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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K


(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10702
TEREX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
34-1531521
(State of Incorporation)
 
(IRS Employer Identification No.)
200 Nyala Farm Road,
Westport,
Connecticut
 
06880
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (203) 222-7170
_______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE
TEX
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act.
 
Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes
No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
No
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the Registrant was approximately $2,144.8 million based on the last sale price on June 28, 2019.

Number of outstanding shares of common stock: 70.7 million as of February 11, 2020.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Terex Corporation Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.




As used in this Annual Report on Form 10-K, unless otherwise indicated, Terex Corporation, together with its consolidated subsidiaries, is referred to as “Terex,” the “Registrant,” “us,” “we,” “our” or the “Company.” Unless specifically noted otherwise, this Annual Report generally speaks as of December 31, 2019 and excludes discontinued operations. Discontinued operations primarily relate to the Demag® mobile cranes business and mobile crane product lines manufactured in our Oklahoma City facility. See Note D - “Discontinued Operations and Assets and Liabilities Held for Sale” in the Notes to the Consolidated Financial Statements for further information.
Forward-Looking Information
Certain information in this Annual Report includes forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995) regarding future events or our future financial performance that involve certain contingencies and uncertainties, including those discussed below in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contingencies and Uncertainties.” In addition, when included in this Annual Report or in documents incorporated herein by reference, the words “may,” “expects,” “should,” “intends,” “anticipates,” “believes,” “plans,” “projects,” “estimates” and the negatives thereof and analogous or similar expressions are intended to identify forward-looking statements. However, the absence of these words does not mean that the statement is not forward-looking. We have based these forward-looking statements on current expectations and projections about future events. These statements are not guarantees of future performance. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Such risks and uncertainties, many of which are beyond our control, include, among others:
our business is cyclical and weak general economic conditions affect the sales of our products and financial results;
changes in import/export regulatory regimes and the escalation of global trade conflicts could continue to negatively impact sales of our products and our financial results;
our financial results could be adversely impacted by the United Kingdom’s (“U.K.”) departure from the European Union (“E.U.”);
changes affecting the availability of the London Interbank Offered Rate ("LIBOR") may have consequences on us that cannot yet reasonably be predicted;
our need to comply with restrictive covenants contained in our debt agreements;
our ability to generate sufficient cash flow to service our debt obligations and operate our business;
our ability to access the capital markets to raise funds and provide liquidity;
our business is sensitive to government spending;
our business is highly competitive and is affected by our cost structure, pricing, product initiatives and other actions taken by competitors;
our retention of key management personnel;
the financial condition of suppliers and customers, and their continued access to capital;
exposure from providing financing and credit support for some of our customers;
we may experience losses in excess of recorded reserves;
we are dependent upon third-party suppliers, making us vulnerable to supply shortages and price increases;
our business is global and subject to changes in exchange rates between currencies, commodity price changes, regional economic conditions and trade restrictions;
our operations are subject to a number of potential risks that arise from operating a multinational business, including compliance with changing regulatory environments, the Foreign Corrupt Practices Act and other similar laws, and political instability;
a material disruption to one of our significant facilities;
possible work stoppages and other labor matters;
compliance with changing laws and regulations, particularly environmental and tax laws and regulations;
litigation, product liability claims and other liabilities;
our ability to comply with an injunction and related obligations imposed by the United States Securities and Exchange Commission (“SEC”);
disruption or breach in our information technology systems and storage of sensitive data;
our ability to successfully implement our Execute to Win strategy; and
other factors.
Actual events or our actual future results may differ materially from any forward-looking statement due to these and other risks, uncertainties and significant factors. The forward-looking statements contained herein speak only as of the date of this Annual Report and the forward-looking statements contained in documents incorporated herein by reference speak only as of the date of the respective documents. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained or incorporated by reference in this Annual Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

2




TEREX CORPORATION AND SUBSIDIARIES
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2019

 
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PART I


ITEM 1.
BUSINESS

GENERAL

Our Company was incorporated in Delaware in October 1986 as Terex U.S.A., Inc. Since that time, we have changed significantly, and much of this change has been historically accomplished through acquisitions and managing our portfolio of companies by divestiture of non-core businesses and products. Today, Terex is a global manufacturer of aerial work platforms, materials processing machinery and cranes. We design, build and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Our products are manufactured in North and South 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 continue to focus on becoming an industry leading operating company.

We manage and report our business in the following segments: (i) Aerial Work Platforms (“AWP”) and (ii) Materials Processing (“MP”).

Further information about our industry and reportable segments appears in Part II, Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note B – “Business Segment Information” in the Notes to the Consolidated Financial Statements.

AERIAL WORK PLATFORMS

Our AWP segment designs, manufactures, services and markets aerial work platform equipment, utility equipment, telehandlers and light towers. Products include portable material lifts, portable aerial work platforms, trailer-mounted articulating booms, self-propelled articulating and telescopic booms, scissor lifts, utility equipment (including truck-mounted digger derricks, auger drills and insulated aerial devices), telehandlers and trailer-mounted light towers, as well as, their related components and replacement parts. Customers use these products to construct and maintain industrial, commercial, institutional and residential buildings and facilities, for construction and maintenance of energized power lines, tree trimming, certain construction and foundation drilling applications, and for other commercial operations, as well as in a wide range of infrastructure projects. We market aerial work platform products principally under the Terex® and Genie® brand names.

AWP has the following significant manufacturing operations:

Aerial work platform equipment is manufactured in Redmond and Moses Lake, Washington, Rock Hill, South Carolina, Umbertide, Italy and Changzhou, China;
Utility products are manufactured in Watertown and Huron, South Dakota and Betim, Brazil;
Telehandlers are manufactured in Oklahoma City, Oklahoma and Umbertide, Italy; and
Trailer-mounted light towers, trailer-mounted booms and self-propelled aerials are manufactured in Rock Hill, South Carolina.

We have a parts and logistics center located in North Bend, Washington for our aerial work platform and utility products equipment. Additionally, a portion of our aerial work platform and utility products parts business is conducted at a shared Terex facility in Southaven, Mississippi. Our European, Asian Pacific and Latin American parts and logistics operations are conducted through outsourced facilities.

We also provide service and support for utility and aerial products in the U.S. through a network of service branches and field service operations. We have announced plans to exit and sell our utility hot line tools business in Betim, Brazil.

MATERIALS PROCESSING

Our MP segment designs, manufactures and markets materials processing and specialty equipment, including crushers, washing systems, screens, apron feeders, material handlers, pick and carry cranes, wood processing, biomass and recycling equipment, concrete mixer trucks and concrete pavers, conveyors, and their related components and replacement parts. Customers use these products in construction, infrastructure and recycling projects, in various quarrying and mining applications, as well as in landscaping and biomass production industries, material handling applications, maintenance applications to lift equipment or material, and in building roads and bridges. We market our MP products principally under the Terex®, Powerscreen®, Fuchs®, EvoQuip®, Canica®, Cedarapids®, CBItm, Simplicity®, Franna®,, Terex Ecotec®, Terex Finlay®, Terex Washing Systems, Terex MPS, Terex Jaques®, Terex Advance®, Terex Conveying Systems and Terex Bid-Well® brand names and business lines.

4




MP has the following significant manufacturing operations:

Mobile crushers, mobile screens, track conveyors and washing systems are manufactured in Omagh and Dungannon, Northern Ireland;
Mobile crushers, mobile screens, base crushers, base screens, modular and wheeled crushing and screening plants, track conveyors and washing systems are manufactured in Hosur, India;
Modular, mobile and static crushing and screening equipment and base crushers are manufactured in Oklahoma City, Oklahoma;
Static crushers and screens are manufactured in Subang Jaya, Malaysia;
Crushing and screening equipment is manufactured in Durand, Michigan;
Static and mobile crushers are manufactured in Coalville, England;
Fabrications, sub-assemblies and steel kits are manufactured in Ballymoney, Northern Ireland;
Wood processing, biomass and recycling equipment systems are manufactured in Newton, New Hampshire, Dungannon, Northern Ireland and Campsie, Northern Ireland;
Material handlers are manufactured in Bad Schönborn, Germany;
Concrete pavers and tracked conveyors are manufactured in Canton, South Dakota;
Front discharge concrete mixer trucks are manufactured in Fort Wayne, Indiana;
Pick and carry cranes are manufactured in Brisbane, Australia; and
Tracked conveyors are manufactured in Campsie, Northern Ireland.

We have North American distribution centers in Louisville, Kentucky and Southaven, Mississippi and service centers in Australia, Thailand, Turkey and Malaysia.

OTHER

We also design, manufacture, service, refurbish and market rough terrain and tower cranes, as well as their related components and replacement parts. Customers use rough terrain cranes to move materials and equipment on rugged or uneven terrain and tower cranes, often in urban areas where space is constrained and in long-term or high rise building sites, to lift construction material and place material at point of use. We market our rough terrain and tower crane products principally under the Terex® brand name.

Rough terrain and tower cranes have the following significant manufacturing operations:

Rough terrain cranes are manufactured in Crespellano, Italy; and
Tower cranes are manufactured in Fontanafredda, Italy.

We may assist customers in their rental, leasing and acquisition of our products through Terex Financial Services (“TFS”). TFS uses its equipment financing experience to provide financing solutions to our customers who purchase our equipment. TFS continually evaluates the level to which it provides direct customer financing versus utilizing third party funding to meet its business objectives.

In the United States and on a limited basis in China, TFS originates and services financing transactions directly with end-user customers, distributors and rental companies. Most of the transactions are fixed and floating rate loans; however, TFS also provides sales-type leases, operating leases and rentals. In the normal course of business, loans and leases are sold to third party financial institutions. Globally, TFS facilitates financing transactions directly between our customers and third party financial institutions. In addition, wholesale financing may be arranged between dealers and distributors who sell our equipment and financial institutions with which TFS has established relationships.

TFS continually monitors used equipment values of Terex equipment in the secondary market sales channels for all of our equipment categories. This provides a basis to project future values of equipment for the underwriting of leases or loans. These secondary market sales channels are also used for re-marketing any equipment which is returned at end of lease, or is repossessed in case of a customer default. When equipment is received, TFS uses the resale channel which maximizes proceeds and/or mitigates risk for Terex and our funding partners.


5



DISCONTINUED OPERATIONS
Mobile Cranes

On July 31, 2019, we completed the disposition of our Demag® mobile cranes business (“Demag”) to Tadano Ltd. and certain of its subsidiaries (“Tadano”). Products divested were our Demag® all terrain cranes and large lattice boom crawler cranes. During 2019, we also exited North American mobile crane product lines manufactured in our Oklahoma City facility. Our actions to sell Demag and cease manufacturing mobile crane product lines in our Oklahoma City facility represented a significant strategic shift in our business away from mobile cranes as these businesses constituted a significant part of our operations and financial results. As a result, we realigned certain operations that were formerly part of our Cranes segment. For financial reporting periods beginning on or after January 1, 2019, our utilities business has been consolidated within our AWP segment, our pick and carry cranes business has been consolidated within our MP segment and our rough terrain and tower cranes businesses have been consolidated within Corporate and Other. Prior period reportable segment information was adjusted to reflect the realignment of our operations.

Material Handling and Port Solutions (“MHPS”)

On January 4, 2017, we completed disposition of our MHPS business (the “Disposition”) to Konecranes Plc (“Konecranes”). The MHPS business sold constituted the entirety of one of our previous reportable segments and comprised two of our six previous reporting units, represented a significant portion of our revenues and assets, and is therefore accounted for as a discontinued operation for all periods presented. The Disposition represented a significant strategic shift in our business away from universal, process, mobile harbor and ship-to-shore cranes that had a major effect on our operating results.

See Note D – “Discontinued Operations and Assets and Liabilities Held for Sale” in the Notes to the Consolidated Financial Statements for further information regarding dispositions and our discontinued operations.

SUBSEQUENT EVENTS

For financial reporting periods beginning on or after January 1, 2020, our rough terrain and tower cranes operations included within Corporate and Other will be consolidated within our MP segment to align with the Company’s new management and reporting structure. Prior period reportable segment information will be adjusted in succeeding periods to reflect the realignment of our operations.

BUSINESS STRATEGY

Terex is a manufacturer of specialized capital equipment and related services. Our goal is to design, manufacture and market equipment and services that provide superior life-cycle return on invested capital to our customers (“Customer ROIC”). Customer ROIC is a key focus of our organization and is central to our ability to generate returns for investors.

We operate our business based on our value system, “The Terex Way.” The Terex Way values shape the culture of our Company and reflect our collective commitment to and understanding of what it means to be a part of Terex. The Terex Way is based on six key values:

Integrity: Integrity reflects honesty, ethics, transparency and accountability. We are committed to maintaining high ethical standards in all of our business dealings and we never sacrifice our integrity for profit.
Respect: Respect incorporates concern for safety, health, teamwork, diversity, inclusion and performance. We treat all our team members, customers and suppliers with respect and dignity.
Improvement: Improvement encompasses quality, problem-solving systems, a continuous improvement culture and collaboration. We continuously search for new and better ways of doing things, focusing on continuous improvement and the elimination of waste.
Servant Leadership: Servant leadership requires service to others, humility, authenticity and leading by example. We work to serve the needs of our customers, investors and team members.
Courage: Courage entails willingness to take risks, responsibility, action and empowerment. We have the courage to make a difference even when it is difficult.
Citizenship: Citizenship means social responsibility and environmental stewardship. We comply with all laws, respect all people’s values and cultures, and are good global, national and local citizens.


