TEREX CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION Terex is a global industrial equipment manufacturer of materials processing machinery, waste and recycling solutions, mobile elevating work platforms (MEWPs), and equipment for the electric utility industry. We design, build, and support products used in maintenance, manufacturing, energy, waste and recycling, minerals and materials management, construction, and the entertainment industry. We provide lifecycle support to our customers through our global parts and services organization, and offer complementary digital solutions, designed to help our customers maximize their return on their investment. 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, and Asia Pacific 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”), (ii) Aerials and (iii) Environmental Solutions (“ES”). 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 (U.S. generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures being disclosed by other companies. Management believes that presenting these non-GAAP financial measures provide investors with additional analytical tools which are useful in evaluating our operating results and the ongoing performance of our underlying businesses because they (i) provide meaningful supplemental information regarding financial performance by excluding impact of one-time items and other items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating our financial results. 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, tariffs, trade policies and other unusual items. Our 2025 outlook for EPS 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 2025 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, Customer advances and Short-term unearned revenue. 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 27 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”) as adjusted, operating profit as adjusted, annualized effective tax rate 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. Overview Safety is a top priority, not only for our team members, but also our customers. All Terex team members contribute to our effort of continuing to provide products and services for our customers, while maintaining a safe working environment. We continue to implement our updated Execute, Innovate and Grow strategy. We are evaluating our global footprint, focusing on opportunities to reduce fixed costs while improving operational performance, efficiency and flexibility. We have a new product development pipeline focused on maximizing return on investment for our customers and we are expanding our suite of digital solutions. We also continue to invest in robotics, automation, and digitizing workstreams to make our operations more efficient and flexible. Completing the ESG acquisition last year was a significant step forward. We expect organic growth in that business to continue, driven by demographics, product technology adoption, share gains, and further penetration of our digital solutions. Integrating ESG into Terex is on track, and we continue to expect to deliver at least $25 million in operational run-rate synergies by the end of 2026. Our overall financial results in the first quarter exceeded our expectations due to strong execution by ESG. Net sales of $1.2 billion were 4.9% lower than the first quarter of 2024, as a 25% decline in organic business sales was partially offset by the addition of ESG. The organic business sales decline was in line with our expectation driven by continued channel adjustment coupled with timing of our backlog conversion. As we expected, our operating margins were impacted by the production cuts in Aerials and MP in the past two quarters that exceeded the revenue decline in the period. Those actions were necessary to manage inventory and rebalance supply with demand. Our current backlog of $2.6 billion is supportive of our outlook. MP first quarter 2025 sales of $382 million was in line with our 2025 planning. We continue to see high fleet utilization rates in the United States. Quotation activity across our dealer network is positive with dealer stock levels declining albeit slowly. However, macro uncertainty and higher interest rates remain a headwind for rent to own conversions and the European market remains weak in particular for Aggregates and Cranes. Our Concrete business, led by Advance, delivered a solid first quarter with improved margins driven by new customers. MP’s backlog increased 33% sequentially and is in line with pre-covid norms. MP has returned to its traditional book-to-bill cadence supported by reliable lead times with backlog coverage of approximately three months. Aerials first quarter 2025 sales of $450 million was consistent with our expectations. Approximately half of the revenue was generated in March, as our rental customers began to ramp up their deliveries heading into the seasonally higher construction period. That pattern is continuing into the second quarter. We continued to see strong Aerials book to bill in the quarter as our rental customers are executing their capex plans focused largely on fleet replacement. Our ES segment had a strong quarter, generating approximately $400 million in sales which represented a third of our total Terex revenue in the first quarter. We produced and delivered more refuse collection vehicles in the first quarter than in any previous quarter in Heil’s history. ES backlog of $1.1 billion continues to demonstrate strong demand in both ESG and Terex Utilities. In the first quarter of 2025, our largest market remained North America, which represented approximately 73% of our global sales. As compared to the prior year, sales were up in North America, driven by the ESG acquisition, and down in all other major geographies. Adding ESG made Terex a more US-centric company, which we believe is advantageous in the current geopolitical environment. Based on 2025 outlook, approximately 75% of our US machine sales is generated by products that we produce in our 11 manufacturing locations in the United States. We continued to execute our capital allocation strategy as we made strategic investments in our businesses and we returned capital to shareholders. We continued to maintain ample liquidity and as of March 31, 2025, we had $1.1 billion 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. 