TEREX CORPORATION 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 inNorth and South America ,Europe ,Australia andAsia and sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. We manage and report our business in the following segments: (i) AWP and (ii) MP. OnJuly 31, 2019 , we completed the disposition of Demag to Tadano. During 2019, we also exited North American mobile crane product lines manufactured in ourOklahoma City facility. As a result, we realigned certain operations, formerly part of our Cranes segment. For financial reporting periods beginning on or afterJanuary 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) inTerex 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
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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 ourOklahoma 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 newNorthern Ireland facility and our new Utilities manufacturing facility inSouth Dakota remains on schedule and within budget. MP's capacity expansion inIndia 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 inNorth America andWestern 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 inNorth America as well as for aerials inChina , 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 strongU.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 strongU.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 isNorth America , which represents approximately 57% of our global sales in continuing operations. As compared to prior year, our sales were down inNorth America ,Europe , theMiddle East andAfrica , up inAsia Pacific and up by double digits off a low base inLatin 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 inSouth Dakota and expansion of MP locations in theU.K. andIndia , 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 theU.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 AWPChina facility in the first half of 2020 which is expected to be made up in the second half of the year. 29
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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 plusTerex 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, andTerex 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 toTerex 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 atDecember 31, 2019 was 17.6%. Amounts described below are reported in millions ofU.S. dollars, except for the annualized effective tax rates. Amounts are as of and for the three months ended for the periods referenced in the tables below. 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 plusTotal 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
30
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Three months Three months Three months Three months
ended 12/31/19 ended 9/30/19 ended 6/30/19 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
Reconciliation ofTerex 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
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Income (loss)
from continuing (Provision for)
operations before benefit from income
Year Ended December 31, 2019 income taxes 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 %
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RESULTS OF OPERATIONS
2019 COMPARED WITH 2018
Consolidated
2019 2018
% Change In
% of % of Reported
Sales Sales 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
Income from operations decreased by$77.5 million for the year endedDecember 31, 2019 when compared to 2018. The decrease was primarily due to the negative effects of foreign exchange rate changes in all segments and lower sales volume and factory overhead absorption in our AWP segment, partially offset by higher sales volume in our MP segment and favorable price variances in our AWP segment. Aerial Work Platforms 2019 2018 % Change In % of % of Reported Sales Sales Amounts ($ 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 $104.3
million when compared to 2018. The decrease was primarily due to lower sales
volume, lower factory overhead absorption from a decrease in overall production
volume, the negative effects of foreign exchange rate changes and higher
engineering and selling costs, partially offset by favorable price variances and
a change in allocation of health care costs.
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Materials Processing
2019 2018
% of % of % Change In
Sales Sales Reported Amounts
($ 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 $50 million .
Income from operations for the year ended
Corporate and Other / Eliminations
2019 2018
% of % of % Change In Reported
Sales Sales Amounts
($ 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 endedDecember 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 endedDecember 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 ourU.S. defined benefit pension plan, as described in Note M - "Retirement Plans and Other Benefits".
Income Taxes
During the year endedDecember 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 endedDecember 31, 2018 . The lower effective tax rate for the year endedDecember 31, 2019 was primarily due to favorable jurisdictional mix. 34
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Income (Loss) from Discontinued Operations - net of tax
Loss from discontinued operations - net of tax for the year endedDecember 31, 2019 was$155.4 million compared to a loss of$130.4 million for the year endedDecember 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 endedDecember 31, 2019 was$0.1 million compared to a gain of$2.4 million for the year endedDecember 31, 2018 . The gain in 2019 was primarily related to a gain on the sale of our North American mobile crane product lines manufactured in itsOklahoma City facility, partially offset by post-closing adjustments for the sale of MHPS and a loss on the sale of Demag. 35 -------------------------------------------------------------------------------- 2018 COMPARED WITH 2017 Consolidated 2018 2017 % of % of % Change In Sales Sales Reported Amounts ($ 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 endedDecember 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 endedDecember 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 endedDecember 31, 2018 increased$10.3 million when compared to 2017 primarily due to planned engineering and strategic sourcing spending. Income from operations increased by$184.3 million for the year endedDecember 31, 2018 when compared to 2017. The increase was primarily due to higher sales and production volume and the positive effects of exchange rate changes in all segments, partially offset by increased material costs across all segments. Aerial Work Platforms 2018 2017 % of % of % Change In Sales Sales Reported Amounts ($ 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 endedDecember 31, 2018 increased$517.2 million when compared to 2017 primarily due to higher broad-based demand for aerial equipment inNorth America ,Western Europe andChina , telehandlers inNorth America from a combination of fleet replacement and growth in rental fleets due to improving rental utilization rates as well as utility equipment sales inNorth America . Net sales were positively impacted by effects of foreign exchange rate changes, particularly inEurope , of approximately$45 million . Income from operations for the year endedDecember 31, 2018 increased$100.7 million when compared to 2017. The increase was primarily due to increased sales volume, improved factory utilization and the positive impact of foreign exchange rate changes, partially offset by increased material costs, driven by higher steel prices and tariffs, and higher selling and administrative costs associated with planned engineering and strategic sourcing spending. 36 --------------------------------------------------------------------------------
Materials Processing
2018 2017
% of % of % Change In
Sales Sales Reported Amounts
($ 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 $50.9
million when compared to 2017 primarily due to increased sales and production
volume, partially offset by higher selling and administrative costs associated
with planned engineering and strategic sourcing spending.
