10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

F O R M   10 – Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10702

Terex Corporation
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)
 
34-1531521
(IRS Employer Identification No.)

200 Nyala Farm Road, Westport, Connecticut 06880
(Address of principal executive offices)

(203) 222-7170
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
x
 
NO
o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES
x
 
NO
o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
o
 
NO
x

Number of outstanding shares of common stock: 109.2 million as of April 25, 2016.
The Exhibit Index begins on page 56.






INDEX

TEREX CORPORATION AND SUBSIDIARIES

GENERAL

This Quarterly Report on Form 10-Q filed by Terex Corporation generally speaks as of March 31, 2016 unless specifically noted otherwise, and includes financial information with respect to the subsidiaries of the Company listed below (all of which are 100%-owned) which were guarantors on March 31, 2016 (the “Guarantors”) of the Company’s 6% Senior Notes Due 2021 (the “6% Notes”) and its 6-1/2% Senior Notes Due 2020 (the “6-1/2% Notes”).  See Note Q – “Consolidating Financial Statements” to the Company’s March 31, 2016 Condensed Consolidated Financial Statements included in this Quarterly Report. Unless otherwise indicated, Terex Corporation, together with its consolidated subsidiaries, is hereinafter referred to as “Terex,” the “Registrant,” “us,” “we,” “our” or the “Company.”

Guarantor Information

Guarantor
State or other jurisdiction of
incorporation or organization
I.R.S. employer
identification number
CMI Terex Corporation
Oklahoma
73-0519810
Fantuzzi Noell USA, Inc.
Illinois
36-3865231
Genie Holdings, Inc.
Washington
91-1666966
Genie Industries, Inc.
Washington
91-0815489
Genie International, Inc.
Washington
91-1975116
Powerscreen Holdings USA Inc.
Delaware
61-1265609
Powerscreen International LLC
Delaware
61-1340898
Powerscreen North America Inc.
Delaware
61-1340891
Powerscreen USA, LLC
Kentucky
31-1515625
Terex Advance Mixer, Inc.
Delaware
06-1444818
Terex Aerials, Inc.
Wisconsin
39-1028686
Terex Financial Services, Inc.
Delaware
45-0497096
Terex South Dakota, Inc.
South Dakota
41-1603748
Terex USA, LLC
Delaware
75-3262430
Terex Utilities, Inc.
Oregon
93-0557703
Terex Washington, Inc.
Washington
91-1499412




Forward-Looking Information

Certain information in this Quarterly Report includes forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995) regarding future events or our future financial performance that involve certain contingencies and uncertainties, including those discussed below in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contingencies and Uncertainties.”  In addition, when included in this Quarterly Report or in documents incorporated herein by reference, the words “may,” “expects,” “should,” “intends,” “anticipates,” “believes,” “plans,” “projects,” “estimates” and the negatives thereof and analogous or similar expressions are intended to identify forward-looking statements. However, the absence of these words does not mean that the statement is not forward-looking. We have based these forward-looking statements on current expectations and projections about future events. These statements are not guarantees of future performance. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Such risks and uncertainties, many of which are beyond our control, include, among others:

our business is cyclical and weak general economic conditions affect the sales of our products and financial results;
the effect of the announcement and pendency of the merger with Konecranes Plc (“Konecranes”) and the non-binding proposal from Zoomlion Heavy Industry Science and Technology Co. on our customers, employees, suppliers, vendors, distributors, dealers, retailers, operating results and business generally, and the diversion of management’s time and attention;
our ability to successfully integrate acquired businesses, including the pending merger with Konecranes;
our need to comply with restrictive covenants contained in our debt agreements;
our ability to generate sufficient cash flow to service our debt obligations and operate our business;
our ability to access the capital markets to raise funds and provide liquidity;
our business is sensitive to government spending;
our business is highly competitive and is affected by our cost structure, pricing, product initiatives and other actions taken by competitors;
our retention of key management personnel;
the financial condition of suppliers and customers, and their continued access to capital;
our providing financing and credit support for some of our customers;
we may experience losses in excess of recorded reserves;
the carrying value of our goodwill and other indefinite-lived intangible assets could become impaired;
our ability to obtain parts and components from suppliers on a timely basis at competitive prices;
our business is global and subject to changes in exchange rates between currencies, commodity price changes, regional economic conditions and trade restrictions;
our operations are subject to a number of potential risks that arise from operating a multinational business, including compliance with changing regulatory environments, the Foreign Corrupt Practices Act and other similar laws, and political instability;
a material disruption to one of our significant facilities;
possible work stoppages and other labor matters;
compliance with changing laws and regulations, particularly environmental and tax laws and regulations;
litigation, product liability claims, intellectual property claims, class action lawsuits and other liabilities;
our ability to comply with an injunction and related obligations imposed by the United States Securities and Exchange Commission (“SEC”);
disruption or breach in our information technology systems; and
other factors.

Actual events or our actual future results may differ materially from any forward-looking statement due to these and other risks, uncertainties and significant factors. The forward-looking statements contained herein speak only as of the date of this Quarterly Report and the forward-looking statements contained in documents incorporated herein by reference speak only as of the date of the respective documents. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained or incorporated by reference in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

2



 
 
Page No.
 
 
 
 
 
 
 
TEREX CORPORATION AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3



PART I.
FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in millions, except per share data)
 
Three Months Ended
March 31,
 
2016
 
2015
Net sales
$
1,426.9

 
$
1,495.6

Cost of goods sold
(1,203.4
)
 
(1,219.0
)
Gross profit
223.5

 
276.6

Selling, general and administrative expenses
(265.2
)
 
(232.4
)
Income (loss) from operations
(41.7
)
 
44.2

Other income (expense)
 
 
 

Interest income
1.3

 
1.0

Interest expense
(25.2
)
 
(29.5
)
Other income (expense) – net 
(3.8
)
 
(5.6
)
Income (loss) from continuing operations before income taxes
(69.4
)
 
10.1

(Provision for) benefit from income taxes
(5.0
)
 
(11.6
)
Income (loss) from continuing operations
(74.4
)
 
(1.5
)
Gain (loss) on disposition of discontinued operations – net of tax
3.4

 
3.1

Net income (loss)
(71.0
)
 
1.6

Net loss (income) attributable to noncontrolling interest
0.2

 
(0.6
)
Net income (loss) attributable to Terex Corporation
$
(70.8
)
 
$
1.0

Amounts attributable to Terex Corporation common stockholders:
 
 
 

Income (loss) from continuing operations
$
(74.2
)
 
$
(2.1
)
Gain (loss) on disposition of discontinued operations – net of tax
3.4

 
3.1

Net income (loss) attributable to Terex Corporation
$
(70.8
)
 
$
1.0

Basic Earnings (Loss) per Share Attributable to Terex Corporation Common Stockholders:
 
 
 

Income (loss) from continuing operations
$
(0.68
)
 
$
(0.02
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 
0.03

Net income (loss) attributable to Terex Corporation
$
(0.65
)
 
$
0.01

Diluted Earnings (Loss) per Share Attributable to Terex Corporation Common Stockholders:
 
 
 

Income (loss) from continuing operations
$
(0.68
)
 
$
(0.02
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 
0.03

Net income (loss) attributable to Terex Corporation
$
(0.65
)
 
$
0.01

Weighted average number of shares outstanding in per share calculation
 

 
 

Basic
108.8

 
106.3

Diluted
108.8

 
106.3

Comprehensive income (loss)
$
(12.6
)
 
$
(198.2
)
Comprehensive loss (income) attributable to noncontrolling interest
0.1

 
(0.6
)
Comprehensive income (loss) attributable to Terex Corporation
$
(12.5
)
 
$
(198.8
)
 
 
 
 
Dividends declared per common share
$
0.07

 
$
0.06


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in millions, except par value)
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
323.6

 
$
466.5

Trade receivables (net of allowance of $24.9 and $29.6 at March 31, 2016 and December 31, 2015, respectively)
1,018.6

 
939.2

Inventories
1,554.3

 
1,445.7

Prepaid assets
256.9

 
221.4

Other current assets
6.8

 
67.4

Total current assets
3,160.2

 
3,140.2

Non-current assets
 
 
 

Property, plant and equipment – net
689.1

 
675.8

Goodwill
1,062.6

 
1,023.2

Intangible assets – net
255.3

 
249.5

Other assets
570.3

 
527.3

Total assets
$
5,737.5

 
$
5,616.0

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 

 
 

Notes payable and current portion of long-term debt
$
162.0

 
$
80.2

Trade accounts payable
751.9

 
737.7

Accrued compensation and benefits
217.5

 
188.2

Accrued warranties and product liability
73.0

 
68.3

Customer advances
162.5

 
142.7

Other current liabilities
267.7

 
241.5

Total current liabilities
1,634.6

 
1,458.6

Non-current liabilities
 
 
 

Long-term debt, less current portion
1,668.9

 
1,729.9

Retirement plans
387.5

 
375.7

Other non-current liabilities
157.3

 
139.8

Total liabilities
3,848.3

 
3,704.0

Commitments and contingencies


 


Stockholders’ equity
 

 
 

Common stock, $.01 par value – authorized 300.0 shares; issued 129.5 and 128.8 shares at March 31, 2016 and December 31, 2015, respectively
1.3

 
1.3

Additional paid-in capital
1,269.9

 
1,273.3

Retained earnings
2,026.1

 
2,104.6

Accumulated other comprehensive income (loss)
(591.2
)
 
(649.6
)
Less cost of shares of common stock in treasury – 21.0 and 21.1 shares at March 31, 2016 and December 31, 2015, respectively
(851.0
)
 
(852.2
)
Total Terex Corporation stockholders’ equity
1,855.1

 
1,877.4

Noncontrolling interest
34.1

 
34.6

Total stockholders’ equity
1,889.2

 
1,912.0

Total liabilities and stockholders’ equity
$
5,737.5

 
$
5,616.0


The accompanying notes are an integral part of these condensed consolidated financial statements.

