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EX-12 - EXHIBIT 12 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES - TEREX CORPtex9302016-ex12.htm
EX-32 - EXHIBIT 32 CEO AND CFO CERTFICATION - TEREX CORPtex9302016-ex32.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION - TEREX CORPtex9302016-ex312.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - TEREX CORPtex9302016-ex311.htm


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, 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: 105.9 million as of October 28, 2016.
The Exhibit Index begins on page 66.






INDEX

TEREX CORPORATION AND SUBSIDIARIES

GENERAL

This Quarterly Report on Form 10-Q filed by Terex Corporation generally speaks as of September 30, 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 September 30, 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 September 30, 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;
our ability to successfully integrate acquired businesses;
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
1,056.4

 
$
1,255.4

 
$
3,468.4

 
$
3,854.1

Cost of goods sold
(872.5
)
 
(1,003.0
)
 
(2,860.7
)
 
(3,098.2
)
Gross profit
183.9

 
252.4

 
607.7

 
755.9

Selling, general and administrative expenses
(144.3
)
 
(160.3
)
 
(483.4
)
 
(489.4
)
Income (loss) from operations
39.6

 
92.1

 
124.3

 
266.5

Other income (expense)
 
 
 

 
 
 
 
Interest income
1.0

 
1.0

 
3.3

 
2.8

Interest expense
(25.4
)
 
(25.7
)
 
(75.6
)
 
(82.5
)
Loss on early extinguishment of debt

 

 
(0.4
)
 

Other income (expense) – net 
(1.3
)
 
(11.5
)
 
(13.3
)
 
(17.8
)
Income (loss) from continuing operations before income taxes
13.9

 
55.9

 
38.3

 
169.0

(Provision for) benefit from income taxes
19.3

 
(25.6
)
 
82.5

 
(64.5
)
Income (loss) from continuing operations
33.2

 
30.3

 
120.8

 
104.5

Income (loss) from discontinued operations – net of tax
64.1

 
15.8

 
(33.4
)
 
26.4

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

 
(1.2
)
 
3.5

 
1.5

Net income (loss)
97.3

 
44.9

 
90.9

 
132.4

Net loss (income) from continuing operations attributable to noncontrolling interest
0.1

 

 
0.1

 
0.1

Net loss (income) from discontinued operations attributable to noncontrolling interest
(0.6
)
 
(1.3
)
 
0.1

 
(3.1
)
Net income (loss) attributable to Terex Corporation
$
96.8

 
$
43.6

 
$
91.1

 
$
129.4

Amounts attributable to Terex Corporation Common Stockholders:
 
 
 

 
 
 
 
Income (loss) from continuing operations
$
33.3

 
$
30.3

 
$
120.9

 
$
104.6

Income (loss) from discontinued operations – net of tax
63.5

 
14.5

 
(33.3
)
 
23.3

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

 
(1.2
)
 
3.5

 
1.5

Net income (loss) attributable to Terex Corporation
$
96.8

 
$
43.6

 
$
91.1

 
$
129.4

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

 
 
 
 
Income (loss) from continuing operations
$
0.31

 
$
0.28

 
$
1.12

 
$
0.98

Income (loss) from discontinued operations – net of tax
0.59

 
0.13

 
(0.31
)
 
0.22

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

 
(0.01
)
 
0.03

 
0.01

Net income (loss) attributable to Terex Corporation
$
0.90

 
$
0.40

 
$
0.84

 
$
1.21

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

 
 
 
 
Income (loss) from continuing operations
$
0.31

 
$
0.28

 
$
1.10

 
$
0.95

Income (loss) from discontinued operations – net of tax
0.58

 
0.13

 
(0.30
)
 
0.22

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

 
(0.01
)
 
0.03

 
0.01

Net income (loss) attributable to Terex Corporation
$
0.89

 
$
0.40

 
$
0.83

 
$
1.18

Weighted average number of shares outstanding in per share calculation
 

 
 

 
 
 
 
Basic
107.6

 
108.5

 
108.5

 
107.0

Diluted
108.6

 
109.2

 
109.3

 
109.7

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
99.8

 
$
(26.6
)
 
$
86.7

 
$
(58.0
)
Comprehensive loss (income) attributable to noncontrolling interest
(0.6
)
 
(1.2
)
 
0.3

 
(2.9
)
Comprehensive income (loss) attributable to Terex Corporation
$
99.2

 
$
(27.8
)
 
