Income (loss) from operations $ 163.2 $ 209.9 $ 147.7 120.8 Multiplied by: 1 minus annualized effective tax rate 80.0 % 80.0 % 80.0 % 81.9 % Net operating income (loss) after tax $ 130.6 $ 167.9 $ 118.2 $ 98.9 Debt $ 708.7 $ 736.7 $ 777.0 $ 775.5 $ 826.5 Less: Cash and cash equivalents (352.3) (297.7) (254.2) (304.1) (231.7) Debt less Cash and cash equivalents 356.4 439.0 522.8 471.4 594.8 Stockholders’ equity 1,496.2 1,432.2 1,294.6 1,181.2 1,034.7 Debt less Cash and cash equivalents plus Stockholders’ equity $ 1,852.6 $ 1,871.2 $ 1,817.4 $ 1,652.6 $ 1,629.5 (1) The annualized effective tax rate for Dec ’22 represents the actual full-year 2022 effective tax rate. September 30, 2023 ROIC 29.2 % NOPAT as adjusted (last 4 quarters) $ 515.6 Average Debt less Cash and cash equivalents plus Stockholders’ equity (5 quarters) $ 1,764.7 Nine Months Ended September 30, 2023 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 $ 474.0 $ (85.2) 18.0 % Effect of adjustments: Tax related — (9.6) As adjusted $ 474.0 $ (94.8) 20.0 % 29 RESULTS OF OPERATIONS Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022 Consolidated Three Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,290.1 — $ 1,120.5 — 15.1 % Gross profit 292.5 22.7 % 237.1 21.2 % 23.4 % SG&A expenses 129.3 10.0 % 116.3 10.4 % 11.2 % Income from operations 163.2 12.7 % 120.8 10.8 % 35.1 % Net sales for the three months ended September 30, 2023 increased $169.6 million when compared to the same period in 2022. The increase in net sales was primarily due to healthy demand for our products across multiple businesses in North America and improved price realization necessary to mitigate rising costs. Changes in foreign exchange rates positively impacted consolidated net sales by approximately $25 million. Gross profit for the three months ended September 30, 2023 increased $55.4 million when compared to the same period in 2022. The increase was primarily due to incremental profit achieved on higher sales volume, improved manufacturing efficiencies and price realization. SG&A expenses for the three months ended September 30, 2023 increased $13.0 million when compared to the same period in 2022 primarily due to inflation and increased marketing, engineering and technology expenses. SG&A expenses were lower as a percent of sales when compared to the same period in 2022 due to strict expense management and higher sales. Income from operations for the three months ended September 30, 2023 increased $42.4 million when compared to the same period in 2022. The increase was primarily due to incremental profit achieved on higher sales volume, improved manufacturing efficiencies and price realization, partially offset by cost increases. Materials Processing Three Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 541.1 — $ 457.9 — 18.2 % Income from operations 91.3 16.9 % 66.8 14.6 % 36.7 % Net sales for the three months ended September 30, 2023 increased $83.2 million when compared to the same period in 2022 primarily due to robust end-market demand for aggregates across all major geographies as well as concrete products and environmental equipment in North America. Net sales were positively impacted by changes in foreign exchange rates of approximately $12 million. Income from operations for the three months ended September 30, 2023 increased $24.5 million when compared to the same period in 2022 primarily due to incremental profit achieved on higher sales volume, favorable mix and improved manufacturing efficiencies. 30 Aerial Work Platforms Three Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 751.0 — $ 662.6 — 13.3 % Income from operations 93.6 12.5 % 63.5 9.6 % 47.4 % Net sales for the three months ended September 30, 2023 increased $88.4 million when compared to the same period in 2022 primarily due to higher demand resulting from end-market growth for aerial work platforms, telehandlers and utility products in North America, as well as improvements in the Genie supply chain and price realization necessary to mitigate rising costs. Net sales were positively impacted by changes in foreign exchange rates of approximately $13 million. Income from operations for the three months ended September 30, 2023 increased $30.1 million when compared to the same period in 2022 primarily due to incremental profit achieved on higher sales volume, price realization and cost reduction initiatives, partially offset by cost increases, including costs associated with the ramp-up of our Monterrey facility. Corporate and Other / Eliminations Three Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ (2.0) — $ — — * Loss from operations (21.7) * (9.5) * (128.4) % * Not a meaningful percentage Loss from operations for the three months ended September 30, 2023 increased $12.2 million when compared to the same period in 2022. The increase in operating loss is primarily due to changes in foreign exchange costs absorbed by our operating segments in the prior year period. Interest Expense, Net of Interest Income During the three months ended September 30, 2023, our interest expense, net of interest income, was $14.9 million, or $2.5 million higher when compared to the same period in 2022 primarily due to increased receivable sales at higher interest rates and an increase in our weighted average interest rate on revolving credit amounts, partially offset by higher interest income in the current year period. 