# MANITOWOC CO INC (MTW) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MANITOWOC CO INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/61986/000095017023004241/mtw-20221231.htm
Accession: 0000950170-23-004241
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MTW/
All MD&A years: /company/MTW/mda/
Previous year: /company/MTW/mda/fy2021/ (FY 2021)
Next year: /company/MTW/mda/fy2023/ (FY 2023)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.

Overview: The Manitowoc Company, Inc. (“Manitowoc” or the “Company”) is a leading provider of engineered lifting solutions headquartered in Milwaukee, Wisconsin, United States. Through its wholly-owned subsidiaries, Manitowoc designs, manufacturers, markets, distributes and supports comprehensive product lines of mobile hydraulic cranes, lattice-boom crawler cranes, boom trucks and tower cranes. The Company has three reportable segments, the Americas segment, the Europe and Africa (“EURAF”) segment and the Middle East and Asia Pacific (“MEAP”) segment. The segments were identified using the “management approach,” which designates the internal organization that is used by the CEO, who is also the Company’s Chief Operating Decision Maker (“CODM”), for making decisions about the allocation of resources and assessing performance. Further information regarding the Company’s reportable segments can be found in Note 18, “Segments,” to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

All dollar amounts are in millions throughout the tables included in Management’s Discussion and Analysis of Financial Conditions and Results of Operations unless otherwise indicated.

Current Events

Inflation

The Company was negatively impacted by inflation in wages, logistics, energy, raw material and component costs for the years ended December 31, 2022 and 2021. The Company has implemented price increases and provisional pricing strategies to mitigate the impact of cost inflation on margins and continues to actively monitor costs. There is a delay, however, in the realization of pricing due to long lead times of orders in the backlog, exacerbated by global supply chain and logistics constraints. In response to high inflation, the U.S. Federal Reserve and other central banks around the globe, have increased interest rates throughout 2022 and into the first quarter of 2023. The pace of interest rate increases and rising interest rates have resulted in further macroeconomic uncertainty and could impact our customer's decision to purchase cranes. Further inflationary pressure could increase our input costs and negatively impact our margins if we cannot obtain a corresponding increase in the pricing of our products. Furthermore, persistent inflation may prompt further governmental monetary policy response, such as continued interest rate increases by central banks, that in combination with higher pricing could negatively impact customer demand for our products. Continuing or worsening inflation may have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Supply Chain and Logistics Constraints

The Company continues to actively monitor global supply chain and logistics constraints which had a negative impact on the Company's ability to source parts and complete and ship units for the years ended December 31, 2022 and 2021. While the Company experienced some relief with supply chain and logistics constraints in the fourth-quarter of 2022, the Company anticipates these constraints to persist throughout 2023. Further, global supply chain and logistics constraints have also impacted end market customers, particularly in the European construction industry, which resulted in the postponement of certain construction projects in 2022 and negatively impacted customer demand for our products. The Company continues to actively monitor and manage supply chain constraints through alternative sourcing of parts and adapting production to limit waste and inefficiencies in the facilities. Continuing or worsening supply chain and logistics constraints may have a material adverse impact on the Company's financial condition, results of operations or cash flows. Refer to Item 1. “Business,” section, Raw Material Sources and Availability for more information.

Conflict in Ukraine

Russia’s invasion and the related economic sanctions by Western governments on Russia resulted in volatile raw material and component costs in Europe during 2022, exacerbating the inflation and supply chain situation. Ongoing economic sanctions targeting Russia may cause further disruptions to the Company’s supply chain and impact access to certain materials in its European operations which may have a material adverse impact on the Company’s financial condition, results of operations or cash flows. Further, the conflict has also heightened the threat of cybersecurity attacks. In response, the Company has increased monitoring of such threats and continues to take steps to enhance the security of its systems.

In the second quarter of 2022, the Company began to curtail its operations in Russia due to the ongoing conflict in Ukraine. The Company’s operations in Russia accounted for less than two percent of consolidated net sales in 2021 and were primarily limited to sales and aftermarket support with less than twenty employees. As part of the curtailment, the Company cancelled

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$21.0 million of orders in Russia and stopped taking new orders. For the year ended December 31, 2022, the Company recorded $0.8 million of restructuring expense in the Consolidated Statements of Operations. The Company expects future charges of $5.0 million to $10.0 million related to the non-cash write-off of foreign currency adjustments recorded in accumulated other comprehensive loss in the Consolidated Balance Sheets.

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Segment Operating Performance

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Americas

Americas net sales increased 33.7% in 2022 to $1,013.0 million from $757.6 million in 2021. The increase was primarily attributable to higher new machine and non-new machine sales, inclusive of the acquisitions, and pricing actions. The acquisitions contributed to the increase in net sales by $189.8 million. While backlog was higher entering the year, supply chain constraints negatively impacted the Company's ability to produce and ship certain products.

Americas operating loss of $88.8 million in 2022 was primarily attributable to $171.9 million of non-cash goodwill and indefinite-lived intangible asset impairment charges. Refer to Note 10, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for further information. Excluding this item, operating income was $83.1 million, an increase of $25.8 million or 45.0% from 2021. This increase was primarily attributable to higher net sales and favorable product mix, partially offset by higher raw material, component, logistics and employee related costs.

Americas net sales increased 21.0% in 2021 to $757.6 million from $626.1 million in 2020. The increase was primarily attributable to favorable product mix and pricing actions taken during the year. While demand for cranes was higher year-over-year, supply chain constraints impacted the Company's ability to produce and ship certain products. The acquisitions of Aspen Equipment Company (“Aspen”) and the crane business of H&E Equipment Services, Inc. (“H&E”) contributed to the increase of net sales by $26.7 million. However, the acquisitions generated $74.2 million of net sales during the period on a standalone basis.

Americas operating income increased 78.5% in 2021 to $57.3 million from $32.1 million in 2020. The increase was primarily attributable to higher net sales, favorable product mix and the impact of pricing actions taken during the year. This was partially offset by unfavorable impacts from higher material and transportation costs, increased short-term incentive compensation costs and a $1.9 million asset impairment charge to write-down the value of one of the Company's Brazilian entities to its expected sale price.