6



During 2016, Terex began implementing a strategy that has three principal elements:

1.
Focus the portfolio on businesses best positioned to generate returns above the cost of capital through the cycle.
2.
Simplify company structure, systems and footprint to improve efficiency and enhance global competitiveness.
3.
Execute to Win, driving process discipline, execution rigor, and accountability in core processes.

The “Focus” element of this strategy concentrated our business portfolio in product categories where we are among the market leaders. Where we were not among the market leaders our strategy has been to either divest those product lines or pursue a business strategy which we believe will enable us to become a market leader. Work related to this strategic theme involved review of all businesses in the portfolio from the perspectives of market attractiveness and competitive position. Several portfolio actions were taken as a result, including the sale of our former MHPS segment, sale of Demag, sale of certain of our former Construction segment product lines and exiting certain North American mobile crane product lines. Though the original objectives have been met, the principles on which the focus element was based will continue to be applied to our Company’s business portfolio. Businesses that do not lead in their markets or do not achieve reasonable return expectations will be reviewed. Meanwhile, businesses that do lead and do deliver attractive returns will be candidates for additional investment.

The “Simplify” element of the Terex strategy is centered on complexity reduction and cost management. Historically, Terex has grown through acquisitions and our businesses were generally operated autonomously. This resulted in a complex legal entity structure, multiple financial systems, and high organizational complexity. As part of our strategy, we have been addressing these issues and are implementing strategic initiatives to simplify our structure, footprint and processes. We have been working to flatten and streamline the organization. We have undertaken finance initiatives to simplify the way that we measure and manage the Company day-to-day. We also simplified the Company’s manufacturing footprint by reducing the number of production facilities, sharing facilities across businesses, and driving aggressive productivity improvement within the facilities we operate. During 2019, following the sale of Demag and exiting certain North American mobile crane product lines, Terex simplified its corporate structure and we are now a two segment company.

The third major theme of the Terex strategy is Execute to Win, which is a focus on three key management processes: talent development, strategy development and deployment, and operational excellence. Execute to Win represents a major change in the philosophy of our Company in terms of where and how work is done. Our goal is to become operationally excellent, balancing desire for business autonomy with the need for overall efficiency and relying on process excellence as a critical enabler of both business and company performance. We have been implementing three specific near-term transformational priorities in our Execute to Win initiatives.

1.
Lifecycle Solutions are comprehensive solutions that include our equipment and other offerings such as financing, spare parts, technical and repair services, operator training, and technology solutions that drive Customer ROIC.
2.
Commercial Excellence is about driving process discipline and execution in our commercial operations, such as sales, pricing, marketing, and sales support.
3.
Strategic Sourcing involves implementing a standard, Terex-wide strategic sourcing process that will help us leverage our spending, thereby achieving lower costs from suppliers.

Capital allocation is an important part of our overall strategy. Our capital allocation priorities (in order) have been:

1.
Maintain an optimal capital structure (~2.5 x average net debt to EBITDA over the cycle).
2.
Organic growth investments (product & service development, maintenance capex, geographic expansion).
3.
Restructuring investments (transformation initiatives, general & administrative cost reduction, footprint rationalization).
4.
Efficient return of capital to shareholders (dividends and share repurchases).

During 2019, we returned approximately $36 million to shareholders in the form of dividends and share repurchases.


7



PRODUCTS

AERIAL WORK PLATFORMS

AERIAL WORK PLATFORMS. Aerial work platform equipment positions workers and materials easily and quickly to elevated work areas, enhancing safety and productivity at height. These products have been developed as alternatives to scaffolding and ladders. We offer a variety of aerial lifts that are categorized into six product families: portable material lifts; portable aerial work platforms; trailer-mounted articulating booms; self-propelled articulating and self-propelled telescopic booms; and scissor lifts.

Portable material lifts are used primarily indoors in the construction, industrial and theatrical markets.
Portable aerial work platforms are used primarily indoors in a variety of markets to perform overhead maintenance.
Trailer-mounted articulating booms are used both indoors and outdoors. They provide versatile reach, and they have the ability to be towed between job sites.
Self-propelled articulating booms are primarily used in construction and industrial applications, both indoors and outdoors. They feature lifting versatility with up, out and over position capabilities to access difficult to reach overhead areas.
Self-propelled telescopic booms are used outdoors in commercial, industrial and institutional construction, as well as highway and bridge maintenance projects.
Scissor lifts are used in indoor and outdoor applications in a variety of construction, industrial, institutional and commercial settings.

UTILITY EQUIPMENT. Our utility products include digger derricks, auger drills and insulated aerial devices. These products are used by electric utilities, tree care companies, telecommunications and cable companies, and the related construction industries, as well as by government organizations.

Digger derricks are insulated products used to dig holes, hoist and set utility poles, as well as lift transformers and other materials at job sites near energized power lines. Auger drills are used to dig holes for utility poles or construction foundations requiring larger diameter holes in difficult soil conditions.
Insulated aerial devices are used to elevate workers and material to work areas at the top of utility poles near energized transmission and distribution lines and for trimming trees near energized electrical lines, as well as for miscellaneous purposes such as sign maintenance.

TELEHANDLERS. Telehandlers are used to move and place materials on residential and commercial construction sites and in the energy and infrastructure industries.

LIGHT TOWERS. Trailer-mounted light towers are used primarily to light work areas for construction, entertainment, emergency assistance and security during nighttime or low light applications.

SERVICES. We offer a range of services for aerial work platform and utility equipment consisting of inspections, preventative maintenance, general repairs, reconditioning, refurbishment, modernization and spare parts, as well as consultancy and training services. Our services are provided on our own products and on third-party products and related equipment.

MATERIALS PROCESSING

MATERIALS PROCESSING EQUIPMENT. Materials processing equipment is used in processing aggregate materials for building applications and is also used in the quarrying, mining, demolition, recycling, landscaping and biomass production industries. Our materials processing equipment includes crushers, screens and feeders, washing systems as well as wood and biomass chippers, grinders and windrow turners.

We manufacture a range of jaw, impactor (both horizontal and vertical shaft) and cone crushers, as well as base crushers for integration within mobile, modular and static plants.

Jaw crushers are used for crushing larger rock, primarily at the quarry face or on recycling duties. Applications include hard rock, sand and gravel and recycled materials. Cone crushers are used in secondary and tertiary applications to reduce a number of materials, including quarry rock and riverbed gravel.
Horizontal shaft impactors are primary and secondary crushers. They are typically applied to reduce soft to medium hard materials, as well as recycled materials. Vertical shaft impactors are secondary and tertiary crushers that reduce material utilizing various rotor configurations and are highly adaptable to any application.


8



Our screening and feeder equipment includes:

Heavy duty inclined and horizontal screens and feeders, which are used in low to high tonnage applications and are available as either stationary or heavy-duty mobile equipment. Screens are used in all phases of plant design from handling quarried material to fine screening. Dry screening is used to process materials such as sand, gravel, quarry rock, coal, ore, construction and demolition waste, soil, compost and wood chips.
Feeders are used to unload materials from hoppers and bulk material storage at controlled rates. They are available for applications ranging from primary feed hoppers to fine material bin unloading. Our range includes apron feeders, grizzly feeders and pan feeders.

Washing system products include mobile and static wash plants incorporating separation, washing, scrubbing, dewatering and stockpiling. We manufacture mobile and stationary rinsing screens, scrubbing systems, sand screw dewaterers, bucket-wheel dewaterers, water management systems, hydrocyclone plants for efficient silt extraction and a range of stockpiling conveyors. Washing systems operate in the aggregates, recycling, mining and industrial sands segments.

Wood processing, biomass and recycling equipment includes shredders, grinders, trommels, chippers, compost turners and specialty systems. This equipment is used in, among other things, recycling, wood energy, green waste/construction, demolition recycling industries and pulp and paper.

We manufacture a range of conveyors which include tracked mobile conveyors. Conveyors are mechanical machines used to transport and stockpile materials such as aggregates and minerals after processing.

SPECIALTY EQUIPMENT. We manufacture material handlers, concrete mixer trucks and concrete pavers.

Material handlers are designed for handling logs, scrap, recycling and other bulky materials with clamshell, magnet or grapple attachments.
Pick and carry cranes are designed for a wide variety of applications, including use at mine sites, large fabrication yards, building and construction sites and in machinery maintenance and installation. They combine high road speed with all-terrain capability.
Concrete mixer trucks are machines with a large revolving drum in which cement is mixed with other materials to make concrete. We offer models with custom chassis with configurations from three to seven axles.
Our concrete pavers are used to finish bridges, concrete streets, highways and airport surfaces.

OTHER

ROUGH TERRAIN CRANES. Rough terrain cranes move materials and equipment on rugged or uneven terrain and are often located on a single construction or work site for long periods. Rough terrain cranes cannot be driven on highways (other than in Italy) and accordingly must be transported by truck to the work site.

TOWER CRANES. Tower cranes are often used in urban areas where space is constrained and in long-term or high-rise building sites. Tower cranes lift construction material and place the material at the point of use. We produce the following types of tower cranes:

Self-erecting tower cranes unfold from sections and can be trailer mounted; certain larger models have a telescopic tower and folding jib. These cranes can be assembled on site in a few hours. Applications include residential and small commercial construction.
Hammerhead tower cranes have a tower and a horizontal jib assembled from sections. The tower extends above the jib into an A-frame to which suspension cables supporting the jib are attached. These cranes are assembled on-site in one to three days depending on height, and can increase in height with the project.
Flat top tower cranes have a tower and a horizontal jib assembled from sections. There is no A-frame above the jib, which is self-supporting and consists of reinforced jib sections. These cranes are assembled on-site in one to two days, and can increase in height with the project.
Luffing jib tower cranes have a tower and an angled jib assembled from sections. There is one A-frame above the jib to which suspension cables supporting the jib are attached. Unlike other tower cranes, there is no trolley to control linear movement of the load, which is accomplished by changing the jib angle. These cranes are assembled on-site in two to three days, and can increase in height with the project.

9




BACKLOG

Our backlog as of December 31, 2019 and 2018 was as follows:
 
December 31,
 
2019
 
2018
 
(in millions)
AWP
$
752.5

 
$
1,098.1

MP
295.4

 
512.6

Corporate and other
33.3

 
50.7

Total
$
1,081.2

 
$
1,661.4


We define backlog as firm orders that are expected to be filled within one year, although there can be no assurance that all such backlog orders will be filled within that time. Our backlog orders represent primarily new equipment orders. Parts orders are generally filled on an as-ordered basis.

Our management views backlog as one of many indicators of the performance of our business. Because many variables can cause changes in backlog and these changes may or may not be of any significance, we consequently view backlog as an important, but not necessarily determinative, indicator of future results.

Our overall backlog amounts at December 31, 2019 decreased $580.2 million from our backlog amounts at December 31, 2018, due to lower orders across all business segments.

AWP segment backlog at December 31, 2019 decreased approximately 31% from our backlog amounts at December 31, 2018. This decrease from the prior year was driven primarily by lower orders in North America and Europe and not all national account customers’ 2020 advance purchase orders were completed by December 31, 2019.

MP segment backlog at December 31, 2019 decreased approximately 42% from our backlog amounts at December 31, 2018. This decrease from the prior year was driven primarily by softening demand for crushing and screening products and material handlers, as well as dealers in the fourth quarter of 2018 ordering a much higher percentage of their 2019 full year equipment requirements due to extended lead times.

DISTRIBUTION

We distribute our products through a global network of dealers, rental companies, major accounts and direct sales to customers.

AERIAL WORK PLATFORMS

Our aerial work platform, telehandler and light tower products are distributed principally through a global network of rental companies and independent distributors. We employ sales representatives who service these channel partners from offices located throughout the world.

We sell utility equipment to the utility and municipal markets through a direct sales model in certain territories and through independent distributors in North America. Outside of North America, independent distributors sell our utility equipment directly to customers.

MATERIALS PROCESSING

We distribute our products through a global network of independent distributors, rental companies, major accounts and direct sales to customers.

OTHER

We market our crane products globally, optimizing assorted channel marketing systems, including a distribution network and a direct sales force. Distribution via a distributor network is often utilized in certain geographic areas, including the United States and Canada where we also sell directly to key accounts.


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RESEARCH, DEVELOPMENT AND ENGINEERING

We maintain engineering staff primarily at our manufacturing locations to conduct research, development and engineering for site-specific products. We have also established competency centers that support entire segments from single locations in certain fields such as control systems. Our businesses also assess global trends to understand future needs of our customers and help us decide which technologies to implement in future development projects. In addition, our engineering center in India supports our engineering teams worldwide through new product design, existing product design improvement and development of products for local markets. Continually monitoring our materials, manufacturing and engineering costs is essential to identify possible savings, then leverage those savings to improve our competitiveness and our customers’ return on investment. Our research, development and engineering expenses are primarily incurred to develop (i) additional applications and extensions of our existing product lines to meet customer needs, such as the telematics application to remotely monitor and manage our products, and take advantage of growth opportunities, and (ii) customer responsive enhancements and continuous cost improvements of existing products.

Our engineering focus mirrors the business priorities of delivering customer responsive solutions, growing in developing markets, complying with evolving regulatory standards in our global markets and applying our lean manufacturing principles by standardizing products, rationalizing components and strategically aligning with select global suppliers. Our engineering teams in China and India represent our commitment to engineering products for developing markets. They take equipment technology from the developed markets and translate it to appropriate technology for developing markets using the experience and cultural understanding of engineering teams native to those markets.

