TEREX CORP (TEX) FY 2022 MD&A

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

BUSINESS DESCRIPTION

Terex is a global manufacturer of materials processing machinery and aerial work platforms. We design, build and support products used in construction, maintenance, manufacturing, energy, recycling, minerals and materials management applications. Certain Terex products and solutions enable customers to reduce their impact on the environment including electric and hybrid offerings that deliver quiet and emission-free performance, products that support renewable energy, and products that aid in the recovery of useful materials from various types of waste. Our products are manufactured in North America, Europe, Australia and Asia and sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. We report our business in the following segments: (i) MP and (ii) AWP.

Further information about our reportable segments appears below and in Note B – “Business Segment Information” in the Notes to 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 disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors consider, such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Non-GAAP measures we may use include translation effect of foreign currency exchange rate changes on net sales, gross profit, SG&A expenses and operating profit, as well as the net sales, gross profit, SG&A expenses and operating profit excluding the impact of acquisitions and divestitures.

As changes in foreign currency exchange rates have a non-operating impact on our financial results, we believe excluding effects of these changes assists in assessment of our business results between periods. We calculate the translation effect of foreign currency exchange rate changes by translating current period results using rates that the comparable prior periods were translated at to isolate the foreign exchange component of fluctuation from the operational component. Similarly, impact of changes in our results from acquisitions and divestitures not included in comparable prior periods may be subtracted from the absolute change in results to allow for better comparability of results between periods.

We calculate a non-GAAP measure of free cash flow. We define free cash flow as Net cash provided by (used in) operating activities less Capital expenditures, net of proceeds from sale of capital assets. We believe this measure of free cash flow provides management and investors further useful information on cash generation or use in our primary operations.

We discuss forward-looking information related to expected earnings per share (“EPS”) excluding the impact of potential future acquisitions, divestitures, restructuring and other unusual items. Our 2023 outlook for earnings per share is a non-GAAP financial measure because it excludes unusual items. The Company is not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because the Company is unable to predict with a reasonable degree of certainty the exact timing and impact of such items. The unavailable information could have a significant impact on the Company’s full year 2023 GAAP financial results. This forward-looking information provides guidance to investors about our EPS expectations excluding these unusual items that we do not believe are reflective of our ongoing operations.

Working capital is calculated using the Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories, less Trade accounts payable and Customer advances. We view excessive working capital as an inefficient use of resources, and seek to minimize the level of investment without adversely impacting ongoing operations of the business. Trailing three months annualized net sales is calculated using net sales for the most recent quarter end multiplied by four. The ratio calculated by dividing working capital by trailing three months annualized net sales is a non-GAAP measure we believe measures our resource use efficiency.

Non-GAAP measures also include Net Operating Profit After Tax (“NOPAT”), which is used in the calculation of our after tax return on invested capital (“ROIC”) (collectively the “Non-GAAP Measures”), which are discussed in detail below.

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Overview

Safety remains our top priority; driven by Think Safe – Work Safe – Home Safe. All Terex team members contributed to our effort of continuing to provide products and services for our customers, while maintaining a safe working environment.

We remain focused on executing our multi-year growth plan and continue to invest in new technologies and products across our businesses. Our strategic operational priorities of execution, innovation and growth continue to strengthen our operations and allow us to capitalize on the strong demand in our end-markets. We are leveraging our business operating systems to navigate supply challenges and labor constraints while working to mitigate material cost inflation. Company-wide investments in new product development and continued deployment of digital customer and dealer solutions are important to help to deliver long-term growth. In 2022, we completed a number of acquisitions, including enhancing our concrete offerings, adding fabrication capacity for our Northern Ireland businesses and expanding the capabilities of our growing environmental business in the MP segment with the acquisition of a company that designs and creates robots that pick, sort and recycle waste material.

Our performance in 2022 reflected continued, strong, global customer demand in our businesses and good execution by our team members in a dynamic and challenging environment. Net sales of $4.4 billion were up 14% year-over-year, 20% on a foreign exchange neutral basis, as end-markets remained strong. Gross margins increased by 190 basis points in the quarter as the team implemented cost take out plans and pricing actions helped to offset cost increases. The year-over-year gross margin increase was in both our segments. Despite the high inflationary environment, SG&A spending as a percentage of net sales was down 80 basis points to 10.2% of net sales, reflecting focused cost management. Operating margin of 9.5% was up 110 basis points year-over-year driven by prudent cost management and the improvement throughout the year in price cost dynamics.