EURAF

EURAF net sales increased 12.5% in 2022 to $761.5 million from $677.0 million in 2021. The increase was primarily attributable to higher new machine sales and pricing actions. While backlog was higher entering the year, supply chain constraints negatively impacted the Company's ability to produce and ship certain products. EURAF net sales were unfavorably impacted by $88.7 million from changes in foreign currency exchange rates.

EURAF operating loss of $3.2 million decreased $12.1 million in 2022 from operating income of $8.9 million in 2021. The decrease was primarily attributable to higher raw material, component and logistics costs, tradeshow costs related to the triennial bauma tradeshow and unfavorable absorption of overhead and labor costs due to inefficiencies from the supply chain constraints. This was partially offset by higher net sales and price increases. Operating loss was favorably impacted by $1.3 million from changes in foreign currency exchange rates.

EURAF net sales increased 13.1% in 2021 to $677.0 million from $598.7 million in 2020. The increase was primarily due to higher shipments of cranes compared to the year ended December 31, 2020, which was negatively impacted by the COVID-19 pandemic. While demand for cranes was higher year-over-year, supply chain constraints impacted the ability to produce and ship certain products. EURAF net sales were favorably impacted by $20.9 million from changes in foreign currency exchange rates.

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EURAF operating income decreased 25.8% in 2021 to $8.9 million from $12.0 million in 2020. The decrease was primarily due to higher material and transportation costs and engineering, selling and administrative expenses including short-term incentive compensation costs. This was partially offset by higher net sales. Operating income was favorably impacted by $2.4 million from changes in foreign currency exchange rates.

MEAP

MEAP net sales decreased 9.7% in 2022 to $258.0 million from $285.6 million in 2021. The decrease was primarily due to lower new machine sales, partially offset by pricing actions. MEAP net sales were unfavorably impacted by $18.1 million from changes in foreign currency exchange rates.

MEAP operating income increased 30.1% in 2022 to $40.2 million from $30.9 million in 2021. The increase was primarily attributable to lower engineering, selling and administrative expenses as a result of $3.6 million of higher prior year expense due to a write-off of a long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture, $4.8 million of benefit in the current year from the partial recovery of the previously written-off long-term note receivable and realization of pricing in net sales. This was partially offset by lower net sales and higher raw material, component and logistics costs. Operating income was unfavorably impacted by $2.7 million from changes in foreign currency exchange rates.

MEAP net sales increased 30.6% in 2021 to $285.6 million from $218.6 million in 2020. The increase was primarily due to higher crane shipments compared to the year ended December 31, 2020, which was negatively impacted by the COVID-19 pandemic. MEAP net sales were favorably impacted by $10.0 million from changes in foreign currency exchange rates.

MEAP operating income increased 1.6% in 2021 to $30.9 million from $30.4 million in 2020. The increase was primarily due to higher net sales. This was partially offset by higher material and transportation costs, engineering, selling and administrative expenses including short-term incentive compensation costs and a $3.6 million loss from a write-off of a long-term note receivable resulting from the 2014 divestiture of the Company’s Chinese joint venture. MEAP operating income was favorably impacted by $0.3 million from changes in foreign currency exchange rates.

Results of Operations for the Years Ended December 31, 2022, 2021 and 2020:

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[[/GREPCENT_TABLE]]

Orders and Backlog

Backlog represents the dollar value of orders which are expected to be recognized in net sales in the future. Orders are included in backlog when an executed binding contract has been received but has not been recognized in net sales. Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America (“GAAP”) and our methodology for determining orders and backlog may vary from the methodology used by other companies. Management uses orders and backlog for capacity and resource planning purposes. We believe this information is useful to investors to provide an indication of our future revenues.

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Orders for the year ended December 31, 2022 decreased 3.3% to $2,095.5 million from $2,166.6 million for the same period in 2021. The decrease in orders was primarily attributable to softening demand in the EURAF segment and certain regions of the MEAP segment as a result of macroeconomic conditions and geopolitical uncertainty. This was partially offset by an increase in demand in the Americas segment. In addition, the Company cancelled $21.0 million of orders in Russia, which were included in backlog as of December 31, 2021, as a result of Russia's invasion of Ukraine and the Company's curtailment of its operations in Russia. Orders were unfavorably impacted by $92.3 million from changes in foreign currency exchange rates.

The Company’s backlog as of December 31, 2022, 2021, and 2020, was $1,056.0 million, $1,010.9 million and $543.2 million, respectively. The increase in backlog from December 31, 2021, was primarily attributable to an increase in demand in the Americas segment and continued delays in shipments due to supply chain constraints. This was partially offset by lower orders due to softening demand in the EURAF segment. Backlog was unfavorably impacted by $24.5 million from changes in foreign currency exchange rates.

Net Sales

Consolidated net sales for the year ended December 31, 2022 increased 18.2% to $2,032.5 million from $1,720.2 million for the same period in 2021.The increase was primarily attributable to higher new machine sales in the Americas and EURAF segments, pricing actions and higher non-new machine sales in the Americas segment, inclusive of the acquisitions. The acquisitions contributed to the increase in net sales by $189.8 million. While the higher backlog entering the year contributed to the increase in net sales, this was partially offset by supply chain constraints which negatively impacted the Company's ability to produce and ship certain products. Net sales were unfavorably impacted by $106.5 million from changes in foreign currency exchange rates.

Consolidated net sales for the year ended December 31, 2021 increased 19.2% to $1,720.2 million from $1,443.4 million for the same period in 2020. The increase was primarily attributable to higher crane shipments due to increased demand as compared to the year ended December 31, 2020, which was negatively impacted by the COVID-19 pandemic. While demand for cranes was higher year-over-year, supply chain constraints negatively impacted the Company's ability to produce and ship certain products. The acquisitions of Aspen and the crane business of H&E contributed to the increase of net sales by $26.7 million. However, the acquisitions generated $74.2 million of net sales during the period on a standalone basis. Net sales were favorably impacted by $31.0 million from changes in foreign currency exchange rates.

