TEREX CORPORATION BUSINESS DESCRIPTION
Terex is a global manufacturer of materials processing machinery and aerial work platforms. We design, build and support products used in construction, maintenance, manufacturing, energy, recycling, minerals and materials management applications. Certain Terex products and solutions enable customers to reduce their environmental impact including electric and hybrid offerings that deliver quiet and emission-free performance, products that support renewable energy, and products that aid in the recovery of useful materials from various types of waste. Our products are manufactured inNorth America ,Europe ,Australia andAsia and sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. We report our business in the following segments: (i) Materials Processing ("MP") and (ii) Aerial Work Platforms ("AWP"). Further information about our reportable segments appears below and in Note B - "Business Segment Information" in the Notes to Condensed Consolidated Financial Statements. Non-GAAP Measures In this document, we refer to various GAAP (United States ("U.S.") generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors consider, such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Non-GAAP measures we may use include translation effect of foreign currency exchange rate changes on net sales, gross profit, selling, general & administrative ("SG&A") expenses and operating profit, as well as the net sales, gross profit, SG&A expenses and operating profit excluding the impact of acquisitions and divestitures.
As changes in foreign currency exchange rates have a non-operating impact on our
financial results, we believe excluding effects of these changes assists in
assessment of our business results between periods. We calculate the translation
effect of foreign currency exchange rate changes by translating current period
results using rates that the comparable prior periods were translated at to
isolate the foreign exchange component of fluctuation from the operational
component. Similarly, impact of changes in our results from acquisitions and
divestitures not included in comparable prior periods may be subtracted from the
absolute change in results to allow for better comparability of results between
periods.
We calculate a non-GAAP measure of free cash flow. We define free cash flow as
Net cash provided by (used in) operating activities less Capital expenditures,
net of proceeds from sale of capital assets. We believe this measure of free
cash flow provides management and investors further useful information on cash
generation or use in our primary operations.
We discuss forward-looking information related to expected earnings per share
("EPS") excluding the impact of potential future acquisitions, divestitures,
restructuring and other unusual items. Our 2022 outlook for earnings per share
is a non-GAAP financial measure because it excludes unusual items. The Company
is not able to reconcile these forward-looking non-GAAP financial measures to
their most directly comparable forward-looking GAAP financial measures without
unreasonable efforts because the Company is unable to predict with a reasonable
degree of certainty the exact timing and impact of such items. The unavailable
information could have a significant impact on the Company's full year 2022 GAAP
financial results. This forward-looking information provides guidance to
investors about our EPS expectations excluding these unusual items that we do
not believe are reflective of our ongoing operations.
Working capital is calculated using the Condensed Consolidated Balance Sheet
amounts for Trade receivables (net of allowance) plus Inventories, less Trade
accounts payable and Customer advances. We view excessive working capital as an
inefficient use of resources, and seek to minimize the level of investment
without adversely impacting ongoing operations of the business. Trailing three
months annualized net sales is calculated using net sales for the most recent
quarter end multiplied by four. The ratio calculated by dividing working capital
by trailing three months annualized net sales is a non-GAAP measure we believe
measures our resource use efficiency.
26
--------------------------------------------------------------------------------Non-GAAP measures we also use include Net Operating Profit After Tax ("NOPAT") as adjusted, annualized effective tax rate as adjusted and cash and cash equivalents as adjusted, which are used in the calculation of our after tax return on invested capital ("ROIC") (collectively the "Non-GAAP Measures"), which are discussed in detail below.
Overview
Safety remains our top priority; driven by Think Safe - Work Safe - Home Safe. All Terex team members contributed to our effort of continuing to provide products and services for our customers, while maintaining a safe working environment.
