TEREX CORP MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Terex is a global manufacturer of materials processing machinery and aerial work platforms. We design, build and support products used in construction, maintenance, manufacturing, energy, recycling, minerals and materials management applications. Certain Terex products and solutions enable customers to reduce their environmental impact including electric and hybrid offerings that deliver quiet and emission-free performance, products that support renewable energy, and products that aid in the recovery of useful materials from various types of waste. Our products are manufactured in
North America, Europe, Australiaand Asiaand sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. We report our business in the following segments: (i) Materials Processing ("MP") and (ii) Aerial Work Platforms ("AWP"). Further information about our reportable segments appears below and in Note B - "Business Segment Information" in the Notes to Condensed Consolidated Financial Statements. Non-GAAP Measures In this document, we refer to various GAAP ( United States("U.S.") generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors consider, such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Non-GAAP measures that we may use include the translation effect of changes in foreign exchange rates on net sales, gross profit, selling, general and administrative (“SG&A”) expenses and operating income. , as well as net sales, gross margin, SG&A expenses and operating income excluding the impact of acquisitions and divestitures.
As changes in foreign currency exchange rates have a non-operating impact on our financial results, we believe excluding effects of these changes assists in assessment of our business results between periods. We calculate the translation effect of foreign currency exchange rate changes by translating current period results using rates that the comparable prior periods were translated at to isolate the foreign exchange component of fluctuation from the operational component. Similarly, impact of changes in our results from acquisitions and divestitures not included in comparable prior periods may be subtracted from the absolute change in results to allow for better comparability of results between periods. We calculate a non-GAAP measure of free cash flow. We define free cash flow as Net cash provided by (used in) operating activities less Capital expenditures, net of proceeds from sale of capital assets. We believe this measure of free cash flow provides management and investors further useful information on cash generation or use in our primary operations. We discuss forward-looking information related to expected earnings per share ("EPS") excluding the impact of potential future acquisitions, divestitures, restructuring and other unusual items. Our 2022 outlook for earnings per share is a non-GAAP financial measure because it excludes unusual items. The Company is not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because the Company is unable to predict with a reasonable degree of certainty the exact timing and impact of such items. The unavailable information could have a significant impact on the Company's full year 2022 GAAP financial results. This forward-looking information provides guidance to investors about our EPS expectations excluding these unusual items that we do not believe are reflective of our ongoing operations. Working capital is calculated using the Condensed Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories, less Trade accounts payable and Customer advances. We view excessive working capital as an inefficient use of resources, and seek to minimize the level of investment without adversely impacting ongoing operations of the business. Trailing three months annualized net sales is calculated using net sales for the most recent quarter end multiplied by four. The ratio calculated by dividing working capital by trailing three months annualized net sales is a non-GAAP measure we believe measures our resource use efficiency. 23 --------------------------------------------------------------------------------
Non-GAAP measures we also use include adjusted net operating income after tax (“NOPAT”), adjusted annualized effective tax rate and adjusted cash and cash equivalents, which are used in the calculation our after-tax return on invested capital (“ROIC”) (collectively the “Non-GAAP Measures”), which are described in detail below.
Safety remains our top priority; driven by Think Safe – Work Safe – Home Safe. All members of the Terex team have contributed to our efforts to continue to provide products and services to our customers, while maintaining a safe working environment.