Gross Profit

Gross profit for the year ended December 31, 2022 increased 18.7% to $364.5 million compared to $307.2 million for the year ended December 31, 2021. The increase was primarily attributable to higher net sales and pricing actions. This was partially offset by higher employee related, raw material, component and logistics costs and unfavorable absorption of overhead and labor costs due to inefficiencies from the supply chain constraints. Gross profit was unfavorably impacted by $15.6 million from changes in foreign currency exchange rates.

Gross profit percentage in 2022 and 2021 was 17.9%.

Gross profit for the year ended December 31, 2021 increased by 20.6% to $307.2 million compared to $254.7 million for the year ended December 31, 2020. The increase was primarily due to the increase in net sales, partially offset by increases in material and transportation costs. Gross profit was favorably impacted by $7.1 million from changes in foreign currency exchange rates.

Gross profit percentage in 2021 was 17.9% compared to 17.6% in 2020.

Engineering, Selling and Administrative Expenses

Engineering, selling and administrative expenses for the year ended December 31, 2022 increased $22.5 million to $281.0 million. The increase was primarily attributable to the acquisitions which accounted for incremental costs of $36.9 million and higher stock-based compensation expense, other employee related costs and tradeshow costs related to the triennial bauma tradeshow. This was partially offset by a $13.9 million charge recorded in the prior year related to a legal matter with the U.S. Environmental Protection Agency, $3.6 million of higher prior year expense due to a write-off of a long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture and $4.8 million of benefit in the current year from the partial

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recovery of the previously written-off long-term note receivable. Engineering, selling and administrative expenses were favorably impacted by $14.6 million from changes in foreign currency exchange rates.

Engineering, selling and administrative expenses for the year ended December 31, 2021 increased $49.7 million to $258.5 million. The increase was primarily due to a $13.9 million charge related to a legal matter with the U.S. Environmental Protection Agency, higher employee-related costs, inclusive of short-term incentive compensation costs, a $3.6 million loss from a write-off of a long-term note receivable resulting from the 2014 divestiture of the Company’s Chinese joint venture and acquisition related costs. This was partially offset by lower tradeshow costs from the triennial ConExpo trade show in March 2020. Engineering, selling and administrative expenses were unfavorably impacted by $4.4 million from changes in foreign currency exchange rates.

Asset Impairment Expense

During the year ended December 31, 2022, the Company recorded non-cash charges in the Americas segment of $171.9 million consisting of a $166.5 million goodwill impairment charge and a $5.4 million indefinite-lived intangible asset impairment charge. Refer to Note 10, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for further information.

During the year ended December 31, 2021, the Company recorded an asset impairment charge of $1.9 million to write-down the value of one of the Company's Brazilian entities to its expected sale price.

Restructuring (Income) Expense

Restructuring expense for the year ended December 31, 2022 was immaterial to the financial statements.

Restructuring income for the year ended December 31, 2021 primarily related to adjustments of previously recorded costs associated with a lease write-off in the Americas and headcount reduction in Europe. In addition, the Company recorded income on the sale of previously expensed Brazilian tax credits.

Restructuring expense for the year ended December 31, 2020 primarily related to costs associated with headcount reductions in Europe and North America, partially offset by $2.5 million of income primarily related to the forfeiture of equity compensation awards associated with employee separation agreements.

Interest Expense

Interest expense for the year ended December 31, 2022 was $31.6 million compared to $28.9 million for the year ended December 31, 2021. The increase in interest expense is due to higher average outstanding balances of debt with higher variable interest rates. Refer to Note 12, “Debt,” to the Consolidated Financial Statements.

Interest expense remained flat for the year ended December 31, 2021 at $28.9 million compared to $29.1 million for the year ended December 31, 2020.

Other Income (Expense) – Net

Other income (expense) – net for the year ended December 31, 2022 was $5.8 million of income and was primarily composed of $5.5 million of net foreign currency gains and a $0.9 million gain on disposal of property, plant and equipment, partially offset by a $0.5 million charge related to non-capitalizable one-time legal and debt related costs.

Other income (expense) - net for the year ended December 31, 2021 was $1.0 million of income and was primarily composed of $1.1 million of net foreign currency gains.

Other income (expense) - net for the year ended December 31, 2020 was $10.0 million of expense was primarily composed of $3.9 million of net foreign currency losses, $3.7 million charge related to the settlement of a legal matter and $1.6 million of pension benefit costs.

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Provision for Income Taxes

During the year ended December 31, 2022, 2021 and 2020 the Company recorded a provision for income taxes of $3.4 million, $6.1 million and $17.1 million respectively.

Due to the Company’s historic losses, impacts from United States tax reform and full valuation allowances in certain jurisdictions, the effective annual tax rate is not a meaningful measure of the Company’s cash tax position or performance of the business.

The 2022 effective tax rate was favorably impacted by the net release of unrecognized tax positions of $11.5 million. The rate was unfavorably impacted primarily by the goodwill impairment charge for which there was no related tax asset, additional valuation allowances recorded during the year and the jurisdictional mix of the financial results.

The 2021 effective tax rate was favorably impacted primarily by the release of unrecognized tax positions of $2.8 million and a $2.7 million partial release of a Chinese valuation allowance. The rate was unfavorably impacted by the jurisdictional mix of the financial results which included recognition of additional valuation allowances in certain jurisdictions.

The 2020 effective tax rate was favorably impacted primarily by the passing of The Coronavirus Aid, Relief and Economic Security Act by $3.7 million that allowed the Company to implement certain United States tax planning strategies. The rate was unfavorably impacted primarily by additional valuation allowances recorded during the year and the jurisdictional mix of the financial results.

Refer to Note 14, “Income Taxes,” to the Consolidated Financial Statements.

Financial Condition

Cash Flows

The table below shows a summary of cash flows for the years ended December 31, 2022, 2021 and 2020:

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[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Net cash provided by operating activities of $76.9 million in 2022 increased $0.7 million from net cash provided by operating activities of $76.2 million in 2021. The increase in net cash provided by operating activities was due to higher net income adjusted for non-cash items including higher depreciation and amortization due to the acquisitions, non-cash goodwill and indefinite-lived intangible asset impairment charges of $171.9 million and higher stock-based compensation expense. The higher non-cash items were partially offset by unfavorable changes in working capital due to higher inventory from supply chain constraints and inflation and accounts receivable driven by the timing of shipments in the fourth quarter.