28 We are closely following the administration’s approach to international trade policy and the responses from countries around the world. The majority of the products we sell in the United States, we make in the United States which largely limits our exposure. Moreover, we initiated mitigation actions last year and in the first quarter of 2025 in anticipation of additional tariffs, leveraging our global capabilities to manage the impact. Like other industrial companies, we have a global supply base and are exposed to tariffs on imported material. A key element of our tariff mitigation plan was working closely with our global suppliers to absorb the added cost and forward-place inventory in the United States to buffer the impact of the new tariffs. In addition, we are leveraging the global sourcing capabilities we developed during the first Trump administration and the post-Covid supply chain crisis, to re-balance supply to more favorable sources, among other actions. As a global company with a significant footprint in the United States and around the world, we have optionality and are ready to take additional actions if needed. See Part II, Item 1A. – “Risk Factors” for a detailed description of the risks resulting from the imposition of new, postponed or increased international tariffs. We continue to expect growth in 2025, anticipating net sales of $5.3 to $5.5 billion, as a result of the ESG acquisition more than offsetting year-over-year declines in organic sales. We are maintaining our full-year earnings per share outlook of $4.70 and $5.10 on lower organic operating profit, partially offset by ESG accretion. Our outlook assumes easing of recently announced tariffs. It is important to realize we are operating in a complex environment with many macroeconomic variables and geopolitical uncertainties, so results could change, negatively or positively. 29 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 Operating profit by one minus the annualized effective tax rate, as adjusted. 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 operating profit, 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 more useful to understanding our operating results and the ongoing performance of our underlying business excluding the impact of unusual items as shown in the tables below. Our management and Board of Directors (“Board”) use ROIC as one measure to assess operational performance, which is also included in 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 March 31, 2025 was 15.0%. Amounts described below are reported in millions of U.S. dollars, except for the annualized effective tax rate as adjusted. Amounts are as of and for the three months ended for the periods referenced in the tables below. Mar '25 Dec '24 Sep '24 Jun '24 Mar '24 Annualized effective tax rate as adjusted (1) 17.5 % 15.6 % 15.6 % 15.6 % Operating profit as adjusted $ 111 $ 97 $ 127 $ 196 Multiplied by: 1 minus annualized effective tax rate as adjusted 82.5 % 84.4 % 84.4 % 84.4 % Net operating income (loss) after tax as adjusted $ 92 $ 82 $ 107 $ 165 Debt $ 2,586 $ 2,584 $ 628 $ 666 $ 724 Less: Cash and cash equivalents (298) (388) (352) (319) (365) Debt less Cash and cash equivalents 2,288 2,196 276 347 359 Stockholders’ equity as adjusted 1,957 1,908 1,984 1,839 1,742 Debt less Cash and cash equivalents plus Stockholders’ equity as adjusted $ 4,245 $ 4,104 $ 2,260 $ 2,186 $ 2,101 (1) The annualized effective tax rate as adjusted for each 2024 period represents the adjusted full-year 2024 effective tax rate. March 31, 2025 ROIC 15.0 % NOPAT as adjusted (last 4 quarters) $ 446 Average Debt less Cash and cash equivalents plus Stockholders’ equity as adjusted (5 quarters) $ 2,979 30 Three months ended 3/31/2025 Three months ended 12/31/2024 Three months ended 9/30/2024 Three months ended 6/30/2024 Reconciliation of operating profit: Operating profit as reported $ 69 $ 53 $ 122 $ 193 Adjustments: Accelerated vesting / severance 5 4 5 3 Purchase price accounting 21 38 — — Deal related 5 2 — — Litigation related 10 — — — Tariff related 1 — — — Operating profit as adjusted $ 111 $ 97 $ 127 $ 196 As of 3/31/2025 As of 12/31/2024 As of 9/30/2024 As of 6/30/2024 As of 3/31/2024 Reconciliation of Stockholders’ equity: Stockholders’ equity as reported $ 1,844 $ 1,832 $ 1,957 $ 1,824 $ 1,732 Effects of adjustments, net of tax: Accelerated vesting / severance 19 14 11 6 4 Purchase price accounting 50 32 — — — Deal related 21 16 2 2 — Litigation related 8 — — — — Mark-to-market 15 14 14 7 6 Stockholders’ equity as adjusted $ 1,957 $ 1,908 $ 1,984 $ 1,839 $ 1,742 Three Months Ended March 31, 2025 Income (loss) before income taxes (Provision for) benefit from income taxes Income tax rate Reconciliation of annualized effective tax rate: As reported $ 26 $ (5) 20.3 % Effect of adjustments: Accelerated vesting / severance 5 (1) Purchase price accounting 21 (5) Deal related 6 (1) Mark-to-Market 1 (1) Litigation related 10 (2) Tariff related 1 — Tax related to full-year effective tax rate expectation — 1 Tax related to Swiss deferred tax asset — 2 As adjusted $ 70 $ (12) 17.5 % 31 RESULTS OF OPERATIONS Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024 Consolidated Three Months Ended March 31, 2025 2024 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 1,229 — $ 1,292 — (4.9) % Gross profit 230 18.7 % 297 23.0 % (22.6) % SG&A expenses 161 13.1 % 139 10.8 % 15.8 % Operating profit 69 5.6 % 158 12.2 % (56.3) % Net sales for the three months ended March 31, 2025 decreased $63 million when compared to the same period in 2024, primarily due to lower end-market demand across most geographies within MP and Aerials, partially offset by sales generated from the recently acquired ESG business. Gross profit for the three months ended March 31, 2025 decreased $67 million when compared to the same period in 2024, primarily due to the impact of lower sales volume and unfavorable absorption due to lower production volumes and mix within MP, partially offset by strong performance in our ESG business. SG&A expenses for the three months ended March 31, 2025 increased $22 million when compared to the same period in 2024, primarily due to a one-time litigation related charge, additional compensation cost related to the recently acquired ESG business and higher severance costs, partially offset by lower compensation cost within MP and Aerials. Operating profit for the three months ended March 31, 2025 decreased $89 million when compared to the same period in 2024, primarily due to the impact of lower sales volume, production adjustment, unfavorable mix within MP and higher severance costs, partially offset by strong performance in our ESG business and cost reduction actions within MP and Aerials. Materials Processing Three Months Ended March 31, 2025 2024 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 382 — $ 520 — (26.5) % Operating profit 36 9.4 % 72 13.9 % (50.0) % Net sales for the three months ended March 31, 2025 decreased $138 million when compared to the same period in 2024, primarily due to lower channel requirements and end-market demand across most product lines and geographies. Operating profit for the three months ended March 31, 2025 decreased $36 million when compared to the same period in 2024, primarily due to lower sales volume, unfavorable mix and higher severance costs, partially offset by cost reduction actions. 32 Aerials Three Months Ended March 31, 2025 2024 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ 450 — $ 623 — (27.8) % Operating profit 2 0.4 % 92 14.8 % (97.8) % Net sales for the three months ended March 31, 2025 decreased $173 million when compared to the same period in 2024, primarily due to a return to a more customary seasonal delivery pattern and the timing of our customers' expected equipment replacement schedule. Operating profit for the three months ended March 31, 2025 decreased $90 million when compared to the same period in 2024, primarily due to lower sales volume, unfavorable absorption due to lower production volumes, and a one-time litigation related charge, partially offset by cost reduction actions. Environmental Solutions Three Months Ended March 31, 2025 2024 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales 399 — 151 — 164.2 % Operating profit 56 14.0 % 15 10.1 % 273.3 % Net sales for the three months ended March 31, 2025 increased $248 million when compared to the same period in 2024, primarily due to sales generated by the recently acquired ESG business. See Note D - “Acquisitions and Dispositions” in our Condensed Consolidated Financial Statements for additional information regarding acquisition of ESG. Operating profit for the three months ended March 31, 2025 increased $41 million when compared to the same period in 2024, primarily due to operating profit generated by the recently acquired ESG business. See Note D - “Acquisitions and Dispositions” in our Condensed Consolidated Financial Statements for additional information regarding acquisition of ESG. Corporate and Other / Eliminations Three Months Ended March 31, 2025 2024 % of Sales % of Sales % Change In Reported Amounts ($ amounts in millions) Net sales $ (2) — $ (2) — — % Operating profit (loss) (25) * (21) * (19.0) % * Not a meaningful percentage Operating loss for the three months ended March 31, 2025 increased $4 million when compared to the same period in 2024. The increase in operating loss is primarily due to lower sales before intercompany elimination. 33 Interest Expense, Net of Interest Income Interest expense, net of interest income, for the three months ended March 31, 2025 and 2024 was $41 million and $11 million, respectively. The increase in expense is primarily due to the issuance of additional debt in the fourth quarter of 2024 to finance the ESG acquisition. Other Income (Expense) – Net Other income (expense) – net was an expense of $2 million and $10 million for the three months ended March 31, 2025 and 2024, respectively. The decrease in expense is primarily due to lower mark-to-market losses recorded on equity investments, and the favorable impact of changes in foreign exchange rates. Income Taxes During the three months ended March 31, 2025, we recognized income tax expense of $5 million on income of $26 million, an effective tax rate of 20.3%, as compared to income tax expense of $28 million on income of $137 million, an effective tax rate of 20.5%, for the three months ended March 31, 