Our strategic operational priorities of execution, innovation, and growth continue to make excellent progress. We continue to drive penetration of new markets and geographies, which have high growth potential, including recycling, material handling and electrification. Parts and service remain a focus as we enhance our digital offerings for dealers and customers. We also expanded our Utilities customer service footprint in the quarter with a new
Atlanta, Georgiafacility. In addition to technology and customer experience, we continue to invest for future growth, both organically and inorganically. An important part of our organic growth is our investment in the new Monterrey, Mexicofacility. Our Mexicooperation has ramped up production and is shipping telehandlers. Our performance in the first quarter of 2022 reflected strong, global customer demand in our businesses and good execution by our team members in a dynamic and challenging environment. Net sales of $1 billionwere up 16% year-over-year as end-markets remained strong. Despite the high inflationary environment, SG&A spending was $3 millionlower year-over-year at 11.1% of net sales, reflecting focused cost management. Operating margin of 7.4% expanded 30 basis points driven by higher sales and strict expense discipline. This led to earnings per share ("EPS") increasing by 32% year-over-year to $0.74in the first quarter of 2022. Overall, first quarter financial performance demonstrated continued, strong execution. We continued to experience global supply chain disruptions and significant inflationary pressures due to COVID-19 and geopolitical risks. These issues are causing increased disruptions and cost pressures in materials, logistics, freight and labor. These headwinds have constrained our growth and became more pronounced at the end of the quarter. However, we are aggressively managing these challenges. We have taken pricing actions, but they were only able to partially offset the cost increases we experienced in the quarter. We still anticipate being price cost negative in the first half of 2022 but being price cost neutral for all of 2022. MP had another strong quarter with net sales up 20% from the prior year period driven by strong customer sentiment across all end-markets and geographies. Our mobile crushing and screening businesses are benefiting from the strength of aggregates demand for infrastructure and sand for silicon used in semiconductors. Secular growth of environmental and waste recycling solutions is driving demand for our wood processing, biomass and recycling equipment. The strength of residential construction is driving demand for our cement products in the U.S.Our material handlers are benefiting from strong scrap steel prices as steel prices remain elevated. The strength of commodity prices is driving demand for our pick and carry cranes in Australia. MP has been aggressively managing all elements of cost resulting in a 14.2% operating margin for the quarter. We are encouraged by MP's backlog of $1.2 billion, which is up 66% compared to the prior year period. AWP's first quarter 2022 net sales increased 16% compared to last year, driven by strong global end market demand. Construction, infrastructure, and industrial applications are driving demand for Genie products. In addition, the fundamentals of the North American and European replacement cycle are strong as fleets age and customers have strong utilization rates. Globally, increased adoption continues to improve labor efficiency and jobsite safety. Except for China, demand remains strong for Genie products in all regions. Our Utilities business is benefiting from electric grid expansion as well as the demand for 5G telecom across the United States. AWP delivered operating margins of 5.9% in the quarter driven by strict expense management. AWP's end market strength is demonstrated by its backlog of $2.3 billion, up 77% year-over-year. In the first quarter of 2022, our largest market remained North America, which represented approximately 54% of our global sales. As compared to the prior year period, our sales were up double digits in every major geography except for Asia Pacificwhich was down single digits. 24 -------------------------------------------------------------------------------- We continued to execute our disciplined capital allocation strategy in the first quarter of 2022. We are making strategic investments in our businesses as described above and we also continued to return capital to shareholders. In February 2022, our Board of Directors approved increasing our quarterly dividend by 8% to $0.13per share. We also completed $20 millionof share repurchases in the quarter. We typically use cash in the first quarter of the year and had a negative free cash flow of $72 millionin the first quarter of 2022. We continue to maintain ample liquidity and as of March 31, 2022, we had $753 millionin available liquidity, with no near-term debt maturities. See "Liquidity and Capital Resources" for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels, as well as a reconciliation of net cash provided by (used in) operating activities to free cash flow. Customer demand remains strong globally for our products and services. However, the global operating environment, became increasingly difficult and unpredictable as the quarter progressed and it continues here into the second quarter. Despite these challenges, we are maintaining our outlook for 2022 EPS to be between $3.55and $4.05, on net sales between $4.1 billionand $4.3 billion. We are operating in an unprecedented environment with supply chain challenges, inflationary pressures, geopolitical uncertainty, and highly restrictive China COVID-19 policies, so results could change, positively or negatively.