31 Other Income (Expense) – Net Other income (expense) – net for the three months ended September 30, 2023 and 2022 was income of $0.7 million and an expense of $1.0 million, respectively. The increase in income is due primarily to higher mark-to-market gains recorded on equity investments in the current year period compared to the same period in the prior year, partially offset by increased non-service cost portion of pension expense and foreign exchange transaction losses in the current year period compared to the prior year period. Income Taxes During the three months ended September 30, 2023, we recognized income tax expense of $29.8 million on income of $149.0 million, an effective tax rate of 20.0%, as compared to income tax expense of $25.6 million on income of $107.4 million, an effective tax rate of 23.8%, for the three months ended September 30, 2022. The lower effective tax rate for the three months ended September 30, 2023 when compared with the three months ended September 30, 2022 is primarily due to lower tax related to geographic distribution of income and lower expense on permanent items. Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 Consolidated Nine Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 3,928.9 — $ 3,200.1 — 22.8 % Gross profit $ 914.1 23.3 % $ 635.8 19.9 % 43.8 % SG&A expenses $ 393.3 10.0 % $ 336.6 10.5 % 16.8 % Income from operations $ 520.8 13.3 % $ 299.2 9.3 % 74.1 % Net sales for the nine months ended September 30, 2023 increased $728.8 million when compared to the same period in 2022. The increase in net sales was primarily due to healthy demand for our products across multiple businesses and all major geographies and improved price realization necessary to mitigate rising costs. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately $28 million. Gross profit for the nine months ended September 30, 2023 increased $278.3 million when compared to the same period in 2022. The increase was primarily due to incremental profit achieved on higher sales volume, price realization and improved manufacturing efficiencies, partially offset by the negative impact of changes in foreign exchange rates. SG&A expenses for the nine months ended September 30, 2023 increased $56.7 million when compared to the same period in 2022 primarily due to inflation, incremental spend on new acquisitions and increased marketing, engineering and technology expenses. SG&A expenses were lower as a percent of sales when compared to the same period in 2022 due to strict expense management and higher sales. Income from operations for the nine months ended September 30, 2023 increased $221.6 million when compared to the same period in 2022. The increase was primarily due to incremental profit achieved on higher sales volume, price realization and improved manufacturing efficiencies, partially offset by cost increases and the negative impact of changes in foreign exchange rates. 32 Materials Processing Nine Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,672.3 — $ 1,391.3 — 20.2 % Income from operations $ 274.8 16.4 % $ 210.8 15.2 % 30.4 % Net sales for the nine months ended September 30, 2023 increased $281.0 million when compared to the same period in 2022 primarily due to robust end-market demand for aggregates across all major geographies as well as concrete products and environmental equipment in North America. Net sales were negatively impacted by changes in foreign exchange rates of approximately $24 million. Income from operations for the nine months ended September 30, 2023 increased $64.0 million when compared to the same period in 2022 primarily due to incremental profit achieved on higher sales volume and improved manufacturing efficiencies, partially offset by cost increases and the negative impact of changes in foreign exchange rates. Aerial Work Platforms Nine Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 2,261.8 — $ 1,811.8 — 24.8 % Income from operations $ 310.3 13.7 % $ 142.2 7.8 % 118.2 % Net sales for the nine months ended September 30, 2023 increased $450.0 million when compared to the same period in 2022 primarily due to higher demand resulting from end-market growth for aerial work platforms in all major geographies and telehandlers and utility products in North America as well as price realization necessary to mitigate rising costs. Income from operations for the nine months ended September 30, 2023 increased $168.1 million when compared to the same period in 2022 primarily due to incremental profit achieved on higher sales volume, price realization and improved manufacturing efficiencies, partially offset by cost increases. Corporate and Other / Eliminations Nine Months Ended September 30, 2023 2022 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ (5.2) — $ (3.0) — (73.3) % Loss from operations $ (64.3) * $ (53.8) * (19.5) % * Not a meaningful percentage Loss from operations for the nine months ended September 30, 2023 increased $10.5 million when compared to the same period in 2022. The increase in operating loss is primarily due to changes in foreign exchange costs absorbed by our operating segments in the prior year period. 