Document


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 September 30, 2017

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 

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

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

Number of outstanding shares of common stock: 84.1 million as of October 27, 2017.
The Exhibit Index begins on page 54.






TEREX CORPORATION AND SUBSIDIARIES

GENERAL

This Quarterly Report on Form 10-Q filed by Terex Corporation generally speaks as of September 30, 2017 unless specifically noted otherwise. Unless otherwise indicated, Terex Corporation, together with its consolidated subsidiaries, is hereinafter referred to as “Terex,” the “Registrant,” “us,” “we,” “our” or the “Company.”

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;
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 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.




 
 
Page No.
 
 
 
Financial Statements
 
 
 
 
TEREX CORPORATION AND SUBSIDIARIES
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3



PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in millions, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net sales
$
1,111.2

 
$
1,056.4

 
$
3,299.8

 
$
3,468.4

Cost of goods sold
(892.2
)
 
(872.5
)
 
(2,687.8
)
 
(2,860.7
)
Gross profit
219.0

 
183.9

 
612.0

 
607.7

Selling, general and administrative expenses
(154.8
)
 
(144.3
)
 
(478.2
)
 
(483.4
)
Income (loss) from operations
64.2

 
39.6

 
133.8

 
124.3

Other income (expense)
 
 
 

 
 
 
 
Interest income
1.9

 
1.0

 
5.2

 
3.3

Interest expense
(15.5
)
 
(25.4
)
 
(52.0
)
 
(75.6
)
Loss on early extinguishment of debt
(0.7
)
 

 
(52.6
)
 
(0.4
)
Other income (expense) – net 
6.8

 
(1.3
)
 
52.2

 
(13.3
)
Income (loss) from continuing operations before income taxes
56.7

 
13.9

 
86.6

 
38.3

(Provision for) benefit from income taxes
(0.1
)
 
19.3

 
5.1

 
82.5

Income (loss) from continuing operations
56.6

 
33.2

 
91.7

 
120.8

Income (loss) from discontinued operations – net of tax

 
64.1

 

 
(33.4
)
Gain (loss) on disposition of discontinued operations – net of tax
2.6

 

 
63.7

 
3.5

Net income (loss)
59.2

 
97.3

 
155.4

 
90.9

Net loss (income) from continuing operations attributable to noncontrolling interest

 
0.1

 

 
0.1

Net loss (income) from discontinued operations attributable to noncontrolling interest

 
(0.6
)
 

 
0.1

Net income (loss) attributable to Terex Corporation
$
59.2

 
$
96.8

 
$
155.4

 
$
91.1

Amounts attributable to Terex Corporation Common Stockholders:
 
 
 

 
 
 
 
Income (loss) from continuing operations
$
56.6

 
$
33.3

 
$
91.7

 
$
120.9

Income (loss) from discontinued operations – net of tax

 
63.5

 

 
(33.3
)
Gain (loss) on disposition of discontinued operations – net of tax
2.6

 

 
63.7

 
3.5

Net income (loss) attributable to Terex Corporation
$
59.2

 
$
96.8

 
$
155.4

 
$
91.1

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

 
 
 
 
Income (loss) from continuing operations
$
0.64

 
$
0.31

 
$
0.96

 
$
1.12

Income (loss) from discontinued operations – net of tax

 
0.59

 

 
(0.31
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 

 
0.66

 
0.03

Net income (loss) attributable to Terex Corporation
$
0.67

 
$
0.90

 
$
1.62

 
$
0.84

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

 
 
 
 
Income (loss) from continuing operations
$
0.63

 
$
0.31

 
$
0.93

 
$
1.10

Income (loss) from discontinued operations – net of tax

 
0.58

 

 
(0.30
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 

 
0.65

 
0.03

Net income (loss) attributable to Terex Corporation
$
0.66

 
$
0.89

 
$
1.58

 
$
0.83

Weighted average number of shares outstanding in per share calculation
 

 
 

 
 
 
 
Basic
88.0

 
107.6

 
96.2

 
108.5

Diluted
90.0

 
108.6

 
98.1

 
109.3

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
91.2

 
$
99.8

 
$
673.2

 
$
86.7

Comprehensive loss (income) attributable to noncontrolling interest

 
(0.6
)
 

 
0.3

Comprehensive income (loss) attributable to Terex Corporation
$
91.2

 
$
99.2

 
$
673.2

 
$
87.0

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.08

 
$
0.07

 
$
0.24

 
$
0.21


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)
 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
592.7

 
$
428.5

Trade receivables (net of allowance of $15.9 and $16.5 at September 30, 2017 and December 31, 2016, respectively)
712.6

 
512.5

Inventories
904.4

 
853.8

Prepaid and other current assets
241.7

 
172.8

Current assets held for sale
5.7

 
732.9

Total current assets
2,457.1

 
2,700.5

Non-current assets
 
 
 

Property, plant and equipment – net
300.8

 
304.6

Goodwill
272.2

 
259.7

Intangible assets – net
14.2

 
18.4

Other assets
558.4

 
552.3

Non-current assets held for sale

 
1,171.3

Total assets
$
3,602.7

 
$
5,006.8

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 

 
 

Notes payable and current portion of long-term debt
$
4.9

 
$
13.8

Trade accounts payable
552.3

 
522.7

Accrued compensation and benefits
134.3

 
125.1

Accrued warranties and product liability
47.3

 
61.2

Other current liabilities
272.6

 
230.4

Current liabilities held for sale
2.2

 
453.8

Total current liabilities
1,013.6

 
1,407.0

Non-current liabilities
 
 
 

Long-term debt, less current portion
980.0

 
1,562.0

Retirement plans
160.0

 
153.8

Other non-current liabilities
68.0

 
50.7

Non-current liabilities held for sale
0.8

 
312.1

Total liabilities
2,222.4

 
3,485.6

Commitments and contingencies


 


Stockholders’ equity
 

 
 

Common stock, $.01 par value – authorized 300.0 shares; issued 130.4 and 129.6 shares at September 30, 2017 and December 31, 2016, respectively
1.3

 
1.3

Additional paid-in capital
1,314.4

 
1,300.0

Retained earnings
2,029.5

 
1,897.9

Accumulated other comprehensive income (loss)
(261.6
)
 
(779.4
)
Less cost of shares of common stock in treasury – 46.8 and 24.6 shares at September 30, 2017 and December 31, 2016, respectively
(1,703.9
)
 