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. We remain disciplined on SG&A and our recentNorthern Ireland acquisition is providing cost effective fabrication and capacity support for future growth. Sustaining investments in new products company-wide and continued deployment of digital solutions are critical for our competitiveness as we navigate near-term macro challenges to deliver long-term growth. Our performance in the second quarter reflected strong, global customer demand in our businesses and good execution by our team members in a dynamic and challenging environment. Net sales of$1.1 billion were up 4% year-over-year, 9% on a foreign exchange neutral basis, as end-markets remained strong. Despite the high inflationary environment, SG&A spending was flat year-over-year at 10.1% of net sales, reflecting focused cost management. Operating margin of 9.6% was up 220 basis points sequentially, but was down 220 basis points compared to the prior year. Although price cost dynamics have improved sequentially from the first quarter, operating profit in the second quarter was down from the prior year as price realization was offset by continued cost increases and the negative impact of changes in foreign exchange rates. Overall, second quarter financial performance demonstrated continued, strong execution and focus on delivering for our customers and dealers despite global supply chain disruptions and significant inflationary pressures. 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 theU.S. Dollar had a meaningful negative impact on our results in the quarter. Although these headwinds have constrained our growth, we are aggressively managing these challenges. We have continued to take pricing actions, but, as expected, they were only able to partially offset the cost increases we have experienced. However, we still anticipate being price cost neutral for all of 2022. MP had an excellent quarter with net sales up 9% from the prior year period, 16% on a foreign exchange neutral basis, driven by price realization and strong customer sentiment across all end-markets and geographies. The MP businesses continue to benefit from strong equipment utilization rates and dealers looking to replenish their inventory and rental fleets. Our mobile crushing and screening businesses are benefiting from the strength of aggregates demand for infrastructure and sand for silicon used in semiconductors. Growth of environmental and waste recycling solutions is driving demand for our wood processing, biomass and recycling equipment. The strength of construction and infrastructure spending is driving demand for our cement products in theU.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 inAustralia . MP has been aggressively managing all elements of cost resulting in a 16.5% operating margin for the quarter. We are encouraged by MP's backlog of$1.1 billion , which is up 32% compared to the prior year period. AWP's second quarter 2022 net sales were up slightly compared to the prior year period and increased 4% on a foreign exchange neutral basis, primarily due to price realization and higher demand in all major geographies, partially offset by lower demand inChina . Construction, infrastructure, and industrial applications are driving demand for Genie products. Examples of such applications for Genie products include data centers, warehouses and manufacturing facilities. In addition, the fundamentals of the North American and European replacement cycle are strong as fleets age and customers have strong utilization rates. Globally, increased adoption continues to improve labor efficiency and jobsite safety. Demand remains strong for Genie products in all regions exceptChina . Our Utilities business is benefiting from electric grid expansion across theU.S. AWP delivered operating margins of 7.7% in the quarter driven by strict expense management and disciplined pricing actions. AWP's end market strength is demonstrated by its backlog of$2.3 billion , up 62% year-over-year. In the second quarter, our largest market remainedNorth America , which represented approximately 58% of our global sales. As compared to the prior year period, sales were up in every major geography except forAsia Pacific which was down low double digits. 27 -------------------------------------------------------------------------------- We continued to execute our disciplined capital allocation strategy in the second quarter. We are making strategic investments in our businesses and continuing to return capital to shareholders. Our strong balance sheet has allowed us to return approximately$100 million of cash to shareholders in the first half of 2022 and to prepay$23 million on our term loans in the quarter. We generated$44 million of free cash flow in the quarter, consistent with our expectations. Free cash flow in the second quarter includes the benefit of$38 million received on anIRS approved refund, but is also impacted by elevated levels of substantially completed inventory awaiting installation of final components. We continue to maintain ample