Corporate and Other / Eliminations
2018 2017
% of % of % Change In
Sales Sales Reported Amounts
($ 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 ourU.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 endedDecember 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 endedDecember 31, 2017 . The lower effective tax rate for the year endedDecember 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 endedDecember 31, 2018 was$130.4 million , compared to a loss of$49.6 million for the year endedDecember 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 endedDecember 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 endedDecember 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
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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 - "
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 ofDecember 31, 2019 , we maintained an unfunded, nonqualified Supplemental Executive Retirement Plan (the "U.S. SERP") for certain formerU.S. employees. Generally, theU.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 theU.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 inFrance ,Germany ,India ,Switzerland and theU.K. for some of our subsidiaries. The plans inFrance ,Germany andIndia are unfunded plans. The plan in theU.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 inItaly , 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 theU.K. plan and 2.00% for the Swiss plan atDecember 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 atDecember 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 theU.S. SERP and 0.10% to 10.71% with a weighted average of 1.87% for non-U.S. plans atDecember 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 theDecember 31 measurement date. The discount rate atDecember 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. TheU.S. SERP has no expected rate of compensation increase as all participants have retired or have a terminated vested benefit payable in the future. OurU.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% atDecember 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$5.9 million was due to changes in assumptions from the previous year, primarily decreases in discount rates, partially offset by gains incurred on our pension assets. 41 -------------------------------------------------------------------------------- Actual results in any given year will often differ from actuarial assumptions because of demographic, economic and other factors. Market value of plan assets can change significantly in a relatively short period of time. Additionally, the measurement of plan benefit obligations is sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plans' estimated benefit obligations could increase, causing an increase in liabilities and a reduction in Stockholders' Equity. We expect any future obligations under our plans that are not currently funded will be funded from future cash flows from operations. If our contributions are insufficient to adequately fund the plans to cover our future obligations, or if the performance of assets in our plans does not meet expectations, or if our assumptions are modified, contributions could be higher than expected, which would reduce cash available for our business. Changes inU.S. or foreign laws governing these plans could require additional contributions. Assumptions used in computing our net pension expense and projected benefit obligation have a significant effect on the amounts reported. A 25 basis point change in each assumption below would have the following effects upon net pension expense and projected benefit obligation, respectively, as of and for the year endedDecember 31, 2019 : ($ amounts in millions) Increase Decrease Expected long- Expected long- Discount Rate term rate of return Discount Rate 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. AtDecember 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 endedDecember 31, 2019 , our liquidity increased by approximately$405 million fromDecember 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 insidethe 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 theU.S. , if necessary. Cash repatriated to theU.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
The following table reconciles Net cash provided by (used in) operating activities to free cash flow (in millions):
Year Ended
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
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 endedDecember 31, 2019 , we sold, without recourse, approximately$1,108 million of trade accounts receivable to enhance liquidity. During the year endedDecember 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
The following tables show the calculation of our working capital in continuing operations and trailing three months annualized sales as ofDecember 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 OnJanuary 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. OnMarch 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 throughJanuary 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 ofDecember 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 ofDecember 31, 2019 . AtDecember 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 atDecember 31, 2019 . We remain focused on expanding financing solutions in key markets like theU.S. ,Europe andChina . We also anticipate using TFS to drive incremental sales by increasing customer financing through TFS in certain instances. InJuly 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 endedDecember 31, 2019 , we repurchased a total of 0.2 million shares for$4.9 million under theJuly 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. InFebruary 2020 , our Board of Directors declared a dividend of$0.12 per share which will be paid onMarch 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 theSEC . 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 endedDecember 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 endedDecember 31, 2019 was$103.8 million , compared to$85.9 million of cash used in investing activities for the year endedDecember 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 endedDecember 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
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 153.2 34.2 52.6 38.8 27.6
Purchase obligations (1) 528.5 527.8 0.6 0.1 -
Total $ 2,136.7 $ 626.2 $ 178.9 $ 699.4 $ 632.2 (1) Purchase obligations include non-cancellable and cancellable commitments.