Net cash provided by operating activities of $76.2 million in 2021 increased $111.3 million from net cash used for operating activities of $35.1 million in 2020. The increase in net cash provided by operating activities was due to higher net income adjusted for non-cash items such as higher depreciation due to the acquisitions as well as favorable changes in working capital primarily due to lower accounts receivable and higher accrued expenses and other liabilities year-over-year.

Cash Flows from Investing Activities

Net cash used for investing activities of $58.0 million in 2022 decreased $168.3 million from net cash used for investing activities of $226.3 million in 2021. The decrease in net cash used for investing activities was primarily due to $186.2 million of cash paid for the acquisitions in 2021 and a $2.3 million cash receipt related to the finalization of the purchase price for the acquisition of the crane business of H&E in 2022. This was partially offset by higher capital expenditures of $21.4 million which included $16.5 million of incremental capital expenditures for the rental fleet year-over-year.

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Net cash used for investing activities of $226.3 million in 2021 increased $200.5 million from net cash used for investing activities of $25.8 million in 2020. The increase in net cash used for investing activities was primarily due to $186.2 million of cash paid for the acquisitions in 2021 and higher capital expenditures which included $14.1 million of incremental capital expenditures for the rental fleet year-over-year.

Cash Flows from Financing Activities

Net cash used for financing activities of $29.9 million in 2022 compares to net cash provided by financing activities of $100.9 million in 2021. The change in net cash from financing activities was primarily due to $20.0 million in repayments of borrowings from the Company's ABL Revolving Credit Facility in 2022, as compared to $100.0 million of proceeds on the ABL revolving Credit Facility in 2021. Additionally, there was $1.9 million of payments for debt issuance and other debt related costs, $3.0 million of common stock repurchases and $5.7 million of lower proceeds from the exercises of stock options compared to the prior year.

Net cash provided by financing activities of $100.9 million in 2021 compares to net cash used for financing activities of $14.8 million in 2020. The change in net cash from financing activities was primarily due to $100.0 million of borrowings from the ABL Revolving Credit Facility to fund the acquisitions and higher proceeds from exercise of stock options. This was partially offset by no repurchases of common stock in 2021, compared to $12.0 million of repurchases in 2020.

Liquidity and Capital Resources

Liquidity

The Company’s liquidity position as of December 31, 2022 and 2021 is summarized as follows:

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[[/GREPCENT_TABLE]]

The Company’s revolving credit facility, or other future facilities, may be used for working capital requirements, capital expenditures, funding future acquisitions (within the Company’s debt limitations), and other operating, investing and financing needs. The Company believes its liquidity and expected cash flows from operations are sufficient to meet expected working capital, capital expenditures, contractual obligations and other ongoing operational needs in the subsequent twelve months.

Cash Sources

The Company has historically relied primarily on cash flows from operations, borrowings under revolving credit facilities, issuances of notes and other forms of debt financing as its sources of cash.

The maximum availability under the Company’s current ABL Revolving Credit Facility is $275.0 million. The borrowing capacity under the ABL Revolving Credit Facility is based on the value of inventory, accounts receivable and certain fixed assets of the Loan Parties. The Loan Parties’ obligations under the ABL Revolving Credit Facility are secured on a first-priority basis, subject to certain exceptions and permitted liens, by substantially all of the personal property and fee-owned real property of the Loan Parties. The liens securing the ABL Revolving Credit Facility are senior in priority to the second-priority liens securing the obligations under the 2026 Notes and the related guarantees. The ABL Revolving Credit Facility has a maturity date of May 19, 2027 (with a springing maturity date of December 30, 2025 if the 2026 Notes have not been repaid in full or refinanced prior to December 30, 2025), and includes a $75.0 million letter of credit sub-facility, $10.0 million of which is available to the Company’s German subsidiary that is a borrower under the ABL Revolving Credit Facility.

In addition to the ABL Revolving Credit Facility, the Company has access to non-committed overdraft facilities to fund working capital in Europe and China. There are six facilities, of which four are denominated in Euros totaling €28.0 million, one facility denominated in U.S. dollars totaling $9.5 million and one denominated in Chinese Yuan totaling ¥30.0 million. Total U.S. dollar availability as of December 31, 2022 for the six overdraft facilities is $43.8 million, with $4.3 million outstanding.

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Debt

On March 25, 2019, the Company and certain subsidiaries of the Company (the “Loan Parties”) entered into a credit agreement (the “ABL Credit Agreement”) with JP Morgan Chase Bank, N.A as administrative and collateral agent, and certain financial institutions party thereto as lenders, providing for a senior secured asset-based revolving credit facility (the “ABL Revolving Credit Facility”) of up to $275.0 million. The borrowing capacity under the ABL Revolving Credit Facility is based on the value of inventory, accounts receivable and certain fixed assets of the Loan Parties. The Loan Parties’ obligations under the ABL Revolving Credit Facility are secured on a first-priority basis, subject to certain exceptions and permitted liens, by substantially all of the personal property and fee-owned real property of the Loan Parties. The liens securing the ABL Revolving Credit Facility are senior in priority to the second-priority liens securing the obligations under the 2026 Notes and the related guarantees. The ABL Revolving Credit Facility includes a $75.0 million letter of credit sub-facility, $10.0 million of which is available to the Company’s German subsidiary that is a borrower under the ABL Revolving Credit Facility.

On June 17, 2021, the Company amended the ABL Credit Agreement to adjust certain negative covenants which reduces restrictions on the Company's ability to expand its rental business. On May 19, 2022, the Company further amended the ABL Credit Agreement to (i) extend the maturity date to May 19, 2027 (subject to a springing maturity date of December 30, 2025 if the 2026 Notes have not been repaid in full or refinanced prior to December 30, 2025), (ii) permit the inclusion, subject to certain limitations, of the crane rental assets of certain subsidiaries in the borrowing base used to calculate availability under the ABL Credit Agreement, (iii) permit separate financing of crane rental assets not included in the borrowing base and (iv) replace U.S. dollar London Inter-bank Offered Rate with interest rates based on the secured overnight financing rate plus a credit spread adjustment (“SOFR”). Refer to Note 12, “Debt,” to the Consolidated Financial Statements for further information regarding the ABL Credit Agreement.