liquidity and as ofJune 30, 2022 , we had$678 million in available liquidity, with no near-term debt maturities. See "Liquidity and Capital Resources" for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels, as well as a reconciliation of net cash provided by (used in) operating activities to free cash flow. As a result of our strong performance in the first half of the year, we are increasing our outlook for 2022 EPS to between$3.80 and$4.20 , on net sales between$4.1 billion and$4.3 billion . We are operating in an unprecedented environment with supply chain challenges, inflationary pressures, geopolitical uncertainty, and restrictive China COVID-19 policies, so results can change, positively or negatively. ROIC ROIC and other Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Stockholders' equity for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from operations by one minus the annualized effective tax rate. In the calculation of ROIC, we adjust annualized effective tax rate to reflect management's expectation of the full year effective tax rate to create a measure that is more useful to understanding our operating results and the ongoing performance of our underlying business as shown in the tables below. Cash and cash equivalents is adjusted to include amounts recorded as held for sale. Furthermore, debt is calculated using amounts for Current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters' adjusted NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters' ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital. Our management and Board of Directors use ROIC as one measure to assess operational performance, including in connection with certain compensation programs. We use ROIC as a metric because we believe it measures how effectively we invest our capital and provides a better measure to compare ourselves to peer companies to assist in assessing how we drive operational improvement. We believe ROIC measures return on the amount of capital invested in our businesses and is an accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Stockholders' equity provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC atJune 30, 2022 was 17.3%. 28 -------------------------------------------------------------------------------- Amounts described below are reported in millions ofU.S. dollars, except for the annualized effective tax rates. Amounts are as of and for the three months ended for the periods referenced in the tables below. Jun '22 Mar '22
Dec '21 Sep '21 Jun '21
Annualized effective tax rate as adjusted(1) 20.0 % 20.0 %
17.6 % 17.6 %
Income (loss) from operations $ 103.9 $ 74.5 $ 69.8 $ 74.2
Multiplied by: 1 minus annualized effective tax
rate 80.0 % 80.0 % 82.4 % 82.4 %
Adjusted net operating income (loss) after tax $ 83.1 $ 59.6 $ 57.5 $ 61.1
Debt $ 828.2 $ 740.3 $ 674.1 $ 893.4 $ 894.2
Less: Cash and cash equivalents as adjusted (253.3) (218.4) (266.9) (558.2) (547.5)
Debt less Cash and cash equivalents as adjusted 574.9 521.9 407.2 335.2 346.7
Stockholders' equity 1,048.9 1,114.1 1,109.6 1,050.7 1,033.9
Debt less Cash and cash equivalents as adjusted
plus Stockholders' equity $ 1,623.8 $ 1,636.0 (1) The annualized effective tax rate for each 2021 period represents the actual full year 2021 effective tax rate.
June 30, 2022 ROIC 17.3 % NOPAT as adjusted (last 4 quarters) $
261.3
Average Debt less Cash and cash equivalents as adjusted plus Stockholders' equity (5 quarters)
$ 1,508.6 As of 6/30/22 As of 3/31/22 As of 12/31/21 As of 9/30/21 As of 6/30/21 Reconciliation of Cash and cash equivalents: Cash and cash equivalents - continuing operations$ 253.3 $
218.4
- - - 5.0 5.3
Cash and cash equivalents as adjusted $ 253.3 $ 218.4 $ 266.9 $ 558.2 $ 547.5
Income (loss) from
continuing (Provision for)
Six Months Ended operations before benefit from
June 30, 2022 income taxes income taxes Income tax rate
Reconciliation of annualized effective tax rate:
As reported $ 153.4 $ (27.0) 17.6 %
Effect of adjustments:
Tax related - (3.7)
As adjusted $ 153.4 $ (30.7) 20.0 %
29--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months EndedJune 30, 2022 Compared with Three Months EndedJune 30, 2021 Consolidated Three Months Ended June 30, 2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales$ 1,077.1 -$ 1,038.7 - 3.7 % Gross profit$ 212.9 19.8 %$ 231.6 22.3 % (8.1) % SG&A expenses$ 109.0 10.1 %$ 109.1 10.5 % (0.1) % Income from operations$ 103.9 9.6 %$ 122.5 11.8 % (15.2) % Net sales for the three months endedJune 30, 2022 increased$38.4 million when compared to the same period in 2021. The increase in net sales was primarily due to price realization across all segments and healthy demand for our products across multiple businesses. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately$52 million . Gross profit for the three months endedJune 30, 2022 decreased$18.7 million when compared to the same period in 2021. The decrease was primarily due to 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, partially offset by price realization and incremental margin on higher sales volume.