Overall, 2022 financial performance demonstrated continued, strong execution and focus on delivering for our customers and dealers despite global supply chain disruptions, significant inflationary pressures and foreign exchange rate volatility. The global operating environment has remained difficult and unpredictable with increases in commodity prices, energy costs and logistics adversely impacting the Company. In addition, the weakening of the Euro and British Pound against the U.S. Dollar had a meaningful negative impact on our results in the year. Although these headwinds have constrained our growth, we are aggressively managing these challenges. We have continued to take pricing actions which has been necessary to mitigate rising costs in both segments. As a result of these actions, we were price/cost neutral for all of 2022.

MP had a strong year with net sales up 15% from 2021, 23% on a foreign exchange neutral basis, driven by strong customer sentiment across multiple end-markets and geographies as well as price realization. The MP businesses continue to benefit from strong equipment utilization rates and dealers looking to replenish their inventory and rental fleets. Our mobile crushing and screening businesses are benefiting from the strength of aggregates driven by investments in infrastructure projects and demand for sand to source silicon used in semiconductors. Growth of environmental and waste recycling solutions is driving demand for our wood processing, biomass and recycling equipment. The strength of construction and infrastructure spending is driving demand for our cement products in the U.S. Our material handlers are benefiting from diversification into waste, scrap, port and timber applications. The strength of commodity prices is driving demand for our pick and carry cranes in Australia. MP has been aggressively managing all elements of cost resulting in a 15.3% operating margin for the year, up 110 basis points as compared to 2021. We expect customer sentiment to remain strong and we are encouraged by MP’s backlog (including deliveries beyond 12 months) of $1.2 billion, which is up 12% compared to 2021 backlog of $1.0 billion. As a result, we anticipate net sales between $2.0 billion and $2.1 billion and an operating margin of approximately 15.5% in 2023.

AWP’s 2022 net sales were up 14% compared to 2021 and increased 19% on a foreign exchange neutral basis, primarily due to higher demand driven by fleet replacement and end-market growth for aerial work platforms and price realization necessary to mitigate rising costs. Utility product growth was strong in North America. Construction, infrastructure, and industrial applications are driving demand for Genie products. Examples of such applications for Genie products include data centers, warehouses and manufacturing facilities. In addition, the fundamentals of the North American and European replacement cycle are strong as fleets age and customers have strong utilization rates. Globally, increased adoption of aerial work platforms continues to improve labor efficiency and jobsite safety. Our Utilities business is benefiting from electric grid expansion across the U.S. AWP delivered operating margins of 7.9% in the year driven by strict expense management and disciplined pricing actions. We expect end market demand to remain strong into 2023 as demonstrated by AWP’s backlog (including deliveries beyond 12 months) of $2.9 billion, which is up 27% compared to 2021 backlog of $2.3 billion. As a result, we anticipate net sales between $2.6 billion and $2.7 billion and an operating margin of approximately 9.0% in 2023. We anticipate moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico, which we expect to impact manufacturing efficiencies in 2023.

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In 2022, our largest market remained North America, which represented approximately 56% of our global sales. As compared to 2021, sales were up double digits in every major geography except for Asia Pacific which was down although essentially flat on a foreign exchange neutral basis.

We continued to execute our disciplined capital allocation strategy in 2022. We made strategic investments in our businesses and continued to return capital to shareholders. Our strong balance sheet has allowed us to return approximately $132 million of cash to shareholders during 2022. We generated $152 million of free cash flow in the year, $27 million greater than we generated in 2021. We continue to maintain ample liquidity and as of December 31, 2022, we had $727 million in available liquidity, with no near-term debt maturities. See “Liquidity and Capital Resources” for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels, as well as a reconciliation of net cash provided by (used in) operating activities to free cash flow.

Customer demand remains strong for our products and services. However, we continue to operate in a highly uncertain environment with supply chain challenges, inflationary pressures, foreign exchange rate volatility and geopolitical uncertainty, so results can change, positively or negatively. See Part I, Item 1A. – “Risk Factors” for a detailed description of the risks associated with supply chain disruptions. As a result, we currently expect 2023 EPS to be between $4.60 and $5.00, on net sales between $4.6 billion and $4.8 billion. Our outlook assumes pricing actions along with manufacturing efficiencies will offset cost pressures. We intend to continue to make prudent investment in the business including our new product development, engineering and digital initiatives.