5



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in millions)
 
Three Months Ended
March 31,
 
2016
 
2015
Operating Activities
 
 
 
Net income (loss)
$
(71.0
)
 
$
1.6

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
29.9

 
32.9

Deferred taxes
(4.5
)
 
(1.8
)
Stock-based compensation expense
8.7

 
10.5

Changes in operating assets and liabilities (net of effects of acquisitions and divestitures):
 

 
 

Trade receivables
(57.7
)
 
(101.4
)
Inventories
(93.3
)
 
(132.7
)
Trade accounts payable
4.2

 
49.8

Customer advances
16.6

 
36.6

Other assets and liabilities
40.4

 
(19.9
)
Other operating activities, net
(2.5
)
 
13.7

Net cash provided by (used in) operating activities
(129.2
)
 
(110.7
)
Investing Activities
 

 
 

Capital expenditures
(22.2
)
 
(26.2
)
Acquisitions, net of cash acquired
(3.2
)
 
(22.1
)
Other investing activities, net
(0.5
)
 
(2.0
)
Net cash provided by (used in) investing activities
(25.9
)
 
(50.3
)
Financing Activities
 

 
 

Repayments of debt
(166.1
)
 
(126.3
)
Proceeds from issuance of debt
177.0

 
237.4

Share repurchases

 
(40.2
)
Dividends paid
(7.6
)
 
(6.4
)
Other financing activities, net
(0.6
)
 

Net cash provided by (used in) financing activities
2.7

 
64.5

Effect of Exchange Rate Changes on Cash and Cash Equivalents
9.5

 
(30.4
)
Net Increase (Decrease) in Cash and Cash Equivalents
(142.9
)
 
(126.9
)
Cash and Cash Equivalents at Beginning of Period
466.5

 
478.2

Cash and Cash Equivalents at End of Period
$
323.6

 
$
351.3


The accompanying notes are an integral part of these condensed consolidated financial statements.

6



TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

NOTE A – BUSINESS COMBINATION AGREEMENT AND PLAN OF MERGER

On August 10, 2015, Terex Corporation ("Terex" or the "Company") entered into a Business Combination Agreement and Plan of Merger (the "BCA") with Konecranes Plc, a Finnish public company limited by shares ("Konecranes"), Konecranes, Inc., a Texas corporation and an indirect wholly owned subsidiary of Konecranes, Konecranes Acquisition Company LLC, a Delaware limited liability company and a newly formed, wholly owned subsidiary of Konecranes, Inc. ("Merger Sub"). The combined company that would result from the transaction will be called Konecranes Terex Plc (“Konecranes Terex”) and will be incorporated in Finland.
Pursuant to the BCA, Terex shareholders will receive 0.8 of a Konecranes Terex American Depositary Share, or ADS, for each existing Terex share ("Exchange Ratio"). Each ADS will represent one Konecranes Terex ordinary share. Equivalent terms will apply to instruments granted prior to the merger date under Terex's long-term incentive plans. Upon completion of the merger, Terex shareholders would own approximately 60% and Konecranes shareholders would own approximately 40% of the combined company. In the proposed transaction, Merger Sub merges with and into Terex, with Terex surviving as an indirect wholly-owned subsidiary of Konecranes (the “Merger”) and Terex shareholders, option holders and other equity right holders receiving Konecranes Terex ADSs and options in accordance with the exchange ratios set forth above as merger consideration.
The BCA includes undertakings by Terex and Konecranes that are typical in similar transactions and include, for example, undertakings by both companies to conduct their businesses in the ordinary course prior to the completion of the Merger, to cooperate in making the necessary regulatory filings, undertakings not to initiate, solicit, facilitate or encourage any offers or proposals competing with the transaction, and to inform each other and provide each other with an opportunity to negotiate in matters arising from such offers or proposals.
The BCA may be terminated by Terex or Konecranes under certain circumstances prior to the completion of the Merger, including, for example, a material breach by either party of the terms and conditions of the BCA, the Board of Directors of either party not issuing or amending in an adverse manner its recommendation, non-receipt of regulatory approvals, and certain other circumstances. The parties have further agreed on certain termination fees customary in similar transactions and payable to the other party under certain circumstances, including for example, a failure by either party to obtain the requisite shareholder approval, or a change or withdrawal of the recommendation by the Board of Directors of either party. In the event that the BCA is terminated by either party because the requisite shareholder approval was not obtained, the terminating party will be required to reimburse the other party’s reasonable expenses up to a maximum amount of $20 million. In the event that the BCA is terminated by either party because of a change or withdrawal of the recommendation of the Board of Directors, the terminating party will be required to pay a termination fee of $37 million.
The transaction is subject to approval by both Terex and Konecranes shareholders, regulatory approvals, the listing of the Konecranes Terex ADSs on the New York Stock Exchange or another U.S. national securities exchange reasonably acceptable to Konecranes and Terex, no change in certain legal and tax assumptions, the absence of any material adverse effect occurring with respect to Konecranes or Terex, and other customary conditions. Terex and Konecranes expect to convene meetings of their shareholders to approve the transaction in mid-2016. Closing of the transaction is expected to occur in the latter part of the third quarter or fourth quarter of 2016, which is slightly later than originally planned due to some delays related to regulatory filings. Upon closing of the transaction, the combined company will have a Board of Directors comprising nine members, of which five directors will be nominated by Terex and four directors will be nominated by Konecranes. Konecranes' current Chairman of the Board will become Konecranes Terex's Chairman and the Terex Chief Executive Officer (“CEO”) will become Konecranes Terex's CEO.
The proposed merger transaction with Konecranes does not change the Company's assertion that the unremitted earnings of its foreign subsidiaries are indefinitely reinvested.
We have determined that while Konecranes will be the legal acquirer in the transaction, Terex will be the accounting acquirer and will account for the transaction using the acquisition method of accounting.
Business Combination Related Expenses
The Company has incurred transaction costs directly related to the BCA of $7.3 million for the three months ended March 31, 2016, which is recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).


7



NOTE B – BASIS OF PRESENTATION

Basis of Presentation.  The accompanying unaudited Condensed Consolidated Financial Statements of Terex Corporation and subsidiaries as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America to be included in full-year financial statements.  The accompanying Condensed Consolidated Balance Sheet as of December 31, 2015 has been derived from and should be read in conjunction with the audited Consolidated Balance Sheet as of that date.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The Condensed Consolidated Financial Statements include the accounts of Terex Corporation, its majority-owned subsidiaries and other controlled subsidiaries (“Terex” or the “Company”).  The Company consolidates all majority-owned and controlled subsidiaries, applies the equity method of accounting for investments in which the Company is able to exercise significant influence, and applies the cost method for all other investments.  All intercompany balances, transactions and profits have been eliminated.

In the opinion of management, all adjustments considered necessary for fair presentation of these interim financial statements have been made.  Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature.  Operating results for the three months ended March 31, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016.

Cash and cash equivalents at March 31, 2016 and December 31, 2015 include $27.2 million and $27.8 million, respectively, which were not immediately available for use.  These consist primarily of cash balances held in escrow to secure various obligations of the Company.

Reclassifications. In conjunction with the adoption of new accounting standards, certain debt issuance costs for the three months ended March 31, 2015 as well as certain amounts as of December 31, 2015, have been reclassified to conform to the current year’s presentation.

Effective January 1, 2016, the Company reorganized the reportable segments to align with its new management reporting structure and business activities which resulted in the material handling business in its Construction segment being reassigned to its Materials Processing (“MP”) segment, certain non-operations related assets in the U.K. being reassigned from its Construction segment to Corporate and Other category, and parts of services North America business in its Cranes segment being reassigned into its Aerial Work Platforms (“AWP”) and Material Handling & Port Solutions (“MHPS”) segments. Historical results have been reclassified to give effect to these changes. See Note C - “Business Segment Information” and Note J - “Goodwill and Intangible Assets” for further information.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which amends ASU 2014-09. As a result, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. Adoption will use one of two retrospective application methods. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements and footnote disclosures.

In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs,” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to borrowings be presented in the balance sheet as a direct deduction from the carrying amount of the borrowing, consistent with debt discounts. The ASU does not affect the amount or timing of expenses for debt issuance costs. The Company adopted ASU 2015-03 as of January 1, 2016 on a retrospective basis, by recasting all prior periods shown to reflect the effect of adoption, the effect of which is not material.


8



In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value. The ASU defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date will be the first quarter of fiscal year 2017 with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”). The amendments in ASU 2015-17 eliminate the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet and instead require all deferred tax assets and liabilities to be classified as noncurrent. The Company adopted ASU 2015-17 as of January 1, 2016 on a prospective basis, which resulted in the reclassification of the Company’s current deferred tax assets and current deferred tax liabilities to non-current deferred tax assets or non-current deferred tax liabilities on its condensed consolidated balance sheet. No prior periods were retrospectively adjusted. The adoption did not have a material effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," (“ASU 2016-01”). The amendments in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. The effective date will be the first quarter of fiscal year 2018. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for leases with lease terms greater than twelve months and disclose key information about leasing arrangements. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815),” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815),” (“ASU 2016-06”). ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323),” (“ASU 2016-07”). ASU 2016-07 eliminates the retroactive adjustments to an investment qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. The effective date will be the first quarter of fiscal year 2017. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within ASU 2014-09. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

9




In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”).  The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability of licensing implementation guidance related to the entity's intellectual property.  Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.  The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

Accrued Warranties.  The Company records accruals for potential warranty claims based on its claims experience.  The Company’s products are typically sold with a standard warranty covering defects that arise during a fixed period.  Each business provides a warranty specific to the products it offers.  The specific warranty offered by a business is a function of customer expectations and competitive forces.  Warranty length is generally a fixed period of time, a fixed number of operating hours, or both.

A liability for estimated warranty claims is accrued at the time of sale.  The non-current portion of the warranty accrual is included in Other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.  The liability is established using historical warranty claim experience for each product sold.  Historical claim experience may be adjusted for known design improvements or for the impact of unusual product quality issues.  Warranty reserves are reviewed quarterly to ensure critical assumptions are updated for known events that may affect the potential warranty liability.

The following table summarizes the changes in the consolidated product warranty liability (in millions):
 
Three Months Ended
 
March 31, 2016
Balance at beginning of period
$
74.2

Accruals for warranties issued during the period
25.7

Changes in estimates
(2.0
)
Settlements during the period
(19.5
)
Foreign exchange effect/other
1.7

Balance at end of period
$
80.1


Fair Value Measurements. Assets and liabilities measured at fair value on a recurring basis under the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement and Disclosure” (“ASC 820”) include interest rate swaps and foreign currency forward contracts discussed in Note K – “Derivative Financial Instruments.”  These contracts are valued using a market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.  ASC 820 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs).  The hierarchy consists of three levels:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Determining which category an asset or liability falls within this hierarchy requires judgment.  The Company evaluates its hierarchy disclosures each quarter.