(935.1
)
Total Terex Corporation stockholders’ equity
1,379.7

 
1,484.7

Noncontrolling interest
0.6

 
36.5

Total stockholders’ equity
1,380.3

 
1,521.2

Total liabilities and stockholders’ equity
$
3,602.7

 
$
5,006.8


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)
 
Nine Months Ended
September 30,
 
2017
 
2016
Operating Activities
 
 
 
Net income (loss)
$
155.4

 
$
90.9

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

 
 

Depreciation and amortization
48.7

 
77.4

(Gain) loss on disposition of discontinued operations
(63.7
)
 
(3.5
)
Deferred taxes
(22.9
)
 
(101.1
)
(Gain) loss on sale of assets
(59.8
)
 
2.4

Loss on early extinguishment of debt
52.6

 
0.4

Stock-based compensation expense
29.9

 
28.2

Other non-cash charges
31.8

 
58.9

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

 
 

Trade receivables
(141.4
)
 
(19.2
)
Inventories
7.9

 
(31.5
)
Trade accounts payable
(7.5
)
 
(105.4
)
Income taxes payable / receivable
2.6

 
1.2

Other assets and liabilities
(67.7
)
 
147.4

Foreign exchange and other operating activities, net
(22.1
)
 
(45.8
)
Net cash provided by (used in) operating activities
(56.2
)
 
100.3

Investing Activities
 

 
 

Capital expenditures
(27.2
)
 
(64.2
)
Acquisitions, net of cash acquired

 
(3.2
)
Proceeds (payments) from disposition of discontinued operations
773.7

 
3.5

Proceeds from sales of assets
803.3

 
63.7

Other investing activities, net

 
(2.5
)
Net cash provided by (used in) investing activities
1,549.8

 
(2.7
)
Financing Activities
 

 
 

Repayments of debt
(1,593.0
)
 
(1,004.8
)
Proceeds from issuance of debt
1,010.5

 
889.9

Share repurchases
(761.7
)
 
(80.9
)
Dividends paid
(22.8
)
 
(22.7
)
Payment of debt extinguishment costs
(36.4
)
 

Other financing activities, net
(30.7
)
 
(8.3
)
Net cash provided by (used in) financing activities
(1,434.1
)
 
(226.8
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
34.3

 
6.4

Net Increase (Decrease) in Cash and Cash Equivalents
93.8

 
(122.8
)
Cash and Cash Equivalents at Beginning of Period
501.9

 
466.5

Cash and Cash Equivalents at End of Period
$
595.7

 
$
343.7


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

6



TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A – BASIS OF PRESENTATION

Basis of Presentation.  The accompanying unaudited Condensed Consolidated Financial Statements of Terex Corporation and subsidiaries as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 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, 2016 has been derived from and should be read in conjunction with the audited Consolidated Balance Sheet as of that date, but does not include all disclosures required by accounting principles generally accepted in the United States.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2016 included in the Company’s Current Report on Form 8-K dated August 25, 2017.

The Condensed Consolidated Financial Statements include 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, adjustments considered necessary for the fair statement 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 and nine months ended September 30, 2017 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.

Cash and cash equivalents at September 30, 2017 and December 31, 2016 include $3.9 million and $6.0 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. See discussion below for reclassification and cumulative effect adjustment impacts related to adoption of Accounting Standards Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” and ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”.

Recently Issued Accounting Standards

Accounting Standards Implemented in 2017

In July 2015, the Financial Accounting Standards Board (“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 Company adopted ASU 2015-11 on January 1, 2017. Adoption did not have a material effect on the Company’s 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 de-designation of that hedge accounting relationship. The Company adopted ASU 2016-05 on January 1, 2017. Adoption did not 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 Company adopted ASU 2016-06 on January 1, 2017. Adoption did not have a material effect on the Company’s consolidated financial statements.


7



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 Company adopted ASU 2016-07 on January 1, 2017. Adoption did not have a material effect on the Company’s consolidated financial statements.

On January 1, 2017, the Company adopted ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”). As required by ASU 2016-09, excess tax benefits and tax deficiencies recognized on the vesting date of restricted stock awards are reflected in the Condensed Consolidated Statements of Comprehensive Income (Loss) as a component of the provision for income taxes and was adopted on a prospective basis. In addition, ASU 2016-09 requires that the excess tax benefit be removed from the overall calculation of diluted shares. The impact on diluted earnings per share for adoption of this provision was not material. As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are now classified as an operating activity in the Company’s Condensed Consolidated Statement of Cash Flows versus previously classified as a financing activity. The Company has elected to apply this provision on a prospective basis, so no prior periods have been adjusted. ASU 2016-09 increases the amount of shares an employer can withhold for tax purposes without triggering liability accounting, which had no effect on the Company’s consolidated financial statements. ASU 2016-09 requires all cash payments made on an employee’s behalf for withheld shares to be presented as a financing activity in the Condensed Consolidated Statement of Cash Flows, with retrospective application required. As a result, net cash provided by operating activities for the nine months ended September 30, 2016 increased by $9.5 million with a corresponding increase to net cash used in financing activities. Finally, ASU 2016-09 allows for the option to account for forfeitures as they occur, rather than estimating expected forfeitures over the service period. The Company elected to account for forfeitures as they occur and the net cumulative effect of this change was recognized as a $0.6 million increase to additional paid in capital, a $0.2 million increase to deferred tax assets and a $0.4 million reduction to retained earnings as of January 1, 2017.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”).  ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in Accounting Standards Codification (“ASC”) 230, “Statement of Cash Flows,” and provides specific guidance on certain cash flow classification issues.  The effective date for ASU 2016-15 is the first quarter of fiscal year 2018 and early adoption is permitted. During the third quarter of 2017, the Company adopted ASU 2016-15 effective January 1, 2017. Adoption of this standard required the Company to classify cash payments for debt prepayment or debt extinguishment costs as cash outflows for financing activities on the Condensed Consolidated Statement of Cash Flows. As a result, net cash used in operating activities for the nine months ended September 30, 2017 decreased by $36.4 million with a corresponding increase to net cash used in financing activities on the statement of cash flows. The impact for the nine months ended September 30, 2016 was immaterial.

Accounting Standards to be Implemented

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“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 requires 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. ASU 2014-09 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.

Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (“ASU 2016-08”); ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”); ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”); and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” (“ASU 2016-20”), which are intended to provide additional guidance and clarity to ASU 2014-09. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 along with ASU 2014-09 (collectively, the “New Revenue Standards”).


8



The New Revenue Standards may be applied using one of two retrospective application methods: (1) a full retrospective approach for all periods presented, or (2) a modified retrospective approach that presents a cumulative effect as of the adoption date and additional required disclosures. The Company plans to adopt the New Revenue Standards in the first quarter of 2018 using the modified retrospective approach. During the third quarter of 2017, we substantially completed our evaluation of the impact of the New Revenue Standards and do not expect adoption to have a material effect on the Company’s consolidated financial statements. We reached conclusions on key accounting assessments related to the standard, including our assessment of the impact of accounting for costs incurred to obtain a contract, goods or services immaterial in the context of the contract and additional disclosure requirements.

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; require public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminate 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. Early adoption is not permitted. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months and requires the disclosure of key information about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The effective date will be the first quarter of fiscal year 2019 and early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While the Company continues to assess the effect of adoption, it currently believes that ASU 2016-02 may have a material effect on its consolidated financial statements with the most significant changes likely related to the recognition of new ROU assets and lease liabilities on the consolidated balance sheet.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets forth a “current expected credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. The guidance in this new standard replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The effective date will be the first quarter of fiscal year 2020 and early adoption is permitted after 2018. ASU 2016-13 will be applied using a modified retrospective approach. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740) - Intra-Entity Transfer of Assets Other than Inventory,” (“ASU 2016-16”).  ASU 2016-16 requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. This is a change from existing U.S. generally accepted accounting principles which prohibits recognition of current and deferred income taxes until the asset is sold to a third party.  The effective date for ASU 2016-16 will be the first quarter of fiscal year 2018 and early adoption is permitted.  Adoption will be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment directly to retained earnings.  The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The effective date will be the first quarter of fiscal year 2018 and early adoption is permitted. ASU 2016-18 will be applied retrospectively. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.


9



In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU 2017-01”). ASU 2017-01 provides guidance in ascertaining whether a collection of assets and activities is considered a business. The effective date will be the first quarter of fiscal year 2018 and early adoption is permitted for specific transactions. ASU 2017-01 will be applied prospectively. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment. The effective date will be the first quarter of fiscal year 2020 and early adoption is permitted. ASU 2017-04 will be applied prospectively. The Company plans to early adopt ASU 2017-04 in the first quarter of 2018. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” (ASU 2017-05”). ASU 2017-05 is meant to clarify the scope of ASC Subtopic 610-20, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets” and to add guidance for partial sales of nonfinancial assets. ASU 2017-05 is to be applied using a full retrospective method or a modified retrospective method as outlined in the guidance and is effective at the same time as ASU 2014-09. Further, the Company is required to adopt ASU 2017-05 at the same time that it adopts the guidance in the New Revenue Standards. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” (“ASU 2017-07”). ASU 2017-07 changes how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic benefit cost in the income statement. An employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendment also allows only the service cost component to be eligible for capitalization, when applicable. The effective date will be the first quarter of fiscal year 2018. Early adoption is permitted only in the first interim period of a fiscal year. ASU 2017-07 will be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables--Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities,” (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. The effective date will be the first quarter of fiscal year 2019 and early adoption is permitted. Adoption will be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment directly to retained earnings. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09”). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The effective date will be the first quarter of fiscal year 2018 and early adoption is permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.


10



In May 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” (“ASU 2017-12”). ASU 2017-12 expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allow for a simplified approach for fair value hedging of interest rate risk. ASU 2017-12 eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance. The effective date will be the first quarter of fiscal year 2019 and early adoption is permitted. Adoption will be applied through a cumulative-effect adjustment to cash flows and prospectively for presentation and disclosure. 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 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):
 
Nine Months Ended
 
September 30, 2017
Balance at beginning of period
$
59.8

Accruals for warranties issued during the period
37.2

Changes in estimates
(0.2
)
Settlements during the period
(47.1
)
Foreign exchange effect/other
4.4

Balance at end of period
$
54.1


Fair Value Measurements. Assets and liabilities measured at fair value on a recurring basis under the provisions of ASC 820, “Fair Value Measurement and Disclosure” (“ASC 820”) include interest rate swaps, foreign currency forward contracts and cross currency swaps discussed in Note K – “Derivative Financial Instruments” and debt discussed in Note M – “Long-term Obligations”. These instruments 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.


11



NOTE B – SALE OF MHPS BUSINESS AND INVESTMENT CARRIED AT FAIR VALUE

On May 16, 2016, Terex agreed to sell its Material Handling and Port Solutions (“MHPS”) business to Konecranes Plc, a Finnish public company limited by shares, (“Konecranes”) by entering into a Stock and Asset Purchase Agreement, as amended (the “SAPA”), with Konecranes. As a result, the Company and Konecranes terminated the Business Combination Agreement and Plan of Merger (the “BCA”) announced on August 11, 2015, with no penalties incurred by either party. On January 4, 2017, the Company completed the disposition of its MHPS business to Konecranes (the “Disposition”), pursuant to the SAPA, effective as of January 1, 2017. In connection with the Disposition, the Company received 19.6 million newly issued Class B shares of Konecranes and approximately $835 million in cash after adjustments for estimated cash, debt and net working capital at closing and the divestiture of Konecranes’ Stahl Crane Systems business (“Stahl”), which was undertaken by Konecranes in connection with the Disposition. The final transaction consideration was subject to post-closing adjustments for the actual cash, debt and net working capital at closing, the 2016 performance of the MHPS business and Konecranes business, and the closing of the sale of Stahl. During the three and nine months ended September 30, 2017, the Company recognized a gain on the Disposition (net of tax) of $2.6 million and $60.7 million, respectively.

The Company and Konecranes entered into a Stockholders Agreement, dated as of January 4, 2017, which provided certain customary restrictions and obligations. Terex also had customary registration rights pursuant to a registration rights agreement between Terex and Konecranes entered into on January 4, 2017.