As of December 31, 2022, the Company had $80.0 million of borrowings outstanding under the ABL Revolving Credit Facility and $100.0 million of borrowings outstanding as of December 31, 2021. During the year ended December 31, 2022, the highest daily borrowing under the ABL Revolving Credit Facility was $112.5 million and the average borrowing was $90.9 million, while the weighted-average annual interest rate was 3.1%. During the year ended December 31, 2021, the highest daily borrowing under the ABL Revolving Credit Facility was $100.0 million and the average borrowing was $26.0 million, while the weighted-average annual interest rate was 1.4%. The interest rate of the ABL Revolving Credit Facility fluctuates based on excess availability. During the year ended December 31, 2022, the spreads for SOFR and Eurodollar, and Alternative Base Rate borrowings were 1.25% and 0.25%, respectively. Excess availability as of December 31, 2022 was $192.0 million, which represents revolver borrowing capacity of $275.0 million less $80.0 million in borrowings outstanding and U.S. letters of credit outstanding of $3.0 million.

On March 25, 2019, the Company and certain of its subsidiaries entered into an indenture with U.S. Bank National Association as trustee and notes collateral agent, pursuant to which the Company issued $300.0 million aggregate principal amount of the 2026 Notes with an annual coupon rate of 9.000%. Interest on the 2026 Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year. The 2026 Notes are fully and unconditionally guaranteed on a senior secured second lien basis, jointly and severally, by each of the Company’s existing and future domestic subsidiaries that is either a guarantor or a borrower under the ABL Revolving Credit Facility or that guarantees certain other debt of the Company or a guarantor. The 2026 Notes and the related guarantees are secured on a second-priority basis, subject to certain exceptions and permitted liens, by pledges of capital stock and other equity interests and other security interests in substantially all of the personal property and fee-owned real property of the Company and of the guarantors that secure obligations under the ABL Revolving Credit Facility.

As of December 31, 2022, the Company was in compliance with all affirmative and negative covenants in its debt instruments, inclusive of the financial covenants pertaining to the ABL Revolving Credit Facility and 2026 Notes. Based upon management’s current plans and outlook, the Company believes it will be able to comply with these covenants during the subsequent twelve months. From time to time, the Company seeks to opportunistically raise capital in the debt capital markets and bank credit markets.

Other Financing Arrangements

The Company has two non-U.S. accounts receivable financing programs with no maximum availability and one U.S. accounts receivable financing program with maximum availability of $36.0 million. Transactions under the U.S. and non-U.S. programs were accounted for as sales in accordance with Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing.” Under these financing programs, the Company has the ability to sell eligible receivables up to the maximum limit. Refer to Note 13, “Accounts Receivable Factoring,” to the Consolidated Financial Statements.

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Off-Balance Sheet Arrangements

The Company's disclosures concerning transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources are as follows:

•
As of December 31, 2022, the Company had buyback commitments with a balance outstanding of $42.5 million. This amount is not reduced for amounts the Company would recover from the repossession and subsequent resale of collateral. Refer to Note 20, “Guarantees,” to the Consolidated Financial Statements for further information.

Contractual Obligations and Commercial Commitments

The Company's material cash requirements, contractual obligations and commercial commitments include the following:

Debt

As of December 31, 2022, the Company had outstanding debt of $385.6 million with $6.1 million payable within one year. The Company is committed to pay 9.000% of annual interest on the $300.0 million 2026 Notes that mature on April 1, 2026. Additionally, the Company's debt outstanding under the ABL Revolving Credit Facility is subject to variable interest based on prevailing rates. For the year ended December 31, 2022, the Company incurred $2.8 million of interest on borrowings from the ABL Revolving Credit Facility. Refer to Note 12, “Debt,” to the Consolidated Financial Statements for further information.

Purchase Obligations

As of December 31, 2022, the Company has purchase obligations of $1,017.9 million with $667.6 million due within one year. Purchase obligations consist primarily of open purchase orders for raw materials and various components used in the manufacturing process and purchase obligations from agreements with various suppliers that include a right of cancellation.

Leases

As of December 31, 2022, the Company had contractual fixed costs related to operating lease commitments of $64.6 million with $13.5 million due within one year. Refer to Note 23, “Leases,” to the Consolidated Financial Statements for further information.

Capital Expenditures

The Company funds capital expenditures that are intended to improve the cost structure of the Company’s business; invest in new processes, products and technology; maintain high-quality production standards; and maintain and expand the Company's rental fleet.

The Company paid a total of $61.8 million during 2022 for capital expenditures. For the year ended December 31, 2022, depreciation was $60.6 million. The Company anticipates that capital expenditures for 2023 will be approximately $65.0 million to $75.0 million, of which approximately $25.0 million will be funded from sales of the Company's existing rental fleet through rent to own programs and sales of older cranes. If the value of rental fleet sales is less than expected, capital expenditures will be reduced accordingly.

Other Cash Requirements

The Company has unrecognized tax benefits totaling $9.1 million as of December 31, 2022, excluding related interest and penalties. During the next twelve months, the unrecognized tax benefits are not expected to significantly increase or decrease due to audit settlements or lapsing statuses of limitations. Refer to Note 14, “Income Taxes,” to the Consolidated Financial Statements for disclosures surrounding uncertain income tax positions under ASC Topic 740 “Income Taxes.”

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The Company maintains defined benefit pension plans for some of the Company’s employees and retirees. The Board of Directors has established the Retirement Plan Committee to manage the operations and administration of all benefit plans and related trusts. Refer to Note 22, “Employee Benefit Plans,” to the Consolidated Financial Statements.

In 2022, cash contributions by the Company to defined benefit pension plans were $3.9 million, and the Company estimates that its contributions in 2023 will be approximately $3.7 million. Cash contributions to the Company’s 401(k) plan were $7.2 million in 2022. Cash contributions to the 401(k) plan earned in 2022 and committed to be paid in 2023 is $6.6 million.