10



NOTE C – BUSINESS SEGMENT INFORMATION

Terex is a lifting and material handling solutions company. The Company is focused on operational improvement and delivering reliable, customer-driven solutions for a wide range of commercial applications, including the construction, infrastructure, quarrying, mining, manufacturing, transportation, energy and utility industries. The Company operates in five reportable segments: (i) AWP; (ii) Cranes; (iii) MHPS; (iv) MP; and (v) Construction.

The AWP segment designs, manufactures, services and markets aerial work platform equipment, telehandlers and light towers. Customers use these products to construct and maintain industrial, commercial and residential buildings and facilities and for other commercial operations, as well as in a wide range of infrastructure projects.

The Cranes segment designs, manufactures, services, refurbishes and markets mobile telescopic cranes, tower cranes, lattice boom crawler cranes, lattice boom truck cranes, utility equipment and truck-mounted cranes (boom trucks), as well as their related components and replacement parts. Customers use these products primarily for construction, repair and maintenance of commercial buildings, manufacturing facilities, construction and maintenance of utility and telecommunication lines, tree trimming and certain construction and foundation drilling applications and a wide range of infrastructure projects.

The MHPS segment designs, manufactures, services and markets industrial cranes, including universal cranes, process cranes, rope and chain hoists, electric motors, light crane systems and crane components as well as a diverse portfolio of port and rail equipment including mobile harbor cranes, straddle and sprinter carriers, rubber tired gantry cranes, rail mounted gantry cranes, ship-to-shore gantry cranes, reach stackers, empty container handlers, full container handlers, general cargo lift trucks, automated stacking cranes, automated guided vehicles and terminal automation technology, including software, as well as their related components and replacement parts. Customers use these products for lifting and material handling at manufacturing, port and rail facilities.

The MP segment designs, manufactures and markets materials processing equipment, including crushers, washing systems, screens, apron feeders, material handlers, wood processing, biomass and recycling equipment, and their related components and replacement parts. Customers use these products in construction, infrastructure and recycling projects, in various quarrying and mining applications, as well as in landscaping and biomass production industries and for material handling applications.

The Construction segment designs, manufactures and markets compact construction and specialty equipment, as well as their related replacement parts and components. Customers use these products in construction and infrastructure projects, in building roads, bridges, residential and commercial buildings, and industrial sites.

The Company assists customers in their rental, leasing and acquisition of its products through Terex Financial Services (“TFS”). TFS uses its equipment financing experience to provide financing solutions to customers who purchase the Company’s equipment.

Subsequent to December 31, 2015, the Company reorganized the reportable segments to align with its new management reporting structure and business activities which resulted in the material handling business in its Construction segment being reassigned to its MP segment, certain non-operations related assets in the U.K. being reassigned from its Construction segment to Corporate and Other category, and parts of services North America business in its Cranes segment being reassigned into its AWP and MHPS segments. Historical results have been reclassified to give effect to these changes.


11



Business segment information is presented below (in millions):
 
Three Months Ended
March 31,
 
2016
 
2015
Net Sales
 
 
 
AWP
$
520.7

 
$
517.5

Cranes
307.3

 
353.3

MHPS
317.7

 
344.3

MP
177.3

 
181.1

Construction
142.5

 
122.2

Corporate and Other / Eliminations
(38.6
)
 
(22.8
)
Total
$
1,426.9

 
$
1,495.6

Income (loss) from Operations
 
 
 

AWP
$
38.1

 
$
44.6

Cranes
(16.6
)
 
2.4

MHPS
(61.8
)
 
(4.4
)
MP
10.1

 
9.3

Construction
1.3

 
(3.6
)
Corporate and Other / Eliminations
(12.8
)
 
(4.1
)
Total
$
(41.7
)
 
$
44.2


 
March 31,
2016
 
December 31,
2015
Identifiable Assets
 
 
 
AWP
$
1,841.0

 
$
1,701.2

Cranes
1,879.1

 
1,836.9

MHPS
2,508.1

 
2,475.9

MP
1,024.6

 
1,031.1

Construction
555.5

 
534.6

Corporate and Other / Eliminations
(2,070.8
)
 
(1,963.7
)
Total
$
5,737.5

 
$
5,616.0




12



NOTE D – INCOME TAXES

During the three months ended March 31, 2016, the Company recognized income tax expense of $5.0 million on a loss of $69.4 million, an effective tax rate of (7.2)% as compared to income tax expense of $11.6 million on income of $10.1 million, an effective tax rate of 114.9%, for the three months ended March 31, 2015.  The lower effective tax rate for the three months ended March 31, 2016 was primarily due to a decrease in losses not benefited as a percentage of income (loss) before income taxes.

NOTE E –DISCONTINUED OPERATIONS

The following amounts related to the discontinued operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Statement of Comprehensive Income (in millions):
 
Three Months Ended
 
March 31,
 
2016
 
2015
Gain (loss) on disposition of discontinued operations
$
4.5

 
$
3.6

(Provision for) benefit from income taxes
(1.1
)
 
(0.5
)
Gain (loss) on disposition of discontinued operations – net of tax
$
3.4

 
$
3.1


During the three months ended March 31, 2016 and 2015 the Company recorded gains of $3.0 million and $2.8 million, respectively, net of tax, related to the sale of its Atlas heavy construction equipment and knuckle-boom cranes businesses based on contractually obligated earnings based payments from the purchaser. During the three months ended March 31, 2016 the Company recorded a gain of $0.5 million, net of tax, related to the sale of its truck business.

NOTE F – EARNINGS PER SHARE
(in millions, except per share data)
Three Months Ended
March 31,
 
2016
 
2015
Income (loss) from continuing operations attributable to Terex Corporation common stockholders
$
(74.2
)
 
$
(2.1
)
Income (loss) from discontinued operations–net of tax

 

Gain (loss) on disposition of discontinued operations–net of tax
3.4

 
3.1

Net income (loss) attributable to Terex Corporation
$
(70.8
)
 
$
1.0

Basic shares:
 
 
 

Weighted average shares outstanding
108.8

 
106.3

Earnings (loss) per share – basic:
 

 
 

Income (loss) from continuing operations
$
(0.68
)
 
$
(0.02
)
Income (loss) from discontinued operations–net of tax

 

Gain (loss) on disposition of discontinued operations–net of tax
0.03

 
0.03

Net income (loss) attributable to Terex Corporation
$
(0.65
)
 
$
0.01

Diluted shares:
 

 
 

Weighted average shares outstanding - basic
108.8

 
106.3

Effect of dilutive securities:
 

 
 

Stock options, restricted stock awards and convertible notes

 

Diluted weighted average shares outstanding
108.8

 
106.3

Earnings (loss) per share – diluted:
 

 
 

Income (loss) from continuing operations
$
(0.68
)
 
$
(0.02
)
Income (loss) from discontinued operations–net of tax

 

Gain (loss) on disposition of discontinued operations–net of tax
0.03

 
0.03

Net income (loss) attributable to Terex Corporation
$
(0.65
)
 
$
0.01



13



The following table provides information to reconcile amounts reported on the Condensed Consolidated Statement of Comprehensive Income to amounts used to calculate earnings per share attributable to Terex Corporation common stockholders (in millions):
Reconciliation of Amounts Attributable to Common Stockholders
 
Three Months Ended
March 31,
 
2016
 
2015
Income (loss) from continuing operations
$
(74.4
)
 
$
(1.5
)
Net loss (income) attributable to noncontrolling interest
0.2

 
(0.6
)
Income (loss) from continuing operations attributable to common stockholders
$
(74.2
)
 
$
(2.1
)

Weighted average options to purchase 0.1 million of the Company’s common stock, par value $0.01 per share (“Common Stock”), were outstanding during the three months ended March 31, 2016 and 2015, but were not included in the computation of diluted shares as the effect would be anti-dilutive.  Weighted average restricted stock awards of 2.5 million and 2.4 million were outstanding during the three months ended March 31, 2016 and 2015, respectively, but were not included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not yet achieved for awards contingent upon performance. ASC 260, “Earnings per Share,” requires that employee stock options and non-vested restricted shares granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.  The Company includes the impact of pro forma deferred tax assets in determining the amount of tax benefits for potential windfalls and shortfalls (the differences between tax deductions and book expense) in this calculation.

In connection with settlement of the 4% Convertible Senior Subordinated Notes due 2015 (the “4% Convertible Notes”) the Company issued 3.4 million shares of common stock in June 2015. See Note M – “Long-Term Obligations.” The number of shares that were contingently issuable for the 4% Convertible Notes during the three months ended March 31, 2015 was 3.1 million, but was not included in the computation of diluted shares because the effect would have been anti-dilutive.

NOTE G – FINANCE RECEIVABLES

TFS leases equipment and provides financing to customers for the purchase and use of Terex equipment. In the normal course of business, TFS assesses credit risk, establishes structure and pricing of financing transactions, documents the finance receivable, records and funds the transactions. TFS bills and collects cash from the end customer.

TFS primarily conducts on-book business in the U.S., with limited business in China, the United Kingdom, and Germany. TFS does business with various types of customers consisting of rental houses, end user customers, and Terex equipment dealers.

The Company’s net finance receivable balances include both sales-type leases and commercial loans. Finance receivables that management intends to hold until maturity are stated at their outstanding unpaid principal balances, net of an allowance for loan losses as well as any deferred fees and costs.

TFS bills customers and accrues interest income monthly on the unpaid principal balance. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has significant doubts about further collectibility of the contractual payments, even though the loan may be currently performing. A receivable may remain on accrual status if it is in the process of collection and is either guaranteed or secured. Interest received on non-accrual finance receivables is typically applied against principal. Finance receivables are generally restored to accrual status when the obligation is brought current and the borrower has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Finance receivables originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, in the aggregate. Revenue attributable to finance receivables is recognized on the accrual basis using the effective interest method. The Company has a history of enforcing the terms of these separate financing agreements.