$
87.0

 
$
(60.9
)
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.07

 
$
0.06

 
$
0.21

 
$
0.18


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,
2016
 
December 31,
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
248.8

 
$
371.2

Trade receivables (net of allowance of $16.2 and $20.4 at September 30, 2016 and December 31, 2015, respectively)
656.8

 
703.3

Inventories
978.4

 
1,063.6

Prepaid and other current assets
229.6

 
252.5

Current assets held for sale
806.8

 
749.6

Total current assets
2,920.4

 
3,140.2

Non-current assets
 
 
 

Property, plant and equipment – net
355.8

 
371.9

Goodwill
448.7

 
459.1

Intangible assets – net
21.3

 
22.6

Other assets
591.7

 
461.7

Non-current assets held for sale
1,231.4

 
1,160.5

Total assets
$
5,569.3

 
$
5,616.0

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 

 
 

Notes payable and current portion of long-term debt
$
10.5

 
$
66.4

Trade accounts payable
474.5

 
560.7

Accrued compensation and benefits
110.5

 
128.5

Accrued warranties and product liability
62.2

 
51.5

Customer advances
42.1

 
29.6

Other current liabilities
278.6

 
175.9

Current liabilities held for sale
497.0

 
446.0

Total current liabilities
1,475.4

 
1,458.6

Non-current liabilities
 
 
 

Long-term debt, less current portion
1,653.0

 
1,729.8

Retirement plans
150.2

 
157.0

Other non-current liabilities
62.1

 
60.1

Non-current liabilities held for sale
315.0

 
298.5

Total liabilities
3,655.7

 
3,704.0

Commitments and contingencies


 


Stockholders’ equity
 

 
 

Common stock, $.01 par value – authorized 300.0 shares; issued 129.6 and 128.8 shares at September 30, 2016 and December 31, 2015, respectively
1.3

 
1.3

Additional paid-in capital
1,291.0

 
1,273.3

Retained earnings
2,172.5

 
2,104.6

Accumulated other comprehensive income (loss)
(653.8
)
 
(649.6
)
Less cost of shares of common stock in treasury – 24.6 and 21.1 shares at September 30, 2016 and December 31, 2015
(933.3
)
 
(852.2
)
Total Terex Corporation stockholders’ equity
1,877.7

 
1,877.4

Noncontrolling interest
35.9

 
34.6

Total stockholders’ equity
1,913.6

 
1,912.0

Total liabilities and stockholders’ equity
$
5,569.3

 
$
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)
 
Nine Months Ended
September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net income (loss)
$
90.9

 
$
132.4

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

 
 

Depreciation and amortization
77.4

 
99.8

(Gain) loss on disposition of discontinued operations
(3.5
)
 
(1.5
)
Deferred taxes
(101.1
)
 
(17.4
)
(Gain) loss on sale of assets
2.4

 
(0.9
)
Stock-based compensation expense
28.2

 
31.9

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

 
 

Trade receivables
(19.2
)
 
(145.1
)
Inventories
(31.5
)
 
(139.8
)
Trade accounts payable
(105.4
)
 
37.2

Customer advances
49.1

 
(35.3
)
Other assets and liabilities
90.0

 
(50.8
)
Other operating activities, net
13.5

 
32.9

Net cash provided by (used in) operating activities
90.8

 
(56.6
)
Investing Activities
 

 
 

Capital expenditures
(64.2
)
 
(73.4
)
Acquisitions, net of cash acquired
(3.2
)
 
(71.3
)
Proceeds (payments) from disposition of discontinued operations
3.5

 
(0.2
)
Proceeds from sale of assets
63.7

 
0.8

Other investing activities, net
(2.5
)
 

Net cash provided by (used in) investing activities
(2.7
)
 
(144.1
)
Financing Activities
 

 
 

Repayments of debt
(1,004.8
)
 
(1,029.4
)
Proceeds from issuance of debt
889.9

 
1,153.6

Share repurchases
(80.9
)
 
(50.4
)
Dividends paid
(22.7
)
 
(19.3
)
Other financing activities, net
1.2

 
(1.3
)
Net cash provided by (used in) financing activities
(217.3
)
 
53.2

Effect of Exchange Rate Changes on Cash and Cash Equivalents
6.4

 
(29.6
)
Net Increase (Decrease) in Cash and Cash Equivalents
(122.8
)
 