Product change driven by new regulations continues to be a focus of the Company, including the newest diesel engine emission reduction program introduced in Europe, known as Stage V, which is driving further engine emissions related product development.  Product innovation has become a core element of our growth strategy. We have re-invigorated and increased our emphasis on creating new models and meeting the demands of our customers.  Robust product development pipelines are in place, which we expect will continue to bring new, differentiated products to the market in the years ahead.  We have also focused on producing more cost-effective product solutions across product families, as well as increasing commonalities of components to ease manufacturing processes.

We will continue our commitment to appropriate levels of research, development and engineering spending in order to meet our customer needs, uphold competitive functionality of our products and maintain regulatory compliance in all the markets we serve.

MATERIALS

Information regarding principal materials, components and commodities and any risks associated with these items are included in Part II, Item 7A. – “Quantitative and Qualitative Disclosures about Market Risk – Commodities Risk.”


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COMPETITION

We face a competitive global manufacturing market for all of our products. We compete with other manufacturers based on many factors, particularly price, performance and product reliability. We generally operate under a best value strategy, where we attempt to offer our customers products designed to improve customers’ return on invested capital. However, in some instances, customers may prefer the pricing, performance or reliability aspects of a competitor’s product despite our product pricing or performance. We do not have a single competitor across our business segments. The following table shows the primary competitors for our products in the following categories:
BUSINESS SEGMENT
 
PRODUCTS
 
PRIMARY COMPETITORS
Aerial Work Platforms
 
Portable Material Lifts and Portable Aerial Work Platforms
 
Oshkosh (JLG), Vestil, Sumner and Wesco
 
 
 
 
 
 
 
Boom Lifts
 
Oshkosh (JLG), Haulotte, Linamar (Skyjack), Xtreme/Tanfield (Snorkel), JCB and Aichi
 
 
 
 
 
 
 
Scissor Lifts
 
Oshkosh (JLG), Linamar (Skyjack), Haulotte, Manitou and Xtreme/Tanfield (Snorkel), JCB and Dingli
 
 
 
 
 
 
 
Telehandlers
 
Oshkosh (JLG), Skytrak, Caterpillar and Lull brands), JCB, CNH, Merlo and Manitou (Gehl)
 
 
 
 
 
 
 
Trailer-mounted Light Towers
 
Allmand Bros., Generac, Wacker Neuson and Doosan
 
 
 
 
 
 
 
Utility Equipment
 
Altec and Time Manufacturing
 
 
 
 
 
Materials Processing
 
Crushing & Screening Equipment
 
Metso, Sandvik, Deere (Kleeman), Astec Industries, Keestrack, Rubble Master and Portafill
 
 
 
 
 
 
 
Washing Systems
 
CDE Global, Metso, McLanahan, Azfab, Phoenix Process Equipment, Matec, Weir/Trio and Superior
 
 
 
 
 
 
 
Wood Processing, Biomass and Recycling Equipment
 
Doppstadt, Komptech, Morbark, Vermeer, Astec Industries, Eggersmann, Jenz and Bandit
 
 
 
 
 
 
 
Conveyors
 
Superior, Astec/Telestack, Metso/McCloskey, Puzzulona Thor, Deere (Kleeman), Weir/Trio and Edge
 
 
 
 
 
 
 
Material Handlers
 
Sennebogen, Liebherr and Caterpillar
 
 
 
 
 
 
 
Concrete Pavers
 
Gomaco, Deere (Wirtgen), Power Curbers, Guntert & Zimmerman and Allen Equipment
 
 
 
 
 
 
 
Concrete Mixer Trucks
 
Oshkosh, Kimble and Continental Manufacturing and McNeilus
 
 
 
 
 
 
 
Pick and Carry Cranes
 
TIDD and Humma
 
 
 
 
 
Corporate and Other
 
Rough Terrain Cranes

 
Liebherr, Manitowoc (Grove), Tadano-Faun, Link-Belt, XCMG, Kato, Zoomlion and Sany
 
 
 
 
 
 
 
Tower Cranes
 
Liebherr, Manitowoc (Potain), Comansa, Jaso, Zoomlion, XCMG and Wolffkran

MAJOR CUSTOMERS

None of our customers individually accounted for more than 10% of our consolidated net sales in 2019. In 2019, our largest customer accounted for less than 6% of our consolidated net sales and our top ten customers in the aggregate accounted for less than 27% of our consolidated net sales. A material portion of AWP net sales are to national rental companies.

EMPLOYEES

As of December 31, 2019, we had approximately 9,500 employees; including approximately 4,700 employees in the U.S. Approximately one percent of our employees in the U.S. are represented by labor unions. Outside of the U.S., we enter into employment contracts and collective agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction. We generally consider our relations with our employees to be good.


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PATENTS, LICENSES AND TRADEMARKS

We use proprietary materials such as patents, trademarks, trade secrets and trade names in our operations and take actions to protect these rights.

We use several significant trademarks and trade names, most notably the Terex®, Genie®, Powerscreen® and Fuchs® trademarks. The other trademarks and trade names that we use include registered trademarks of Terex Corporation or its subsidiaries.

We have many patents that we use in connection with our operations and most of our products contain some proprietary technology. Many of these patents and related proprietary technology are important to the production of particular products; however, overall, our patents, taken together, are not material to our business or our overall financial results.

Currently, we are engaged in various legal proceedings with respect to intellectual property rights. While the outcome of these matters cannot be predicted with certainty, we believe the outcome of such matters will not have a material adverse effect, individually or in aggregate, on our business or operating performance. For more detail, see Item 3 – “Legal Proceedings.”

SAFETY AND ENVIRONMENTAL CONSIDERATIONS

As part of The Terex Way, we are committed to providing a safe and healthy environment for our team members, and strive to provide quality products that are safe to use and operate in an environmentally conscious and respectful manner.

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 and 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 lost time injuries and working towards a world-class level of safety practices in our industry.

We are dedicated to product safety when designing and manufacturing our equipment. Our equipment is designed to meet all applicable laws, regulations and industry standards for use in their markets. We continually incorporate safety improvements in our products. We maintain an internal product safety team that is dedicated to improving safety and investigating and resolving any product safety issues that may arise.

Use and operation of our equipment in an environmentally conscious manner is an important priority for us. We are aware of global discussions regarding climate change and the impact of greenhouse gas emissions on global warming. We are increasing our production of products that have lower greenhouse gas emissions in response to both regulatory initiatives and anticipated market demand trends. For example, the newest diesel engine emission reduction program introduced in Europe, known as Stage V, is driving further engine emissions related product development. Our segments also offer products that use plug-in electric hybrid technology to save fuel, reduce emissions and reduce noise in residential areas.

Increasing laws and regulations dealing with the environmental aspects of the products we manufacture can result in significant expenditures in designing and manufacturing new forms of equipment that satisfy such new laws and regulations. Compliance with laws and regulations regarding safety and the environment has required, and will continue to require, us to make expenditures. We currently do not expect that these expenditures will have a material adverse effect on our business or results of operations.

SEASONAL FACTORS

Terex is a globally diverse company, supporting multiple end uses.  Seasonality is a factor in some businesses, where annual purchasing patterns are impacted by the seasonality of downstream project spending.  Specifically, our businesses can experience stronger demand during the second quarter, as customers in the northern hemisphere make investments in time for the annual construction season (April to October). While we expect a normal historical sales pattern in 2020, our earnings generated in the first quarter of 2020 are projected to be less than the historical pattern due to lower revenues in AWP combined with unabsorbed overhead on production below retail demand.

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WORKING CAPITAL

Our businesses are working capital intensive and require funding to purchase production and replacement parts inventories, expenditures to repair, replace and upgrade existing facilities, as well as funding to finance receivables from customers and dealers. We have debt service requirements, including semi-annual interest payments on our outstanding notes and quarterly interest payments on our bank credit facility. We believe cash generated from operations, together with availability under our bank credit facility and cash on hand, provide us with adequate liquidity to meet our operating and debt service requirements. See 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. We will continue to pursue cash generation opportunities, including reducing costs and working capital, reviewing alternatives for under-utilized assets, and selectively investing in our businesses to promote growth opportunities.

AVAILABLE INFORMATION

We maintain a website at www.terex.com. We make available on our website under “Investor Relations” – “Financial Reporting”, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the SEC. References to our website in this report are provided as a convenience, and the information on our website is not, and shall not be deemed to be a part of this report or incorporated into any other filings we make with the SEC. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. In addition, we make available on our website under “Investor Relations” – “Governance”, free of charge, our Audit Committee Charter, Compensation Committee Charter, Governance and Nominating Committee Charter, Corporate Governance Guidelines and Code of Ethics and Conduct. In addition, the foregoing information is available in print, without charge, to any stockholder who requests these materials from us.


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ITEM 1A.    RISK FACTORS

You should carefully consider the following risks, together with the cautionary statement under the caption “Forward-Looking Information” above and the other information included in this report. The risks described below are not the only ones we face. Additional risks that are currently unknown to us or that we currently consider immaterial may also impair our business or adversely affect our financial condition or results of operations. If any of the following risks actually occurs, our business, financial condition or results of operation could be adversely affected.

Our business is affected by the cyclical nature of markets we serve.

Demand for our products tends to be cyclical and is affected by the general strength of the economies in which we sell our products, prevailing interest rates, residential and non-residential construction spending, capital expenditure allocations of our customers and other factors. We currently expect market conditions to remain challenged in 2020 and expect continued geopolitical and economic uncertainty. If the global economy weakens or customers’ perceptions concerning the timing of the economic cycle change, it may cause customers to continue to forgo or postpone new purchases in favor of reducing their existing fleets or refurbishing or repairing existing machinery.

Our sales depend in part upon our customers’ replacement or repair cycles, which are impacted in part by historical purchase levels. In addition, if our customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable owed to us. If global economic conditions are weaker than our market expectations or the global economic weakness of the past were to recur, then there could be an adverse effect on our net sales, financial condition, profitability and/or cash flow which could result in the need for us to record impairments.

Changes in import/export regulatory regimes, the imposition of tariffs and escalation of global trade conflicts could continue to negatively impact our business.

The current U.S. administration continues to express strong concerns about imports from countries that it perceives as engaging in unfair trade practices. The U.S. government has imposed tariffs on certain foreign goods from a variety of countries and regions and has raised the possibility of imposing additional tariff increases or expanding the tariffs to capture other types of goods. In response, many of these foreign governments have imposed retaliatory tariffs on goods that their countries import from the U.S. Changes in U.S. trade policy have and may continue to result in one or more foreign governments adopting responsive trade policies that make it more difficult or costly for us to do business in or import our products from those countries. For example, tariffs on certain Chinese origin goods impact the cost of material and machines we import directly from our manufacturing operations in China, as well as the cost of material and components imported on our behalf by suppliers. The indirect impact of inflationary pressure on costs throughout the supply chain and the direct impact, for example, on costs for machines we import from our manufacturing operations in China, is leading to higher input costs and lower margins on certain products we sell. In addition, tariffs imposed by the Chinese government on U.S. imports have made the cost of some of our products more expensive for our Chinese customers.

We cannot predict the extent to which the U.S. or other countries will impose new or additional quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. Tariffs and the possibility of an escalation or further developments of current trade conflicts, particularly between the U.S. and China, could continue to negatively impact global trade and economic conditions in many of the regions where we do business. This could result in continued significant increases in our material and component costs and the cost of machinery imported directly from our manufacturing operations in China. In addition, it may adversely impact demand for our products in China and elsewhere.

While we have been able to mitigate a portion of the effects of recent tariffs through the U.S. government’s duty draw back mechanism and from tariff exclusions, there can be no assurance that any existing tariff exclusions that have been granted will be extended beyond their expiration dates. In addition, if we are unable to recover a substantial portion of increased raw material, component or machinery costs either through duty draw-back, tariff exclusions or from our customers and suppliers this could have an adverse effect on our business or results of operations.

15




Our financial results could be adversely impacted by the U.K.’s departure from the E.U.

Uncertainty related to the withdrawal of the U.K. from the E.U. commonly referred to as “Brexit,” could negatively impact the global economy, particularly many important European economies. While the U.K. officially left the E.U. on January 31, 2020, the U.K. has entered into a transition period during which period of time the U.K.’s trading relationship with the E.U. will remain largely the same while the U.K. negotiates trade and other agreements with the E.U. and other countries. The terms and eventual date of any agreement between the U.K and E.U. remain highly uncertain. Given the lack of comparable precedent, it is not certain what financial, trade and legal implications the withdrawal of the U.K. from the E.U. will ultimately have on us, particularly for our MP segment which has significant manufacturing facilities in Northern Ireland. Depending on the agreements negotiated by the U.K. with the E.U. and other countries, we could become subject to, among other things, export tariffs and regulatory restrictions that could increase transaction costs, reduce our ability to hire or retain employees in Northern Ireland, reduce access to supplies and materials, cause shipping delays because of the need for new customs inspections and procedures and reduce demand or access to customers in international markets, all of which would impair our ability to conduct our operations as they have been conducted historically. While we continue to closely monitor negotiations and take steps to identify and implement potential countermeasures for our businesses that are likely to be affected, these and other potential implications of Brexit could adversely affect our business, financial condition or results of operation.

Changes affecting the availability of LIBOR may have consequences on us that cannot yet reasonably be predicted.

We currently have outstanding variable rate debt with interest rates based on LIBOR. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past and LIBOR may ultimately cease to exist after 2021. LIBOR reforms could result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates. Although we continue to monitor the status and discussions regarding LIBOR, at this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates on our Company. It is possible this change may cause our interest expense to increase and our available cash flow and /or financial condition to be adversely affected.

We have a significant amount of debt outstanding and must comply with restrictive covenants in our debt agreements.