ROIC

ROIC and other Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Stockholders’ equity for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from operations by one minus the full year 2022 effective tax rate (“Effective Tax Rate”). Debt is calculated using amounts for Current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters’ NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters’ ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital.

Our management and Board of Directors use ROIC as one measure to assess operational performance, including in connection with certain compensation programs. We use ROIC as a metric because we believe it measures how effectively we invest our capital and provides a better measure to compare ourselves to peer companies to assist in assessing how we drive operational improvement. We believe ROIC measures return on the amount of capital invested in our businesses and is an accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Stockholders’ equity provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC at December 31, 2022 was 21.3%.

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Amounts described below are reported in millions of U.S. dollars, except for the Effective Tax Rate. Amounts are as of and for the three months ended for the periods referenced in the tables below.

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RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Exhibit 15 (a) (1) and (2) Financial Statements and Financial Statement Schedules of this Annual Report on Form 10-K. This section of our Annual Report on Form 10-K generally discusses 2022 and 2021 and provides a year-over-year comparison of 2022 and 2021. Discussions of 2020 and year-over-year comparison of 2021 and 2020 are not included in this document and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Consolidated

Net sales for the year ended December 31, 2022 increased $530.9 million when compared to 2021. The increase in net sales was primarily due to healthy demand for our products across multiple businesses and price realization, necessary to mitigate rising costs, across all segments. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately $244 million.

Gross profit for the year ended December 31, 2022 increased $113.8 million when compared to 2021. The increase was primarily due to incremental margin on higher sales volume, price realization and favorable mix, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates.

SG&A expenses for the year ended December 31, 2022 increased $21.8 million when compared to 2021 primarily due to increased selling, technology and engineering costs in 2022 and non-recurring gains in 2021, partially offset by the positive impact of changes in foreign exchange rates. SG&A expenses were lower as a percent of sales when compared to 2021 due to continued cost discipline across all areas of our business.

Income from operations for the year ended December 31, 2022 increased by $92.0 million when compared to 2021. The increase was primarily due to incremental margin on higher sales volume, price realization and favorable mix which more than offset cost increases and the negative impact of changes in foreign exchange rates.

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Materials Processing

Net sales for the year ended December 31, 2022 increased by $249.8 million when compared to 2021 primarily due to robust end-market demand for aggregates in all major geographies, material handlers and environmental equipment in North America and Western Europe, and cranes in Asia-Pacific and North America, as well as price realization, necessary to mitigate rising costs, and new product offerings. Net sales were negatively impacted by changes in foreign exchange rates of approximately $138 million.

Income from operations for the year ended December 31, 2022 increased $56.9 million when compared to 2021 primarily due to incremental margin on higher sales volume, favorable mix and price realization, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates.

Aerial Work Platforms

Net sales for the year ended December 31, 2022 increased $304.8 million when compared to 2021 primarily due to price realization, necessary to mitigate rising costs, and higher demand that was driven by fleet replacement and end-market growth for aerial work platforms in all major geographies except China and utility products and telehandlers in North America. Net sales were negatively impacted by changes in foreign exchange rates of approximately $106 million.

Income from operations for the year ended December 31, 2022 increased $44.1 million when compared to 2021 primarily due to incremental margin on higher sales volume, price realization and favorable mix, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative impact of changes in foreign exchange rates.

Corporate and Other / Eliminations

* Not a meaningful percentage

Net sales include financing activities of TFS, governmental sales and elimination of intercompany sales activity among segments. The net sales decrease is primarily attributable to lower TFS revenue and higher intercompany sales eliminations.

Loss from operations for the year ended December 31, 2022 increased $9.0 million when compared to 2021. The increase in operating loss is primarily due to a gain on the sale of the finance receivables and a finance receivable reserve release in 2021.

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Other

* Not a meaningful percentage

Interest Expense, Net of Interest Income

Interest expense, net of interest income, was comparable at $46.3 million and $47.8 million for the year ended December 31, 2022 and 2021, respectively.

Loss on Early Extinguishment of Debt

During the year ended December 31, 2022, loss on early extinguishment of debt was $0.3 million, or $29.1 million lower when compared to the same period in 2021, due to refinancing of a significant portion of our capital structure and prepayment of term loans in 2021.