ROIC and other Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Stockholders' equity for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from operations by one minus the annualized effective tax rate. In the calculation of ROIC, we adjust annualized effective tax rate to reflect management's expectation of the full year effective tax rate to create a measure that is more useful to understanding our operating results and the ongoing performance of our underlying business as shown in the tables below. Cash and cash equivalents is adjusted to include amounts recorded as held for sale. Furthermore, debt is calculated using amounts for Current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters' adjusted NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters' ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital. 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 businesses and is an accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Stockholders' equity provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC at
March 31, 2022was 19.2%. 25 -------------------------------------------------------------------------------- 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. Mar '22 Dec '21
Sep ’21 Jun ’21 Mar ’21
Adjusted annualized effective tax rate(1) 20.5% 17.6%
17.6 % 17.6 % Income (loss) from operations
$ 74.5 $ 69.8 $ 74.2 $ 122.5Multiplied by: 1 minus annualized effective tax rate 79.5 % 82.4 % 82.4 % 82.4 % Adjusted net operating income (loss) after tax $ 59.2 $ 57.5 $ 61.1 $ 100.9Debt $ 740.3 $ 674.1 $ 893.4 $ 894.2 $ 979.2Less: Cash and cash equivalents as adjusted (218.4) (266.9) (558.2) (547.5) (577.8) Debt less Cash and cash equivalents as adjusted 521.9 407.2 335.2 346.7 401.4 Stockholders' equity 1,114.1 1,109.6 1,050.7 1,033.9 946.1 Debt less Cash and cash equivalents as adjusted plus Stockholders' equity $ 1,636.0 $ 1,516.8
(1) The annualized effective tax rate for each 2021 period represents the effective effective tax rate for the full year 2021.
March 31, 2022ROIC 19.2 % NOPAT as adjusted (last 4 quarters) $
Average debt less cash and adjusted cash equivalents plus equity (5 quarters)
$ 1,453.4As of 3/31/22 As of 12/31/21 As of 9/30/21 As of 6/30/21 As of 3/31/21 Reconciliation of Cash and cash equivalents: Cash and cash equivalents - continuing operations $ 218.4$
Cash and cash equivalents – assets held for sale
- - 5.0 5.3 4.9 Cash and cash equivalents as adjusted
$ 218.4 $ 266.9 $ 558.2 $ 547.5 $ 577.8Income (loss) from continuing (Provision for) Three Months Ended operations before benefit from March 31, 2022 income taxes income taxes Income tax rate Reconciliation of annualized effective tax rate: As reported $ 64.2 $ (11.9) 18.5 % Effect of adjustments: Tax related - (1.3) As adjusted $ 64.2 $ (13.2) 20.5 % 26
RESULTS OF OPERATIONS
Three Months Ended
March 31, 2022Compared with Three Months Ended March 31, 2021Consolidated Three Months Ended March 31, 2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales $ 1,002.5- $ 864.2- 16.0 % Gross profit $ 185.8 18.5 % $ 175.420.3 % 5.9 % SG&A $ 111.3 11.1 % $ 113.913.2 % (2.3) % Income from operations $ 74.5 7.4 % $ 61.57.1 % 21.1 % Net sales for the three months ended March 31, 2022increased $138.3 millionwhen compared to the same period in 2021. The increase in net sales was primarily due to strong demand for our products across multiple businesses. Changes in foreign exchange rates negatively impacted consolidated net sales by approximately $32 million.
Gross profit for the three months ended
compared to the same period in 2021. The increase is mainly due to higher sales volume. However, price realization was more than offset by increases in material, labor and freight costs due to global supply chain disruptions, significant inflationary pressures and the impact negative for changes in exchange rates.
SG&A costs for the three months ended
March 31, 2022decreased $2.6 millionwhen compared to the same period in 2021 primarily due to continued cost discipline across all areas of our business. Income from operations for the three months ended March 31, 2022increased $13.0 millionwhen compared to the same period in 2021. The increase was primarily due to higher sales volume. However, price realization was more than offset by cost increases and the negative impact of changes in foreign exchange rates.
2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales
$ 452.7- $ 378.2- 19.7 % Income from operations $ 64.514.2 % $ 49.113.0 % 31.4 % Net sales for the MP segment for the three months ended March 31, 2022increased $74.5 millionwhen compared to the same period in 2021 primarily due to robust end-market demand for aggregates and material handlers in all major geographies, cranes in Asia-Pacific, and concrete mixer trucks and environmental equipment in North America. Net sales were negatively impacted by the effects of foreign exchange rate changes of approximately $17 million. Income from operations for the three months ended March 31, 2022increased $15.4 millionwhen compared to the same period in 2021 primarily due to higher sales volume. Price realization offset material, labor and freight cost increases due to global supply chain disruptions and significant inflationary pressures. 27 --------------------------------------------------------------------------------
Aerial Work Platforms Three Months Ended March 31, 2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales
$ 551.5- $ 476.7- 15.7 % Income from operations $ 32.55.9 % $ 26.65.6 % 22.2 % Net sales for the AWP segment for the three months ended March 31, 2022increased $74.8 millionwhen compared to the same period in 2021 primarily due to higher demand driven by fleet replacement and end-market growth for aerial work platforms, utility products and telehandlers in North America, partially offset by lower demand for aerial work platforms in China. Net sales were negatively impacted by the effects of foreign exchange rate changes of approximately $15 million. Income from operations for the three months ended March 31, 2022increased $5.9 millionwhen compared to the same period in 2021 primarily due to higher sales volume. However, price realization was more than offset by material, labor and freight cost increases due to global supply chain disruptions and significant inflationary pressures.