Our total debt at December 31, 2019 was approximately $1.2 billion. Our credit agreement and other debt agreements contain financial and restrictive covenants that may limit our ability to, among other things, borrow additional funds or take advantage of business opportunities. As of December 31, 2019, we are in compliance with the financial covenants. However, increases in our debt, increases in our interest expense or decreases in our earnings could cause us to fail to comply with these financial covenants. Failing to comply with such covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have a material adverse effect on our financial position, results of operations and debt service capability.

Our level of debt and the financial and restrictive covenants contained in our credit agreement could have important consequences on our financial position and results of operations, including increasing our vulnerability to increases in interest rates because debt under our credit agreement bears interest at variable rates. In addition, our credit agreement indebtedness may use LIBOR as a benchmark for establishing our interest rate. As discussed above, LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform which may cause LIBOR to perform differently than in the past or to be replaced entirely. Consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our credit agreement indebtedness.

We may be unable to generate sufficient cash flow to service our debt obligations.

Servicing our debt requires a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control and our business may not generate sufficient cash flow from operating activities. Our ability to make payments on, and refinance, our debt and fund planned capital expenditures will depend on our ability to generate cash in the future. To some extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Lower sales, or uncollectible receivables, generally will reduce our cash flow.

We cannot assure our business will generate sufficient cash flow from operations, or future borrowings will be available to us under our credit facility or otherwise, in an amount sufficient to fund our liquidity needs.


16



If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

Our access to capital markets and borrowing capacity could be limited in certain circumstances.

Our access to capital markets to raise funds through the sale of equity or debt securities is subject to various factors, including general economic and/or financial market conditions. Significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce our earnings and cash flows. If our consolidated cash flow coverage ratio is less than 2.0 to 1.0, we are subject to significant restrictions on the amount of indebtedness we can incur. Although our cash flow coverage ratio was greater than 2.0 to 1.0 at the end of 2019, there can be no assurance this will continue to occur.

Our access to debt financing at competitive risk-based interest rates is partly a function of our credit ratings. A downgrade to our credit ratings could increase our interest rates, could limit our access to public debt markets, could limit the institutions willing to provide us credit facilities, and could make any future credit facilities or credit facility amendments more costly and/or difficult to obtain.

Although we believe the banks participating in our credit facility have adequate capital and resources, we can provide no assurance that all of these banks will continue to operate as a going concern in the future. If any of the banks in our lending group were to fail or be unwilling to renew our credit facility at or prior to its expiration, it is possible that the borrowing capacity under our current or any future credit facility would be reduced. If the availability under our credit facility was reduced significantly, we could be required to obtain capital from alternate sources to finance our capital needs. Our options for addressing such capital constraints would include, but not be limited to (i) obtaining commitments from the remaining banks in the lending group or from new banks to fund increased amounts under the terms of our credit facility, or (ii) accessing the public capital markets. If it becomes necessary to access additional capital, it is possible that any such alternatives in the current market could be on terms less favorable than under our existing credit facility terms, which could have a negative impact on our consolidated financial position, results of operations or cash flows.

Our business is sensitive to government spending.

Many of our customers depend substantially on government funding of highway construction, maintenance and other infrastructure projects. In addition, we sell products to governments and government agencies in the U.S. and other nations. Policies of governments attempting to address local deficit or structural economic issues could have a material impact on our customers and markets. Any decrease or delay in government funding of highway construction and maintenance, other infrastructure projects and overall government spending could cause our revenues and profits to decrease.

We operate in a highly competitive industry.

Our industry is highly competitive. To compete successfully, our products must excel in terms of quality, reliability, productivity, price, features, ease of use, safety and comfort, and we must provide excellent customer service. The greater financial resources of certain of our competitors may put us at a competitive disadvantage. Low-cost competition from China and other developing markets could also result in decreased demand for our products. If competition in our industry intensifies or if our current competitors lower their prices for competing products, we may lose sales or be required to lower the prices we charge for our products. If we are unable to provide continued technological improvements in our equipment that meet our customers’ expectations, or the industry’s expectations, the demand for our equipment could be substantially adversely affected. Our ability to match new product offerings to diverse global customers’ anticipated preferences for different types and sizes of equipment and various equipment features and functionality, at affordable prices, is critical to our success. This requires a thorough understanding of our existing and potential customers on a global basis, particularly in developing markets, including China, India, Brazil and the Middle East. Failure to compete effectively could result in lower revenues from our products and services, lower gross margins or cause us to lose market share.

We rely on key management.

We rely on the management and leadership skills of our senior management team, particularly those of the Chief Executive Officer. The loss of the services of key employees or senior officers, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations.

17




Some of our customers rely on financing with third parties to purchase our products.

We rely on sales of our products to generate cash from operations. Significant portions of our sales are financed by third party finance companies on behalf of our customers. The availability of financing by third parties is affected by general economic conditions, credit worthiness of our customers and estimated residual value of our equipment. Deterioration in credit quality of our customers or estimated residual value of our equipment could negatively impact the ability of our customers to obtain resources they need to purchase our equipment. There can be no assurance third party finance companies will continue to extend credit to our customers.

Some of our customers have been unable to obtain the credit they need to buy our equipment. As a result, some of our customers may need to cancel existing orders and some may be compelled to sell their equipment at less than fair value to raise cash, which could have a negative impact on residual values of our equipment. These economic conditions could have a material adverse effect on demand for our products and on our financial condition and operating results.

We are exposed to losses from providing financing and credit support to some of our customers.

We assist customers in their rental, leasing and acquisition of our products through TFS. We provide financing for some of our customers, primarily in the U.S., to acquire and use our equipment through loans, sales-type leases, and operating leases. TFS enters into these financing agreements with the intent either to hold the financing until maturity or to sell the financing to a third party within a short time period. Until such financing obligations are satisfied through either customer payments or a third party sale, we retain the risks associated with such customer financing. Our results could be adversely affected if such customers default on their contractual obligations to us, if residual values of such equipment on these transactions decline below original estimated values or we are unable to sell the financing receivable to a third party.

As described above, our customers, from time to time, may fund acquisition of our equipment through third-party finance companies. In certain instances, we may provide credit guarantees or residual value guarantees. With these guarantees, we must assess the probability of losses or non-performance in ways similar to the evaluation of accounts receivable, including consideration of a customer’s payment history, leverage, availability of third party financing, political and currency exchange risks, and other factors. Many of these factors, including assessment of a customer’s ability to pay, are influenced by economic and market factors that cannot be predicted with certainty. We establish reserves based upon our analysis of the current quality and financial position of our customers, past payment experience and collateral values. In circumstances where we believe it is probable that a specific customer will have difficulty meeting its financial obligations, a specific reserve is recorded to recognize a liability for a guarantee we expect to pay, taking into account any amounts that we would anticipate realizing if we are forced to repossess the equipment that supports the customer’s financial obligations to us. During periods of economic weakness, collateral underlying our guarantees of indebtedness of customers or receivables can decline sharply, thereby increasing our exposure to losses. In the future, we may incur losses in excess of our recorded reserves if the financial condition of our customers were to deteriorate further or the full amount of any anticipated proceeds from the sale of the collateral supporting our customers’ financial obligations is not realized. Historically, losses related to guarantees have been immaterial; however, there can be no assurance that our historical experience with respect to guarantees will be indicative of future results.

We may experience losses in excess of our recorded reserves for trade receivables.

As of December 31, 2019, we had trade receivables of $401.9 million. We evaluate the collectability of open accounts, finance receivables and note receivables based on a combination of factors and establish reserves based on our estimates of probable losses. In circumstances where we believe it is probable that a specific customer will have difficulty meeting its financial obligations, a specific reserve is recorded to reduce the net recognized receivable to the amount we expect to recover. We also establish additional reserves based upon our analysis of the quality of the current receivables, the current financial position of our customers and past collections experience. An unexpected change in customer financial condition or future economic uncertainty could result in additional requirements for specific reserves, which could have a negative impact on our consolidated financial position.


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We are dependent upon third-party suppliers, making us vulnerable to supply shortages and price increases.

We obtain materials and manufactured components from third-party suppliers. In the absence of labor strikes or other unusual circumstances, substantially all materials and components are normally available from multiple suppliers. However, certain of our businesses receive materials and components from a single source supplier, although alternative suppliers of such materials are generally available. Delays in our suppliers’ abilities, especially any sole suppliers for a particular business, to provide us with necessary materials and components may delay production at a number of our manufacturing locations, or may require us to seek alternative supply sources. Delays in obtaining supplies may result from a number of factors affecting our suppliers, including capacity constraints, trade barriers, labor disputes, suppliers’ impaired financial condition, suppliers’ allocations to other purchasers, weather emergencies or acts of war or terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

Principal materials and components used in our various manufacturing processes include steel, castings, engines, tires, hydraulics, cylinders, drive trains, electric controls and motors, and a variety of other commodities and fabricated or manufactured items. Increases in the cost of these materials and components may affect our financial performance. If we are not able to recover increased raw material or component costs either from duty draw-back credits or our customers, our margins could be adversely affected.

In addition, we purchase material and services from our suppliers on terms extended based on our overall credit rating. Deterioration in our credit rating may impact suppliers’ willingness to extend terms and in turn increase the cash requirements of our business.

We are subject to currency fluctuations.

Our products are sold in over 100 countries around the world. The reporting currency for our consolidated financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses, revenues and earnings are denominated in other countries’ currencies, including the Euro, British Pound and Australian dollar. Those assets, liabilities, expenses, revenues and earnings are translated into U.S. dollars at the applicable exchange rates to prepare our consolidated financial statements. Therefore, increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in our consolidated financial statements, even if their value remains unchanged in their original currency. Due to the continued volatility of foreign currency exchange rates to the U.S. dollar, fluctuations in currency exchange rates may have an impact on the accuracy of our financial guidance. Such fluctuations in foreign currency rates relative to the U.S. dollar may cause our actual results to differ materially from those anticipated in our guidance and have a material adverse effect on our business or results of operations. We also note that Brexit may negatively impact the value of the British Pound as compared to the U.S. dollar and other currencies.

We may buy protecting or offsetting positions (known as “hedges”) in certain currencies to reduce the risk of an adverse currency exchange movement. We have not engaged in any speculative hedging activities. Although we partially hedge our revenues and costs, currency fluctuations may impact our financial performance in the future.

We are exposed to political, economic and other risks that arise from operating a multinational business.

Our operations are subject to a number of potential risks. Such risks principally include:

trade protection measures and currency exchange controls;
labor unrest;
global and regional economic conditions;
political instability;
terrorist activities and the U.S. and international response thereto;
restrictions on the transfer of funds into or out of a country;
export duties and quotas;
domestic and foreign customs and tariffs;
current and changing regulatory environments;
difficulties protecting our intellectual property;
transportation delays and interruptions;
costs and difficulties in integrating, staffing and managing international operations, especially in developing markets such as China, India, Brazil and the Middle East;
difficulty in obtaining distribution support;
natural disasters; and
current and changing tax laws.


19



In addition, many of the nations in which we operate have developing legal and economic systems adding greater uncertainty to our operations in those countries than would be expected in North America and Western Europe. These factors may have an adverse effect on our international operations in the future.

We must comply with all applicable laws, including the Foreign Corrupt Practices Act (“FCPA”) and other laws that prohibit engaging in corruption for the purpose of obtaining or retaining business. These anti-corruption laws prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence government officials or private individuals for the purpose of obtaining or retaining a business advantage regardless of whether those practices are legal or culturally expected in a particular jurisdiction. Our global activities and distribution model are subject to risk of corruption by our employees and in addition, our sales agents, distributors, dealers and other third parties that transact Terex business particularly because these parties are generally not subject to our control. We have an internal policy that expressly prohibits engaging in any commercial bribery and public corruption, including facilitation payments. We conduct corruption risk assessments, we have implemented training programs for our employees with respect to the Company’s prohibition against public corruption and commercial bribery, and we perform reputational due diligence on certain third parties that transact Terex business. In addition, we conduct transaction testing to assess compliance with our internal anti-corruption policy and procedures. However, we cannot assure you that our policies, procedures and programs always will protect us from reckless or criminal acts committed by our employees or third parties that transact Terex business. We have a zero tolerance policy for violations of anti-corruption laws and our anti-corruption policy. In the event we believe or have reason to believe our employees, agents, representatives, dealers or distributors or other third parties that transact Terex business have or may have violated our anti-corruption policy or applicable anti-corruption laws, we investigate or have outside counsel investigate relevant facts and circumstances. Although we have a compliance program in place designed to reduce the likelihood of potential violations of such laws, violations of anti-corruption laws could result in significant fines, criminal sanctions against us or our employees, prohibitions on the conduct of our business including our business with the U.S. government, an adverse effect on our reputation, business and results of operations and financial condition and a violation of our injunction or cease and desist order with the SEC. See Risk Factor entitled, “We must comply with an injunction and related obligations imposed by the SEC.”

The legislative and regulatory framework for privacy and data protection issues worldwide is also rapidly evolving and is likely to remain uncertain for the foreseeable future. We collect and transfer personal data as part of our business processes and activities. This data is subject to a variety of U.S., E.U. and other international laws and regulations, including oversight by various regulatory or other governmental bodies. Any inability, or perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations (including at newly acquired companies) could result in additional cost and liability to us or company officials, damage our reputation, inhibit sales, and otherwise adversely affect our business.

We continue to focus on operational improvement in developing markets such as China, India, Brazil and the Middle East. These efforts will require us to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist. Any significant difficulties in continuing to improve or expand our operations in developing markets may divert management’s attention from our existing operations and require a greater level of resources than we plan to commit.