The Company sold all shares received in connection with the Disposition in three tranches. During the three and nine months ended September 30, 2017, the Company sold 5.2 million and 19.6 million Konecranes shares for proceeds of approximately $221 million and $770 million, respectively. During the three and nine months ended September 30, 2017, the Company recorded a net gain on sale, including the effects of foreign exchange rate changes, of $3.4 million and $42.0 million. The net gain on these sales is recorded as a component of Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

On March 23, 2017, Konecranes declared a dividend of €1.05 per share to holders of record as of March 27, 2017, which was paid on April 4, 2017. During the nine months ended September 30, 2017, the Company recognized dividend income of $13.5 million as a component of Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

In connection with the Disposition, the Company and Konecranes entered into certain ancillary agreements, including Transition Services Agreements (“TSA’s”) generally with terms from three to twelve months, dated as of January 4, 2017, under which the parties provide one another certain transition services to facilitate both the separation of the MHPS business from the businesses retained by the Company and the interim operations of the MHPS business acquired by Konecranes. Cash inflows and outflows related to these TSA’s generally offset to immaterial amounts.

Loss Contract

Related to the Disposition, the Company and Konecranes entered into an agreement for Konecranes to manufacture certain crane products on behalf of the Company for a period of 12 months. The Company recorded an expense of $6.3 million related to losses expected to be incurred over the agreement’s life during the nine months ended September 30, 2017. The agreement was amended on October 11, 2017 to extend the period of manufacturing for an additional 24 months.

SAPA and BCA Related Expenses

Terex incurred transaction costs directly related to the SAPA of $1.3 million and $2.5 million for the three and nine months ended September 30, 2016, respectively, which amounts are recorded in Income (loss) from discontinued operations - net of tax in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Terex incurred transaction costs directly related to the terminated BCA of $0.2 million and $12.8 million for the three and nine months ended September 30, 2016, respectively, which amounts are recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).


12



NOTE C – BUSINESS SEGMENT INFORMATION

Terex is a global manufacturer of lifting and material processing products and services that deliver lifecycle solutions to maximize customer return on investment. The Company delivers lifecycle solutions to a broad range of industries, including the construction, infrastructure, manufacturing, shipping, transportation, refining, energy, utility, quarrying and mining industries. The Company operates in three reportable segments: (i) Aerial Work Platforms (“AWP”); (ii) Cranes; and (iii) Materials Processing (“MP”).

The AWP segment designs, manufactures, services and markets aerial work platform equipment, telehandlers and light towers, as well as their related components and replacement parts. 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 a wide variety of cranes, including mobile telescopic cranes, lattice boom crawler cranes, tower cranes, and utility equipment, 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 MP segment designs, manufactures and markets materials processing and specialty equipment, including crushers, washing systems, screens, apron feeders, material handlers, wood processing, biomass and recycling equipment, concrete mixer trucks and concrete pavers, and their related components and replacement parts. Customers use these products in construction, infrastructure and recycling projects, in various quarrying and mining applications, as well as in landscaping and biomass production industries, material handling applications, and in building roads and bridges.

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. TFS is included in the Corporate and Other category.

Business segment information is presented below (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net Sales
 
 
 
 
 
 
 
AWP
$
556.7

 
$
484.4

 
$
1,622.1

 
$
1,598.8

Cranes
301.9

 
282.8

 
869.6

 
947.5

MP
259.9

 
228.2

 
789.5

 
708.2

Corporate and Other / Eliminations
(7.3
)
 
61.0

 
18.6

 
213.9

Total
$
1,111.2

 
$
1,056.4

 
$
3,299.8

 
$
3,468.4

Income (loss) from Operations
 
 
 

 
 
 
 
AWP
$
57.5

 
$
48.6

 
$
140.0

 
$
159.2

Cranes
(1.3
)
 
(12.1
)
 
(19.6
)
 
(41.5
)
MP
28.4

 
19.5

 
89.3

 
63.9

Corporate and Other / Eliminations
(20.4
)
 
(16.4
)
 
(75.9
)
 
(57.3
)
Total
$
64.2

 
$
39.6

 
$
133.8

 
$
124.3



13



 
September 30,
2017
 
December 31,
2016
Identifiable Assets
 
 
 
AWP (1)
$
1,348.6

 
$
1,659.8

Cranes
1,707.1

 
1,618.0

MP
1,233.4

 
1,104.9

Corporate and Other / Eliminations (2)
(692.1
)
 
(1,280.1
)
Assets held for sale
5.7

 
1,904.2

Total
$
3,602.7

 
$
5,006.8


(1) Reduction due primarily to the settlement of an intercompany balance with Corporate and Other.
(2) Increase due to settlement of intercompany balance with AWP segment, increased cash on hand as a result of the sale of MHPS, and debt refinancing.

NOTE D – INCOME TAXES

During the three months ended September 30, 2017, the Company recognized an income tax expense of $0.1 million on income of $56.7 million, an effective tax rate of 0.2%, as compared to an income tax benefit of $19.3 million on income of $13.9 million, an effective tax rate of (138.8)%, for the three months ended September 30, 2016.  The higher effective tax rate for the three months ended September 30, 2017 is primarily due to lower tax benefits from the establishment of net operating loss carryforwards and geographic mix of earnings when compared to the three months ended September 30, 2016.

During the nine months ended September 30, 2017, the Company recognized an income tax benefit of $5.1 million on income of $86.6 million, an effective tax rate of (5.9)%, as compared to an income tax benefit of $82.5 million on income of $38.3 million, an effective tax rate of (215.4)%, for the nine months ended September 30, 2016. The higher effective tax rate for the nine months ended September 30, 2017 is primarily due to lower tax benefits from the establishment of net operating loss carryforwards, valuation allowance releases and agreement with a non-U.S. authority with respect to certain tax matters extending back a period of years, partially offset by low-taxed capital gains from the disposition of Konecranes shares, tax benefits from interest deductions, and geographic mix of earnings when compared to the nine months ended September 30, 2016.


NOTE E – DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

MHPS

On January 4, 2017, the Company completed the disposition of its MHPS business to Konecranes. See Note B - “Sale of MHPS Business and Investment Carried at Fair Value” for further information on the Disposition. The Disposition represented a significant strategic shift in the Company’s business away from universal, process, mobile harbor and ship-to-shore cranes that will have a major effect on the Company’s future operating results, primarily because the MHPS business represented the entirety of one of the Company’s five previous reportable operating segments and comprised two of the Company’s six previous reporting units, representing a significant portion of the Company’s revenues and assets, and is therefore accounted for as a discontinued operation for all periods presented. MHPS products include universal cranes, process cranes and components, such as rope hoists, chain hoists, light crane systems, travel units and electric motors, primarily for industrial applications, and mobile harbor cranes, ship-to-shore gantry cranes, rubber tired and rail mounted gantry cranes, straddle carriers, sprinter carriers, reach stackers, container handlers, general cargo lift trucks, automated stacking cranes, automated guided vehicles and software solutions for logistics terminals.