SG&A expenses for the three months ended
Income from operations for the three months endedJune 30, 2022 decreased$18.6 million when compared to the same period in 2021. The decrease was primarily due to cost increases and the negative impact of changes in foreign exchange rates which more than offset price realization and incremental margin on higher sales volume. Materials Processing Three Months Ended June 30, 2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales$ 480.7 -$ 440.8 - 9.1 % Income from operations$ 79.5 16.5 %$ 72.1 16.4 % 10.3 % Net sales for the MP segment for the three months endedJune 30, 2022 increased$39.9 million when compared to the same period in 2021 primarily due to price realization and robust end-market demand for aggregates and material handlers in all major geographies and cranes inAsia-Pacific andNorth America , partially offset by lower demand for cranes inWestern Europe . Net sales were negatively impacted by the effects of foreign exchange rate changes of approximately$31 million . Income from operations for the three months endedJune 30, 2022 increased$7.4 million when compared to the same period in 2021 primarily due to price realization and incremental margin on higher sales volume, partially offset by material, labor, manufacturing inefficiency and freight cost increases due to global supply chain disruptions, significant inflationary pressures and the negative effects of foreign exchange rate changes. 30 --------------------------------------------------------------------------------
Aerial Work Platforms
Three Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ 597.7 - $ 595.2 - 0.4 %
Income from operations $ 46.2 7.7 % $ 65.2 11.0 % (29.1) %
Net sales for the AWP segment for the three months ended June 30, 2022 increased
$2.5 million when compared to the same period in 2021 primarily due to price
realization and higher demand that was driven by fleet replacement and
end-market growth for aerial work platforms and utility products in all major
geographies, partially offset by lower demand in China . Net sales were
negatively impacted by the effects of foreign exchange rate changes of
approximately $21 million .
Income from operations for the three months ended June 30, 2022 decreased $19.0
million when compared to the same period in 2021 primarily due to material,
labor, manufacturing inefficiency and freight cost increases due to global
supply chain disruptions, significant inflationary pressures and the negative
effects of foreign exchange rate changes, partially offset by price realization.
Corporate and Other / Eliminations
Three Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ (1.3) - $ 2.7 - (148.1) %
Loss from operations $ (21.8) * $ (14.8) * (47.3) %
* Not a meaningful percentage
Net sales include on-book financing activities of
Loss from operations for the three months endedJune 30, 2022 increased$7.0 million when compared to the same period in 2021. The increase in operating loss is primarily due the negative impact of changes in foreign exchange rates, provision for litigation settlement on a former product line and restructuring charges in the current period and a finance receivable reserve release in the prior period, partially offset by lower SG&A expenses.
Interest Expense, Net of Interest Income
During the three months endedJune 30, 2022 , our interest expense, net of interest income, was$11.3 million , or$0.1 million lower than the same period in the prior year primarily due to a decrease in average borrowings, partially offset by lower interest income in the current year period.
Loss on Early Extinguishment of Debt
During the three months ended
31
--------------------------------------------------------------------------------Other Income (Expense) - Net
Other income (expense) - net for the three months endedJune 30, 2022 was expense of$3.3 million compared to income of$1.2 million in the same period in the prior year. The increase in expense was primarily due to foreign exchange translation losses in the current year compared to gains in the same period in the prior year. Income Taxes During the three months endedJune 30, 2022 , we recognized income tax expense of$15.1 million on income of$89.2 million , an effective tax rate of 16.9%, as compared to income tax expense of$14.4 million on income of$86.7 million , an effective tax rate of 16.6%, for the three months endedJune 30, 2021 . The higher effective tax rate for the three months endedJune 30, 2022 when compared with the three months endedJune 30, 2021 is primarily due to lower favorable discrete benefit in the current quarter largely offset by reduced tax on the geographic distribution of income.
Gain (Loss) on Disposition of Discontinued Operations - net of taxes
During the three months ended
Six Months Ended
Consolidated
Six Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ 2,079.6 - $ 1,902.9 - 9.3 %
Gross profit $ 398.7 19.2 % $ 407.0 21.4 % (2.0) %
SG&A expenses $ 220.3 10.6 % $ 223.0 11.7 % (1.2) %
Income from operations $ 178.4 8.6 % $ 184.0 9.7 % (3.0) %
Net sales for the six months ended June 30, 2022 increased $176.7 million when
compared to the same period in 2021. The increase in net sales was primarily due
to price realization across all segments and healthy demand for our products
across multiple businesses. Changes in foreign exchange rates negatively
impacted consolidated net sales by approximately $83 million .