Expansion into developing markets may require modification of products to meet local requirements or preferences.  Modification to the design of our products to meet local requirements and preferences may take longer or be more costly than we anticipate and could have a material adverse effect on our ability to achieve international sales growth.

A material disruption to one of our significant manufacturing plants could adversely affect our ability to generate revenue.

We produce most of our machines for each product type at one manufacturing facility. If operations at a significant facility were disrupted as a result of equipment failures, natural disasters, work stoppages, power outages or other reasons, our business, financial conditions and results of operations could be adversely affected. Interruptions in production could increase costs and delay delivery of units in production. Production capacity limits could cause us to reduce or delay sales efforts until production capacity is available.

We may be adversely impacted by work stoppages and other labor matters.

As of December 31, 2019, we employed approximately 9,500 people worldwide in our continuing operations businesses. While we have no reason to believe that we will be impacted by work stoppages or other labor matters, we cannot assure that future issues with our team members or labor unions will be resolved favorably or that we will not encounter future strikes, further unionization efforts or other types of conflicts with labor unions or our team members. Any of these factors may have an adverse effect on us or may limit our flexibility in dealing with our workforce.


20



Compliance with environmental regulations could be costly and require us to make significant expenditures.

We generate hazardous and nonhazardous wastes in the normal course of our manufacturing operations. As a result, we are subject to a wide range of environmental laws and regulations. These laws and regulations govern actions that may have adverse environmental effects and require compliance with certain practices when handling and disposing of hazardous and nonhazardous wastes. Some environmental laws impose strict, retroactive and joint and several liability for the remediation of the release of hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Failure to comply with environmental laws could expose us to substantial fines or penalties and to civil and criminal liability. These liabilities, sanctions, damages and remediation efforts related to any non-compliance with such laws and regulations could have a material adverse effect on our business or results of operations. No such incidents have occurred which required us to pay material amounts to comply with such laws and regulations.

In addition, increasing laws and regulations dealing with environmental aspects of the products we manufacture can result in significant expenditures in designing and manufacturing new forms of equipment that satisfy such new laws and regulations. In particular, climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. While additional regulation of emissions in the future appears likely, it is too early to predict how new regulations would ultimately affect our business, operations or financial results, although government policies limiting greenhouse gas emissions of our products will likely require increased compliance expenditures on our part.

While plans are in place to continue to comply with the phase-in of European Stage V regulations, we are dependent on our engine suppliers to continue to timely deliver engines which meet applicable emissions regulations. A failure to timely receive appropriate engines from our suppliers could result in our being placed in uncompetitive positions or without finished product when needed. Compliance with environmental laws and regulations has required, and will continue to require, us to make expenditures, however we do not expect these expenditures to have a material adverse effect on our business or results of operations.

There is also increased focus, including by governmental and non-governmental organizations, investors and other stakeholders, on these and other sustainability matters. Maintaining a strong reputation with customers, investors, stakeholders and trade partners is critical to the success of our business. We devote significant time and resources to programs that are consistent with our corporate values and are designed to protect and preserve our reputation as a good corporate citizen. Any perception (whether or not valid) of our failure to act responsibly with respect to the environment or to effectively respond to new, or changes in, legal or regulatory requirements concerning climate change or other sustainability concerns could adversely affect our business and reputation.

We face litigation and product liability claims and other liabilities.

In our lines of business, numerous suits have been filed alleging damages for accidents that have occurred during use or operation of our products. We are self-insured, up to certain limits, for these product liability exposures, as well as for certain exposures related to general, workers’ compensation and automobile liability. We obtain insurance coverage for catastrophic losses as well as those risks where insurance is required by law or contract. We do not believe that the outcome of such matters will have a material adverse effect on our consolidated financial position; however, any significant liabilities not covered by insurance could have an adverse effect on our financial condition.

We must comply with an injunction and related obligations imposed by the SEC.

We and our directors, officers and employees are required to comply at all times with the terms of a 2009 settlement with the SEC that includes an injunction barring us from committing or aiding and abetting any future violations of the anti-fraud, books and records, reporting and internal control provisions of the federal securities laws and related SEC rules. In addition, regarding a separate and unrelated SEC matter, we consented to the entry of an administrative cease and desist order prohibiting future violations of certain provisions of the federal securities laws. As a result, if we commit or aid or abet any future violations of the anti-fraud, books and records, reporting and internal control provisions of the federal securities laws and related SEC rules, we are likely to suffer severe penalties, financial and otherwise, that could have a material negative impact on our business and results of operations.


21



We may be adversely affected by disruption in, or breach in security of, our information technology systems.

We rely on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners), and to manage or support a variety of critical business processes and activities. As technology continues to evolve, we anticipate that we will collect and store even more data in the future and that our systems will increasingly use remote communication. We continuously seek to maintain a robust program of information security and controls, but these systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. A failure of or breach in information technology security, particularly through malicious cyber-attacks which are increasing in both frequency and sophistication by both state and non-state actors, could expose us and our customers, distributors and suppliers to risks of misuse of information or systems, the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operations disruptions. In addition, such breaches in security could result in misstated financial information, regulatory action, fines and litigation, and other potential liabilities, as well as the costs and operational consequences of implementing further data protection measures, each of which could have a material adverse effect on our business or results of operations.

The current cyber threat environment indicates increased risk for all companies. In addition, we could be impacted by cyber threats, disruptions or vulnerabilities of our customers and suppliers. Like other global companies, we have experienced cyber threats and incidents, although none have had a material adverse effect on our business or financial condition. Our information security efforts include programs designed to address security governance, identification and protection of critical assets, insider risk, third-party risk and cyber defense operations. While these measures are designed to reduce the risk of a breach or failure of our information technology systems, no security measures or countermeasures can guarantee that the Company will not experience a significant information security incident in the future.

The timing and amount of benefits from the Company’s Execute to Win initiatives may not be as expected and the Company’s financial results could be adversely impacted.

We have continued to implement our Focus, Simplify and Execute to Win initiatives as part of our strategy to deliver long-term growth and earnings to our shareholders. The Execute to Win component of this strategy has three priority areas: Lifecycle Solutions, Commercial Excellence and Strategic Sourcing. We made significant investments in each of these priority areas. However, we cannot provide any assurance that we will be able to realize the anticipated benefits of these initiatives. Although Execute to Win is expected to improve future operating margins and revenue growth, if the Company is unable to achieve expected benefits from one or more of these three initiatives or is unable to complete these initiatives without material disruption to our businesses, the timing and amount of benefits may not be as expected and could adversely impact the Company’s competitive position, financial condition, profitability and/or cash flows.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

Not applicable.


22



ITEM 2.
PROPERTIES

As of December 31, 2019, our principal manufacturing, warehouse, service and office facilities comprised a total of approximately 7 million square feet of space worldwide. The following table outlines the principal manufacturing, warehouse, service and office facilities owned or leased (as indicated below) by the Company and its subsidiaries in relation to our continuing businesses:
BUSINESS SEGMENT
 
FACILITY LOCATION
 
BUSINESS SEGMENT
 
FACILITY LOCATION
 
 
 
 
 
 
 
Corporate/Other
 
Westport, Connecticut (1)
 
MP
 
Louisville, Kentucky
 
 
Schaffhausen, Switzerland (1)
 
 
 
Durand, Michigan
 
 
Crespellano, Italy
 
 
 
Coalville, England
 
 
Fontanafredda, Italy
 
 
 
Hosur, India
AWP
 
Rock Hill, South Carolina
 
 
 
Subang Jaya, Malaysia (1)
 
 
Moses Lake, Washington (1)
 
 
 
Ballymoney, Northern Ireland
 
 
North Bend, Washington (1)
 
 
 
Campsie, Northern Ireland
 
 
Redmond, Washington (1)
 
 
 
Dungannon, Northern Ireland (1)
 
 
Changzhou, China
 
 
 
Omagh, Northern Ireland (1)
 
 
Umbertide, Italy
 
 
 
Newton, New Hampshire
 
 
Darra, Australia (1)
 
 
 
Canton, South Dakota
 
 
Watertown, South Dakota (1)
 
 
 
Fort Wayne, Indiana
 
 
Huron, South Dakota
 
 
 
Bad Schönborn, Germany
 
 
Betim, Brazil (1) (2)
 
 
 
Brisbane, Australia (1)
 
 
 
 
Multiple Business Segments
 
Southaven, Mississippi (1)
 
 
 
 
 
 
Oklahoma City, Oklahoma

(1) 
These facilities are either partially or fully leased or subleased.
(2) Plans have been announced to exit the business associated with this facility.

We also have numerous owned or leased locations for new machine and parts sales and distribution and rebuilding of components located worldwide.

We believe the properties listed above are suitable and adequate for our use. From time to time, we may determine that certain of our properties exceed our requirements. Such properties may be sold, leased or utilized in another manner.


ITEM 3.
LEGAL PROCEEDINGS

We are involved in various legal proceedings, including product liability, general liability, workers’ compensation liability, employment, commercial and intellectual property litigation, which have arisen in the normal course of operations. We are insured for product liability, general liability, workers’ compensation, employer’s liability, property damage and other insurable risk required by law or contract with retained liability to us or deductibles. We believe the outcome of such matters, individually and in aggregate, will not have a material adverse effect on our consolidated financial position. However, outcomes of lawsuits cannot be predicted and, if determined adversely, could ultimately result in us incurring significant liabilities which could have a material adverse effect on our results of operations.

For information concerning litigation and other contingencies and uncertainties, including our proceedings involving a claim in Brazil regarding payment of ICMS tax (Brazilian state value-added tax), see Note O – “Litigation and Contingencies,” in the Notes to the Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURE

Not applicable.

23



PART II


ITEM 5.
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $.01 per share (“Common Stock”) is traded on the New York Stock Exchange (“NYSE”) under the symbol “TEX.” Certain of our debt agreements contain restrictions as to the payment of cash dividends to stockholders. In addition, Delaware law limits payment of dividends. In February 2020, Terex’s Board of Directors declared a dividend of $0.12 per share to be paid on March 19, 2020. Any additional payments of dividends will depend upon our financial condition, capital requirements and earnings, as well as other factors that the Board of Directors may deem relevant.

As of February 11, 2020, there were 582 stockholders of record of our Common Stock.

Performance Graph

The following stock performance graph is intended to show our stock performance compared with that of comparable companies. The stock performance graph shows the change in market value of $100 invested in our Common Stock, the Standard & Poor’s 500 Stock Index and the Peer Group (as defined below) for the period commencing December 31, 2014 through December 31, 2019. The cumulative total stockholder return assumes dividends are reinvested. The stockholder return shown on the graph below is not indicative of future performance. The companies in the Peer Group are weighted by market capitalization.

The Peer Group consists of the following companies that are in our same industry, of comparable revenue size to us and/or other manufacturing companies: AGCO Corporation, Carlisle Companies Inc., Crane Company, Dana Incorporated, Dover Corporation, Flowserve Corporation, Hubbell Inc., Lennox International Inc., The Manitowoc Company, Inc., Meritor Inc., Navistar International Corporation, Oshkosh Corporation, Pentair Ltd., Rockwell Automation, Inc., Roper Technologies Inc., Timken Company, Trinity Industries Inc. and Westinghouse Air Brake Technologies Corporation.


24



A2019CUMRETURNCHARTA02.JPG
 
12/14

12/15

12/16

12/17

12/18

12/19

Terex Corporation
100.00

66.76

115.69

178.49

103.14

113.13

S&P 500
100.00

101.38

113.51

138.29

132.23

173.86

Peer Group
100.00

89.79

111.88

147.27

124.31

169.63

Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.

Purchases of Equity Securities

The following table provides information about our purchases during the quarter ended December 31, 2019 of our common stock that is registered by us pursuant to the Exchange Act.
 
 
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares that May Yet be Purchased
Under the Plans or Programs (in thousands) (2)
October 1, 2019 – October 31, 2019
 
2,498
 
$23.99
 
 
$200,000
November 1, 2019 – November 30, 2019
 
140,156
 
$27.69
 
138,275
 
$196,176
December 1, 2019 – December 31, 2019
 
41,625
 
$28.08
 
37,000
 
$195,146
Total
 
184,279
 
$27.72
 
175,275
 
$195,146
(1) 
Amount includes shares of common stock purchased to satisfy requirements under the Company’s deferred compensation obligations to employees.
(2) 
In July 2018, our Board of Directors authorized and the Company publicly announced the repurchase of up to an additional $300 million of the Company’s outstanding common shares.

25



ITEM 6.
SELECTED FINANCIAL DATA

FIVE-YEAR SELECTED FINANCIAL DATA

The following table summarizes our selected financial data and should be read in conjunction with the more detailed Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations. This selected financial data includes comparative income statement data whose presentation has been retrospectively adjusted for the effects of discontinued operations. All periods are presented on a consistent basis.