Cash flows from discontinued operations are included in the Condensed Consolidated Statement of Cash Flows.


14



Income (loss) from 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 (Loss) (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016
Net sales
$
348.8

 
$
983.5

Cost of sales
(261.2
)
 
(774.1
)
Selling, general and administrative expenses
(63.7
)
 
(222.2
)
Reversal of impairment of MHPS disposal group
55.6

 

Net interest (expense)
(1.4
)
 
(2.0
)
Other income (expense)
(2.3
)
 
(0.1
)
Income (loss) from discontinued operations before income taxes
75.8

 
(14.9
)
(Provision for) benefit from income taxes
(11.7
)
 
(18.5
)
Income (loss) from discontinued operations – net of tax
64.1

 
(33.4
)
Net loss (income) attributable to noncontrolling interest
(0.6
)
 
0.1

Income (loss) from discontinued operations – net of tax attributable to Terex Corporation
$
63.5

 
$
(33.3
)
 
 
 
 

As a result of the SAPA, the Company recognized a pre-tax charge of $55.6 million ($55.6 million after-tax) in the second quarter of 2016 to write-down the MHPS disposal group to fair value, less costs to sell. The Company estimated the amount of sale proceeds using the cash proceeds plus an average of closing stock prices in the month of June 2016 for Konecranes common shares as traded on the Nasdaq Helsinki stock exchange (under the symbol “KCR1V”) multiplied by 19.6 million Class B shares expected to be received.

In the third quarter of 2016, the Company reversed the pre-tax charge of $55.6 million ($55.6 million after-tax) recognized in the second quarter of 2016 due primarily to improvement in Konecranes’ stock price in the three months ended September 30, 2016. The Company estimated the amount of sale proceeds as calculated above; however, it replaced the average of Konecranes closing stock prices with an average of closing stock prices in the month of September 2016.

As a result of the SAPA, the Company determined that amounts invested in the MHPS business were no longer indefinitely reinvested. Accordingly, the Company recorded previously unrecognized U.S. and foreign deferred taxes associated with its investment in MHPS subsidiaries.

Cranes

As part of the transformation and improvement of its Cranes segment, the Company is actively seeking a buyer for its utility hot lines tools business located in South America and, accordingly, the assets and liabilities are reported as held for sale.

In August 2017, the Company entered into an agreement to sell its cranes manufacturing facility in Jinan, China. The sale was completed during the third quarter of 2017 and the Company recorded a gain on sale of $5.7 million in its Corporate and Other category as a component of Selling, general and administrative expenses (“SG&A”) in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Construction

In December 2016, the Company entered into an agreement to sell its Coventry, UK-based compact construction business.  During the nine months ended September 30, 2017, the Company completed the sale of Coventry, UK-based compact construction business and remaining UK-based compact construction product lines and recognized a loss of $1.2 million within SG&A in the Condensed Consolidated Statement of Comprehensive Income (Loss) related to the sale.


15



During the nine months ended September 30, 2017, the Company recognized a gain of $5.8 million within SG&A resulting from a post-closing adjustment related to the 2016 sale of its midi/mini excavators, wheeled excavators, and compact wheel loader business in Germany.

In March 2017, the Company signed a sale agreement with a buyer to sell its Indian compact construction business. The Company completed the sale during the nine months ended September 30, 2017 and a loss of $1.6 million was recognized within SG&A related to the sale.

The operating results for these construction product lines are reported in continuing operations, within the Corporate and Other category in our segment disclosures.

Assets and liabilities held for sale

Assets and liabilities held for sale consist of the Company’s former MHPS segment, portions of its Cranes segment and portions of its former Construction Segment. Such assets and liabilities are classified as held for sale upon meeting the requirements of ASC 360 - “Property, Plant and Equipment”, and are recorded at lower of carrying amounts or fair value less costs to sell. Assets are no longer depreciated once classified as held for sale.

The following table provides the amounts of assets and liabilities held for sale in the Condensed Consolidated Balance Sheet (in millions):
 
September 30, 2017
 
December 31, 2016
 
Cranes
 
MHPS
Cranes
Construction
Total
Assets
 
 
 
 
 
 
Cash and cash equivalents
$
3.0

 
$
71.0

$
1.2

$
1.2

$
73.4

Trade receivables – net
2.8

 
243.5

3.1

24.4

271.0

Inventories
2.1

 
309.4

1.7

23.9

335.0

Prepaid and other current assets
0.4

 
49.9

0.5

3.1

53.5

Impairment reserve
(2.6
)
 




Current assets held for sale
$
5.7

 
$
673.8

$
6.5

$
52.6

$
732.9

 
 
 
 
 
 
 
Property, plant and equipment – net
$
0.6

 
$
294.2

$
0.8

$
3.2

$
298.2

Goodwill

 
573.7



573.7

Intangible assets
3.0

 
212.6

2.9


215.5

Impairment reserve
(3.6
)
 

(1.7
)
(3.5
)
(5.2
)
Other assets

 
86.4

1.1

1.6

89.1

Non-current assets held for sale
$

 
$
1,166.9

$
3.1

$
1.3

$
1,171.3

 
 
 
 
 
 
 
Liabilities
 

 
 

 

 

 

Notes payable and current portion of long-term debt
$

 
$
13.1

$

$
1.3

$
14.4

Trade accounts payable
0.6

 
132.6

0.7

23.8

157.1

Accruals and other current liabilities
1.6

 
267.0

6.2

9.1

282.3

Current liabilities held for sale
$
2.2

 
$
412.7

$
6.9

$
34.2

$
453.8

 
 
 
 
 
 
 
Long-term debt, less current portion
$

 
$
2.4

$

$

$
2.4

Retirement plans and other non-current liabilities
0.8

 
235.3

0.7

0.9

236.9

Other non-current liabilities

 
71.7

0.4

0.7

72.8

Non-current liabilities held for sale
$
0.8

 
$
309.4

$
1.1

$
1.6

$
312.1


16




The following table provides amounts of cash and cash equivalents presented in the Condensed Consolidated Statement of Cash Flows (in millions):

 
September 30, 2017
 
December 31, 2016
Cash and cash equivalents:
 
 
 
Cash and cash equivalents - continuing operations
$
592.7

 
$
428.5

Cash and cash equivalents - held for sale
3.0

 
73.4

Total cash and cash equivalents:
$
595.7

 
$
501.9


Cash and cash equivalents held for sale at September 30, 2017 includes no amounts which were not immediately available for use. Cash and cash equivalents held for sale at December 31, 2016 includes $14.0 million which were not immediately available for use.  These consist primarily of cash balances held in escrow to secure various obligations of the Company.