Other Income (Expense) – Net

Other income (expense) – net for the year ended December 31, 2022 was an expense of $6.8 million, compared to income of $13.0 million in the same period in 2021. The increase in expense was primarily due to a gain related to the early termination of a lease in 2021, mark-to-market losses recorded on an equity investment in 2022 compared to gains recorded in 2021 and foreign exchange transaction losses in 2022 compared to gains in 2021.

Income Taxes

During the year ended December 31, 2022, we recognized income tax expense of $66.4 million on income of $366.6 million, an effective tax rate of 18.1%, as compared to income tax expense of $46.3 million on income of $263.8 million, an effective tax rate of 17.6%, for the year ended December 31, 2021. The higher effective tax rate for the year ended December 31, 2022 when compared to the year ended December 31, 2021 is primarily due to unfavorable items including higher U.S. tax on foreign income and lower uncertain tax positions benefit, partially offset by the release of the valuation allowance for the German interest expense deferred tax asset in 2022.

Gain (Loss) on Disposition of Discontinued Operations – Net of Tax

During the years ended December 31, 2022 and 2021, we recognized a gain (loss) on disposition of discontinued operations - net of tax of $(0.2) million and $3.4 million, respectively. The loss in 2022 primarily related to the sale of our mobile cranes business in 2019. The gain in 2021 primarily related to the sales of our MHPS and mobile crane businesses in 2017 and 2019, respectively.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Changes in estimates and assumptions used by management could have significant impacts on our financial results. Actual results could differ from those estimates.

We believe the following are among our most significant accounting policies which are important in determining the reporting of transactions and events and which utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management judgment. Please refer to Note A – “Basis of Presentation” in the accompanying Consolidated Financial Statements for a listing of our accounting policies.

Inventories – In valuing inventory, we are required to make assumptions regarding the level of reserves required to value potentially obsolete or over-valued items at the lower of cost or net realizable value (“NRV”). These assumptions require us to analyze the aging of and forecasted demand for our inventory, forecast future product sales prices, pricing trends and margins, and to make judgments and estimates regarding obsolete or excess inventory. Future product sales prices, pricing trends and margins are based on historical experience and actual orders received. Our judgments and estimates for excess or obsolete inventory are based on analysis of actual and forecasted usage. Valuation of used equipment taken in trade from customers requires us to use the best information available to determine the value of the equipment to potential customers. This value is subject to change based on numerous conditions. Inventory reserves are established taking into account age, frequency of use, or sale, and in the case of repair parts, installed base of machines. While calculations are made involving these factors, significant management judgment regarding expectations for future events is involved. Future events that could significantly influence our judgment and related estimates include general economic conditions in markets where our products are sold, new equipment price fluctuations, actions of our competitors, including introduction of new products and technological advances, as well as new products and design changes we introduce. We make adjustments to our inventory reserves based on identification of specific situations and increase our inventory reserves accordingly. As further changes in future economic or industry conditions occur, we may revise estimates that were used to calculate our inventory reserves.

If actual conditions are less favorable than those we have projected, we will increase our reserves for lower of cost or NRV, excess and obsolete inventory accordingly. Any increase in our reserves will adversely impact our results of operations. Establishment of a reserve for lower of cost or NRV, excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold.

Revenue Recognition – We recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, we perform the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The majority of our revenue is recognized at the time of shipment, at the net sales price (transaction price). Estimates of variable consideration, such as volume discounts and rebates, reduce transaction price when it is probable that a customer will attain these types of sales incentives. These estimates are primarily derived from contractual terms and historical experience.

Goodwill – We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Our annual impairment test date is the first day of our fiscal fourth quarter. We consider whether each component of an operating segment meets the criteria for a reporting unit in accordance with ASC 350-20. However, we aggregate two or more components of an operating segment into a single reporting unit if the components have similar economic characteristics.

In performing the goodwill impairment test, we may first perform a qualitative assessment or bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. A qualitative assessment requires that we consider events or circumstances including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segment’s net assets and changes in our stock price. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair values of our reporting units are greater than the carrying amounts, then a quantitative impairment test does not need to be performed.

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If the qualitative assessment indicates a quantitative analysis should be performed or a quantitative analysis is directly elected, we evaluate goodwill for impairment by comparing the fair value of each of our reporting units to its carrying value, including the associated goodwill. To determine the fair values, we use an income approach, along with other relevant market information, derived from a discounted cash flow model to estimate fair value of our reporting units. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any, would be recognized. The loss recognized would not exceed total amount of goodwill allocated to that reporting unit. The quantitative assessment indicated that each reporting unit had an estimated fair value which substantially exceeded its respective carrying amount at the annual impairment test date.