Business and others / Eliminations
Three Months Ended March 31, 2022 2021 % of % of % Change In Sales Sales Reported Amounts ($ amounts in millions) Net sales
$ (1.7)- $ 9.3- (118.3) % Loss from operations $ (22.5)* $ (14.2)* (58.5) %
* Not a significant percentage
Net revenues include listed financing activities
(“TFS”), government sales and the elimination of intercompany sales activities between segments. The decrease in net sales is mainly attributable to lower revenues from TFS.
Loss from operations for the three months ended
March 31, 2022increased $8.3 millionwhen compared to the same period in 2021. The increase in operating loss is primarily due to a gain on the sale of assets in the prior period and the negative impact of changes in foreign exchange rates, provision for litigation on former product lines and restructuring charges in the current year, partially offset by lower SG&A.
Interest expense, net of interest income
In the three months ended
Loss on early extinguishment of debt
In the three months ended
Other income (expenses) – Net
Other income (expense) - net for the three months ended
March 31, 2022was expense of $0.3 millioncompared to income of $2.6 millionin the same period in the prior year. The increase in expense was primarily due to lower mark-to-market gains recorded on an equity investment and higher foreign exchange translation losses in the current year compared to the same period in the prior year. Income Taxes During the three months ended March 31, 2022, we recognized income tax expense of $11.9 millionon income of $64.2 million, an effective tax rate of 18.5%, as compared to income tax expense of $7.7 millionon income of $47.4 million, an effective tax rate of 16.2%, for the three months ended March 31, 2021. The higher effective tax rate for the three months ended March 31, 2022when compared with the three months ended March 31, 2021is primarily due to increased tax on the geographic distribution of income partially offset by reduced U.S.tax on foreign income.
CASH 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
March 31, 2022, we had cash and cash equivalents of $218.4 millionand undrawn availability under our revolving line of credit of $535 million, giving us total liquidity of approximately $753 million. During the three months ended March 31, 2022, our liquidity decreased by approximately $114 millionfrom December 31, 2021primarily due to cash used in our operating activities, share repurchases and capital expenditures. Our main sources of funding are cash generated from operations, including cash generated from the sale of receivables, loans from our bank credit facilities and funds raised in capital markets. We have no significant debt maturities until 2024 and we have increased our focus on free cash flow generation. Our actions to maintain liquidity include disciplined management of costs and working capital. We believe these measures will provide us with adequate liquidity to comply with our financial covenants under our bank credit facility, continue to support internal operating initiatives and meet our operating and debt service requirements for at least the next 12 months from the date of issuance of this quarterly report. See Part I, Item 1A. - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021for a detailed description of the risks resulting from our debt and our ability to generate sufficient cash flow to operate our business.
Our ability to generate operating cash flow is subject to many factors, including the following:
•The duration and depth of the global economic uncertainty resulting from COVID-19. •As our sales change, the amount of working capital needed to support our business may change. •Many of our customers fund their purchases through third-party finance companies that extend credit based on the credit-worthiness of customers and expected residual value of our equipment. Changes either in customers' credit profile or used equipment values may affect the ability of customers to purchase equipment. There can be no assurance that third-party finance companies will continue to extend credit to our customers as they have in the past. •Our suppliers extend payment terms to us primarily based on our overall credit rating. Deterioration in our credit rating may influence suppliers' willingness to extend terms and in turn accelerate cash requirements of our business. •Sales of our products are subject to general economic conditions, weather, competition, translation effect of foreign currency exchange rate changes, and other factors that in many cases are outside our direct control. For example, during periods of economic uncertainty, our customers have delayed purchasing decisions, which reduces cash generated from operations. •Availability and utilization of other sources of liquidity such as trade receivables sales programs.