The following table provides supplemental cash flow information related to discontinued operations (in millions):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016
Non-cash operating items:
 
 
 
Depreciation and amortization
$

 
$
22.4

Reversal of impairment of MHPS disposal group
$
(55.6
)
 
$

Deferred taxes
$
4.5

 
$
8.8

Investing activities:
 
 
 
Capital expenditures
$
2.6

 
$
11.1


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
MHPS
Atlas
Total
 
Total
 
MHPS
Atlas
Total
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on disposition of discontinued operations
$
2.8

$

$
2.8

 
$

 
$
82.3

$
3.5

$
85.8

 
$
4.6

(Provision for) benefit from income taxes
(0.2
)

(0.2
)
 

 
(21.6
)
(0.5
)
(22.1
)
 
(1.1
)
Gain (loss) on disposition of discontinued operations – net of tax
$
2.6

$

$
2.6

 
$

 
$
60.7

$
3.0

$
63.7

 
$
3.5

 
 
 
 
 
 
 
 
 
 
 
 

During the three and nine months ended September 30, 2017, the Company recognized a gain on disposition of discontinued operations - net of tax of $2.6 million and $63.7 million, respectively, $2.6 million and $60.7 million of which is due to the sale of the MHPS business. During the nine months ended September 30, 2017, the Company recorded contractual earnout payments of $3.0 million related to the sale of its Atlas heavy construction equipment and knuckle-boom cranes businesses (“Atlas”). During the nine months ended September 30, 2016 the Company recognized a gain on disposition of discontinued operations - net of tax of $3.5 million due primarily to a gain of $3.0 million related to the sale of Atlas based on contractual earnout payments and a $0.5 million gain related to sale of its truck business.

17



NOTE F – EARNINGS PER SHARE
(in millions, except per share data)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Income (loss) from continuing operations attributable to Terex Corporation Common Stockholders
$
56.6

 
$
33.3

 
$
91.7

 
$
120.9

Income (loss) from discontinued operations–net of tax

 
63.5

 

 
(33.3
)
Gain (loss) on disposition of discontinued operations–net of tax
2.6

 

 
63.7

 
3.5

Net income (loss) attributable to Terex Corporation
$
59.2

 
$
96.8

 
$
155.4

 
$
91.1

Basic shares:
 
 
 

 
 
 
 
Weighted average shares outstanding
88.0

 
107.6

 
96.2

 
108.5

Earnings (loss) per share – basic:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.64

 
$
0.31

 
$
0.96

 
$
1.12

Income (loss) from discontinued operations–net of tax

 
0.59

 

 
(0.31
)
Gain (loss) on disposition of discontinued operations–net of tax
0.03

 

 
0.66

 
0.03

Net income (loss) attributable to Terex Corporation
$
0.67

 
$
0.90

 
$
1.62

 
$
0.84

Diluted shares:
 

 
 

 
 
 
 
Weighted average shares outstanding - basic
88.0

 
107.6

 
96.2

 
108.5

Effect of dilutive securities:
 

 
 

 
 
 
 
Stock options and restricted stock awards
2.0

 
1.0

 
1.9

 
0.8

Diluted weighted average shares outstanding
90.0

 
108.6

 
98.1

 
109.3

Earnings (loss) per share – diluted:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.63

 
$
0.31

 
$
0.93

 
$
1.10

Income (loss) from discontinued operations–net of tax

 
0.58

 

 
(0.30
)
Gain (loss) on disposition of discontinued operations–net of tax
0.03

 

 
0.65

 
0.03

Net income (loss) attributable to Terex Corporation
$
0.66

 
$
0.89

 
$
1.58

 
$
0.83

 
Weighted average options to purchase approximately 2,600 and 6,100 shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), were outstanding during the three and nine months ended September 30, 2017, but were not included in the computation of diluted shares as the effect would be anti-dilutive.  Weighted average options to purchase approximately 23,100 and 87,900 shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), were outstanding during the three and nine months ended September 30, 2016, respectively, but were not included in the computation of diluted shares as the effect would be anti-dilutive. There were no weighted average restricted stock awards outstanding during the three months ended September 30, 2017 included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not expected to be achieved for awards contingent upon performance. Weighted average restricted stock awards of approximately 4,300 were outstanding during the nine months ended September 30, 2017, but were not included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not expected to be achieved for awards contingent upon performance. Weighted average restricted stock awards of approximately 501,000 and 711,400 were outstanding during the three and nine months ended September 30, 2016, respectively, but were not included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not expected to be 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 and the amount of compensation cost for future services that the Company has not yet recognized are assumed to be used to repurchase shares.


18



NOTE G – FINANCE RECEIVABLES

The Company, primarily through 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, and records and funds the transactions. The Company bills and collects cash from the customer.

The Company primarily conducts on-book business in the U.S., with limited business in China, the United Kingdom, Germany and Italy. The Company 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. 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. During the three and nine months ended September 30, 2017, the Company transferred finance receivables of $60.5 million and $149.5 million, respectively, to third party financial institutions, which qualified for sales treatment under ASC 860. During the three and nine months ended September 30, 2016, the Company transferred finance receivables of $81.1 million and $191.3 million, respectively, to third party financial institutions, which qualified for sales treatment under ASC 860. At September 30, 2017, the Company had $41.7 million of held for sale finance receivables recorded in Prepaid and other current assets in the Condensed Consolidated Balance Sheet.

Revenue attributable to finance receivables management intends to hold until maturity is recognized on the accrual basis using the effective interest method. The Company 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 collectability of 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 collectability of the total contractual principal and interest is no longer in doubt. The Company has a history of enforcing the terms of these separate financing agreements.