(in millions, except per share amounts and employees)
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
 
2019
 
2018
 
2017
 
2016
 
2015
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
Net sales
$
4,353.1

 
$
4,517.2

 
$
3,793.7

 
$
3,808.5

 
$
4,141.3

Income (loss) from operations
335.0

 
412.5

 
228.2

 
124.9

 
300.4

Income (loss) from continuing operations
209.7

 
241.7

 
111.0

 
47.8

 
108.9

Income (loss) from discontinued operations – net of tax
(155.4
)
 
(130.4
)
 
(49.6
)
 
(226.8
)
 
36.7

Gain (loss) on disposition of discontinued operations – net of tax
0.1

 
2.4

 
67.3

 
3.5

 
3.4

Net income (loss) attributable to common stockholders
54.4

 
113.7

 
128.7

 
(176.1
)
 
145.9

Per Common and Common Equivalent Share:
 
 
 
 
 
 
 
 
 
Basic attributable to common stockholders
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
2.95

 
$
3.21

 
$
1.20

 
$
0.45

 
$
1.02

Income (loss) from discontinued operations – net of tax
(2.18
)
 
(1.73
)
 
(0.53
)
 
(2.11
)
 
0.31

Gain (loss) on disposition of discontinued operations – net of tax

 
0.03

 
0.72

 
0.03

 
0.03

Net income (loss) attributable to common stockholders
0.77

 
1.51

 
1.39

 
(1.63
)
 
1.36

Diluted attributable to common stockholders
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
2.92

 
$
3.14

 
$
1.17

 
$
0.45

 
$
1.00

Income (loss) from discontinued operations – net of tax
(2.16
)
 
(1.69
)
 
(0.52
)
 
(2.11
)
 
0.30

Gain (loss) on disposition of discontinued operations – net of tax

 
0.03

 
0.71

 
0.03

 
0.03

Net income (loss) attributable to common stockholders
0.76

 
1.48

 
1.36

 
(1.63
)
 
1.33

 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS AND LIABILITIES
 
 
 
 
 
 
 
 
 
Current assets
$
2,019.7

 
$
2,423.0

 
$
2,383.0

 
$
2,700.5

 
$
3,140.2

Current liabilities
872.4

 
1,214.7

 
1,035.5

 
1,407.0

 
1,458.6

PROPERTY, PLANT AND EQUIPMENT  
 
 
 
 
 
 
 
 
 
Net property, plant and equipment
$
389.4

 
$
317.3

 
$
277.7

 
$
277.1

 
$
329.8

Capital expenditures
(105.5
)
 
(91.0
)
 
(31.7
)
 
(48.8
)
 
(74.4
)
Depreciation
39.6

 
39.0

 
47.0

 
52.0

 
50.9

TOTAL ASSETS
$
3,195.6

 
$
3,485.9

 
$
3,462.5

 
$
5,006.8

 
$
5,616.0

 
 
 
 
 
 
 
 
 
 
CAPITALIZATION
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,175.7

 
$
1,214.7

 
$
979.1

 
$
1,570.0

 
$
1,791.0

Total Terex Corporation Stockholders’ Equity
932.3

 
860.5

 
1,222

 
1,484.7

 
1,877.4

Dividends per share of Common Stock
0.44

 
0.40

 
0.32

 
0.28

 
0.24

Shares of Common Stock outstanding at year end
70.4

 
69.6

 
80.2

 
105.0

 
107.7

EMPLOYEES (1), (2)
9,500

 
9,900

 
8,900

 
9,200

 
10,500

For more information on items that affect comparability among the years, see Note D - “Discontinued Operations and Assets and Liabilities Held for Sale” in the Notes to the Consolidated Financial Statements.

(1) Excludes approximately 6,800 and 6,700 MHPS employees in years 2016 and 2015, respectively. 
(2) Excludes approximately 1,800, 1,800, 2,100 and 3,200 Mobile Cranes employees in years 2018, 2017, 2016, and 2015, respectively. 


26



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

BUSINESS DESCRIPTION

Terex is a global manufacturer of aerial work platforms, materials processing machinery and cranes. We design, build and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Our products are manufactured in North and South 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 manage and report our business in the following segments: (i) AWP and (ii) MP.

On July 31, 2019, we completed the disposition of Demag to Tadano. During 2019, we also exited North American mobile crane product lines manufactured in our Oklahoma City facility. As a result, we realigned certain operations, formerly part of our Cranes segment. For financial reporting periods beginning on or after January 1, 2019, our utilities business has been consolidated within our AWP segment, our pick and carry cranes business has been consolidated within our MP segment and our rough terrain and tower cranes businesses have been consolidated within Corporate and Other. Prior period reportable segment information was adjusted to reflect the realignment of our operations.

Please refer to Note B - “Business Segment Information” in the accompanying Consolidated Financial Statements for further information about our reportable segments.

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, selling, general & administrative (“SG&A”) costs and operating profit, as well as the net sales, gross profit, SG&A costs 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, plus (minus) increases (decreases) in Terex Financial Services finance receivables consisting of sales-type leases and commercial loans (“TFS Assets”), less Capital expenditures, net of proceeds from sale of capital assets, plus the estimated level of net working capital in divested businesses at the closing date. 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 unusual items. Our 2020 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 2020 GAAP financial results. Adjusted EPS provides guidance to investors about our EPS expectations excluding unusual items that we do not believe are reflective of our ongoing operations.


27



Working capital is calculated using the Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories (net of allowance), 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 we also use include Net Operating Profit After Tax (“NOPAT”) as adjusted, income (loss) from operations as adjusted, annualized effective tax rate as adjusted, cash and cash equivalents as adjusted, Debt as adjusted and Terex Corporation stockholders’ equity as adjusted, which are used in the calculation of our after tax return on invested capital (“ROIC”) (collectively the “Non-GAAP Measures”), which are discussed in detail below.

Overview

Focus, Simplify and Execute to Win have been the three pillars of our business strategy. We continued to implement the elements of our strategy in 2019. We completed the sale of Demag and exited the mobile crane product lines manufactured at our Oklahoma City facility. These actions have positively impacted Terex by Focusing our portfolio on high performing businesses best positioned to out-earn their cost of capital over the cycle. We also continued to simplify and optimize our manufacturing footprint. We had the official opening of MP’s new Northern Ireland facility and our new Utilities manufacturing facility in South Dakota remains on schedule and within budget. MP’s capacity expansion in India also remains on track. These investments enable simplification and improved manufacturing productivity critical to our future success and growth. In addition, we have transitioned to a simpler two segment operating structure that has reduced corporate operating expenses. We continued to invest in our Execute to Win business system, focusing on enhancing our capabilities by investing in people, processes and tools in our three priority areas: Commercial Excellence, Parts and Lifecycle Solutions and Strategic Sourcing.

Overall, 2019 was a challenging year for us. Operationally, MP had excellent performance in 2019 as it increased sales and expanded operating margin. However, softening in the Company’s aerials business more than offset MP’s strong operating performance. Despite the challenging global markets, our global, cross-segment parts and services team drove 9% revenue growth on currency neutral basis in parts and services even though machine sales were down throughout the Company.

Our AWP segment’s 2019 net sales were down 8% from the prior year. AWP’s revenue declines were greatest in North America and Western Europe as concerns over the global macroeconomic market for industrial equipment caused rental customers for aerials to hold back capital equipment purchases. This more than offset revenue increases for utility products in North America as well as for aerials in China, which improved due to market growth and increased product adoption. To align with customer demand and manage inventory levels, we reduced aerial production throughout 2019 with fourth quarter 2019 production levels approximately 45% lower than production levels in the fourth quarter of 2018. AWP’s lower sales, significantly reduced production levels and the strong U.S. Dollar relative to the Euro were the primary drivers in the operating profit reduction in 2019 as compared to the prior year. We expect continued growth for our utilities business in 2020 and the caution being exhibited by our aerials rental customers during 2019 to continue into 2020. As a result, we expect AWP sales to be down 7%-10% and operating margins to contract to 6%-7% in 2020.

Our MP segment had another strong year, with its operating profit improving on increased net sales. These results were driven primarily by continued demand for crushing and screening products, concrete trucks, material handlers and pick and carry cranes, as well as effective price and cost management. The strong U.S. Dollar to the British Pound provided a modest tailwind for our crushing and screening business. However, MP did have challenging markets at the end of the year as cautious customer sentiment led to delays of capital purchases of crushing and screening products, material handlers and environmental equipment. As a result of this market softening, we expect MP sales, including our tower and rough terrain cranes businesses, to be down 8%-11% and operating margins to contract to 12.3%-13% in 2020.

Geographically, our largest market is North America, which represents approximately 57% of our global sales in continuing operations. As compared to prior year, our sales were down in North America, Europe, the Middle East and Africa, up in Asia Pacific and up by double digits off a low base in Latin America.


28



We continued to execute our disciplined capital allocation strategy in 2019. In addition to making strategic investments in our businesses to drive more efficient manufacturing, such as the construction of our new Utilities manufacturing center in South Dakota and expansion of MP locations in the U.K. and India, we have also reduced inventories of finished goods in the second half of 2019 by adjusting production rates down at AWP. Furthermore, we completed sales of businesses and investments, including the sale of our Demag mobile cranes business, in 2019, generating approximately $160 million of additional cash for Terex. We also generated approximately $86 million of free cash flow in 2019. We expect to generate an additional $140 million of free cash flow in 2020. We also continued to return capital to shareholders. Between dividends and share repurchases in 2019, approximately $36 million was returned to shareholders. Finally, our Board of Directors approved increasing our quarterly dividend in 2020 by 9% to $0.12 per share.

We believe our liquidity continues to be sufficient to meet our business plans. See “Liquidity and Capital Resources” for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels.

Based on the challenging global industrial equipment market, we expect 2020 earnings per share (“EPS”) to be between $1.85 and $2.35, on net sales of approximately $3.9 billion. This EPS guidance (i) is based on an expected tax rate of 19%, (ii) anticipates renewal of the current Section 301 tariff exclusions we are receiving from the U.S. government, (iii) excludes any benefit associated with our existing share repurchase program and (iv) does not anticipate any material impact associated with Brexit. Also, with respect to the Coronavirus, we are not currently anticipating any material impact on our 2020 results; however, we do expect to have lower sales and earnings from our AWP China facility in the first half of 2020 which is expected to be made up in the second half of the year.


29



ROIC

ROIC and other Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Terex Corporation 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 income (loss) from operations, annualized effective tax rate, and Terex Corporation stockholders’ equity to remove the effects of the impact of certain transactions in order to create a measure that is useful to understanding our operating results and the ongoing performance of our underlying business without the impact of unusual items as shown in the tables below. Cash and cash equivalents and Debt are adjusted to include amounts recorded as held for sale.

Furthermore, we believe returns on capital deployed in TFS do not represent our primary operations and, therefore, TFS Assets and results from operations have been excluded from the Non-GAAP Measures. 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.

Terex 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 primary businesses, excluding TFS, as opposed to another metric such as return on stockholders’ equity that only incorporates book equity, and is thus a more accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Terex Corporation 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, 2019 was 17.6%.

Amounts described below are reported in millions of U.S. dollars, except for the annualized effective tax rates. Amounts are as of and for the three months ended for the periods referenced in the tables below.
 
Dec '19
Sep '19
Jun '19
Mar '19
Dec '18
Annualized effective tax rate as adjusted
15.6
%
15.6
%
15.6
%
15.6
%
 
Income (loss) from operations as adjusted
$
35.3

$
86.2

$
127.9

$
104.8

 
Multiplied by: 1 minus annualized effective tax rate
84.4
%
84.4
%
84.4
%
84.4
%
 
Adjusted net operating income (loss) after tax
$
29.8

$
72.8

$
107.9

$
88.5

 
Debt as adjusted
$
1,175.7

$
1,175.6

$
1,351.9

$
1,477.8

$
1,219.4

Less: Cash and cash equivalents as adjusted
(540.1
)
(475.5
)
(394.6
)
(330.2
)
(372.1
)
Debt less Cash and cash equivalents as adjusted
$
635.6

$
700.1

$
957.3

$
1,147.6

$
847.3

Total Terex Corporation stockholders’ equity as adjusted
$
963.7

$
881.3

$
852.2

$
743.4

$
752.5

Debt less Cash and cash equivalents plus Total Terex Corporation stockholders’ equity as adjusted
$
1,599.3

$
1,581.4

$
1,809.5

$
1,891.0

$
1,599.8


December 31, 2019 ROIC
17.6
%
NOPAT as adjusted (last 4 quarters)
$
299.0

Average Debt less Cash and cash equivalents plus Total Terex Corporation stockholders’ equity, as adjusted (5 quarters)
$
1,696.2


30




 
Three months ended 12/31/19
Three months ended 9/30/19
Three months ended 6/30/19
Three months ended 3/31/19
 
Reconciliation of income (loss) from operations:
 
 
 
 
 
Income (loss) from operations as reported
$
22.9

$
86.4

$
126.0

$
99.7

 
Adjustments:
 
 
 
 
 
Deal related

(0.9
)
(7.0
)
0.2

 
Restructuring and related
9.8

2.2

8.7

1.7

 
Transformation
3.4

2.2

4.0

4.1

 
Other
0.2




 
(Income) loss from TFS
(1.0
)
(3.7
)
(3.8
)
(0.9
)
 
Income (loss) from operations as adjusted
$
35.3

$
86.2

$
127.9

$
104.8

 
 
 
 
 
 
 
 
As of 12/31/19
As of 9/30/19
As of 6/30/19
As of 3/31/19
As of 12/31/18
Reconciliation of Cash and cash equivalents:
 
 
 
 
 
Cash and cash equivalents - continuing operations
$
535.1

$
470.6

$
367.5

$
304.6

$
339.5

Cash and cash equivalents - assets held for sale
5.0

4.9

27.1

25.6

32.6

Cash and cash equivalents as adjusted
$
540.1

$
475.5

$
394.6

$
330.2

$
372.1

 
 
 
 
 
 
Reconciliation of Debt:
 
 
 
 
 
Debt - continuing operations
$
1,175.7

$
1,175.6

$
1,347.7

$
1,473.4

$
1,214.7

Debt - liabilities held for sale


4.2

4.4

4.7

Debt as adjusted
$
1,175.7

$
1,175.6

$
1,351.9

$
1,477.8

$
1,219.4

 
 
 
 
 
 