(177.1
)
Cash and Cash Equivalents at Beginning of Period
466.5

 
478.2

Cash and Cash Equivalents at End of Period
$
343.7

 
$
301.1


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

6



TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

NOTE A – STOCK AND ASSET PURCHASE AGREEMENT

On May 16, 2016, as a result of entering into a Stock and Asset Purchase Agreement (the “SAPA”) with Konecranes Plc, a Finnish public company limited by shares (“Konecranes”), Terex 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. Pursuant to the SAPA, Terex is selling its Material Handling and Port Solutions business (“MHPS”) to Konecranes for total consideration of approximately $1.5 billion (the “Transaction”). Pursuant to the SAPA, as amended, the consideration being paid is comprised of $595 million and €200 million in cash and 19.6 million newly created Class B shares of Konecranes. The value of the shares is not guaranteed until closing. The purchase price is subject to post-closing adjustments based upon the level of net working capital and cash and debt in MHPS at the closing date. In addition, the number of shares to be issued may be adjusted depending on the performance of the MHPS business and Konecranes in 2016. Also, certain purchase price adjustments may occur based on possible outcomes related to antitrust divestitures.

Upon completion of the Transaction, Terex will own approximately 25% of the outstanding shares of Konecranes and have the right to nominate two directors to the Konecranes Board. Terex expects to account for the Company’s investment in Konecranes using the equity-method of accounting. The Transaction, which is subject to customary regulatory approvals, is expected to close in early 2017.

As part of the Transaction, Konecranes’ shareholders have voted to amend the articles of association to create a new class of B shares and Terex and Konecranes will enter into a shareholder’s agreement ("SHA"). Pursuant to the SHA and amended articles of association, Terex will be entitled to nominate up to two members to the Board of Directors of Konecranes as long as Terex’s or its group companies' shareholding in Konecranes exceeds certain agreed thresholds. Terex's initial Board nominees will be current Terex Board members David Sachs and Oren Shaffer as of closing of the Transaction. Terex will also be subject to certain standstill obligations for an initial four-year period, followed by some limited obligations after the initial four-year period, and a non-compete obligation with respect to the MHPS business for a two-year period. Terex will also have customary registration rights pursuant to a registration rights agreement to be entered into in connection with the closing of the Transaction.

SAPA and BCA Related Expenses

Terex has 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 has 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, and $8.6 million and $9.5 million for the three and nine months ended September 30, 2015 which amounts are recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

NOTE B – BASIS OF PRESENTATION

Basis of Presentation.  The accompanying unaudited Condensed Consolidated Financial Statements of Terex Corporation and subsidiaries as of September 30, 2016 and for the three and nine months ended September 30, 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, 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.


7



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 the 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 and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016.

Cash and cash equivalents at September 30, 2016 and December 31, 2015 include $9.8 million and $18.0 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. In conjunction with the adoption of new accounting standards, certain debt issuance costs for the three and nine months ended September 30, 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 scrap material handling business in its former Construction segment being reassigned to its Materials Processing (“MP”) segment, certain non-operations related assets in the U.K. being reassigned from its former Construction segment to Corporate and Other category, and parts of its North America services business formerly part of its Cranes segment being reassigned into its Aerial Work Platforms (“AWP”) and its former MHPS segments. Historical results have been reclassified to give effect to these changes. Effective as of June 30, 2016, further adjustments were made to the Company’s reportable segments as a result of definitive agreements to sell portions of its business and reorganize the management structure of other portions of its business, as discussed below. On May 16, 2016, the Company entered into an agreement to sell its MHPS business to Konecranes. As a result, the former MHPS segment is reported in discontinued operations in the Condensed Consolidated Statement of Comprehensive Income for all periods presented, and in assets and liabilities held for sale in the Condensed Consolidated Balance Sheet at September 30, 2016 and December 31, 2015, and is no longer a reportable segment. During June and July of 2016, the Company entered into agreements to sell certain portions of its former Construction segment. As a result, concrete mixer trucks and concrete paver product lines from the former Construction segment have been reassigned to the Company’s MP segment and remaining product lines within the former Construction segment, such as loader backhoes and site dumpers, have been reassigned to the Corporate and Other category, as a result of changes in management responsibilities and reporting associated with these product lines, and the effect of these changes has been shown in all periods presented. Assets and liabilities associated with the portions of the former Construction segment to be sold are reported in assets and liabilities held for sale in the Condensed Consolidated Balance Sheet at September 30, 2016. See Note A - “Stock and Asset Purchase Agreement”, Note C - “Business Segment Information”, Note E - “Discontinued Operations and Assets and Liabilities Held for Sale” and Note J - “Goodwill and Intangible Assets, Net” 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 in the process of completing its initial analysis identifying the revenue streams that will be impacted by the adoption of this new standard and is currently analyzing the impact to its consolidated financial statements and footnote disclosures. 