Long-Lived Assets – We assess the realizability of our long-lived assets, including definite-lived intangible assets, and evaluate such assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets (or group of assets) may not be recoverable. Impairment is determined to exist if estimated future undiscounted cash flows are less than carrying value. If an impairment is indicated, assets are written down to their fair value, which is typically determined by a discounted cash flow analysis. Future cash flow projections include assumptions regarding future sales levels and the level of working capital needed to support the assets. We use data developed by business segment management as well as macroeconomic data in making these calculations. There are no assurances that future cash flow assumptions will be achieved. The amount of any impairment then recognized would be calculated as the difference between estimated fair value and carrying value of the asset.

Accrued Warranties – We record accruals for potential warranty claims based on our claim experience. A liability for estimated warranty claims is accrued at the time of sale. The liability is established using historical warranty claims experience for each product sold. Historical claims experience may be adjusted for known design improvements or for the impact of unusual product quality issues. Assumptions are updated for known events that may affect the potential warranty liability. However, actual claims could be higher or lower than amounts estimated, as the amount and value of warranty claims are subject to variation as a result of many factors that cannot be predicted with certainty, including production quality issues, performance of new products, models and technology, changes in weather conditions for product operation, different uses for products and other similar factors.

Defined Benefit Plans – Pension benefits represent financial obligations that will be ultimately settled in the future with employees who meet eligibility requirements. We maintain defined benefit plans in France, Germany, India, Switzerland and the U.K. for some of our subsidiaries, as well as a nonqualified Supplemental Executive Retirement Plan in the U.S. (“U.S. SERP”). In Italy and Mexico, there are mandatory termination indemnity plans providing a benefit that is payable upon termination of employment in substantially all cases of termination. We have several non-pension post-retirement benefit programs, including health and life insurance benefits to certain former salaried and hourly employees.

Plan assets consist primarily of fixed income and equity securities. For non-U.S. funded plans, approximately 71% of the assets are in fixed income securities, 25% are in equity securities and 4% are in real estate securities. These allocations are reviewed periodically and updated to meet the long-term goals of the plans.

Determination of defined benefit pension and post-retirement plan obligations and their associated expenses requires use of actuarial valuations to estimate the benefits employees earn while working, as well as the present value of those benefits. We use the services of independent actuaries to assist with these calculations. Inherent in these valuations are economic assumptions, including expected returns on plan assets and discount rates at which liabilities may be settled. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower turnover rates, or longer or shorter life spans of participants. Actual results that differ from the actuarial assumptions used are recorded as unrecognized gains and losses. Unrecognized gains and losses that exceed 10% of the greater of the plan’s projected benefit obligations or the market-related value of assets are amortized to earnings over the shorter of the estimated future service period of the plan participants or the period until any anticipated final plan settlements. The assumptions used in the actuarial models are evaluated periodically and are updated to reflect experience. We believe the assumptions used in the actuarial calculations are reasonable and are within accepted practices in each of the respective geographic locations in which we operate.

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Expected long-term rates of return on pension plan assets were 4.00% for the U.K. plan and 2.50% for the Swiss plan at December 31, 2022. Our strategy with regard to the investments in the pension plans is to earn a rate of return sufficient to match or exceed the long-term growth of pension liabilities. The expected rate of return of plan assets represents an estimate of long-term returns on the investment portfolio. These rates are determined annually by management based on a weighted average of current and historical market trends, historical portfolio performance and the portfolio mix of investments. The expected long-term rate of return on plan assets at the December 31 measurement date is used to measure the earnings effects for the subsequent year. The difference between the expected return and the actual return on plan assets affects the calculated value of plan assets and, ultimately, future pension expense (income).

The discount rates were 5.43% for the U.S. SERP and 2.15% to 7.30% with a weighted average of 4.68% for non-U.S. plans at December 31, 2022. The discount rate enables us to estimate the present value of expected future cash flows on the measurement date. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments at the December 31 measurement date. The discount rates are used to measure the year-end benefit obligations and the earnings effects on the subsequent year. Typically, a higher discount rate decreases the present value of benefit obligations.