Gross profit for the six months ended June 30, 2022 decreased $8.3 million when
compared to the same period in 2021. The decrease was primarily due to 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, partially offset by price
realization and incremental margin on higher sales volume.
SG&A expenses for the six months ended June 30, 2022 decreased $2.7 million when
compared to the same period in 2021 primarily due to continued cost discipline
across all areas of our business.
Income from operations for the six months ended June 30, 2022 decreased $5.6
million when compared to the same period in 2021. The decrease was primarily due
to cost increases and the negative impact of changes in foreign exchange rates
which more than offset price realization and incremental margin on higher sales
volume.
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Materials Processing
Six Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ 933.4 - $ 819.0 - 14.0 %
Income from operations $ 144.0 15.4 % $ 121.2 14.8 % 18.8 %
Net sales for the MP segment for the six months ended June 30, 2022 increased
$114.4 million when compared to the same period in 2021 primarily due to robust
end-market demand for aggregates and material handlers in all major geographies,
cranes in Asia-Pacific and North America , and environmental equipment in North
America and Western Europe , as well as price realization. Net sales were
negatively impacted by the effects of foreign exchange rate changes of
approximately $47 million .
Income from operations for the six months ended June 30, 2022 increased $22.8
million when compared to the same period in 2021 primarily due to incremental
margin on higher sales volume and price realization, partially offset by
material, labor, manufacturing inefficiency and freight cost increases due to
global supply chain disruptions, significant inflationary pressures and the
negative effects of foreign exchange rate changes.
Aerial Work Platforms
Six Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ 1,149.2 - $ 1,071.9 - 7.2 %
Income from operations $ 78.7 6.8 % $ 91.8 8.6 % (14.3) %
Net sales for the AWP segment for the six months ended June 30, 2022 increased
$77.3 million when compared to the same period in 2021 primarily due to price
realization and higher demand that was driven by fleet replacement and
end-market growth for aerial work platforms, utility products and telehandlers
in in all major geographies, partially offset by lower demand in China . Net
sales were negatively impacted by the effects of foreign exchange rate changes
of approximately $36 million .
Income from operations for the six months ended June 30, 2022 decreased $13.1
million when compared to the same period in 2021 primarily due to material,
labor, manufacturing inefficiency and freight cost increases due to global
supply chain disruptions, significant inflationary pressures and the negative
effects of foreign exchange rate changes, partially offset by price realization
and incremental margin on higher sales volume.
33
--------------------------------------------------------------------------------Corporate and Other / Eliminations
Six Months Ended June 30,
2022 2021
% of % of % Change In
Sales Sales Reported Amounts
($ amounts in millions)
Net sales $ (3.0) - $ 12.0 - (125.0) %
Loss from operations $ (44.3) * $ (29.0) * (52.8) %
* Not a meaningful percentage
Net sales include on-book 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, partially offset by lower intercompany sales eliminations. Loss from operations for the six months endedJune 30, 2022 increased$15.3 million when compared to the same period in 2021. The increase in operating loss is primarily due to a gain on the sale of the on book finance receivables and a finance receivable reserve release in the prior period and the negative impact of changes in foreign exchange rates, a provision for litigation settlement on former product lines and restructuring charges in the current period, partially offset by lower SG&A expenses.
Interest Expense, Net of Interest Income
During the six months endedJune 30, 2022 , our interest expense, net of interest income, was$21.3 million , or$4.7 million lower than the same period in the prior year due to a decrease in average borrowings, partially offset by lower interest income in the current year period.
Loss on Early Extinguishment of Debt
During the six months ended
Other Income (Expense) - Net
Other income (expense) - net for the six months endedJune 30, 2022 was an expense of$3.6 million , compared to income of$3.8 million in the same period in the prior year. The increase in expense was primarily due to foreign exchange translation losses in the current year compared to gains in the prior year and lower mark-to-market gains recorded on an equity investment in the current year compared the same period in the prior year.