14




Finance receivables, net consisted of the following (in millions):
 
March 31,
2016
 
December 31,
2015
Commercial loans
$
335.9

 
$
331.4

Sales-type leases
22.6

 
21.9

Total finance receivables, gross
358.5

 
353.3

Allowance for credit losses
(7.5
)
 
(7.3
)
Total finance receivables, net
$
351.0

 
$
346.0


Credit losses are charged against the allowance for credit losses when management ceases active collection efforts. Subsequent recoveries, if any, are credited to earnings. The allowance for credit losses is maintained at a level set by management which represents evaluation of known and inherent risks in the portfolio at the consolidated balance sheet date. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, market-based loss experience, specific customer situations, estimated value of any underlying collateral, current economic conditions, and other relevant factors. This evaluation is inherently subjective, since it requires estimates that may be susceptible to significant change. Although specific and general loss allowances are established in accordance with management’s best estimate, actual losses are dependent upon future events and, as such, further additions to or decreases from the level of loss allowances may be necessary.

The following table presents an analysis of the allowance for credit losses:

 
 
Three Months Ended
March 31, 2016
 
Three Months Ended
March 31, 2015
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Balance, beginning of period
 
$
6.5

 
$
0.8

 
$
7.3

 
$
1.9

 
$
1.1

 
$
3.0

Provision for credit losses
 
(0.1
)
 
0.3

 
0.2

 
0.7

 
0.1

 
0.8

Charge offs
 

 

 

 

 

 

Recoveries
 

 

 

 

 

 

Balance, end of period
 
$
6.4

 
$
1.1

 
$
7.5

 
$
2.6

 
$
1.2

 
$
3.8


 
The Company utilizes a two tier approach to set allowances: (1) identification of impaired finance receivables and establishment of specific loss allowances on such receivables; and (2) establishment of general loss allowances on the remainder of its portfolio. Specific loss allowances are established based on circumstances and factors of specific receivables. The Company regularly reviews the portfolio which allows for early identification of potentially impaired receivables. The process takes into consideration, among other things, delinquency status, type of collateral and other factors specific to the borrower.

General loss allowance levels are determined based upon a combination of factors including, but not limited to, TFS experience, general market loss experience, performance of the portfolio, current economic conditions, and management's judgment. The two primary risk characteristics inherent in the portfolio are (1) the customer's ability to meet contractual payment terms, and (2) the liquidation values of the underlying primary and secondary collaterals. The Company records a general or unallocated loss allowance that is calculated by applying the reserve rate to its portfolio, including the unreserved balance of accounts that have been specifically reserved for. All delinquent accounts are reviewed for potential impairment. A receivable is deemed to be impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is measured as the difference between the balance outstanding and the underlying collateral value of the equipment being financed, as well as any other collateral. All finance receivables identified as impaired are evaluated individually. The Company does not aggregate impaired finance receivables for evaluation purposes. Generally, the Company does not change the terms and conditions of existing finance receivables.

15




The following tables present individually impaired finance receivables (in millions):

 
 
March 31, 2016
 
December 31, 2015
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Recorded investment
 
$
1.3

 
$
2.1

 
$
3.4

 
$
1.9

 
$
1.8

 
$
3.7

Related allowance
 
1.3

 
0.5

 
1.8

 
1.9

 
0.5

 
2.4

Average recorded investment
 
1.6

 
1.9

 
3.5

 
1.0

 
2.5

 
3.5


The average recorded investment for impaired finance receivables was $1.5 million for sales-type leases at March 31, 2015, which was fully reserved. There were no impaired commercial loans at March 31, 2015.

The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in millions):

 
 
March 31, 2016
 
December 31, 2015
Allowance for credit losses, ending balance:
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Individually evaluated for impairment
 
$
1.3

 
$
0.5

 
$
1.8

 
$
1.9

 
$
0.5

 
$
2.4

Collectively evaluated for impairment
 
5.1

 
0.6

 
5.7

 
4.6

 
0.3

 
4.9

Total allowance for credit losses
 
$
6.4

 
$
1.1

 
$
7.5

 
$
6.5

 
$
0.8

 
$
7.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables, ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1.3

 
$
2.1

 
$
3.4

 
$
1.9

 
$
1.8

 
$
3.7

Collectively evaluated for impairment
 
334.6

 
20.5

 
355.1

 
329.5

 
20.1

 
349.6

Total finance receivables
 
$
335.9

 
$
22.6

 
$
358.5

 
$
331.4

 
$
21.9

 
$
353.3


Accounts are considered delinquent when the billed periodic payments of the finance receivables exceed 30 days past the due date.


16



The following table presents analysis of aging of recorded investment in finance receivables (in millions):

 
March 31, 2016
 
Current
 
31-60 days past due
 
61-90 days past due
 
Greater than 90 days past due
 
Total past due
 
Total Finance Receivables
Commercial loans
$
333.9

 
$
1.4

 
$
0.5

 
$
0.1

 
$
2.0

 
$
335.9

Sales-type leases
22.3

 
0.3

 

 

 
0.3

 
22.6

Total finance receivables
$
356.2

 
$
1.7

 
$
0.5

 
$
0.1

 
$
2.3

 
$
358.5


 
December 31, 2015
 
Current
 
31-60 days past due
 
61-90 days past due
 
Greater than 90 days past due
 
Total past due
 
Total Finance Receivables
Commercial loans
$
329.6

 
$
0.8

 
$

 
$
1.0

 
$
1.8

 
$
331.4

Sales-type leases
20.2

 
0.5

 

 
1.2

 
1.7

 
21.9

Total finance receivables
$
349.8

 
$
1.3

 
$

 
$
2.2

 
$
3.5

 
$
353.3



At March 31, 2016 and December 31, 2015, $0.1 million and $1.0 million respectively, of commercial loans were 90 days or more past due. Commercial loans in the amount of $8.4 million and $4.8 million were on non-accrual status as of March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016 there were no sales-type lease receivables which were 90 days or more past due. At December 31, 2015 there were $1.2 million of sales-type lease receivables which were 90 days or more past due. Sales-type leases in the amount of $1.9 million and $1.3 million were on non-accrual status as of March 31, 2016 and December 31, 2015, respectively.

Credit Quality Information

Credit quality is reviewed on a monthly basis based on customers’ payment status. In addition to the delinquency status, any information received regarding a customer (such as bankruptcy filings, etc.) will also be considered to determine the credit quality of the customer. Collateral asset values are also monitored regularly to determine the potential loss exposures on any given transaction.

The Company uses the following internal credit quality indicators, based on an internal risk rating system, using certain external credit data, listed from the lowest level of risk to highest level of risk. The internal rating system considers factors affecting specific borrowers’ ability to repay.

Finance receivables by risk rating (in millions):

Rating
 
March 31, 2016
 
December 31, 2015
Superior
 
$
24.8

 
$
21.5

Above Average
 
170.5

 
159.4

Average
 
121.8

 
117.9

Below Average
 
29.7

 
44.2

Sub Standard
 
11.7

 
10.3

Total
 
$
358.5


$
353.3




17




NOTE H – INVENTORIES

Inventories consist of the following (in millions):
 
March 31,
2016
 
December 31,
2015
Finished equipment
$
542.4

 
$
455.2

Replacement parts
199.4

 
184.8

Work-in-process
445.3

 
431.2

Raw materials and supplies
367.2

 
374.5

Inventories
$
1,554.3

 
$
1,445.7


Reserves for lower of cost or market value, excess and obsolete inventory were $125.8 million and $109.1 million at March 31, 2016 and December 31, 2015, respectively.

NOTE I – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment – net consist of the following (in millions):
 
March 31,
2016
 
December 31,
2015
Property
$
98.8

 
$
95.0

Plant
366.4

 
356.3

Equipment
756.0

 
736.7

Property, plant and equipment – gross 
1,221.2

 
1,188.0

Less: Accumulated depreciation
(532.1
)
 
(512.2
)
Property, plant and equipment – net
$
689.1

 
$
675.8


NOTE J – GOODWILL AND INTANGIBLE ASSETS, NET

An analysis of changes in the Company’s goodwill by business segment is as follows (in millions):
 
AWP
 
Cranes
 
MHPS
 
MP
 
Construction
 
Total
Balance at December 31, 2015, gross
$
137.7

 
$
183.1

 
$
577.1

 
$
204.3

 
$
132.8

 
$
1,235.0

Accumulated impairment
(38.6
)
 
(4.2
)
 
(13.0
)
 
(23.2
)
 
(132.8
)
 
(211.8
)
Balance at December 31, 2015, net (1)
99.1

 
178.9

 
564.1

 
181.1

 

 
1,023.2

Foreign exchange effect and other
0.3

 
6.1

 
34.5

 
(1.5
)
 

 
39.4

Balance at March 31, 2016, gross
138.0

 
189.2

 
611.6

 
202.8

 
132.8

 
1,274.4

Accumulated impairment
(38.6
)
 
(4.2
)
 
(13.0
)
 
(23.2
)
 
(132.8
)
 
(211.8
)
Balance at March 31, 2016, net
$
99.4

 
$
185.0

 
$
598.6

 
$
179.6

 
$

 
$
1,062.6


(1) Includes a $17.9 million reclassification of goodwill from Cranes to MHPS, and a$0.9 million reclassification of goodwill from Cranes to AWP as a result of segment realignments. See Note C - Business Segment Information.


18



Intangible assets, net were comprised of the following as of March 31, 2016 and December 31, 2015 (in millions):
 
 
 
March 31, 2016
 
December 31, 2015
 
Weighted Average Life
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
5
 
$
56.2

 
$
(44.6
)
 
$
11.6

 
$
53.6

 
$
(41.0
)
 
$
12.6

Customer Relationships
16
 
237.3

 
(92.8
)
 
144.5

 
224.5

 
(85.1
)
 
139.4

Land Use Rights
56
 
17.5

 
(2.3
)
 
15.2

 
17.2

 
(2.1
)
 
15.1

Other
7
 
46.6

 
(39.9
)
 
6.7

 
48.1

 
(39.5
)
 
8.6

Total definite-lived intangible assets
 
 
$
357.6

 
$
(179.6
)
 
$
178.0

 
$
343.4

 
$
(167.7
)
 
$
175.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
 
$
77.3

 
 
 
 
 
$
73.8

 
 
 
 
Total indefinite-lived intangible assets
 
 
$
77.3

 
 
 
 
 
$
73.8

 

 
 

 
Three Months Ended
March 31,
(in millions)
2016
 
2015
Aggregate Amortization Expense
$
5.8

 
$
6.3


Estimated aggregate intangible asset amortization expense (in millions) for each of the five years below is:
2016
$
22.5

2017
$
18.8

2018
$
14.5

2019
$
14.0

2020
$
13.4



NOTE K – DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into two types of derivatives to hedge its interest rate exposure and foreign currency exposure: hedges of fair value exposures and hedges of cash flow exposures.  Fair value exposures relate to recognized assets or liabilities and firm commitments, while cash flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities or forecasted transactions.