33 Interest Expense, Net of Interest Income During the nine months ended September 30, 2023, our interest expense, net of interest income, was $42.1 million, or $8.4 million higher when compared to the same period in 2022 due primarily to an increase in receivable sales and average borrowings at higher interest rates, partially offset by higher interest income in the current year period. Other Income (Expense) – Net Other income (expense) – net was an expense of $4.7 million for the nine months ended September 30, 2023 and 2022. Income Taxes During the nine months ended September 30, 2023, we recognized income tax expense of $85.2 million on income of $474.0 million, an effective tax rate of 18.0%, as compared to income tax expense of $52.6 million on income of $260.8 million, an effective tax rate of 20.2%, for the nine months ended September 30, 2022. The lower effective tax rate for the nine months ended September 30, 2023 when compared with the nine months ended September 30, 2022 is primarily due to lower tax expense on permanent items. Gain (Loss) on Disposition of Discontinued Operations - net of taxes During the nine months ended September 30, 2023 and 2022, we recognized a gain (loss) on disposition of discontinued operations - net of tax of $2.3 million and $(0.4) million, respectively. The gain in the current year period primarily relates to post-closing adjustments related to the sales of our former MHPS and mobile cranes businesses. The loss in the prior year related to our former mobile cranes business. 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, 2023, we had cash and cash equivalents of $352 million and undrawn availability under our revolving line of credit of $494 million, giving us total liquidity of approximately $846 million. During the nine months ended September 30, 2023, our liquidity increased by approximately $119 million from December 31, 2022 primarily due to cash generated from operations and sale of capital assets, partially offset by capital expenditures, share repurchases, dividends, and acquisitions and investments. 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 2026 and we continue to 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, 2022 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 volatility resulting from supply chain constraints, inflationary pressures, foreign exchange rate volatility, geopolitical uncertainty and rising interest rates. • 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. 34 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 through funding of capital expenditures, operating expenses or other similar cash needs of worldwide 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 $106.4 million and $230.6 million for the three and nine months ended September 30, 2023, respectively. The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions): Three Months Ended 9/30/2023 Nine Months Ended 9/30/2023 Net cash provided by (used in) operating activities $ 138.8 $ 268.6 Capital expenditures, net of proceeds from sale of capital assets (32.4) (38.0) Free cash flow (use) $ 106.4 $ 230.6 Pursuant to terms of our trade accounts receivable factoring arrangements, during the nine months ended September 30, 2023, we sold, without material recourse, approximately $587 million of trade accounts receivable to enhance liquidity. Working capital as a percent of trailing three month annualized net sales was 20.6% at September 30, 2023. The following tables show the calculation of our working capital and trailing three months annualized sales as of September 30, 2023 (in millions): Three Months Ended September 30, 2023 Net Sales $ 1,290.1 x 4 Trailing Three Month Annualized Net Sales $ 5,160.4 As of September 30, 2023 Inventories $ 1,117.0 Receivables 645.1 Trade Accounts Payable (668.3) Customer Advances (32.4) Working Capital $ 1,061.4 Revolving line of credit (the “Revolver”) borrowings at September 30, 2023 were $106.0 million. At September 30, 2023, the weighted average interest rate was 7.01% on the Revolver. For information regarding debt, see Note J – “Long-Term Obligations” in Notes to Condensed Consolidated Financial Statements. 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 facilitating customer financing. During the nine months ended September 30, 2023, we repurchased 736,644 shares for $33.8 million leaving approximately $159 million available for repurchase under our share repurchase programs. Our Board of Directors declared a dividend of $0.15 per share in the first and second quarters of 2023 and $0.17 per share in the third quarter of 2023, which were paid to the Company’s shareholders. In October 2023, our Board of Directors declared a dividend of $0.17 per share, which will be paid on December 19, 2023 to our shareholders of record as of November 9, 2023. 35 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 and senior notes contain restrictions on our ability to make further borrowings and to sell substantial portions of our assets. Cash Flows Cash provided by operations was $268.6 million and $104.2 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in cash provided by operations was primarily driven by increased operating profitability in the current year. Cash used in investing activities was $53.4 million and $124.4 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease in cash used in investing activities relates primarily to higher proceeds from the sale of capital assets and lower acquisition and investment activity in the current year. Cash used in financing activities was $160.6 million for the nine months ended September 30, 2023, compared to cash provided by financing activities of $13.3 million for the nine months ended September 30, 2022. The increase in cash used in financing activities was primarily due to higher debt repayments and lower debt borrowing in the current year, partially offset by lower 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. 36 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. 37