Generally, we have invested our cash in a combination of liquid, highly rated money market funds and 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
U.S.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, without additional tax expense. Incremental cash repatriated to the U.S.would not be expected to result in material foreign, Federal or state tax cost. We will continue to seek opportunities to tax-efficiently mobilize and redeploy funds. 29 --------------------------------------------------------------------------------
We used free cash flow from
The following table reconciles net cash provided by (used in) operating activities with free cash flow (in millions):
Three Months Ended 3/31/2022 Net cash provided by (used in) operating activities $ (51.7)
Capital expenditures, net of proceeds from sale of capital assets
(20.1) Free cash flow (use) $ (71.8)
In accordance with the terms of our accounts receivable factoring agreements, during the three months ended
Working capital as a percentage of annualized net sales for the last three months was 21.2% at
The following tables show the calculation of our working capital and annualized sales for the last three months at
Three Months Ended 3/31/2022 Net Sales $ 1,002.5 x 4
Annualized net sales over the last three months $4,010.0
As of 3/31/22 Inventories
$ 921.3Trade Receivables 525.6 Trade Accounts Payable (571.5) Customer Advances (25.6) Working Capital $ 849.8On January 31, 2017, we entered into a credit agreement which was subsequently amended to include (i) a $600 millionrevolving line of credit (the "Revolver") and (ii) senior secured term loans totaling $600 millionwith a maturity date of January 31, 2024. On April 1, 2021, we entered into an amendment and restatement of the credit agreement (as amended and restated, the "Credit Agreement") which included the following principal changes to the original credit agreement: (i) extension of the term of the Revolver to expire on April 1, 2026, which maturity will spring forward to November 1, 2023if the principal outstanding under the $400 millionsenior secured term loan (the "Original Term Loan") is not repaid or the maturity date is not extended, (ii) reinstatement of financial covenants that were waived in 2020, (iii) decrease in the interest rate on the drawn Revolver by 25 basis points and (iv) certain other technical changes, including additional language regarding the potential cessation of the London Interbank Offered Rate as a benchmark rate. See Note I - "Long-Term Obligations" in our Condensed Consolidated Financial Statements for additional information regarding the Credit Agreement. Borrowings under the Credit Agreement at March 31, 2022were $77.9 million, net of discount, on the Original Term Loan and $65.0 millionon the Revolver. At March 31, 2022, the weighted average interest rate was 2.75% on the Original Term Loan and 2.17% on the Revolver. We remain focused on expanding customer financing solutions in key markets like the U.S., Europeand China. We also anticipate our continued use of TFS to drive incremental sales by increasing customer financing facilitated through TFS in certain instances. In July 2018, our Board of Directors authorized the repurchase up to $300 millionof our outstanding shares of common stock. During the three months ended March 31, 2022, we repurchased - shares for $17.5 millionunder this authorization leaving approximately $122 millionavailable for repurchase under this program. In the first quarter of 2022, our Board of Directors declared a dividend of $0.13per share, which was paid to the Company's shareholders. 30 -------------------------------------------------------------------------------- Our ability to access capital markets to raise funds, through sale of equity or debt securities, is subject to various factors, some specific to us and others related to general economic and/or financial market conditions. These include results of operations, projected operating results for future periods and debt to equity leverage. Our ability to access capital markets is also subject to our timely filing of periodic reports with the Securities and Exchange Commission. In addition, terms of our bank credit facilities, senior notes and senior subordinated notes contain restrictions on our ability to make further borrowings and to sell substantial portions of our assets.
Cash used in operations for the three months ended
March 31, 2022totaled $51.7 million, compared to cash provided by operations of $138.1 millionfor the three months ended March 31, 2021. The change in operating cash was primarily driven by proceeds from the sale of finance receivables received in the prior year and higher working capital and incentive compensation payments in the current year. Cash used in investing activities was $23.2 millionand $6.1 millionfor the three months ended March 31, 2022and 2021, respectively. The increase in cash used in investing activities relates primarily to higher capital expenditures and investment activity. Cash provided by financing activities was $28.0 millionfor the three months ended March 31, 2022, compared to cash used in financing activities of $214.9 millionfor the three months ended March 31, 2021. The increase in cash provided by financing activities was primarily due to debt prepayments in the prior year compared to borrowings in the current year, partially offset by share repurchases.