The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and uses certain financial instruments to manage its foreign currency, interest rate and fair value exposures.  To qualify a derivative as a hedge at inception and throughout the hedge period, the Company formally documents the nature and relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions, and the method of assessing hedge effectiveness.  Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur.  If it is deemed probable that the forecasted transaction will not occur, then the gain or loss would be recognized in current earnings.  Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.  The Company does not engage in trading or other speculative use of financial instruments.


19



The Company has used and may use forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates on third party and intercompany forecasted transactions.  Primary currencies to which the Company is exposed are the Euro, British Pound and Australian Dollar.  The effective portion of unrealized gains and losses associated with forward contracts and intrinsic value of option contracts are deferred as a component of Accumulated other comprehensive income (“AOCI”) until the underlying hedged transactions are reported in the Company’s Condensed Consolidated Statement of Comprehensive Income.  The Company has used and may use interest rate swaps to mitigate its exposure to changes in interest rates related to existing issuances of variable rate debt and changes in the fair value of fixed rate debt.  Primary exposure includes movements in the London Interbank Offer Rate (“LIBOR”) and Commercial Paper rates. The change in fair value of derivatives designated as cash flow hedges are deferred in AOCI and are recognized in earnings as hedged transactions occur.  Changes in fair value associated with contracts deemed ineffective are recognized in earnings immediately.

In the Condensed Consolidated Statement of Comprehensive Income, the Company records hedging activity related to debt instruments and hedging activity related to foreign currency and interest rate swaps in the accounts for which the hedged items are recorded.  On the Condensed Consolidated Statement of Cash Flows, the Company records cash flows from hedging activities in the same manner as it records the underlying item being hedged.

The Company is party to currency exchange forward contracts that generally mature within one year to manage its exposure to changing currency exchange rates.  At March 31, 2016, the Company had $231.1 million notional amount of currency exchange forward contracts outstanding that were initially designated as hedge contracts, most of which mature on or before March 31, 2017.  The fair market value of these contracts at March 31, 2016 was a net loss of $0.5 million.  At March 31, 2016, $214.3 million notional amount ($0.8 million of fair value loss) of these forward contracts have been designated as, and are effective as, cash flow hedges of forecasted and specifically identified transactions.  During 2016 and 2015, the Company recorded the change in fair value for these cash flow hedges to AOCI and reclassified to earnings a portion of the deferred gain or loss from AOCI as the hedged transactions occurred and were recognized in earnings.

The Company records foreign exchange contracts at fair value on a recurring basis.  The foreign exchange contracts designated as hedging instruments are categorized under Level 2 of the ASC 820 hierarchy and are recorded at March 31, 2016 and December 31, 2015 as a net liability of $0.5 million and net asset of $2.8 million, respectively.  See Note B – “Basis of Presentation,” for an explanation of the ASC 820 hierarchy. Fair values of these foreign exchange forward contracts are derived using quoted forward foreign exchange prices to interpolate values of outstanding trades at the reporting date based on their maturities.

The Company uses forward foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates on third party and intercompany forecasted transactions and balance sheet exposures. Certain of these contracts have not been designated as hedging instruments. The majority of gains and losses recognized from foreign exchange contracts not designated as hedging instruments were offset by changes in the underlying hedged items, resulting in no material net impact on earnings. Changes in the fair value of these derivative financial instruments are recognized as gains or losses in Cost of goods sold or Other income (expense) – net in the Condensed Consolidated Statement of Comprehensive Income.

Concurrent with the sale of a majority stake in A.S.V., Inc. to Manitex International, Inc. (“Manitex”), the Company invested in a subordinated convertible promissory note from Manitex, which included an embedded derivative, the conversion feature. At the date of issuance, the embedded derivative was measured at fair value. The derivative is marked-to-market each period with changes in fair value recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income.

The Company enters into certain interest rate swap agreements to offset the variability of cash flows due to changes in the floating rate of borrowings under its Securitization Facility. See Note M – “Long-Term Obligations,” for additional information on the Securitization Facility. The interest rate swaps are designated as cash flow hedges of the changes in the cash flows of interest rate payments on debt associated with changes in floating interest rates. Changes in the fair value of these derivative financial instruments are recognized as gains or losses in Cost of goods sold in the Condensed Consolidated Statement of Comprehensive Income. The Company records these contracts at fair value on a recurring basis.  At March 31, 2016, the Company had $126.4 million notional amount of interest rate swap contracts outstanding that were initially designated as hedge contracts and scheduled to mature in November, 2022. Because we have reached an understanding to repay all outstanding amounts borrowed under the Securitization Facility in 2016, we also intend to terminate the outstanding interest rate swap contracts in 2016. The interest rate swap contracts designated as hedging instruments are categorized under Level 2 of the ASC 820 hierarchy and are recorded at March 31, 2016 and December 31, 2015 as a net liability of $0.9 million and as a net asset of $0.2 million, respectively. The fair value of these contracts is derived using quoted interest rate swap prices at the reporting date based on their maturities.


20



The following table provides the location and fair value amounts of derivative instruments designated as hedging instruments that are reported in the Condensed Consolidated Balance Sheet (in millions):
Asset Derivatives
Balance Sheet Account
March 31,
2016
 
December 31,
2015
Foreign exchange contracts
Other current assets
$
4.6

 
$
4.0

Interest rate swap
Other assets

 
0.9

Total asset derivatives
 
4.6

 
4.9

Liability Derivatives
 
 

 
 

Foreign exchange contracts
Other current liabilities
(5.1
)
 
(1.2
)
Interest rate swap
Other current liabilities
(0.9
)
 
(0.7
)
Total liability derivatives
 
(6.0
)
 
(1.9
)
Total Derivatives
 
$
(1.4
)
 
$
3.0


The following table provides the location and fair value amounts of derivative instruments not designated as hedging instruments that are reported in the Condensed Consolidated Balance Sheet (in millions):
Asset Derivatives
Balance Sheet Account
March 31,
2016
 
December 31,
2015
Foreign exchange contracts
Other current assets
$
0.3

 
$
0.5

Debt conversion feature
Other assets
0.9

 
1.1

Total asset derivatives
 
1.2

 
1.6

Liability Derivatives
 
 

 
 

Foreign exchange contracts
Other current liabilities
(2.4
)
 
(0.3
)
Total liability derivatives
 
(2.4
)
 
(0.3
)
Total Derivatives
 
$
(1.2
)
 
$
1.3


The following tables provide the effect of derivative instruments that are designated as hedges in the Condensed Consolidated Statement of Comprehensive Income and AOCI (in millions):
Gain (Loss) Recognized in AOCI on Derivatives:
Three Months Ended
March 31,
Cash Flow Derivatives
 
2016
 
2015
Foreign exchange contracts
 
$
(3.1
)
 
$
0.3

Interest rate swap
 
(0.5
)
 

Total
 
$
(3.6
)
 
$
0.3

Gain (Loss) Reclassified from AOCI into Income (Effective):
Three Months Ended
March 31,
Account
 
2016
 
2015
Cost of goods sold
 
$
1.1

 
$
2.4

Other income (expense) – net

 
(6.4
)
Total
 
$
1.1

 
$
(4.0
)
Gain (Loss) Recognized in Income on Derivatives (Ineffective):
Three Months Ended
March 31,
Account
 
2016
 
2015
Cost of goods sold
 
$
0.3

 
$

Other income (expense) – net
 
$
0.1

 
$
6.9

Total
 
$
0.4

 
$
6.9



21



The following table provides the effect of derivative instruments that are not designated as hedges in the Condensed Consolidated Statement of Comprehensive Income (in millions):
Gain (Loss) Recognized in Income on Derivatives not designated as hedges:
Three Months Ended
March 31,
Account
2016
 
2015
Other income (expense) – net
$
(2.5
)
 
$
(2.1
)

Counterparties to the Company’s currency exchange forward contracts and interest rate swap agreements are major financial institutions with credit ratings of investment grade or better and no collateral is required.  There are no significant risk concentrations.  Management continues to monitor counterparty risk and believes the risk of incurring losses on derivative contracts related to credit risk is unlikely and any losses would be immaterial.

Unrealized net gains (losses), net of tax, included in AOCI are as follows (in millions):
 
Three Months Ended
March 31,
 
2016
 
2015
Balance at beginning of period
$
2.3

 
$
(0.7
)
Additional gains (losses) – net
(2.4
)
 
(2.8
)
Amounts reclassified to earnings
(1.2
)
 
3.1

Balance at end of period
$
(1.3
)
 
$
(0.4
)

Within the unrealized net gains (losses) included in AOCI as of March 31, 2016, it is estimated that $1.3 million of losses are expected to be reclassified into earnings in the next twelve months.

NOTE L – RESTRUCTURING AND OTHER CHARGES

The Company continually evaluates its cost structure to be appropriately positioned to respond to changing market conditions. From time to time the Company may initiate certain restructuring programs to better utilize its workforce and optimize facility utilization to match the demand for its products.

Restructuring

During the third quarter of 2015, the Company established a restructuring program in the MP segment to close one of its manufacturing facilities in the U.S., consolidate production with other U.S. sites and exit the hand-fed chipper line of products. By consolidating operations, the Company will optimize use of resources, eliminate areas of duplication and operate more efficiently and effectively. The program cost $0.9 million, resulted in the reduction of 38 team members and was completed in 2015.

During the third quarter of 2015, the Company established a restructuring program across multiple operating segments to centralize transaction processing and accounting functions into shared service centers. The program cost $0.9 million, resulted in the reduction of 69 team members and was completed in 2016. The segment breakdown of this program cost is as follows: Cranes ($0.8 million) and MP ($0.1 million).

During the first quarter of 2016, the Company established a restructuring program in the MHPS segment to streamline sales and service by closing small branch locations and transferring the activity at those branches to larger existing facilities. The program is expected to cost $2.8 million, result in the reduction of 37 team members and is expected to be completed in 2016.