Finance receivables, net consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Commercial loans
$
230.0

 
$
226.4

Sales-type leases
16.7

 
16.4

Total finance receivables, gross
246.7

 
242.8

Allowance for credit losses
(7.1
)
 
(6.3
)
Total finance receivables, net
$
239.6

 
$
236.5


At September 30, 2017, approximately $108 million of finance receivables are recorded in Prepaid and other current assets and approximately $132 million are recorded in Other assets in the Condensed Consolidated Balance Sheet. At December 31, 2016, approximately $74 million of finance receivables were recorded in Prepaid and other current assets and approximately $162 million were recorded in Other assets in the Condensed Consolidated Balance Sheet

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.

19




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

 
 
Three Months Ended
September 30, 2017
 
Three Months Ended
September 30, 2016
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Balance, beginning of period
 
$
5.9

 
$
0.4

 
$
6.3

 
$
6.9

 
$
0.5

 
$
7.4

Provision for credit losses
 
0.9

 
0.1

 
1.0

 
(0.5
)
 
0.6

 
0.1

Charge offs
 
(0.2
)
 

 
(0.2
)
 

 

 

Recoveries
 

 

 

 

 

 

Balance, end of period
 
$
6.6

 
$
0.5

 
$
7.1

 
$
6.4

 
$
1.1

 
$
7.5

 
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Balance, beginning of period
 
$
5.9

 
0.4

 
$
6.3

 
$
6.5

 
$
0.8

 
$
7.3

Provision for credit losses
 
1.0

 
0.1

 
1.1

 
(0.1
)
 
0.3

 
0.2

Charge offs
 
(0.3
)
 

 
(0.3
)
 

 

 

Recoveries
 

 

 

 

 

 

Balance, end of period
 
$
6.6

 
$
0.5

 
$
7.1

 
$
6.4

 
$
1.1

 
$
7.5


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. Amount of impairment is measured as the difference between the balance outstanding and underlying collateral value of equipment being financed, as well as any other collateral. All finance receivables identified as impaired are evaluated individually. Generally, the Company does not change terms and conditions of existing finance receivables.

The following table presents individually impaired finance receivables (in millions):

 
 
September 30, 2017
 
December 31, 2016
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Recorded investment
 
$
6.1

 
$

 
$
6.1

 
$
1.6

 
$

 
$
1.6

Related allowance
 
2.4

 

 
2.4

 
1.6

 

 
1.6

Average recorded investment
 
3.0

 

 
3.0

 
1.7

 
0.9

 
2.6


The average recorded investment for impaired finance receivables was $1.2 million for sales-type leases and $1.7 million for commercial loans at September 30, 2016, which were fully reserved.


20



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):

 
 
September 30, 2017
 
December 31, 2016
Allowance for credit losses, ending balance:
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Individually evaluated for impairment
 
$
2.4

 
$

 
$
2.4

 
$
1.6

 
$

 
$
1.6

Collectively evaluated for impairment
 
4.2

 
0.5

 
4.7

 
4.3

 
0.4

 
4.7

Total allowance for credit losses
 
$
6.6

 
$
0.5

 
$
7.1

 
$
5.9

 
$
0.4

 
$
6.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables, ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
6.1

 
$

 
$
6.1

 
$
1.6

 
$

 
$
1.6

Collectively evaluated for impairment
 
223.9

 
16.7

 
240.6

 
224.8

 
16.4

 
241.2

Total finance receivables
 
$
230.0

 
$
16.7

 
$
246.7

 
$
226.4

 
$
16.4

 
$
242.8


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

The following tables present analysis of aging of recorded investment in finance receivables (in millions):

 
September 30, 2017
 
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
$
225.5

 
$
3.2

 
$
0.1

 
$
1.2

 
$
4.5

 
$
230.0

Sales-type leases
16.7

 

 

 

 

 
16.7

Total finance receivables
$
242.2

 
$
3.2

 
$
0.1

 
$
1.2

 
$
4.5

 
$
246.7


 
December 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
$
224.2

 
$
0.6

 
$
0.2

 
$
1.4

 
$
2.2

 
$
226.4

Sales-type leases
15.8

 

 
0.6

 

 
0.6

 
16.4

Total finance receivables
$
240.0

 
$
0.6

 
$
0.8

 
$
1.4

 
$
2.8

 
$
242.8



At September 30, 2017 and December 31, 2016, $1.2 million and $1.4 million, respectively, of commercial loans were 90 days or more past due. Commercial loans in the amount of $12.7 million and $7.4 million were on non-accrual status as of September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017 and December 31, 2016 there were no sales-type lease receivables that were 90 days or more past due. Sales-type leases in the amount of $0.5 million were on non-accrual status as of September 30, 2017. At December 31, 2016 there were no sales-type leases on non-accrual status.

Credit Quality Information

Credit quality is reviewed periodically based on customers’ payment status. In addition to 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.


21



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
 
September 30, 2017
 
December 31, 2016
Superior
 
$
6.7

 
$
9.6

Above Average
 
51.4

 
64.7

Average
 
107.6

 
111.3

Below Average
 
69.7

 
53.0

Sub Standard
 
11.3

 
4.2

Total
 
$
246.7


$
242.8



NOTE H – INVENTORIES

Inventories consist of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Finished equipment
$
337.9

 
$
334.7

Replacement parts
158.7

 
144.9

Work-in-process
184.2

 
175.4

Raw materials and supplies
223.6

 
198.8

Inventories
$
904.4

 
$
853.8


Reserves for lower of cost or net realizable value and excess and obsolete inventory were $90.3 million at September 30, 2017. Reserves for lower of cost or market value, excess and obsolete inventory were $83.3 million at December 31, 2016.