Reconciliation of Terex Corporation stockholders’ equity:
 
 
 
 
 
Terex Corporation stockholders’ equity as reported
$
932.3

$
866.3

$
860.1

$
781.8

$
860.5

TFS Assets
(154.0
)
(159.0
)
(180.2
)
(204.6
)
(185.1
)
Effects of adjustments, net of tax:
 
 
 
 
 
Deal related
75.3

75.3

75.8

83.1


Restructuring and related
31.0

22.7

19.2

9.5

6.8

Transformation
23.5

20.6

18.4

13.9

9.1

Pension annuitization
56.3

56.3

56.3

56.3

56.3

Other
7.4

6.4

6.8

4.4

5.1

(Income) loss from TFS
(8.1
)
(7.3
)
(4.2
)
(1.0
)
(0.2
)
Terex Corporation stockholders’ equity as adjusted
$
963.7

$
881.3

$
852.2

$
743.4

$
752.5



31



 
 
 
 
 
Year Ended December 31, 2019
Income (loss) from continuing operations before income taxes
(Provision for) benefit from income taxes
Income tax rate
 
Reconciliation of annualized effective tax rate:
 
 
 
 
As reported
$
247.5

$
(37.8
)
15.3
%
 
Effect of adjustments:
 
 
 
 
Deal related
(7.5
)
0.2

 
 
Restructuring and related
22.4

(4.7
)
 
 
Transformation
13.7

(2.8
)
 
 
Other
0.6

(0.1
)
 
 
Tax related

2.0

 
 
As adjusted
276.7

(43.2
)
15.6
%
 


32




RESULTS OF OPERATIONS

2019 COMPARED WITH 2018

Consolidated
 
2019
 
2018
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
4,353.1

 

 
$
4,517.2

 

 
(3.6
)%
Gross profit
$
887.8

 
20.4
%
 
$
961.9

 
21.3
%
 
(7.7
)%
SG&A
$
552.8

 
12.7
%
 
$
549.4

 
12.2
%
 
0.6
 %
Income (loss) from operations
$
335.0

 
7.7
%
 
$
412.5

 
9.1
%
 
(18.8
)%

Net sales for the year ended December 31, 2019 decreased $164.1 million when compared to 2018. The decrease in net sales was primarily due to weakening demand for aerial work platforms in North America and Western Europe in our AWP segment and changes in foreign exchange rates which negatively impacted consolidated net sales by approximately $105 million, partially offset by higher demand for equipment in our MP segment and aerial work platforms in China and utility equipment in our AWP segment.

Gross profit for the year ended December 31, 2019 decreased $74.1 million when compared to 2018. The decrease was primarily due to the negative impact of foreign exchange rate changes across all segments and lower sales volume and factory overhead absorption in our AWP segment, partially offset by higher sales volume in our MP segment and favorable price variances in our AWP segment.

SG&A costs for the year ended December 31, 2019 increased $3.4 million when compared to 2018 primarily due to increased engineering and selling costs, partially offset by lower personnel costs.

Income from operations decreased by $77.5 million for the year ended December 31, 2019 when compared to 2018. The decrease was primarily due to the negative effects of foreign exchange rate changes in all segments and lower sales volume and factory overhead absorption in our AWP segment, partially offset by higher sales volume in our MP segment and favorable price variances in our AWP segment.

Aerial Work Platforms
 
2019
 
2018
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
2,726.6

 

 
$
2,950.4

 

 
(7.6
)%
Income from operations
$
196.2

 
7.2
%
 
$
300.5

 
10.2
%
 
(34.7
)%

Net sales for the AWP segment for the year ended December 31, 2019 decreased $223.8 million when compared to 2018 primarily due to weakening demand for aerial work platforms in North America and Western Europe, partially offset by increased sales in China and higher demand for utility equipment. Net sales were negatively impacted by effects of foreign exchange rate changes, particularly in Europe, of approximately $43 million.

Income from operations for the year ended December 31, 2019 decreased $104.3 million when compared to 2018. The decrease was primarily due to lower sales volume, lower factory overhead absorption from a decrease in overall production volume, the negative effects of foreign exchange rate changes and higher engineering and selling costs, partially offset by favorable price variances and a change in allocation of health care costs.



33



Materials Processing
 
2019
 
2018
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
1,371.4

 

 
$
1,322.6

 

 
3.7
%
Income from operations
$
196.8

 
14.4
%
 
$
176.0

 
13.3
%
 
11.8
%

Net sales for the MP segment increased by $48.8 million for the year ended December 31, 2019 when compared to 2018 primarily due to higher demand for material handlers and mobile crushing and screening equipment, pick and carry equipment primarily in Australia and concrete mixer trucks in North America. Net sales were negatively impacted by effects of foreign exchange rate changes, particularly in Europe, of approximately $50 million.

Income from operations for the year ended December 31, 2019 increased $20.8 million when compared to 2018 primarily due to higher sales volume, partially offset by the negative effects of foreign exchange rate changes.

Corporate and Other / Eliminations
 
2019
 
2018
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
255.1

 

 
$
244.2

 

 
4.5
%
Loss from operations
$
(58.0
)
 
(22.7
)%
 
$
(64.0
)
 
(26.2
)%
 
9.4
%

Net sales include rough terrain and tower cranes sales, on-book financing activities of TFS and elimination of intercompany sales activity among segments. The net sales increase is primarily due to lower intercompany sales eliminations, partially offset by weakening demand for tower cranes and negative effect of foreign exchange rate changes on rough terrain and tower cranes sales.

Loss from operations for the year ended December 31, 2019 decreased $6.0 million when compared to 2018. The decrease in operating loss is primarily due to lower compensation costs and professional fees, the sale of an equity investment and a customer advance forfeiture, partially offset by the negative effects of exchange rate changes, lower tower cranes sales volume, a change in allocation of health care costs, severance costs and a specific loss allowance on a finance receivable.

Interest Expense, Net of Interest Income

During the year ended December 31, 2019, our interest expense, net of interest income, was $81.4 million, or $17.3 million higher than the prior year due to an increase in average borrowings offset by lower rates.

Other Income (Expense) — Net

Other income (expense) – net for the year ended December 31, 2019 was a loss of $6.1 million, compared to a loss of $60.6 million in 2018. The change was due primarily to a loss in the prior year of approximately $51 million related to the settlement of our U.S. defined benefit pension plan, as described in Note M - “Retirement Plans and Other Benefits”.

Income Taxes

During the year ended December 31, 2019, we recognized an income tax expense of $37.8 million on income of $247.5 million, an effective tax rate of 15.3%, as compared to an income tax expense of $45.4 million on income of $287.1 million, an effective tax rate of 15.8%, for the year ended December 31, 2018. The lower effective tax rate for the year ended December 31, 2019 was primarily due to favorable jurisdictional mix.


34



Income (Loss) from Discontinued Operations - net of tax

Loss from discontinued operations - net of tax for the year ended December 31, 2019 was $155.4 million compared to a loss of $130.4 million for the year ended December 31, 2018. The loss in 2019 was primarily from recognition of a pre-tax charge of approximately $82 million ($82 million after-tax) to write-down the mobile cranes disposal group to fair value, less costs to sell, and the negative performance of our mobile cranes business.

Gain (Loss) on Disposition of Discontinued Operations - net of tax

Gain on disposition of discontinued operations - net of tax for the year ended December 31, 2019 was $0.1 million compared to a gain of $2.4 million for the year ended December 31, 2018. The gain in 2019 was primarily related to a gain on the sale of our North American mobile crane product lines manufactured in its Oklahoma City facility, partially offset by post-closing adjustments for the sale of MHPS and a loss on the sale of Demag.

35



2018 COMPARED WITH 2017

Consolidated
 
2018
 
2017
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
4,517.2

 

 
$
3,793.7

 

 
19.1
%
Gross profit
$
961.9

 
21.3
%
 
$
767.3

 
20.2
%
 
25.4
%
SG&A
$
549.4

 
12.2
%
 
$
539.1

 
14.2
%
 
1.9
%
Income (loss) from operations
$
412.5

 
9.1
%
 
$
228.2

 
6.0
%
 
80.8
%


Net sales for the year ended December 31, 2018 increased $723.5 million when compared to 2017. The increase in net sales was primarily due to higher demand for equipment in all segments. Changes in foreign exchange rates positively impacted consolidated net sales by approximately $67 million.

Gross profit for the year ended December 31, 2018 increased $194.6 million when compared to 2017. The increase was primarily due to higher sales and production volume and the positive impact of foreign exchange rate changes in all segments, partially offset by increased material costs across all segments.

SG&A costs for the year ended December 31, 2018 increased $10.3 million when compared to 2017 primarily due to planned engineering and strategic sourcing spending.

Income from operations increased by $184.3 million for the year ended December 31, 2018 when compared to 2017. The increase was primarily due to higher sales and production volume and the positive effects of exchange rate changes in all segments, partially offset by increased material costs across all segments.

Aerial Work Platforms
 
2018
 
2017
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
2,950.4

 

 
$
2,433.2

 

 
21.3
%
Income (loss) from operations
$
300.5

 
10.2
%
 
$
199.8

 
8.2
%
 
50.4
%

Net sales for the AWP segment for the year ended December 31, 2018 increased $517.2 million when compared to 2017 primarily due to higher broad-based demand for aerial equipment in North America, Western Europe and China, telehandlers in North America from a combination of fleet replacement and growth in rental fleets due to improving rental utilization rates as well as utility equipment sales in North America. Net sales were positively impacted by effects of foreign exchange rate changes, particularly in Europe, of approximately $45 million.

Income from operations for the year ended December 31, 2018 increased $100.7 million when compared to 2017. The increase was primarily due to increased sales volume, improved factory utilization and the positive impact of foreign exchange rate changes, partially offset by increased material costs, driven by higher steel prices and tariffs, and higher selling and administrative costs associated with planned engineering and strategic sourcing spending.


36



Materials Processing
 
2018
 
2017
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
1,322.6

 

 
$
1,119.8

 

 
18.1
%
Income (loss) from operations
$
176.0

 
13.3
%
 
$
125.1

 
11.2
%
 
40.7
%

Net sales for the MP segment increased by $202.8 million for the year ended December 31, 2018 when compared to 2017 primarily due to higher demand for mobile crushing and screening equipment, pick and carry cranes and parts as a result of broad-based economic growth, construction activity and aggregate consumption and increased material handler sales from a stronger scrap market. These increases were partially offset by lower demand for concrete mixer trucks in North America due to emission regulations associated with sales of refurbished trucks. Net sales were positively impacted by effects of foreign exchange rate changes, particularly in Europe, of approximately $14 million.

Income from operations for the year ended December 31, 2018 increased $50.9 million when compared to 2017 primarily due to increased sales and production volume, partially offset by higher selling and administrative costs associated with planned engineering and strategic sourcing spending.

Corporate and Other / Eliminations
 
2018
 
2017
 
 
 
 
 
% of
Sales
 
 
 
% of
Sales
 
% Change In Reported Amounts
 
($ amounts in millions)
 
 
Net sales
$
244.2

 

 
$
240.7

 

 
1.5
%
Income (loss) from operations
$
(64.0
)
 
(26.2
)%
 
$
(96.7
)
 
(40.2
)%
 
33.8
%

Net sales include rough terrain and tower cranes sales, on-book financing activities of TFS and elimination of intercompany sales activity among segments while net sales in 2017 included sales in various construction equipment product lines. The change in net sales was primarily due to higher demand for rough terrain and tower cranes, lower intercompany sales eliminations and increased TFS revenue from syndications in 2018, partially offset by approximately $76 million related to divestiture of construction product lines and lower governmental sales.

Loss from operations decreased $32.7 million for the year ended December 31, 2018 when compared to 2017. The decrease in operating loss is primarily due to lower general and administrative expenses and increased revenue from rough terrain and tower cranes, partially offset by gains in the prior year on the sale of certain construction product line assets.

Interest Expense, Net of Interest Income

During the year ended December 31, 2018, our interest expense, net of interest income, was $64.1 million, or $3.2 million higher than the prior year due to increased borrowings at higher interest rates on floating rate instruments.

Loss on Early Extinguishment of Debt

During the year ended December 31, 2018, we recorded a loss on early extinguishment of debt of $0.7 million as a result of an amendment to the 2017 Credit Agreement which lowered the interest rate on the Company’s senior secured term loan by 25 basis points. During the year ended December 31, 2017, we recorded a loss on early extinguishment of debt of $52.6 million primarily related to the termination of our 2014 Credit Agreement and retirement of our 6% Notes (as defined below) and 6-1/2% Notes (as defined below), all as further described in Note K - “Long-Term Obligations”.

37




Other Income (Expense) — Net

Other income (expense) – net for the year ended December 31, 2018 was a loss of $60.6 million, compared to a gain of $48.7 million in 2017. The change was due primarily to a loss of approximately $51 million related to the settlement of our U.S. defined benefit pension plan, as described in Note M - “Retirement Plans and Other Benefits”, and a net gain recorded in the prior year from the sale of Konecranes shares of $42.0 million and related dividend income of $13.5 million, as described in Note D - “Discontinued Operations And Assets and Liabilities Held for Sale”.

Income Taxes

During the year ended December 31, 2018, we recognized an income tax expense of $45.4 million on income of $287.1 million, an effective tax rate of 15.8%, as compared to an income tax expenses of $52.4 million on income of $163.4 million, an effective tax rate of 32.1%, for the year ended December 31, 2017. The lower effective tax rate for the year ended December 31, 2018 was primarily due to less tax expense associated with H.R. 1 “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (2017 Federal Tax Act) and higher benefits from the resolution of tax audits, partially offset by less favorable character of earnings.