2024. The lower effective tax rate for the three months ended March 31, 2025 when compared with the three months ended March 31, 2024 is primarily due to lower tax related to geographic distribution of income. On December 15, 2022, the European Union (“EU”) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15% for large corporations, as established by the Organization for Economic Co-operation and Development (“OECD”) Pillar Two Framework. A number of countries in which we operate have adopted legislation, many of which were effective in 2024 subject to the OECD transitional safe harbor rules, while other countries are still in the process of introducing legislation. In addition, the OECD continues to issue guidance on this matter including the technical documents released on January 15, 2025. Among this release, the OECD issued Administrative Guidance on the application of the Global Anti-Base Erosion (GloBE) Model Rules. While the Company has determined the impact of enacted Pillar Two legislation on its financial statements is not material, the Company will continue to evaluate the financial statement impacts as additional Pillar Two rules are enacted and OECD guidance is issued, including the documents recently released. 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 March 31, 2025, we had cash and cash equivalents of $298 million and undrawn availability under our revolving line of credit of $800 million, giving us total liquidity of approximately $1,098 million. During the three months ended March 31, 2025, our liquidity decreased by approximately $90 million from December 31, 2024 primarily due to cash used in capital expenditures, share repurchases, dividends and operating activities. 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 2029. 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, 2024 and Part II Item 1A – “Risk Factors” of this Quarterly Report for a detailed description of the risks resulting from our debt and our ability to generate sufficient cash flow to operate our business. 34 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 tariffs, trade war, geopolitical uncertainty, inflationary pressures, foreign exchange rate volatility and high 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 creditworthiness 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, tariffs, 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 in turn reduces cash generated from operations. • Availability and utilization of other sources of liquidity such as trade account 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 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 income and withholding, U.S. federal or state income tax cost. We will continue to seek opportunities to tax-efficiently mobilize and redeploy funds. We had free cash flow use of $55 million for the three months ended March 31, 2025. The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions): Three Months Ended 3/31/2025 Net cash provided by (used in) operating activities $ (21) Capital expenditures, net of proceeds from sale of capital assets (34) Free cash flow (use) $ (55) Pursuant to terms of our trade accounts receivable factoring arrangements, during the three months ended March 31, 2025, we sold, without material recourse, approximately $132 million of trade accounts receivable to enhance liquidity. Working capital as a percent of trailing three month annualized net sales was 26.0% at March 31, 2025. The following tables show the calculation of our working capital and trailing three months annualized sales as of March 31, 2025 (in millions): Three Months Ended March 31, 2025 Net sales $ 1,229 x 4 Trailing three month annualized net sales $ 4,916 As of March 31, 2025 Inventories $ 1,204 Receivables 783 Trade accounts payable (668) Customer advances and Short-term unearned revenue (39) Working capital $ 1,280 35 We remain focused on the use of Terex Financial Services to drive incremental sales by facilitating customer financing solutions in key markets. During the three months ended March 31, 2025, we repurchased 758,843 shares of common stock for $32 million leaving approximately $54 million available for repurchase under our share repurchase programs. Our Board declared a dividend of $0.17 per share in the first quarter of 2025, which was paid to our stockholders. 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 used in operations was $21 million and $34 million for the three months ended March 31, 2025 and 2024, respectively. The decrease in cash used in operations was primarily driven by changes in working capital, partially offset by lower operating profitability. Cash used in investing activities was $26 million and $36 million for the three months ended March 31, 2025 and 2024, respectively. The decrease in cash used in investing activities relates primarily to proceeds from settlement of net investment hedges. Cash used in financing activities was $50 million for the three months ended March 31, 2025, compared to cash provided by financing activities of $71 million for the three months ended March 31, 2024. The increase in cash used in financing activities was primarily due to lower borrowings and higher share repurchases. 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 K – “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. 36 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 K – “Litigation and Contingencies” in the Notes to Condensed Consolidated Financial Statements for more information regarding contingencies and uncertainties. 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