NOTE I – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment – net consist of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Property
$
42.5

 
$
36.4

Plant
142.2

 
144.3

Equipment
480.1

 
456.1

Property, plant and equipment – gross 
664.8

 
636.8

Less: Accumulated depreciation
(364.0
)
 
(332.2
)
Property, plant and equipment – net
$
300.8

 
$
304.6



22



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
 
MP
 
Total
Balance at December 31, 2016, gross
$
137.7

 
$
179.3

 
$
183.8

 
$
500.8

Accumulated impairment
(38.6
)
 
(179.3
)
 
(23.2
)
 
(241.1
)
Balance at December 31, 2016, net
99.1

 

 
160.6

 
259.7

Foreign exchange effect and other
2.2

 

 
10.3

 
12.5

Balance at September 30, 2017, gross
139.9

 
179.3

 
194.1

 
513.3

Accumulated impairment
(38.6
)
 
(179.3
)
 
(23.2
)
 
(241.1
)
Balance at September 30, 2017, net
$
101.3

 
$

 
$
170.9

 
$
272.2


Intangible assets, net were comprised of the following as of September 30, 2017 and December 31, 2016 (in millions):
 
 
 
September 30, 2017
 
December 31, 2016
 
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
7
 
$
18.6

 
$
(17.5
)
 
$
1.1

 
$
17.0

 
$
(15.7
)
 
$
1.3

Customer Relationships
20
 
33.0

 
(26.0
)
 
7.0

 
33.1

 
(25.2
)
 
7.9

Land Use Rights
82
 
4.7

 
(0.6
)
 
4.1

 
7.9

 
(0.9
)
 
7.0

Other
8
 
26.5

 
(24.5
)
 
2.0

 
25.8

 
(23.6
)
 
2.2

Total definite-lived intangible assets
 
 
$
82.8

 
$
(68.6
)
 
$
14.2

 
$
83.8

 
$
(65.4
)
 
$
18.4


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Aggregate Amortization Expense
$
0.5

 
$
0.7

 
$
1.5

 
$
2.1


Estimated aggregate intangible asset amortization expense (in millions) for each of the next five years below is:
2017
$
2.0

2018
$
1.8

2019
$
1.7

2020
$
1.7

2021
$
1.6




23



NOTE K – DERIVATIVE FINANCIAL INSTRUMENTS

The Company operates internationally, with manufacturing and sales facilities in various locations around the world. In the normal course of business, the Company primarily uses cash flow derivatives to manage foreign currency and interest rate exposures on third party and intercompany forecasted transactions.  For a derivative to qualify for hedge accounting treatment 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, 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 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. The Company records all derivative contracts at fair value on a recurring basis. All of the Company’s derivative financial instruments are categorized under Level 2 of the ASC 820 hierarchy, see Note A - “Basis of Presentation,” for an explanation of the ASC 820 hierarchy.

Foreign Exchange Contracts

The Company enters into foreign exchange contracts to manage the variability of future cash flows associated with recognized assets or liabilities or forecasted transactions due to changing currency exchange rates.  Primary currencies to which the Company is exposed are the Euro, British Pound and Australian Dollar.   These foreign exchange contracts are designated as cash flow hedging instruments. Fair values of these contracts are derived using quoted forward foreign exchange prices to interpolate values of outstanding trades at the reporting date based on their maturities. Most of the foreign exchange contracts outstanding as of September 30, 2017 mature on or before September 30, 2018.  At September 30, 2017 and December 31, 2016, the Company had $258.5 million and $245.5 million notional amount, respectively, of foreign exchange contracts outstanding that were initially designated as cash flow hedge contracts. The effective portion of unrealized gains and losses associated with foreign exchange contracts are deferred as a component of Accumulated other comprehensive income (loss) (“AOCI”) until the underlying hedged transactions settle and are reclassified to Cost of goods sold in the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss).

Certain foreign exchange contracts entered into by the Company have not been designated as hedging instruments to mitigate its exposure to changes in foreign currency exchange rates on third party forecasted transactions and recognized assets and liabilities. The Company had $74.1 million and $339.7 million notional amount of foreign exchange contracts outstanding that were not designated as hedging instruments at September 30, 2017 and December 31, 2016, respectively.  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 were recognized as gains or losses in Other income (expense) – net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Other

Other derivatives include cross currency swaps, interest rate swaps and a debt conversion feature. Changes in the fair value of our cross currency and interest rate swaps are deferred in AOCI. Gains or losses on cross currency swaps are reclassified to Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss) when the underlying hedged item is re-measured. Gains or losses on interest rate swaps are reclassified to Cost of goods sold in the Condensed Consolidated Statement of Comprehensive Income (Loss) when underlying hedged transactions settle. Changes in fair value of the debt conversion feature are recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).


24



The following table provides the location and fair value amounts of derivative instruments designated and not designated as hedging instruments that are reported in the Condensed Consolidated Balance Sheet (in millions):
 
 
September 30,
2017
 
December 31,
2016
Asset Derivatives
Balance Sheet Account
Derivatives designated as hedges
Derivatives not designated as hedges
 
Derivatives designated as hedges
Derivatives not designated as hedges
Foreign exchange contracts
Other current assets
$
5.8

$
0.1

 
$
4.2

$
2.6

Debt conversion feature
Other assets
$

$
1.4

 
$

$
1.1

Total asset derivatives
 
$
5.8

$
1.5

 
$
4.2

$
3.7

Liability Derivatives
 
 

 
 
 

 
Foreign exchange contracts
Other current liabilities
$
(2.2
)
$
(0.1
)
 
$
(6.8
)
$
(1.2
)
Cross currency swap
Other current liabilities
(0.2
)

 


Cross currency swap
Other non-current liabilities
(2.4
)

 


Total liability derivatives
 
(4.8
)
(0.1
)
 
(6.8
)
(1.2
)
Total Derivatives
 
$
1.0

$
1.4

 
$
(2.6
)
$
2.5

 
The following tables provide the effect of derivative instruments that are designated as hedges in the Condensed Consolidated Statement of Comprehensive Income (Loss) and AOCI (in millions):
Gain (Loss) Recognized on Derivatives in AOCI, net of tax:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Cash Flow Derivatives
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
$
(0.9
)
 
$
(0.2
)
 
$
4.6

 
$
(4.8
)
Cross currency swap
 
(0.2
)
 

 
(0.2
)
 

Interest rate swap
 

 

 

 
(0.2
)
Total
 
$
(1.1
)
 
$
(0.2
)
 
$
4.4

 
$
(5.0
)
Gain (Loss) Reclassified from AOCI into Income (Effective):
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Account
 
2017
 
2016
 
2017
 
2016
Cost of goods sold
 
$
2.5

 
$
(1.5
)
 
$
1.0

 
$
(0.4
)
Other income (expense) – net
(1.6
)
 

 
(2.3
)
 

Total
 
$
0.9

 
$
(1.5
)
 
$
(1.3
)
 
$
(0.4
)
Gain (Loss) Recognized on Derivatives (Ineffective) in Income :
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Account
 
2017
 
2016
 
2017
 
2016
Cost of goods sold
 
$