22



The following table provides information for all restructuring activities by segment of the amount of expense incurred during the three months ended March 31, 2016, the cumulative amount of expenses incurred since inception of the programs through March 31, 2016 and the total amount expected to be incurred (in millions):
 
Amount incurred
during the
three months ended
March 31, 2016
 
Cumulative amount
incurred through
March 31, 2016
 
Total amount expected to be incurred
Cranes

 
0.8

 
0.8

MHPS
2.8

 
2.8

 
2.8

MP

 
1.0

 
1.0

Total
$
2.8

 
$
4.6

 
$
4.6


The following table provides information by type of restructuring activity with respect to the amount of expense incurred during the three months ended March 31, 2016, the cumulative amount of expenses incurred since inception of the programs and the total amount expected to be incurred (in millions):
 
Employee
Termination Costs
 
Facility
Exit Costs
 
Asset Disposal and Other Costs
 
Total
Amount incurred in the three months ended March 31, 2016
$
2.8

 
$

 
$

 
$
2.8

Cumulative amount incurred through March 31, 2016
$
4.0

 
$
0.1

 
$
0.5

 
$
4.6

Total amount expected to be incurred
$
4.0

 
$
0.1

 
$
0.5

 
$
4.6


The following table provides a roll forward of the restructuring reserve by type of restructuring activity for the three months ended March 31, 2016 (in millions):
 
Employee
Termination Costs
 
Facility
Exit Costs
 
Total
Restructuring reserve at December 31, 2015
$
26.4

 
$
0.1

 
$
26.5

Restructuring charges, net
2.8

 

 
2.8

Cash expenditures
(3.1
)
 

 
(3.1
)
Foreign exchange
1.2

 

 
1.2

Restructuring reserve at March 31, 2016
$
27.3

 
$
0.1

 
$
27.4


Other

During the first quarter of 2016, the Company recorded approximately $22 million and $38 million as a component of Cost of goods sold and Selling, general and administrative expenses (“SG&A”), respectively, for severance charges for structural cost reduction actions across all segments and corporate functions. Approximately $19 million of the charges to Cost of goods sold and $28 million of the charges to SG&A, respectively, were recognized in our MHPS segment, primarily in Germany, to align cost structures with the current business environment. These actions are expected to be completed in 2016.

NOTE M – LONG-TERM OBLIGATIONS

2014 Credit Agreement

On August 13, 2014 the Company entered into a new credit agreement (the “2014 Credit Agreement”), with the lenders party thereto and Credit Suisse AG, as administrative agent and collateral agent.

The 2014 Credit Agreement provides the Company with a senior secured revolving line of credit of up to $600 million that is available through August 13, 2019, a $230.0 million senior secured term loan and a €200.0 million senior secured term loan, which both mature on August 13, 2021. The 2014 Credit Agreement allows unlimited incremental commitments, which may be extended at the option of the existing or new lenders and can be in the form of revolving credit commitments, term loan commitments, or a combination of both as long as the Company satisfies a senior secured debt financial ratio contained in the 2014 Credit Agreement.


23



The 2014 Credit Agreement requires the Company to comply with a number of covenants. The covenants limit, in certain circumstances, the Company’s ability to take a variety of actions, including but not limited to: incur indebtedness; create or maintain liens on its property or assets; make investments, loans and advances; repurchase shares of its Common Stock; engage in acquisitions, mergers, consolidations and asset sales; redeem debt; and pay dividends and distributions.

If the Company’s borrowings under its revolving line of credit are greater than 30% of the total revolving credit commitments, the 2014 Credit Agreement requires the Company to comply with certain financial tests, as defined in the 2014 Credit Agreement. If applicable, the minimum required levels of the interest coverage ratio would be 2.5 to 1.0 and the maximum permitted levels of the senior secured leverage ratio would be 2.75 to 1.0.

The 2014 Credit Agreement contains customary default provisions and has various non-financial covenants, both requiring the Company to refrain from taking certain future actions (as described above) and requiring the Company to take certain actions, such as keeping its corporate existence in good standing, maintaining insurance, and providing its bank lending group with financial information on a timely basis.

On May 29, 2015, the Company entered into an Incremental Assumption Agreement and Amendment No. 1 to the 2014 Credit Agreement which lowered the interest rate on the Company’s €200.0 million Euro denominated term loan from Euro Interbank Offered Rate (“EURIBOR”) plus 3.25% with a 0.75% EURIBOR floor to EURIBOR plus 2.75% with a 0.75% EURIBOR floor.

As of March 31, 2016 and December 31, 2015, the Company had $448.5 million and $439.2 million, respectively, in U.S. dollar and Euro denominated term loans outstanding under its 2014 Credit Agreement. The weighted average interest rate on the term loans at March 31, 2016 and December 31, 2015 was 3.50%. The Company had $82.0 million in U.S. dollar denominated revolving credit amounts outstanding as of March 31, 2016. The Company had no outstanding U.S. dollar and Euro denominated revolving credit amounts at December 31, 2015. The weighted average interest rate on the revolving credit amounts at March 31, 2016 was 3.24%.

The 2014 Credit Agreement incorporates facilities for issuance of letters of credit up to $400 million.  Letters of credit issued under the 2014 Credit Agreement letter of credit facility decrease availability under the $600 million revolving line of credit.  As of March 31, 2016 and December 31, 2015, the Company had no letters of credit issued under the 2014 Credit Agreement.  The 2014 Credit Agreement also permits the Company to have additional letter of credit facilities up to $300 million, and letters of credit issued under such additional facilities do not decrease availability under the revolving line of credit. The Company had letters of credit issued under the additional letter of credit facilities of the 2014 Credit Agreement that totaled $38.3 million and $21.2 million as of March 31, 2016 and December 31, 2015, respectively.

The Company also has bilateral arrangements to issue letters of credit with various other financial institutions.  These additional letters of credit do not reduce the Company’s availability under the 2014 Credit Agreement.  The Company had letters of credit issued under these additional arrangements of $178.3 million and $189.7 million as of March 31, 2016 and December 31, 2015, respectively.

In total, as of March 31, 2016 and December 31, 2015, the Company had letters of credit outstanding of $216.6 million and $210.9 million, respectively. The letters of credit generally serve as collateral for certain liabilities included in the Condensed Consolidated Balance Sheet. Certain letters of credit serve as collateral guaranteeing the Company’s performance under contracts.

The Company and certain of its subsidiaries agreed to take certain actions to secure borrowings under the 2014 Credit Agreement.  As a result, the Company and certain of its subsidiaries entered into a Guarantee and Collateral Agreement with Credit Suisse, as collateral agent for the lenders, granting security to the lenders for amounts borrowed under the 2014 Credit Agreement.  The Company is required to (a) pledge as collateral the capital stock of the Company’s material domestic subsidiaries and 65% of the capital stock of certain of the Company’s material foreign subsidiaries, and (b) provide a first priority security interest in, and mortgages on, substantially all of the Company’s domestic assets.

6-1/2% Senior Notes

On March 27, 2012, the Company sold and issued $300 million aggregate principal amount of Senior Notes Due 2020 (“6-1/2% Notes”) at par. The proceeds from these notes were used for general corporate purposes. The 6-1/2% Notes are redeemable by the Company beginning in April 2016 at an initial redemption price of 103.25% of principal amount. The 6-1/2% Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries (see Note Q – “Consolidating Financial Statements”).


24



On September 8, 2015, the Company, after obtaining the requisite consents, amended the indenture governing the 6-1/2% Notes. The principal changes contained in the amendment are that the Merger will not constitute a “Change of Control” under the indenture, and to permit Konecranes to insert one or more holding companies below or above Konecranes without triggering a “Change of Control” if such holding companies do not affect Terex’s ultimate beneficial ownership. Additionally, the reporting covenant under the indenture was amended to permit Konecranes, instead of Terex, following the Merger to make necessary periodic reports. In connection with the receipt and effectiveness of the consents, Terex will owe a total of $3.2 million upon closing of the Merger. (see Note A - “Business Combination Agreement and Plan of Merger”).

6% Senior Notes

On November 26, 2012, the Company sold and issued $850 million aggregate principal amount of Senior Notes due 2021 (“6% Notes”) at par. The proceeds from this offering plus other cash was used to redeem all $800 million principal amount of the outstanding 8% Senior Subordinated Notes. The 6% Notes are redeemable by the Company beginning in November 2016 at an initial redemption price of 103.0% of principal amount. The 6% Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries (see Note Q – “Consolidating Financial Statements”).

On September 8, 2015, the Company, after obtaining the requisite consents, amended the indenture governing the 6% Notes. The principal changes contained in the amendment are that the Merger will not constitute a “Change of Control” under the indenture, and to permit Konecranes to insert one or more holding companies below or above Konecranes without triggering a “Change of Control” if such holding companies do not affect Terex’s ultimate beneficial ownership. Additionally, the reporting covenant under the indenture was amended to permit Konecranes, instead of Terex, following the Merger to make necessary periodic reports. In connection with the receipt and effectiveness of the consents, Terex will owe a total of $15.5 million upon closing of the Merger. (see Note A - “Business Combination Agreement and Plan of Merger”).

4% Convertible Senior Subordinated Notes

On June 3, 2009, the Company sold and issued $172.5 million aggregate principal amount of 4% Convertible Notes.  At issuance, the Company was required to separately account for the liability and equity components of the 4% Convertible Notes in a manner that reflected the Company’s nonconvertible debt borrowing rate at the date of issuance for interest cost to be recognized in subsequent periods.  The Company allocated $54.3 million of the $172.5 million principal amount of the 4% Convertible Notes to the equity component, which represented a discount to the debt and was amortized into interest expense using the effective interest method through settlement.  The Company recorded a related deferred tax liability of $19.4 million on the equity component. During 2012 the Company purchased approximately 25% of the outstanding 4% Convertible Notes. The balance of the 4% Convertible Notes was $128.8 million at settlement on June 1, 2015.  The Company recognized interest expense of $3.5 million on the 4% Convertible Notes for the three months ended March 31, 2015.  Interest expense on the 4% Convertible Notes throughout its term included 4% annually of cash interest on the maturity balance of $128.8 million plus non-cash interest expense accreted to the debt balance as described.

On June 1, 2015 the Company paid cash of $131.1 million (including accrued interest of $2.3 million) and issued 3.4 million shares of its $0.01 par value common stock to settle the 4% Convertible Notes.