Non-GAAP Measures

The Company uses EBITDA, adjusted EBITDA, adjusted operating income and free cash flows, which are financial measures that are not prepared in accordance with GAAP, as additional metrics to evaluate the Company’s performance. The Company believes these non-GAAP measures provide important supplemental information to readers regarding business trends that can be used in evaluating its results of operations because these financial measures provide a consistent method of comparing financial performance and are commonly used by investors to assess performance. These non-GAAP financial measures should be considered together with, and are not substitutes for, the GAAP financial information provided herein.

EBITDA, Adjusted EBITDA and Adjusted Operating Income

The Company defines EBITDA as net income (loss) before interest, taxes, depreciation and amortization. The Company defines adjusted EBITDA as EBITDA plus the addback or subtraction of restructuring, other income (expense) and certain other charges. The Company defines adjusted operating income as operating income (loss) plus the addback or subtraction of restructuring and certain other charges.

The reconciliation of net income (loss) to EBITDA, and further to adjusted EBITDA and to adjusted operating income and operating income (loss):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Net income (loss)","","$","(123.6",")","","$","11.0","","","$","(19.1",")"],["Interest expense and amortization of deferred financing fees","","","33.0","","","","30.4","","","","30.6"],["Provision for income taxes","","","3.4","","","","6.1","","","","17.1"],["Depreciation expense","","","60.6","","","","45.5","","","","37.2"],["Amortization of intangible assets","","","3.1","","","","1.4","","","","0.3"],["EBITDA","","","(23.5",")","","","94.4","","","","66.1"],["Restructuring (income) expense","","","1.5","","","","(1.1",")","","","7.0"],["Asset impairment expense(1)","","","171.9","","","","1.9","","","","\u2014"],["Other non-recurring charges (2)","","","(1.0",")","","","21.8","","","","\u2014"],["Other (income) expense - net (3)","","","(5.8",")","","","(1.0",")","","","10.0"],["Adjusted EBITDA","","","143.1","","","","116.0","","","","83.1"],["Depreciation expense","","","(60.6",")","","","(45.5",")","","","(37.2",")"],["Amortization of intangible assets","","","(3.1",")","","","(1.4",")","","","(0.3",")"],["Adjusted operating income","","","79.4","","","","69.1","","","","45.6"],["Restructuring income (expense)","","","(1.5",")","","","1.1","","","","(7.0",")"],["Asset impairment expense","","","(171.9",")","","","(1.9",")","","","\u2014"],["Other non-recurring charges (2)","","","1.0","","","","(21.8",")","","","\u2014"],["Operating income (loss)","","$","(93.0",")","","$","46.5","","","$","38.6"]]
[[/GREPCENT_TABLE]]

(1)
Asset impairment expense in 2022 represents non-cash goodwill and indefinite-lived intangible asset impairment charges. Asset impairment expense in 2021 represents a write-down of one of the Company’s Brazilian entities to its expected sale price.

(2)
Other non-recurring charges for the year ended December 31, 2022 relate to the fair value step up on rental fleet assets sold during the period that was expensed within cost of sales, one-time costs associated with the acquired businesses, income from the partial recovery of the previously written off long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture and other one-time charges. Other non-recurring charges for the year ended December 31, 2021 relate to acquisition costs, certain purchase accounting impacts from the acquisitions, a write off of a long-term note receivable from the 2014 divestiture of the Company's Chinese joint

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venture, and costs associated with the U.S. Environmental Protection Agency. Costs are included in engineering, selling and administrative expenses or cost of sales in the Consolidated Statement of Operations.

(3)
Other income - net includes net foreign currency (gains) losses, other components of net periodic pension costs, costs associated with legal matters and other items in the years ended December 31, 2022 and 2021.

Free Cash Flows

Free cash flows is defined as net cash provided by (used for) operating activities less capital expenditures. The reconciliation of net cash provided by (used for) operating activities to free cash flows for the year ended December 31, 2022, 2021 and 2020 are summarized as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Net cash provided by (used for) operating activities","","$","76.9","","","$","76.2","","","$","(35.1",")"],["Capital expenditures","","","(61.8",")","","","(40.4",")","","","(26.3",")"],["Free cash flows","","$","15.1","","","$","35.8","","","$","(61.4",")"]]
[[/GREPCENT_TABLE]]

Financial Risk Management

The Company is exposed to market risks from changes in interest rates, commodities and foreign currency exchange rates. To reduce these risks, the Company selectively makes use of derivative financial instruments and other proactive management techniques. The Company has written policies and procedures that place financial instruments under the direction of corporate finance and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes or speculation is strictly prohibited.

For a more detailed discussion of our accounting policies and the financial instruments that we use, refer to Note 2, “Summary of Significant Accounting Policies,” Note 5, “Fair Value of Financial Instruments,” and Note 12, “Debt,” to the Consolidated Financial Statements.

Interest Rate Risk

As previously discussed, the Company's long-term debt primarily consists of $300.0 million on the 2026 Notes and borrowings under its ABL Revolving Credit Facility. Borrowings under the ABL Revolving Credit Facility bear interest at a variable rate using either the Alternative Base Rate or SOFR plus a spread. The variable interest rate is based upon the average availability as of the most recent determination date. As of December 31, 2022, the Company had borrowings on the ABL Revolving Credit Facility of $80.0 million. At any time, the Company could be party to various interest rate swaps in connection with its fixed or floating rate debt. No interest rate swaps were entered into or outstanding during 2022 or 2021. A hypothetical 100 basis point increase/decrease in the average interest rate of the Company's annual average borrowings under its ABL Revolving Credit Facility would have resulted in approximately a $1.0 million increase/decrease to interest expense for the year ended December 31, 2022.

Commodity Prices

The Company is exposed to fluctuating market prices for commodities, including steel, copper, aluminum and petroleum-based products. From time to time the Company may use commodity financial instruments to hedge commodity prices. No commodity financial instruments were entered into or outstanding during 2022 and 2021. For more information on commodities risk, see Part I, Item 1A. – “Risk Factors.”

Currency Risk

The Company has manufacturing, sales and distribution facilities around the world, and therefore, makes investments and enters into transactions denominated in various currencies, which introduces transactional currency exchange risk.