The U.S. SERP has no expected rate of compensation increase as all participants have retired or have a terminated vested benefit payable in the future. Our U.K. pension plan is frozen so there is no expected rate of compensation increase; however, other non-U.S. plans’ expected rates of compensation increases were 1.50% to 8.00%. The weighted average of the rates for all non-U.S. plans is 0.26% at December 31, 2022. These estimated annual compensation increases are determined by management every year and are based on historical trends and market indices.

We have recorded the underfunded status of our defined benefit pension plans as a liability and the unrecognized prior service costs and actuarial gains (losses) as an adjustment to Stockholders’ equity on the Consolidated Balance Sheet. The decrease in the net liability and increased funded status of $2.4 million was due primarily to changes in assumptions from the previous year, primarily increases in discount rates, partially offset by losses on our plan assets resulting from global economic conditions.

Actual results in any given year will often differ from actuarial assumptions because of demographic, economic and other factors. Market value of plan assets can change significantly in a relatively short period of time. Additionally, the measurement of plan benefit obligations is sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plans’ estimated benefit obligations could increase, causing an increase in liabilities and a reduction in Stockholders’ Equity.

We expect any future obligations under our plans that are not currently funded to be funded by future cash flows from operations. If our contributions are insufficient to adequately fund the plans to cover our future obligations, or if the performance of assets in our plans does not meet expectations, or if our assumptions are modified, contributions could be higher than expected, which would reduce cash available for our business. Changes in U.S. or foreign laws governing these plans could require additional contributions.

Assumptions used in computing our net pension expense and projected benefit obligation have a significant effect on the amounts reported. A 25 basis point change in each assumption below would have the following effects upon net pension expense and projected benefit obligation, respectively, as of and for the year ended December 31, 2022 (in millions):

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Income Taxes – We estimate income taxes based on enacted tax laws in the various jurisdictions where we conduct business. We recognize deferred income tax assets and liabilities, which represent future tax benefits or obligations of our legal entities. These deferred income tax balances arise from temporary differences due to divergent treatment of certain items for accounting and income tax purposes.

We evaluate the net realizable value of our deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character, amount and timing to result in the use of our deferred tax assets. “Character” refers to the type (ordinary income versus capital gain) as well as the source (foreign vs. domestic) of the income we generate. “Timing” refers to the period in which future income is expected to be generated. Timing is important because, in certain jurisdictions, net operating losses (“NOLs”) or other tax attributes expire if not used within an established statutory time frame. We record a valuation allowance for each deferred tax asset for which realization is not assessed as more likely than not.

We must consider all objective evidence, both positive and negative, in evaluating the future realization of our deferred tax assets, including tax loss carry forwards. Available evidence, including historical information is supplemented by currently obtainable information about future tax years. Realization of deferred tax assets requires sufficient taxable income of the appropriate character. Based on these evaluations, we have determined that it is more likely than not that expected future earnings will be sufficient to use most of our deferred tax assets. To the extent estimates of future taxable income decrease or do not materialize, additional valuation allowances may be required.

We do not provide for income taxes or tax benefits on differences between financial reporting basis and tax basis of our non-U.S. subsidiaries where such differences are reinvested and, in our opinion, will continue to be indefinitely reinvested. If earnings of foreign subsidiaries are not considered indefinitely reinvested, deferred U.S. income taxes, foreign income taxes, and foreign withholding taxes may have to be provided. We do not record deferred income taxes on the temporary difference between the book and tax basis in domestic subsidiaries where permissible. At this time, determination of the unrecognized deferred tax liabilities for temporary differences related to our investment in non-U.S. subsidiaries is not practicable.

Judgments and estimates are required to determine tax expense and deferred tax valuation allowances and in assessing uncertain tax positions. Tax returns are subject to audit and local taxing authorities could challenge tax-filing positions we take. Our practice is to file income tax returns that conform to requirements of each jurisdiction and to record provisions for tax liabilities, including interest and penalties, in accordance with Accounting Standards Codification 740, “Income Taxes.” Given the continued changes and complexity in worldwide tax laws, coupled with our geographic scope and size there may be greater exposure to uncertain tax positions. Given the subjective nature of applicable tax laws, results of an audit of some of our tax returns could have a significant impact on our consolidated financial statements.

RECENT ACCOUNTING STANDARDS

Please refer to Note A – “Basis of Presentation” in the accompanying Consolidated Financial Statements for a summary of recently issued accounting standards.