Income Taxes
During the six months endedJune 30, 2022 , we recognized income tax expense of$27.0 million on income of$153.4 million , an effective tax rate of 17.6%, as compared to income tax expense of$22.1 million on income of$134.1 million , an effective tax rate of 16.5%, for the six months endedJune 30, 2021 . The higher effective tax rate for the six months endedJune 30, 2022 when compared to the six months endedJune 30, 2021 is primarily due to lower favorable discrete benefit in the current year period partially offset by reducedU.S. tax on foreign income.
Gain (Loss) on Disposition of Discontinued Operations - net of taxes
During the six months endedJune 30, 2022 and 2021, we recognized a gain (loss) on disposition of discontinued operations - net of tax of$(0.4) million and$2.0 million , respectively. The loss in the current year period primarily related to the sale of our mobile cranes business. The gain in the prior year primarily related to the sale of our former MHPS business. 34 --------------------------------------------------------------------------------
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. AtJune 30, 2022 , we had cash and cash equivalents of$253 million and undrawn availability under our revolving line of credit of$425 million , giving us total liquidity of approximately$678 million . During the six months endedJune 30, 2022 , our liquidity decreased by approximately$189 million fromDecember 31, 2021 primarily due to share repurchases, capital expenditures, term loan prepayment and dividends, partially offset by cash generated from operations which includes the adverse impact of higher working capital. Our main sources of funding are cash generated from operations, including cash generated from the sale of receivables, loans from our bank credit facilities and funds raised in capital markets. We have no significant debt maturities until 2024 and we have increased our focus on free cash flow generation. Our actions to maintain liquidity include disciplined management of costs and working capital. We believe these measures will provide us with adequate liquidity to comply with our financial covenants under our bank credit facility, continue to support internal operating initiatives and meet our operating and debt service requirements for at least the next 12 months from the date of issuance of this quarterly report. See Part I, Item 1A. - "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 and Part II, Item 1A. - "Risk Factors" below for a detailed description of the risks resulting from our debt and our ability to generate sufficient cash flow to operate our business.
Our ability to generate cash from operations is subject to numerous factors, including the following:
•The duration and depth of the global economic challenges resulting from supply chain constraints, inflationary pressures, geopolitical uncertainty and restrictive COVID-19 policies. •As our sales change, the amount of working capital needed to support our business may change. •Many of our customers fund their purchases through third-party finance companies that extend credit based on the credit-worthiness of customers and expected residual value of our equipment. Changes either in customers' credit profile or used equipment values may affect the ability of customers to purchase equipment. There can be no assurance that third-party finance companies will continue to extend credit to our customers as they have in the past. •Our suppliers extend payment terms to us primarily based on our overall credit rating. Deterioration in our credit rating may influence suppliers' willingness to extend terms and in turn accelerate cash requirements of our business. •Sales of our products are subject to general economic conditions, weather, competition, translation effect of foreign currency exchange rate changes, and other factors that in many cases are outside our direct control. For example, during periods of economic uncertainty, our customers have delayed purchasing decisions, which reduces cash generated from operations. •Availability and utilization of other sources of liquidity such as trade receivables sales programs.
Typically, we have invested our cash in a combination of highly rated, liquid money market funds and in short-term bank deposits with large, highly rated banks. Our investment objective is to preserve capital and liquidity while earning a market rate of interest.