To mitigate transactional currency exchange risk, the Company, from time-to-time, enters into foreign exchange contracts to 1) reduce the earnings and cash flows impact on non-functional currency denominated receivables and payables and 2) reduce the impact of changes in foreign currency rates between a budgeted rate and the rate realized at the time it recognizes a particular purchase or sale transaction. Gains and losses resulting from hedging instruments either impact the Company’s Consolidated Statements of Operations in the period of the underlying purchase or sale transaction, or offset the foreign exchange gains and losses on the underlying receivables and payables being hedged. The maturities of these foreign exchange contracts coincide with the expected underlying settlement date of the related cash inflow or outflow. The hedges of anticipated transactions are

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designated as cash flow hedges as required under ASC Topic 815 “Derivatives and Hedging.” As of December 31, 2022, the Company was party to foreign currency forward contracts with a notional value of $87.7 million all of which are carried on the Company’s balance sheet at fair value. As of December 31, 2022, a hypothetical 10% increase or decrease in the exchange rate in the Company’s portfolio of foreign currency contracts would result in a $13.7 million unrealized gain and a $4.1 million unrealized loss, respectively. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged.

Amounts invested in non-U.S. based subsidiaries are translated into U.S. dollars at the exchange rate in effect at year-end. Results of operations are translated into U.S. dollars at an average exchange rate for the period. The resulting translation adjustments are recorded in stockholders’ equity as other comprehensive income (loss). The cumulative translation adjustment recorded in accumulated other comprehensive loss as of December 31, 2022 was a loss of $27.9 million.

Environmental, Health, Safety, Contingencies and Other Matters

Refer to Part II, Item 8, Note 19, “Commitments and Contingencies,” where the Company has disclosed environmental, health, safety, contingencies and other matters.

Critical Accounting Policies and Estimates

The Consolidated Financial Statements include the accounts of the Company and all its subsidiaries. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing these Consolidated Financial Statements, the Company has made its best estimates and judgments of certain amounts included in the Consolidated Financial Statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Although the Company has listed a number of accounting policies below which the Company believes to be most critical, the Company also believes that all of the Company’s accounting policies are important to the reader. Refer to Part II, Item 8, Note 2, “Summary of Significant Accounting Policies,” for a detailed description of these and other accounting policies of the Company.

Revenue Recognition – The Company records revenue in accordance with ASC Topic 606 – “Revenue from Contracts with Customers.” Below are the Company's revenue recognition policies by performance obligation.

•
Crane Sales

Crane sales are primarily generated through the sale of new and used cranes. Contracts with customers are generally in the form of a purchase order. Based on the nature of the Company’s contracts, the Company does not have any significant financing terms. Contracts may have variable consideration in the form of early pay discounts or rebates. Revenue is earned under these contracts when control of the product is transferred to the customer. Control transfers to the customer generally upon delivery to the carrier or acceptance through an independent inspection company that acts as an agent of the customer.

From time to time, the Company enters into agreements where the customer has the right to exercise a put option requiring the Company to buyback a crane at an agreed upon price. The Company evaluates each agreement at the inception of the order to determine if the customer has a significant economic incentive to exercise that right. If it is determined that the customer has a significant economic incentive to exercise that right, the agreement is accounted for as a lease in accordance with ASC Topic 842 – “Leases.” If it is determined that the customer does not have a significant economic incentive to exercise that right, then revenue is recognized when control of the asset is transferred to the customer.

Given the nature of the Company’s products, the customer may request that the product be held until a delivery location is identified. Under these “bill and hold” arrangements, sales are recognized when all of the following criteria are met: 1) the reason for the bill-and-hold arrangement is substantive, 2) the product is separately identified as belonging to the customer, 3) the product is ready for transfer to the customer and 4) the Company does not have the ability to use the product or direct it to another customer.

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•
Aftermarket Part Sales

Aftermarket part sales are generated through the sale of new and used parts to end customers and distributors. Aftermarket part sales are recognized when control of the product is transferred to the customer. Control transfers to the customer generally upon delivery to the carrier. Customers generally have a right of return which the Company estimates using historical information. The amount of estimated returns is deducted from net sales.

•
Other Sales

The Company’s other sales consist primarily of sales from:

•
Repair and field service work;

•
Rental of cranes; and

•
Training and technical publications.

As it relates to the Company’s other sales, the Company’s performance obligations generally relate to performing specific agreed upon services. Sales are earned upon the completion of those services.

Inventories and Related Reserve for Obsolete and Excess Inventory – Inventories are valued at the lower of cost or net realizable value. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. Inventories are reduced by a reserve for excess and obsolete inventories. The estimated reserve is based upon specific identification of excess or obsolete inventories based on historical usage, estimated future usage, sales requiring the inventory and historical write-off experience and are subject to change if experience improves or deteriorates.

Goodwill, Other Intangible Assets and Other Long-Lived Assets – The Company accounts for goodwill and other intangible assets under the guidance of ASC Topic 350-10, “Intangibles – Goodwill and Other.” Under ASC Topic 350-10, goodwill is not amortized; instead, the Company performs an annual impairment test. The Company has three reporting units with goodwill: Americas – Manufacturing, Americas – Distribution and MEAP. The date for the annual impairment test is October 31, 2022, or more frequently if events or changes in circumstances indicate that the assets might be impaired. To perform its goodwill impairment test, the Company uses a combination of the income approach and market approach with a weighting of 70/30, respectively, to determine the fair value of the Americas – Manufacturing and MEAP reporting units. The Company determined a 70% weighting toward the income approach was appropriate as cash flows for each reporting unit are better aligned to the cyclical nature of the crane business and its unique market dynamics. The Company determined a 30% weighting toward the market approach was appropriate as the valuation is indicative of the fair value of the Company and its reporting units but there is a lack of comparable peer companies. The Company uses only the income approach to determine the fair value of the Americas – Distribution reporting unit due to the lack of comparable peer companies to determine fair value under the market approach. Impairment is determined based on the amount in which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill at the reporting unit.

The Company has two indefinite-lived intangible assets subject to an annual impairment test: the Potain trademark, tradename and distribution network assets (“Potain Tradename”) and the Grove trademark, tradename and distribution network assets (“Grove Tradename”). To perform its indefinite-lived intangible assets impairment test, the Company uses a fair-value method, based on a relief of royalty valuation approach. Management’s judgments and assumptions about the amounts of those cash flows and the discount rates are inputs to the annual impairment test. Impairment is determined based on the amount in which the carrying value of the indefinite-lived intangible asset exceeds its fair value, not to exceed the carrying amount of the indefinite-lived intangible asset.