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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 December 31, 2022, we had cash and cash equivalents of $304 million and undrawn availability under our revolving line of credit of $423 million, giving us total liquidity of approximately $727 million. During the year ended December 31, 2022, our liquidity decreased by approximately $140 million from December 31, 2021 primarily due to term loan prepayment, capital expenditures, investments, share repurchases, dividends and acquisitions, partially offset by cash generated from operations which includes the adverse impact of higher inventory due to supply chain disruptions.

Our main sources of funding are cash generated from operations, including cash generated from the sale of receivables, loans from our bank credit facilities and funds raised in capital markets. We have no significant debt maturities until 2026 and we have increased our focus on free cash flow generation. Our actions to maintain liquidity include disciplined management of costs and working capital. We believe these measures will provide us with adequate liquidity to comply with our financial covenants under our bank credit facility, continue to support internal operating initiatives and meet our operating and debt service requirements for at least the next 12 months from the date of issuance of this annual report. See Part I, Item 1A. – “Risk Factors” for a detailed description of the risks resulting from our debt and our ability to generate sufficient cash flow to operate our business.

Our ability to generate cash from operations is subject to numerous factors, including the following:

•The duration and depth of the global economic challenges resulting from supply chain constraints, inflationary pressures, foreign exchange rate volatility, geopolitical uncertainty, rising interest rates and remaining COVID-19 impacts.

•As our sales change, the amount of working capital needed to support our business may change.

•Many of our customers fund their purchases through third-party finance companies that extend credit based on the credit-worthiness of customers and expected residual value of our equipment. Changes either in customers’ credit profile or used equipment values may affect the ability of customers to purchase equipment. There can be no assurance that third-party finance companies will continue to extend credit to our customers as they have in the past.

•Our suppliers extend payment terms to us primarily based on our overall credit rating. Deterioration in our credit rating may influence suppliers’ willingness to extend terms and in turn accelerate cash requirements of our business.

•Sales of our products are subject to general economic conditions, weather, competition, translation effect of foreign currency exchange rate changes, and other factors that in many cases are outside our direct control. For example, during periods of economic uncertainty, our customers have delayed purchasing decisions, which reduces cash generated from operations.

•Availability and utilization of other sources of liquidity such as trade receivables sales programs.

Typically, we have invested our cash in a combination of highly rated, liquid money market funds and in short-term bank deposits with large, highly rated banks. Our investment objective is to preserve capital and liquidity while earning a market rate of interest.

We seek to use cash held by our foreign subsidiaries to support our operations and continued growth plans through funding of capital expenditures, operating expenses or other similar cash needs of worldwide operations. Most of this cash could be used in the U.S., if necessary, without additional tax expense. Incremental cash repatriated to the U.S. would not be expected to result in material foreign, Federal or state tax cost. We will continue to seek opportunities to tax-efficiently mobilize and redeploy funds.

We had free cash flow of $151.8 million for the year ended December 31, 2022.

The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions):

Pursuant to terms of our trade accounts receivable factoring arrangements, during the year ended December 31, 2022, we sold, without material recourse, approximately $665 million of trade accounts receivable to enhance liquidity.

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Working capital as a percent of trailing three month annualized net sales was 18.0% at December 31, 2022.

The following tables show the calculation of our working capital and trailing three months annualized sales as of December 31, 2022 (in millions):

Revolver Borrowings were $177 million at December 31, 2022. At December 31, 2022, the weighted average interest rate was 6.10% on the Revolver. During the year ended December 31, 2022, we prepaid $78 million to retire our Term Loans prior to their maturity date to reduce our outstanding debt and lower our leverage. For information regarding debt, see Note J – “Long-Term Obligations” in Notes to Consolidated Financial Statements.

We remain focused on expanding customer financing solutions in key markets like the U.S., Europe and China. We also anticipate our continued use of TFS to drive incremental sales by increasing customer financing facilitated through TFS in certain instances.

On April 22, 2022, we acquired a manufacturer of heavy fabrications based in Northern Ireland to facilitate manufacturing of certain MP products for cash consideration of approximately $6 million. On July 29, 2022, we acquired a manufacturer of volumetric mixers based in Canada to expand our concrete product offering for consideration of approximately $40 million. See Note D - “Acquisitions and Dispositions” in our Consolidated Financial Statements for additional information regarding these transactions.