2015 Securitization Facility

On May 28, 2015, the Company, through certain of its subsidiaries, entered into a Loan and Security Agreement (the “Securitization Facility”) with lenders party thereto. The borrower under the Securitization Facility is a bankruptcy remote subsidiary of the Company (the “Borrower”).

Under the Securitization Facility, the Borrower may, from time to time, request the conduit lenders thereunder to make loans to the Borrower. Such loans will be secured by and payable from collateral of the Borrower (primarily equipment loans and leases to Terex customers originated by TFS and transferred to the Borrower). Any such loan may be made by the conduit lender in its sole discretion and if not made by the conduit lender, shall be made by the committed lender under the Securitization Facility. The facility limit for such loans is $350 million. The scheduled termination date for the Securitization Facility is May 28, 2017, but it may be extended by agreement of the parties per the terms of the loan agreement. The Securitization Facility also contains customary representations, warranties and covenants.

On August 10, 2015, the Company entered into an Amendment and Agreement to the Securitization Facility with lenders party thereto. The principal change contained in the amendment is that the Merger will not constitute a change in control for purposes of the Securitization Facility and provided clarity regarding downgrade events after the closing of the Merger.


25



At March 31, 2016 and December 31, 2015, the Company had $128.3 million and $206.5 million in loans outstanding under the Securitization Facility, respectively. The weighted average interest rate on the Securitization Facility at March 31, 2016 and December 31, 2015 was 1.73% and 1.46%. Interest expense on loans outstanding under this facility is recorded to Cost of goods sold in the Condensed Consolidated Statement of Comprehensive Income. The Company is party to certain derivative interest rate swap agreements entered into to hedge its exposure to variable interest rates related to the Securitization Facility. The effective interest rate on the Securitization Facility when combined with the interest rate swap agreements was 2.44% and 2.13% at March 31, 2016 and December 31, 2015, respectively. For further information on the interest rate swap agreements see Note K – “Derivative Financial Instruments.”

During the first three months of 2016, we elected to prepay approximately $81 million of loans outstanding under this facility. We have reached an understanding to repay the remaining loan balance and terminate this facility in 2016 as the facility was not providing the Company with the flexibility needed for its portfolio of assets.

Commitment Letter

On August 10, 2015, in connection with the Merger, the Company and Konecranes entered into a Commitment Letter (the "Commitment Letter") with Credit Suisse Securities (USA) LLC ("CS Securities") and Credit Suisse AG ("CS" and, together with CS Securities and their respective affiliates, "Credit Suisse") in which Credit Suisse committed to provide the Company and Konecranes with financing. This financing will be provided by a number of financial institutions and will include senior secured credit facilities in an aggregate principal amount of up to $1.65 billion, consisting of (i) a senior secured term loan facility in an aggregate principal amount of $900.0 million (such aggregate principal amount to be allocated between a U.S. dollar-denominated term loan facility to be made to the Company and a Euro-denominated term loan facility in an aggregate principal amount of up to €500.0 million to be made to Konecranes or one of its subsidiaries and (ii) two senior secured revolving credit facilities in an aggregate principal amount of up to $700.0 million. In connection with the Commitment Letter, the Company incurred fees of $4.4 million on the unused commitment for the three months ended March 31, 2016 which are included with transaction costs directly related to the BCA and are recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Fair Value of Debt

Based on indicative price quotations from financial institutions multiplied by the amount recorded on the Company’s Condensed Consolidated Balance Sheet (“Book Value”), the Company estimates the fair values (“FV”) of its debt set forth below as of March 31, 2016, as follows (in millions, except for quotes):
 
Book Value
 
Quote
 
FV
6% Notes
$
850.0

 
$
0.97500

 
$
829

6-1/2% Notes
$
300.0

 
$
0.97500

 
$
293

2014 Credit Agreement Term Loan (net of discount) – USD
$
225.0

 
$
0.98000

 
$
221

2014 Credit Agreement Term Loan (net of discount) – EUR
$
223.5

 
$
0.99250

 
$
222


The fair value of debt reported in the table above is based on price quotations on the debt instrument in an active market and therefore categorized under Level 1 of the ASC 820 hierarchy. See Note A – “Basis of Presentation,” for an explanation of the ASC 820 hierarchy. The Company believes that the carrying value of its other borrowings, including amounts outstanding for the revolving credit line under the 2014 Credit Agreement and the Securitization Facility, approximate fair market value based on maturities for debt of similar terms. The fair value of these other borrowings are categorized under Level 2 of the ASC 820 hierarchy.


26



NOTE N – RETIREMENT PLANS AND OTHER BENEFITS

The Company maintains defined benefit plans in the United States, France, Germany, India, Switzerland and the United Kingdom for some of its subsidiaries, including a nonqualified Supplemental Executive Retirement Plan (“SERP”) in the United States. In Austria and Italy there are mandatory termination indemnity plans providing a benefit that is payable upon termination of employment in substantially all cases of termination. The Company also has several programs that provide postemployment benefits, including health and life insurance benefits, to certain former salaried and hourly employees. Information regarding the Company’s plans, including the SERP, was as follows (in millions):
 
Three Months Ended
March 31,
 
2016
 
2015
 
U.S. Pension
 
Non-U.S. Pension
 
Other
 
U.S. Pension
 
Non-U.S. Pension
 
Other
Components of net periodic cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
0.3

 
$
1.5

 
$

 
$
0.3

 
$
1.6

 
$

Interest cost
1.8

 
3.1

 
0.1

 
1.8

 
3.2

 
0.1

Expected return on plan assets
(2.1
)
 
(1.7
)
 

 
(2.5
)
 
(2.0
)
 

Amortization of actuarial loss
1.0

 
1.4

 

 
1.0

 
1.9

 

Net periodic cost 
$
1.0

 
$
4.3

 
$
0.1

 
$
0.6

 
$
4.7

 
$
0.1



27



NOTE O – LITIGATION AND CONTINGENCIES

General

The Company is involved in various legal proceedings, including product liability, general liability, workers’ compensation liability, employment, commercial and intellectual property litigation, which have arisen in the normal course of operations. The Company is insured for product liability, general liability, workers’ compensation, employer’s liability, property damage and other insurable risk required by law or contract, with retained liability or deductibles. The Company records and maintains an estimated liability in the amount of management’s estimate of the Company’s aggregate exposure for such retained liabilities and deductibles. For such retained liabilities and deductibles, the Company determines its exposure based on probable loss estimations, which requires such losses to be both probable and the amount or range of probable loss to be estimable. The Company believes it has made appropriate and adequate reserves and accruals for its current contingencies and that the likelihood of a material loss beyond the amounts accrued is remote. The Company believes that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on its financial statements as a whole. However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could ultimately result in the Company incurring significant liabilities which could have a material adverse effect on its results of operations.

Securities and Stockholder Derivative Lawsuits

The Company has received complaints seeking certification of class action lawsuits as follows:

A consolidated class action complaint for violations of securities laws in the securities lawsuit was filed in the United States District Court, District of Connecticut on November 18, 2010 and is entitled Sheet Metal Workers Local 32 Pension Fund and Ironworkers St. Louis Council Pension Fund, individually and on behalf of all others similarly situated v. Terex Corporation, et al.

A stockholder derivative complaint for violation of the Securities and Exchange Act of 1934, breach of fiduciary duty, waste of corporate assets and unjust enrichment was filed on April 12, 2010 in the United States District Court, District of Connecticut and is entitled Peter Derrer, derivatively on behalf of Terex Corporation v. Ronald M. DeFeo, Phillip C. Widman, Thomas J. Riordan, G. Chris Andersen, Donald P. Jacobs, David A. Sachs, William H. Fike, Donald DeFosset, Helge H. Wehmeier, Paula H.J. Cholmondeley, Oren G. Shaffer, Thomas J. Hansen, and David C. Wang, and Terex Corporation.

On August 21, 2015, a purported Terex stockholder, Bernard Stern, filed a class action complaint challenging the Merger in the Delaware Chancery Court, and on August 26, 2015, a purported Terex stockholder, Joseph Weinstock, filed a class action complaint challenging the Merger in the Delaware Chancery Court. The complaints name as defendants Terex Corporation, Konecranes Plc, Konecranes, Inc., Konecranes Acquisition Company LLC and the members of the Board of Directors of Terex. On March 22, 2016, the plaintiff in the Stern action filed a notice of voluntary dismissal without prejudice of his action, which was approved by the Court.

The first two lawsuits generally cover the period from February 2008 to February 2009 and allege, among other things, that certain of the Company’s SEC filings and other public statements contained false and misleading statements which resulted in damages to the Company, the plaintiffs and the members of the purported class when they purchased the Company’s securities and in the stockholder derivative complaint, that there were breaches of fiduciary duties. The stockholder derivative complaint also alleges waste of corporate assets relating to the repurchase of the Company’s shares in the market and unjust enrichment as a result of securities sales by certain officers and directors. The complaints all seek, among other things, unspecified compensatory damages, costs and expenses. As a result, the Company is unable to estimate a possible loss or a range of losses for these lawsuits. The stockholder derivative complaint also seeks amendments to the Company’s corporate governance procedures in addition to unspecified compensatory damages from the individual defendants in its favor.

The lawsuit concerning the Merger seeks, among other relief, an order enjoining or rescinding the Merger and an award of attorneys’ fees and costs on the grounds that the Company’s Board of Directors breached their fiduciary duty in connection with entering into the business combination agreement and approving the Merger. The complaint further alleges that Terex Corporation, Konecranes Plc, Konecranes, Inc. and Konecranes Acquisition Company LLC aided and abetted the alleged breaches of fiduciary duties by the Company’s Board of Directors. It is possible that this complaint will be further amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought, including a refiling of the lawsuit that was voluntarily dismissed.


28



The Company believes that the allegations in the suits are without merit, and Terex, its directors and the named executives will continue to vigorously defend against them. The Company believes that it has acted, and continues to act, in compliance with federal securities laws and Delaware law with respect to these matters. Accordingly, the Company has filed motions to dismiss the securities lawsuit. The plaintiff in the stockholder derivative lawsuit has agreed with the Company to put this lawsuit on hold pending the outcome of the motion to dismiss in connection with the securities lawsuit. The lawsuit pertaining to the Merger is at a very early stage and by agreement with the plaintiff, the time for defendants to respond has not come due.