As of October 31, 2022, the Company performed its annual goodwill impairment test. Based on the results of the test, the carrying value of the Americas – Manufacturing reporting unit exceeded its fair value. As a result, the Company recorded a $166.5 million non-cash impairment charge to write down the carrying value of goodwill to zero. The goodwill impairment charge resulted from a reduction in the estimated fair value of the reporting unit based on a prolonged low Company equity market capitalization that continued into the fourth quarter of 2022 and a higher discount rate. The fair value of the Americas – Distribution and MEAP reporting units were substantially in excess of their carrying values as of the date of the annual impairment test and, therefore, were not at risk of impairment as of December 31, 2022.

As of October 31, 2022, the Company performed its annual indefinite-lived intangible assets impairment test of the Potain Tradename and Grove Tradename. Based on the results of the test, the carrying value of the Grove Tradename exceeded its fair value. As a result, the Company recorded a $5.4 million non-cash impairment charge to write down the carrying value to its fair value of $39.0 million. The Grove Tradename impairment charge was a result of downward pressure from the use of similar

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assumptions to those used in the annual goodwill impairment test which included revenue growth and discount rate. The fair value of the Potain Tradename was substantially in excess of its carrying value as of the date of the annual impairment test and, therefore, was not at risk of impairment as of December 31, 2022.

A considerable amount of management judgment and assumptions are required in performing the goodwill and indefinite-lived asset impairment tests as it relates to revenue growth rates, projected operating income, the discount rate and relevant market multiples, as applicable. While the Company believes the judgments and assumptions are reasonable, different assumptions could change the estimated fair value and, therefore, additional impairments could be required. Weakening industry or economic trends, disruptions to the Company's business, unexpected significant changes or planned changes in the use of the assets or in entity structure are all factors which may adversely impact the assumptions used in the valuations.

Other intangible assets with definite lives continue to be amortized over their estimated useful lives. Definite-lived intangible assets are also subject to impairment testing whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. If an indicator of impairment is identified, the Company would use the income approach, which is based on the present value of expected future cash flows.

The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC Topic 360-10-5, “Property, Plant, and Equipment.” ASC Topic 360-10-5 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and to evaluate the asset group against the sum of the undiscounted future cash flows.

The Company monitors for events and market conditions to determine if any interim impairment tests of goodwill, other intangibles or long-lived assets are warranted. Deterioration in macroeconomic conditions, a decline in actual results as compared with the Company’s projections, or a low equity market capitalization for a prolonged period, are factors which could indicate an interim triggering event has occurred. In the event the Company determines that assets are impaired in the future, the Company would recognize a non-cash impairment charge, which could have a material adverse effect on the Company’s Consolidated Balance Sheet and Results of Operations.

Employee Benefit Plans – The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement health care coverage. Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates and health care cost trend rates as of that date. The approach the Company used to determine the annual assumptions are as follows:

•
Discount Rate – The Company’s discount rate assumptions are based on the interest rate of noncallable high-quality corporate bonds, with appropriate consideration of pension plan participant demographics and benefit payment terms. The Company’s discount rate is provided by an independent third party calculated based on an appropriate mix of high-quality bonds.

•
Expected Return on Plan Assets – The Company’s expected return on plan assets assumptions are based on the Company’s expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds, net of estimated fees.

•
Compensation increase – The Company’s compensation increase assumptions reflect its long-term actual experience, the near-term outlook and assumed inflation.

•
Retirement and Mortality Rates – The Company’s retirement and mortality rate assumptions are based primarily on actual plan experience and mortality tables.

•
Health Care Cost Trend Rates – The Company’s health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends.

Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and obligations. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions when appropriate. As required by GAAP, the effects of the modifications are recorded currently or amortized over future periods. The Company has developed the assumptions with the assistance of its independent actuaries and other relevant sources, and believes the assumptions used are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows. Refer to Note 22, “Employee Benefit Plans,” to the Consolidated

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Financial Statements, for a summary of the impact of a 0.50% change in the discount rate and rate of return on plan assets would have on the Company’s financial statements.

Product Liability – The Company is subject, in the normal course of business, to product liability lawsuits. To the extent permitted under applicable laws, the Company’s exposure to losses from these lawsuits is mitigated by insurance with self-insurance retention limits. The Company’s reserve is based upon two estimates. First, the Company tracks the population of all outstanding product liability cases to determine an appropriate case reserve for each based upon its best judgment and the advice of legal counsel. These estimates are continuously evaluated and adjusted based upon changes to the facts and circumstances surrounding the case. Second, the Company determines the amount of additional reserve required to cover incurred, but not reported, product liability issues and to account for possible adverse development of the established case reserves (collectively referred to as “IBNR”). The Company has established a position within the actuarially determined range, which it believes is the best estimate of the IBNR liability.

Income Taxes – The Company accounts for income taxes under the guidance of ASC Topic 740-10, “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that represents a reserve on deferred tax assets for which utilization is not more likely than not. Management judgment is required in determining its provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against its net deferred tax assets. The Company does not currently provide for additional U.S. and foreign income taxes which would become payable upon repatriation of undistributed earnings of foreign subsidiaries.

The Company measures and records income tax contingency accruals under the guidance of ASC Topic 740-10. The Company recognizes liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company must determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.

Warranties – In the normal course of business, the Company provides its customers warranties covering workmanship, and in some cases materials, on products manufactured. Such warranties generally provide that products will be free from defects for periods ranging from 12 months to 60 months with certain equipment having longer-term warranties. If a product fails to comply with the Company’s warranties, it may be obligated, at its expense, to correct any defect by repairing or replacing such defective product. The Company provides for an estimate of costs that may be incurred under its warranties at the time product revenue is recognized based on historical warranty experience for the related product or estimates of projected losses due to specific warranty issues on new products. These costs primarily include labor and materials, as necessary, associated with repair or replacement. The primary factors that affect the Company’s warranty liabilities include the number of shipped units and historical and anticipated rates or warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.