In July 2018, our Board of Directors authorized the repurchase up to $300 million of our outstanding shares of common stock. During the year ended December 31, 2022, we repurchased 2,862,650 shares for $96.6 million under this authorization leaving approximately $43 million available for repurchase under this program. In December 2022, our Board of Directors authorized the additional repurchase up to $150 million of our outstanding shares of common stock.

Our Board of Directors declared a dividend of $0.13 per share in each quarter of 2022, which were paid to our shareholders. In February 2023, our Board of Directors declared a dividend of $0.15 per share, which will be paid on March 20, 2023 to our shareholders of record as of March 9, 2023.

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 SEC. In addition, terms of our bank credit facilities, senior notes and senior subordinated notes contain restrictions on our ability to make further borrowings and to sell substantial portions of our assets.

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The Company’s material cash requirements include the following contractual and other obligations:

Debt

As of December 31, 2022, the Company had outstanding debt of $771.3 million, with $0.1 million payable within 12 months. Future interest payments associated with the outstanding debt are approximately $203 million with $41.8 million payable within 12 months. For detailed debt information see Note J – “Long Term Obligations” in Notes to Consolidated Financial Statements.

Leases

The Company has leases for real property, vehicles and office and industrial equipment. As of December 31, 2022, the Company had contractual fixed costs primarily related to lease commitments of approximately $107 million, with $33.3 million payable within 12 months. For detailed lease information see Note K – “Leases” in Notes to Consolidated Financial Statements.

Purchase Obligations

The Company had purchase obligations of $696.1 million, with substantially all purchase obligations payable within 12 months. Purchase obligations include non-cancellable and cancellable commitments. In many cases, cancellable commitments contain penalty provisions for cancellation.

We reported a liability of $2.5 million related to unrecognized tax benefits as of December 31, 2022 and do not expect this liability to change materially in 2023. As such, any related payments in 2023 should not be significant.

Additionally, at December 31, 2022, we had outstanding letters of credit that totaled $118.4 million and maximum exposure of $121.4 million for credit guarantees outstanding related to recourse provided to third-party financial institutions when customers finance the purchase of equipment.

We maintain defined benefit pension plans for some of our U.S. and non-U.S. operations. It is our policy to fund the retirement plans at the minimum level required by applicable regulations. In 2022, we made cash contributions and payments to the retirement plans of $8.9 million, and we estimate that our retirement plan contributions will be approximately $9 million in 2023. Changes in market conditions, changes in our funding levels or actions by governmental agencies may result in accelerated funding requirements in future periods.

In 2023, we expect approximately $135 million in capital expenditures, with our largest expenditure related to our manufacturing facility in Mexico.

Cash Flows

Cash provided by operations was $261.2 million and $293.4 million for the years ended December 31, 2022 and 2021, respectively. The change in operating cash was primarily driven by proceeds from the sale of finance receivables received in 2021, partially offset by increased operating profitability in 2022.

Cash used in investing activities was $154.1 million and $102.2 million for the years ended December 31, 2022 and 2021, respectively. The increase in cash used in investing activities relates primarily to higher capital expenditures and investment activity.

Cash used in financing activities was $54.9 million and $580.1 million for the year ended December 31, 2022 and 2021, respectively. The decrease in cash used in financing activities was primarily due to debt prepayments in 2021 compared to borrowings in 2022, partially offset by share repurchases in 2022.

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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 N – “Litigation and Contingencies” in the Notes to 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. See Risk Factors in Part I, Item 1A. for further information on our foreign exchange risk.

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 Consolidated Financial Statements for further information regarding our derivatives and Item 7A. – “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 N – “Litigation and Contingencies” in the Notes to Consolidated Financial Statements for more information regarding contingencies and uncertainties, including our proceedings involving a claim in Brazil regarding payment of ICMS tax, penalties and related interest. We are insured for product liability, general liability, workers’ compensation, employer’s liability, property damage, intellectual property and other insurable risks required by law or contract with retained liability to us or deductibles. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any liability. However, we do not believe these contingencies and uncertainties will, individually or in aggregate, have a material adverse effect on our operations. For contingencies and uncertainties other than income taxes, when it is probable a loss will be incurred and possible to make reasonable estimates of our liability with respect to such matters, a provision is recorded for the amount of such estimate or for the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur.

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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. See Part I, Item 1. – “Business – Safety and Environmental Considerations” for additional discussion of safety and environmental items.