Income (Loss) from Discontinued Operations - net of tax

Loss from discontinued operations - net of tax for the year ended December 31, 2018 was $130.4 million, compared to a loss of $49.6 million for the year ended December 31, 2017. The increased loss was primarily related to supply chain challenges in our mobile cranes business resulting in higher manufacturing and selling costs as well as reductions taken in the prior year to severance accruals.

Gain (Loss) on Disposition of Discontinued Operations - net of tax

During the year ended December 31, 2018, we recognized a gain on disposition of discontinued operations - net of tax of $2.4 million, due primarily to a gain of $2.7 million related to the prior sale of our Atlas heavy construction equipment and knuckle-boom cranes businesses. During the year ended December 31, 2017, we recognized a gain on disposition of discontinued operations - net of tax of $67.3 million, related primarily to the sale of our MHPS business.



38



CRITICAL ACCOUNTING POLICIES

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 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 the best available information at that time including actual orders received, negotiations with our customers for future orders, including their plans for expenditures, and market trends for similar products. 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 reserve based on identification of specific situations and increase our inventory reserves accordingly. As further changes in future economic or industry conditions occur, we will revise estimates 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.

Guarantees – We have issued guarantees to financial institutions related to customer financing of equipment purchases by our customers. We must assess the probability of losses or non-performance in ways similar to the evaluation of accounts receivable, including consideration of a customer’s payment history, leverage, availability of third party financing, political and exchange risks, 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 customers, from time to time, fund the acquisition of our equipment through third-party finance companies. In certain instances, we may provide a credit guarantee to the finance company by which we agree to make payments to the finance company should the customer default. Our maximum liability is generally limited to our customer’s remaining payments due to the finance company 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.

We issue, from time to time, residual value guarantees under sales-type leases. A residual value guarantee involves a guarantee that a piece of equipment will have a minimum fair market value at a future date if certain conditions are met by the customer. We are generally able to mitigate some risk associated with these guarantees because maturity of guarantees is staggered, which limits the amount of used equipment entering the marketplace at any one time.

We record a liability for the estimated fair value of guarantees issued pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 460, “Guarantees” (“ASC 460”). We recognize a loss under a guarantee when our obligation to make payment under the guarantee is probable and the amount of the loss can be estimated. A loss would be recognized if our payment obligation under the guarantee exceeds the value we could expect to recover to offset such payment, primarily through the sale of the equipment underlying the guarantee.


39



There can be no assurance our historical experience in used equipment markets will be indicative of future results. Our ability to recover losses from our guarantees may be affected by economic conditions in used equipment markets at the time of loss. See Note O – “Litigation and Contingencies” in the Notes to the Consolidated Financial Statements for further information regarding our guarantees.

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 – Goodwill is assigned to one or more reporting segments on the date of acquisition. We review our goodwill for impairment annually during the fourth quarter of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of any one of our reporting units below its respective carrying amount.

In performing the goodwill impairment test, we first perform a qualitative assessment, which 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 segments are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed.

If the qualitative assessment indicates that the quantitative analysis should be performed, we then evaluate goodwill for impairment by comparing the fair value of each of our reporting segments to its carrying value, including the associated goodwill. To determine the fair values, we uses 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.

See Note I – “Goodwill and Intangible Assets, Net” in the Notes to the Consolidated Financial Statements for further information.

Impairment of Long-Lived Assets – Our policy is to assess the realizability of our long-lived assets, including definite-lived intangible assets, and to 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 unasserted warranty claims based on our claim experience. Warranty costs are accrued at the time revenue is recognized. However, adjustments to the initial warranty accrual are recorded if actual claims experience indicates adjustments are necessary. These warranty costs are based upon management’s assessment of past claims and current experience. 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.


40



Defined Benefit Plans – Pension benefits represent financial obligations that will be ultimately settled in the future with employees who meet eligibility requirements. As of December 31, 2019, we maintained an unfunded, nonqualified Supplemental Executive Retirement Plan (the “U.S. SERP”) for certain former U.S. employees. Generally, the U.S. SERP provides a benefit based on average total compensation earned over a participant’s final five years of employment and years of service reduced by benefits earned under any Company retirement program, excluding salary deferrals and matching contributions. In addition, benefits are reduced by Social Security Primary Insurance Amounts attributable to Company contributions. Participation in the U.S. SERP is frozen; however, eligible participants are credited with post-freeze service for purposes of determining vesting and the amount of benefits.

We maintain defined benefit plans in France, Germany, India, Switzerland and the U.K. for some of our subsidiaries. The plans in France, Germany and India are unfunded plans. The plan in the U.K. is frozen. Participation in the German plans is frozen; however, eligible participants are credited with post-freeze service for purposes of determining vesting and the amount of benefits. For our operations in Italy, there are mandatory termination indemnity plans providing a benefit payable upon termination of employment in substantially all cases of termination. We record this obligation based on the mandated requirements. The measure of the current obligation is not dependent on the employees’ future service and therefore is measured at current value.

Plan assets consist primarily of common stocks, bonds and short-term cash equivalent funds. For non-U.S. funded plans, approximately 25% of the assets are in equity securities, 72% are in fixed income securities and 3% are in real estate investment 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, discount rates at which liabilities may be settled, rates of increase of health care costs, rates of future compensation increases as well as employee demographic assumptions such as retirement patterns, mortality and turnover. 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.

Expected long-term rates of return on pension plan assets were 4.50% for the U.K. plan and 2.00% for the Swiss plan at December 31, 2019. 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 December 31 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 3.31% for the U.S. SERP and 0.10% to 10.71% with a weighted average of 1.87% for non-U.S. plans at December 31, 2019. 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 rate at December 31 is 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 1.00% to 8.00% with a weighted average for all Non-U.S. plans of 0.17% at December 31, 2019. 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 net increase in the liability and decreased funded status of $5.9 million was due to changes in assumptions from the previous year, primarily decreases in discount rates, partially offset by gains incurred on our pension assets.

41




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 will be funded from 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, 2019:
($ amounts in millions)
Increase
 
Decrease
 
Discount Rate
 
Expected long-
term rate of return
 
Discount Rate
 
Expected long-
term rate of return
U. S. Plan:
 
 
 
 
 
 
 
Net pension expense
$
(0.2
)
 
$

 
$
0.2

 
$

Projected benefit obligation
$
(1.2
)
 
$

 
$
1.2

 

 
 
 
 
 
 
 
 
Non-U.S. Plans:
 
 
 
 
 
 
 
Net pension expense
$
0.2

 
$
(0.3
)
 
$
(0.1
)
 
$
0.3

Projected benefit obligation
$
(5.9
)
 
$

 
$
6.3

 

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 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”) and other tax attributes expire if not used within an established statutory time frame. 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.

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 ASC 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 financial statements.


42



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.

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, 2019, we had cash and cash equivalents of $540.1 million and undrawn availability under our revolving line of credit of $600 million, giving us total liquidity of approximately $1.1 billion. During the year ended December 31, 2019, our liquidity increased by approximately $405 million from December 31, 2018 primarily due to cash provided by an additional debt issuance and proceeds from the sale of Demag and ASV shares.

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 the United States through funding of capital expenditures, operating expenses or other similar cash needs of these operations. Most of this cash could be used in the U.S., if necessary. Cash repatriated to the U.S. could be subject to incremental foreign and state taxation. We will continue to seek opportunities to tax-efficiently mobilize and redeploy funds. There are no trends, demands or uncertainties as a result of the Company’s cash deployment strategies that are reasonably likely to have a material effect on us as a whole or that may be relevant to our financial flexibility.

We had free cash flow of $86.4 million for the year ended December 31, 2019. We are expecting to generate approximately $140 million of free cash flow in 2020.

The following table reconciles Net cash provided by (used in) operating activities to free cash flow (in millions):
 
 
Year Ended
12/31/2019
Net cash provided by (used in) operating activities
 
173.4

Increase (decrease) in TFS assets
 
(31.1
)
Capital expenditures, net of proceeds from sale of capital assets (1)
 
(94.4
)
Deal related net working capital adjustment
 
38.5

Free cash flow
 
$
86.4

(1) Includes $10.2 million of proceeds from sale of capital assets within Proceeds (payments) from disposition of discontinued operations in the Consolidated Statement of Cash Flows.

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. Pursuant to terms of our trade accounts receivable factoring arrangements, during the year ended December 31, 2019, we sold, without recourse, approximately $1,108 million of trade accounts receivable to enhance liquidity. During the year ended December 31, 2019, we also sold approximately $226 million of sales-type leases and commercial loans.

We believe cash generated from operations, including cash generated from the sale of receivables, together with access to our bank credit facilities and cash on hand, provide adequate liquidity to continue to support internal operating initiatives and meet our operating and debt service requirements for at least the next 12 months. 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.


43



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

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 third-party finance companies will continue to extend credit to our customers as they have in the past.
As our sales change, the amount of working capital needed to support our business may change.
Our suppliers extend payment terms to us primarily based on our overall credit rating. Declines 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.

Working capital as a percent of trailing three month annualized net sales was 20.4% at December 31, 2019.

The following tables show the calculation of our working capital in continuing operations and trailing three months annualized sales as of December 31, 2019 (in millions):
 
Three months ended 12/31/19
Net Sales
$
885.0

x
4

Trailing Three Month Annualized Net Sales
$
3,540.0


 
As of 12/31/19
Inventories
$
847.7

Trade Receivables
401.9

Trade Accounts Payable
(508.1
)
Customer Advances
(17.9
)
Working Capital
$
723.6


On January 31, 2017, we entered into a new credit agreement (as amended, the “2017 Credit Agreement”). The 2017 Credit Agreement contains a $400 million senior secured term loan (the “Original Term Loan”). The Original Term Loan portion of the 2017 Credit Agreement bears interest at a rate of LIBOR plus 2.00% with a 0.75% LIBOR floor. On March 7, 2019, we entered into an Incremental Assumption Agreement and Amendment No. 3 (“Amendment No. 3”) to the 2017 Credit Agreement. Amendment No. 3 provided us with an additional term loan (the “2019 Term Loan”) under the 2017 Credit Agreement in the amount of $200 million. The 2019 Term Loan portion of the 2017 Credit Agreement bears interest at a rate of LIBOR plus 2.75% with a 0.75% LIBOR floor (the Original Term Loan together with 2019 Term Loan comprise the “Term Loans” portion of the 2017 Credit Agreement). The 2017 Credit Agreement contains a $600 million revolving line of credit available through January 31, 2022. Net proceeds from the 2019 Term Loan were used to reduce borrowings under the revolving line of credit. The 2017 Credit Agreement allows unlimited incremental commitments, which may be extended at the option of existing or new lenders and can be in the form of revolving credit commitments, term loan commitments, or a combination of both, with incremental amounts in excess of $300 million requiring the Company to satisfy a senior secured leverage ratio contained in the 2017 Credit Agreement. Interest rates charged under the revolving line of credit in the 2017 Credit Agreement are subject to adjustment based on our consolidated leverage ratio. See Note K - “Long-Term Obligations,” in our Consolidated Financial Statements for information concerning the 2017 Credit Agreement.

Borrowings under the 2017 Credit Agreement as of December 31, 2019 were $585.5 million, net of discount, on our Term Loans. There were no amounts outstanding on our revolving line of credit as of December 31, 2019. At December 31, 2019, the weighted average interest rate was 4.10% on the Term Loans portion of the 2017 Credit Agreement.


44



We manage our interest rate risk by maintaining a balance between fixed and floating rate debt, including use of interest rate derivatives when appropriate. Over the long term, we believe this mix will produce lower interest cost than a purely fixed rate mix while reducing interest rate risk.

Our investment in TFS financial services assets was approximately $154 million, net at December 31, 2019. We remain focused on expanding financing solutions in key markets like the U.S., Europe and China. We also anticipate using TFS to drive incremental sales by increasing customer financing through TFS in certain instances.

In July 2018, our Board of Directors authorized the repurchase of up to an additional $300 million of our outstanding shares of common stock. During the year ended December 31, 2019, we repurchased a total of 0.2 million shares for $4.9 million under the July 2018 authorization leaving approximately $195 million available for repurchase under this program. In each quarter of 2019, our Board of Directors declared a dividend of $0.11 per share, which was paid to our shareholders. In February 2020, our Board of Directors declared a dividend of $0.12 per share which will be paid on March 19, 2020.

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.

Cash Flows

Cash provided by operations was $173.4 million and $94.2 million for the years ended December 31, 2019 and 2018, respectively.  The increase in cash provided by operations was primarily driven by working capital efficiency, partially offset by decreased operating profitability.

Cash provided by investing activities for the year ended December 31, 2019 was $103.8 million, compared to $85.9 million of cash used in investing activities for the year ended December 31, 2018.  The increase in cash provided by investing activities was primarily due to proceeds received from the sale of Demag and ASV shares.

Cash used in financing activities was $103.7 million and $244.9 million for the years ended December 31, 2019 and 2018, respectively.   The decrease in cash used in financing activities was primarily due to share repurchases made during the prior year period, partially offset by higher debt repayments on our revolving line of credit in 2019.

Contractual Obligations

The following table sets out our specified contractual obligations at December 31, 2019 (in millions):
 
Payments due by period
 
Total
 
< 1 year
 
1-3 years
 
3-5 years
 
> 5 years
Long-term debt obligations
$
1,450.9

 
$
63.2

 
$
123.7

 
$
659.5

 
$
604.5

Finance lease obligations
4.1

 
1.0

 
2.0

 
1.0

 
0.1

Operating lease obligations