We seek to use cash held by our foreign subsidiaries to support our operations and continued growth plans outside and inside theU.S. through funding of capital expenditures, operating expenses or other similar cash needs of these operations. Most of this cash could be used in theU.S. , if necessary, without additional tax expense. Incremental cash repatriated to theU.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
The following table reconciles net cash provided by (used in) operating activities to free cash flow (in millions):
Three Months Ended Six Months Ended
6/30/2022 6/30/2022
Net cash provided by (used in) operating activities $ 71.0 $ 19.3
Capital expenditures, net of proceeds from sale of capital
assets (26.8) (46.9)
Free cash flow (use) $ 44.2 $ (27.6)
Pursuant to terms of our trade accounts receivable factoring arrangements,
during the six months ended
35
--------------------------------------------------------------------------------
Working capital as a percent of trailing three month annualized net sales was
20.7% at
The following tables show the calculation of our working capital and trailing
three months annualized sales as of
Three Months Ended
6/30/2022
Net Sales $ 1,077.1
x 4
Trailing Three Month Annualized Net Sales $ 4,308.4
As of 6/30/22
Inventories $ 963.2
Trade Receivables 558.9
Trade Accounts Payable (604.6)
Customer Advances (23.7)
Working Capital $ 893.8
On January 31, 2017 , we entered into a credit agreement which was subsequently
amended to include (i) a $600 million revolving line of credit (the "Revolver")
and (ii) senior secured term loans totaling $600 million with a maturity date of
January 31, 2024 . On April 1, 2021 , we entered into an amendment and restatement
of the credit agreement (as amended and restated, the "Credit Agreement") which
included the following principal changes to the original credit agreement: (i)
extension of the term of the Revolver to expire on April 1, 2026 , which maturity
will spring forward to November 1, 2023 if the principal outstanding under the
$400 million senior secured term loan (the "Original Term Loan") is not repaid
or the maturity date is not extended, (ii) reinstatement of financial covenants
that were waived in 2020, (iii) decrease in the interest rate on the drawn
Revolver by 25 basis points and (iv) certain other technical changes, including
additional language regarding the potential cessation of the London Interbank
Offered Rate as a benchmark rate. See Note I - "Long-Term Obligations" in our
Condensed Consolidated Financial Statements for additional information regarding
the Credit Agreement.
Borrowings under the Credit Agreement at June 30, 2022 were $54.9 million , net
of discount, on the Original Term Loan and $175.0 million on the Revolver.
During the six months ended June 30, 2022 , we prepaid $23.0 million of the
amount outstanding on the Original Term Loan prior to its maturity date to
reduce our outstanding debt. At June 30, 2022 , the weighted average interest
rate was 2.86% on the Original Term Loan and 2.80% on the Revolver.
We remain focused on expanding customer financing solutions in key markets like
the U.S. , Europe and China . We also anticipate our continued use of TFS to drive
incremental sales by increasing customer financing facilitated through TFS in
certain instances.
On April 22, 2022 , we acquired a manufacturer of heavy fabrications based in
Northern Ireland to facilitate manufacturing of certain MP products for cash
consideration of approximately $6 million . On July 29, 2022 , we acquired a
manufacturer of volumetric mixers based in Canada to expand our concrete product
offering for consideration of approximately $39 million . See Note A - "Basis of
Presentation" in our Condensed Consolidated Financial Statements for additional
information regarding these transactions.
In July 2018 , our Board of Directors authorized the repurchase up to $300
million of our outstanding shares of common stock. During the six months ended
June 30, 2022 , we repurchased 2,262,523 shares for $78.5 million under this
authorization leaving approximately $61 million available for repurchase under
this program.
In the first and second quarters of 2022, our Board of Directors declared a
dividend of $0.13 per share, which was paid to the Company's shareholders. In
July 2022 , our Board of Directors declared a dividend of $0.13 per share, which
will be paid on September 19, 2022 to the Company's shareholders of record as of
August 12, 2022 .
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Our ability to access capital markets to raise funds, through sale of equity or
debt securities, is subject to various factors, some specific to us and others
related to general economic and/or financial market conditions. These include
results of operations, projected operating results for future periods and debt
to equity leverage. Our ability to access capital markets is also subject to our
timely filing of periodic reports with the Securities and Exchange Commission .
In addition, terms of our bank credit facilities, senior notes and senior
subordinated notes contain restrictions on our ability to make further
borrowings and to sell substantial portions of our assets.
Cash Flows
Cash provided in operations was$19.3 million and$269.2 million for the six months endedJune 30, 2022 and 2021, respectively. The change in operating cash was primarily driven by proceeds from the sale of finance receivables received in the prior year and higher working capital and incentive compensation payments in the current year. Cash used in investing activities was$54.8 million and$48.6 million for the six months endedJune 30, 2022 and 2021, respectively. The increase in cash used in investing activities relates primarily to higher capital expenditures, partially offset by lower investment activity. Cash provided by financing activities was$38.0 million for the six months endedJune 30, 2022 , compared to cash used in financing activities of$337.7 million for the six months endedJune 30, 2021 . The increase in cash provided by financing activities was primarily due to debt prepayments in the prior year compared to borrowings in the current year, partially offset by share repurchases in the current year.