In many cases, cancellable commitments contain penalty provisions for
cancellation.
Long-term debt obligations include expected interest expense. Interest expense
is calculated using fixed interest rates for indebtedness that has fixed rates
and the implied forward rates for term loan indebtedness as of December 31,
2019 .
As of December 31, 2019 , our liability for uncertain income tax positions was
$3.2 million . The amount of reasonably possible payments in 2020 related to our
tax audits worldwide is not significant. Payments may be made in part to
mitigate the accrual of interest in connection with income tax audit assessments
that may be issued and that we would contest, or may in part be made to settle
the matter with tax authorities. Due to the high degree of uncertainty
regarding the timing of potential future cash flows associated with remaining
liabilities, we are unable to make a reasonable estimate of the amount and
period in which these remaining liabilities might be paid.
45
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Additionally, at
We maintain defined benefit pension plans for some of our operations inthe United States andEurope . It is our policy to fund the retirement plans at the minimum level required by applicable regulations. In 2019, we made cash contributions and payments to the retirement plans of$8.5 million , and we estimate that our retirement plan contributions will be approximately$9 million in 2020. Changes in market conditions, changes in our funding levels or actions by governmental agencies may result in accelerated funding requirements in future periods. 46 --------------------------------------------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
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 minimal 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. 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.
CONTINGENCIES AND UNCERTAINTIES
Foreign Exchange and Interest Rate Risk
Our products are sold in over 100 countries around the world and, accordingly, our revenues are generated in foreign currencies, while costs associated with those revenues are only partly incurred in the same currencies. We enter into foreign exchange contracts to manage variability of future cash flows associated with recognized assets or liabilities or forecasted transactions due to changing currency exchange rates. Primary currencies to which we are exposed are the Euro, British Pound and Australian Dollar. See Risk Factor entitled, "We are subject to currency fluctuations." in Part I, Item 1A. for further information on our foreign exchange risk. We manage exposure to interest rates by incurring a mix of indebtedness bearing interest at both floating and fixed rates at inception and maintaining an ongoing balance between floating and fixed rates on this mix of indebtedness using interest rate swaps when necessary. See Note J - "Derivative Financial Instruments" in the Notes to the Consolidated Financial Statements for further information about our derivatives and Item 7A. - "Quantitative and Qualitative Disclosures About Market Risk" for a discussion of the impact that changes in foreign currency exchange rates and interest rates may have on our financial performance.
Other
We are subject to a number of contingencies and uncertainties including, without limitation, product liability claims, workers' compensation liability, intellectual property litigation, self-insurance obligations, tax examinations, guarantees, class action lawsuits and other matters. See Note O - "Litigation and Contingencies" in the Notes to the Consolidated Financial Statements for more information concerning contingencies and uncertainties, including our proceedings involving a claim inBrazil regarding payment of ICMS tax. We are insured for product liability, general liability, workers' compensation, employer's liability, property damage, intellectual property and other insurable risks required by law or contract with retained liability to us or deductibles. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any liability. However, we do not believe these contingencies and uncertainties will, individually or in aggregate, have a material adverse effect on our operations. For contingencies and uncertainties other than income taxes, when it is probable that a loss will be incurred and possible to make reasonable estimates of our liability with respect to such matters, a provision is recorded for the amount of such estimate or for the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur.
See Part I, Item 1. - "Business - Safety and Environmental Considerations" for additional discussion of safety and environmental items.
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