Other

The Company is involved in various other legal proceedings which have arisen in the normal course of its operations.  The Company has recorded provisions for estimated losses in circumstances where a loss is probable and the amount or range of possible amounts of the loss is estimable.

Credit Guarantees

Customers of the Company from time to time may fund the acquisition of the Company’s equipment through third-party finance companies.  In certain instances, the Company may provide a credit guarantee to the finance company, by which the Company agrees to make payments to the finance company should the customer default.  The maximum liability of the Company is generally limited to its customer’s remaining payments due to the finance company at the time of default.  In the event of customer default, the Company or the finance company is generally able to recover and dispose of the equipment at a minimum loss, if any, to the Company.

As of March 31, 2016 and December 31, 2015, the Company’s maximum exposure to such credit guarantees was $41.7 million and $39.8 million, respectively, including total guarantees issued by a German subsidiary, part of the Cranes segment, of $19.2 million and $19.0 million, respectively. The terms of these guarantees coincide with the financing arranged by the customer and generally do not exceed five years. Given the Company’s position as the original equipment manufacturer and its knowledge of end markets, the Company, when called upon to fulfill a guarantee, generally has been able to liquidate the financed equipment at a minimal loss, if any, to the Company.

There can be no assurance that historical credit default experience will be indicative of future results.  The Company’s ability to recover losses experienced from its guarantees may be affected by economic conditions in effect at the time of loss.

Buyback Guarantees

The Company from time to time guarantees that it will buy equipment from its customers in the future at a stated price if certain conditions are met by the customer.  Such guarantees are referred to as buyback guarantees.  These conditions generally pertain to the functionality and state of repair of the machine.  As of March 31, 2016 and December 31, 2015, the Company’s maximum exposure pursuant to buyback guarantees was $7.1 million and $6.9 million, respectively, including total guarantees issued by entities in the MHPS segment of $6.8 million and $6.6 million, respectively. The Company is generally able to mitigate some of the risk of these guarantees because maturity of the guarantees is staggered, limiting the amount of used equipment entering the marketplace at any one time and through leveraging its access to the used equipment markets provided by the Company’s original equipment manufacturer status.

The Company has recorded an aggregate liability within Other current liabilities and Other non-current liabilities in the Condensed Consolidated Balance Sheet of approximately $4 million and $3 million as of March 31, 2016 and December 31, 2015, respectively, for estimated fair value of all guarantees provided.

There can be no assurance that the Company’s historical experience in used equipment markets will be indicative of future results.  The Company’s ability to recover losses experienced from its guarantees may be affected by economic conditions in used equipment markets at the time of loss.


29



NOTE P – STOCKHOLDERS’ EQUITY

Total non-stockholder changes in equity (comprehensive income) include all changes in equity during a period except those resulting from investments by, and distributions to, stockholders.  The specific components include: net income, deferred gains and losses resulting from foreign currency translation, pension liability adjustments, equity security adjustments and deferred gains and losses resulting from derivative hedging transactions.  Total non-stockholder changes in equity were as follows (in millions):
 
Three Months Ended
March 31,
 
2016
 
2015
Net income (loss)
$
(71.0
)
 
$
1.6

Other comprehensive income (loss), net of tax:
 
 
 

Cumulative translation adjustment (CTA), net of (provision for) benefit from taxes of $0.3 and $6.8, respectively
61.9

 
(211.6
)
Derivative hedging adjustment, net of (provision for) benefit from taxes of $0.3 and $0.2, respectively
(3.6
)
 
0.3

Debt and equity securities adjustment, net of (provision for) benefit from taxes of $0.0 and $0.0, respectively
(0.4
)
 
(3.1
)
Pension liability adjustment:
 
 
 
Amortization of actuarial (gain) loss, net of provision for (benefit from) taxes of $(0.5) and $(0.4), respectively
1.9

 
2.5

Foreign exchange and other effects, net of (provision for) benefit from taxes of $1.2 and $(2.4), respectively
(1.4
)
 
12.1

Total pension liability adjustment
0.5


14.6

Other comprehensive income (loss)
58.4

 
(199.8
)
Comprehensive income (loss)
(12.6
)
 
(198.2
)
Comprehensive loss (income) attributable to noncontrolling interest
0.1

 
(0.6
)
Comprehensive income (loss) attributable to Terex Corporation
$
(12.5
)
 
$
(198.8
)

Changes in Accumulated Other Comprehensive Income
The table below presents changes in AOCI by component for the three months ended March 31, 2016 and 2015. All amounts are net of tax (in millions).
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
CTA
Deriv. Hedging Adj.
Debt & Equity Securities Adj.
Pension Liability Adj.
Total
 
CTA
Deriv. Hedging Adj.
Debt & Equity Securities Adj.
Pension Liability Adj.
Total
Beginning balance
$
(492.7
)
$
2.3

$
(6.3
)
$
(152.9
)
$
(649.6
)
 
$
(245.5
)
$
(0.7
)
$
1.6

$
(185.2
)
$
(429.8
)
Other comprehensive income before reclassifications
61.9

(2.4
)
(0.4
)
(1.4
)
57.7

 
(211.6
)
(2.8
)
(3.1
)
12.1

(205.4
)
Amounts reclassified from AOCI

(1.2
)

1.9

0.7

 

3.1


2.5

5.6

Net other comprehensive Income (Loss)
61.9

(3.6
)
(0.4
)
0.5

58.4

 
(211.6
)
0.3

(3.1
)
14.6

(199.8
)
Ending balance
$
(430.8
)
$
(1.3
)
$
(6.7
)
$
(152.4
)
$
(591.2
)
 
$
(457.1
)
$
(0.4
)
$
(1.5
)
$
(170.6
)
$
(629.6
)
 
 

30



Stock-Based Compensation

During the three months ended March 31, 2016, the Company granted 2.0 million shares of restricted stock to its employees with a weighted average grant date fair value of $23.88 per share.  Approximately 80% of these restricted stock awards vest ratably over a three year period and approximately 20% cliff vest at the end of a three year period.  Approximately 13% of the shares granted are based on performance targets containing a market condition and determined over a three year period. The Company used the Monte Carlo method to determine grant date fair value of $29.24 per share for the awards with a market condition granted on March 3, 2016.  The Monte Carlo method is a statistical simulation technique used to provide the grant date fair value of an award.  The following table presents the weighted-average assumptions used in the valuation:
 
Grant date
 
March 3, 2016
Dividend yields
1.22
%
Expected volatility
45.59
%
Risk free interest rate
0.97
%
Expected life (in years)
3


Share Repurchases and Dividends

In February 2015, the Company announced authorization by its Board of Directors for the repurchase of up to $200 million of the Company’s outstanding shares of common stock. During the three months ended March 31, 2016 the Company did not repurchase any shares under this program. In the first quarter of 2016, the Company’s Board of Directors declared a dividend of 0.07 per share, which was paid to its shareholders.

NOTE Q – CONSOLIDATING FINANCIAL STATEMENTS

During 2012, the Company sold and issued the 6% Notes and the 6-1/2% Notes (collectively the “Notes”) (see Note M – “Long-Term Obligations”). The Notes are jointly and severally guaranteed by the following wholly-owned subsidiaries of the Company (the “Wholly-owned Guarantors”): CMI Terex Corporation, Fantuzzi Noell USA, Inc., Genie Holdings, Inc., Genie Industries, Inc., Genie International, Inc., Powerscreen Holdings USA Inc., Powerscreen International LLC, Powerscreen North America Inc., Powerscreen USA, LLC, Terex Advance Mixer, Inc., Terex Aerials, Inc., Terex Financial Services, Inc., Terex South Dakota, Inc., Terex USA, LLC, Terex Utilities, Inc. and Terex Washington, Inc.  Wholly-owned Guarantors are 100% owned by the Company. All of the guarantees are full and unconditional.  The guarantees of the Wholly-owned Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. No subsidiaries of the Company except the Wholly-owned Guarantors have provided a guarantee of the Notes.

The following summarized condensed consolidating financial information for the Company segregates the financial information of Terex Corporation, the Wholly-owned Guarantors and the non-guarantor subsidiaries.  The results and financial position of businesses acquired are included from the dates of their respective acquisitions.

Terex Corporation consists of parent company operations. Subsidiaries of the parent company are reported on the equity basis.  Wholly-owned Guarantors combine the operations of the Wholly-owned Guarantor subsidiaries.  Subsidiaries of Wholly-owned Guarantors that are not themselves guarantors are reported on the equity basis.  Non-guarantor subsidiaries combine the operations of subsidiaries which have not provided a guarantee of the Notes.  Subsidiaries of non-guarantor subsidiaries that are guarantors are reported on the equity basis.  Debt and goodwill allocated to subsidiaries are presented on a “push-down” accounting basis.


31



TEREX CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2016
(in millions)
 
Terex
Corporation
 
Wholly-owned
Guarantors
 
Non-guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
Net sales
$
0.7

 
$
684.7

 
$
965.2

 
$
(223.7
)
 
$
1,426.9

Cost of goods sold
(0.5
)
 
(591.4
)
 
(832.7
)
 
221.2

 
(1,203.4
)
Gross profit
0.2

 
93.3

 
132.5

 
(2.5
)
 
223.5

Selling, general and administrative expenses
1.2

 
(72.9
)
 
(196.0
)
 
2.5

 
(265.2
)
Income (loss) from operations
1.4

 
20.4

 
(63.5
)
 

 
(41.7
)
Interest income
24.2

 
17.2

 
0.8

 
(40.9
)
 
1.3

Interest expense
(36.7
)
 
(2.1
)
 
(27.3
)
 
40.9

 
(25.2
)
Income (loss) from subsidiaries
(44.5
)
 
7.8

 
(2.5
)
 
39.2

 

Other income (expense) – net
(21.5
)
 
9.5

 
8.2

 

 
(3.8
)
Income (loss) from continuing operations before income taxes
(77.1
)
 
52.8

 
(84.3
)
 
39.2

 
(69.4
)
(Provision for) benefit from income taxes
5.8

 
(8.2
)
 
(2.6
)
 

 
(5.0
)
Income (loss) from continuing operations
(71.3
)
 
44.6

 
(86.9
)
 
39.2

 
(74.4
)
Gain (loss) on disposition of discontinued operations – net of tax
0.5

 

 
2.9

 

 
3.4