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
We may assist customers in their rental, leasing and acquisition of our products by facilitating financing transactions directly between (i) end-user customers, distributors and rental companies and (ii) third-party financial institutions, providing recourse in certain circumstances. The expectation of losses or non-performance is evaluated based on consideration of historical customer assessments, current financial conditions, reasonable and supportable forecasts, equipment collateral value and other factors. Many of these factors, including the assessment of a customer's ability to pay, are influenced by economic and market factors that cannot be predicted with certainty. Our maximum liability is generally limited to our customer's remaining payments due to the third-party financial institutions at the time of default. In the event of a customer default, we are generally able to recover and dispose of the equipment at a minimum loss, if any, to us. Reserves are recorded for expected loss over the contractual period of risk exposure.
There can be no assurance that our historical experience in used equipment markets will be indicative of future results. Our ability to recover losses experienced from our guarantees may be affected by economic conditions in used equipment markets at the time of loss.
See Note K - "Litigation and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further information regarding our guarantees.
CONTINGENCIES AND UNCERTAINTIES
Foreign Exchange and Interest Rate Risk
Our products are sold in over 100 countries around the world and, accordingly,
our revenues are generated in foreign currencies, while costs associated with
those revenues are only partly incurred in the same currencies. Primary
currencies to which we are exposed are the Euro, British Pound, Chinese Yuan,
Indian Rupee, Australian Dollar and Mexican Peso. We purchase hedging
instruments to manage variability of future cash flows associated with
recognized assets or liabilities due to changing currency exchange rates.
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.
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See Note H - "Derivative Financial Instruments" in the Notes to Condensed
Consolidated Financial Statements for further information regarding our
derivatives and Item 3 "Quantitative and Qualitative Disclosures About Market
Risk" for a discussion of the impact changes in foreign currency exchange rates
and interest rates may have on our financial performance.
Other
We are subject to a number of contingencies and uncertainties including, without limitation, product liability claims, workers' compensation liability, intellectual property litigation, self-insurance obligations, tax examinations, guarantees, class action lawsuits and other matters. See Note K - "Litigation and Contingencies" in the Notes to Condensed Consolidated Financial Statements for more information regarding contingencies and uncertainties, including our proceedings involving a claim inBrazil regarding payment of ICMS tax, penalties and related interest. We are insured for product liability, general liability, workers' compensation, employer's liability, property damage, intellectual property and other insurable risks required by law or contract with retained liability to us or deductibles. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any liability. However, we do not believe these contingencies and uncertainties will, individually or in aggregate, have a material adverse effect on our operations. For contingencies and uncertainties other than income taxes, when it is probable a loss will be incurred and possible to make reasonable estimates of our liability with respect to such matters, a provision is recorded for the amount of such estimate or for the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur. We generate hazardous and non-hazardous wastes in the normal course of our manufacturing operations. As a result, we are subject to a wide range of environmental laws and regulations. All of our employees are required to obey all applicable health, safety and environmental laws and regulations and must observe the proper safety rules and environmental practices in work situations. These laws and regulations govern actions that may have adverse environmental effects, such as discharges to air and water, and require compliance with certain practices when handling and disposing of hazardous and non-hazardous wastes. These laws and regulations would also impose liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances, should any such events occur. We are committed to complying with these standards and monitoring our workplaces to determine if equipment, machinery and facilities meet specified safety standards. Each of our manufacturing facilities is subject to an environmental audit at least once every five years to monitor compliance. Also, no incidents have occurred which required us to pay material amounts to comply with such laws and regulations. We are dedicated to ensuring that safety and health hazards are adequately addressed through appropriate work practices, training and procedures. We are committed to reducing injuries and working towards a world-class level of safety practices in our industry. RECENT ACCOUNTING STANDARDS Please refer to Note A - "Basis of Presentation" in the accompanying Condensed Consolidated Financial Statements for a summary of recently issued accounting standards. 38
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