OFF-BALANCE SHEET ARRANGEMENTS
We may assist customers in their rental, leasing and acquisition of our products by facilitating financing transactions directly between (i) end-user customers, distributors and rental companies and (ii) third-party financial institutions, providing recourse in certain circumstances. The expectation of losses or non-performance is evaluated based on consideration of historical customer assessments, current financial conditions, reasonable and supportable forecasts, equipment collateral value and other factors. Many of these factors, including the assessment of a customer's ability to pay, are influenced by economic and market factors that cannot be predicted with certainty. Our maximum liability is generally limited to our customer's remaining payments due to the third-party financial institutions at the time of default. In the event of a customer default, we are generally able to recover and dispose of the equipment at a minimum loss, if any, to us. Reserves are recorded for expected loss over the contractual period of risk exposure.
There can be no assurance that our historical experience in the used equipment markets will be indicative of future results. Our ability to recover losses incurred under our warranties may be affected by economic conditions in the used equipment markets at the time of the loss.
See Note K – “Litigation and contingencies” in the Notes to the condensed consolidated financial statements for more information regarding our guarantees.
CONTINGENCIES AND UNCERTAINTIES
Currency and interest rate risk
Our products are sold in over 100 countries around the world and, accordingly, our revenues are generated in foreign currencies, while costs associated with those revenues are only partly incurred in the same currencies. Primary currencies to which we are exposed are the Euro, British Pound, Chinese Yuan, Australian Dollar and Mexican Peso. We purchase hedging instruments to manage variability of future cash flows associated with recognized assets or liabilities due to changing currency exchange rates. We manage our exposure to interest rate risk by establishing a mix of indebtedness bearing interest at both floating and fixed rates at inception and maintain a ratio of floating and fixed rates on this mix of indebtedness using interest rate derivatives when necessary. 31 -------------------------------------------------------------------------------- See Note H - "Derivative Financial Instruments" in the Notes to Condensed Consolidated Financial Statements for further information regarding our derivatives and Item 3 "Quantitative and Qualitative Disclosures About Market Risk" for a discussion of the impact changes in foreign currency exchange rates and interest rates may have on our financial performance.
We are subject to a number of contingencies and uncertainties including, without limitation, product liability claims, workers' compensation liability, intellectual property litigation, self-insurance obligations, tax examinations, guarantees, class action lawsuits and other matters. See Note K - "Litigation and Contingencies" in the Notes to Condensed Consolidated Financial Statements for more information regarding contingencies and uncertainties, including our proceedings involving a claim in
Brazilregarding payment of ICMS tax, penalties and related interest. We are insured for product liability, general liability, workers' compensation, employer's liability, property damage, intellectual property and other insurable risks required by law or contract with retained liability to us or deductibles. Many of the exposures are unasserted or proceedings are at a preliminary stage, and it is not presently possible to estimate the amount or timing of any liability. However, we do not believe these contingencies and uncertainties will, individually or in aggregate, have a material adverse effect on our operations. For contingencies and uncertainties other than income taxes, when it is probable a loss will be incurred and possible to make reasonable estimates of our liability with respect to such matters, a provision is recorded for the amount of such estimate or for the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur. We generate hazardous and non-hazardous wastes in the normal course of our manufacturing operations. As a result, we are subject to a wide range of environmental laws and regulations. All of our employees are required to obey all applicable health, safety and environmental laws and regulations and must observe the proper safety rules and environmental practices in work situations. These laws and regulations govern actions that may have adverse environmental effects, such as discharges to air and water, and require compliance with certain practices when handling and disposing of hazardous and non-hazardous wastes. These laws and regulations would also impose liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances, should any such events occur. We are committed to complying with these standards and monitoring our workplaces to determine if equipment, machinery and facilities meet specified safety standards. Each of our manufacturing facilities is subject to an environmental audit at least once every five years to monitor compliance. Also, no incidents have occurred which required us to pay material amounts to comply with such laws and regulations. We are dedicated to ensuring that safety and health hazards are adequately addressed through appropriate work practices, training and procedures. We are committed to reducing injuries and working towards a world-class level of safety practices in our industry. RECENT ACCOUNTING STANDARDS Please refer to Note A - "Basis of Presentation" in the accompanying Condensed Consolidated Financial Statements for a summary of recently issued accounting standards. 32
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