8



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 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. As a result of adoption, $21.1 million was reclassified from Other assets to Long-term debt, less current portion at December 31, 2015. Unamortized costs related to securing our revolving line of credit will continue to be presented in Other assets.

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 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 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.

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. 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 will not 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.


9



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 related to how share-based payments are accounted for and presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. ASU 2016-09 could result in increased volatility of the Company’s provision for income taxes and earnings per share, depending on the Company’s share price at exercise or vesting of share-based awards compared to grant date. 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.

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.

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”). ASU 2016-12 provides clarification on assessing collectability, presentation of sales tax, non-cash consideration, and transition methods upon adoption of this ASU. Similar to ASU 2014-09, the effective date for ASU 2016-12 will be the first quarter of fiscal year 2018 with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

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. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

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 ASC 230, “Statement of Cash Flows,” and provides specific guidance on certain cash flow classification issues.  The effective date for ASU 2016-15 will be the first quarter of fiscal year 2018, with early adoption permitted.  ASU 2016-15 will be applied retrospectively and may modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows, but is not expected to have a material effect on the Company’s 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 GAAP 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 with early adoption 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.

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.


10



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 product warranty liability (in millions):
 
Nine Months Ended
 
September 30, 2016
Balance at beginning of period
$
53.0

Accruals for warranties issued during the period
55.5

Changes in estimates
(3.8
)
Settlements during the period
(41.5
)
Foreign exchange effect/other
(1.0
)
Balance at end of period
$
62.2


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.

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. Historically, the Company operated in five reportable segments: (i) AWP; (ii) Cranes; (iii) MHPS; (iv) MP; and (v) Construction.

Subsequent to the reorganization discussed in Note B - “Basis of Presentation”, the Company now operates in three reportable segments: (i) AWP; (ii) Cranes; and (iii) MP.

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.


11



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,
 
2016
 
2015
2016
 
2015
Net Sales
 
 
 
 
 
 
AWP
$
484.4

 
$
580.9

$
1,598.8

 
$
1,786.7

Cranes
282.8

 
379.3

947.5

 
1,160.3

MP
228.2

 
238.7

708.2

 
698.6

Corporate and Other / Eliminations
61.0

 
56.5

213.9

 
208.5

Total
$
1,056.4

 
$
1,255.4

$
3,468.4

 
$
3,854.1

Income (loss) from Operations
 
 
 

 
 
 
AWP
$
48.6

 
$
78.9

$
159.2

 
$
228.6

Cranes
(12.1
)
 
12.1

(41.5
)
 
35.8

MP
19.5

 
17.6

63.9

 
54.8

Corporate and Other / Eliminations
(16.4
)
 
(16.5
)
(57.3
)
 
(52.7
)
Total
$
39.6

 
$
92.1

$
124.3

 
$
266.5


 
September 30,
2016
 
December 31,
2015
Identifiable Assets
 
 
 
AWP
$
1,725.2

 
$
1,701.2

Cranes
1,889.5

 
1,822.3

MP
979.1

 
1,073.4

Corporate and Other / Eliminations
(1,062.7
)
 
(891.0
)
Assets held for sale
2,038.2

 
1,910.1

Total
$
5,569.3

 
$
5,616.0




12



NOTE D – INCOME TAXES

During the three months ended September 30, 2016, the Company recognized income tax benefit of $19.3 million on income of $13.9 million, an effective tax rate of (138.8)% as compared to income tax expense of $25.6 million on income of $55.9 million, an effective tax rate of 45.8%, for the three months ended September 30, 2015.  The lower effective tax rate for the three months ended September 30, 2016 was primarily due to tax benefits from prior year net operating loss carryforwards and favorable geographic mix of earnings.

During the nine months ended September 30, 2016, the Company recognized income tax benefit of $82.5 million on income of $38.3 million, an effective tax rate of (215.4)% as compared to income tax expense of $64.5 million on income of $169.0 million, an effective tax rate of 38.2%, for the nine months ended September 30, 2015.  The lower effective tax rate for the nine months ended September 30, 2016 was primarily due to the valuation allowance release for the German and Italian subsidiaries of the Company and other tax benefits from prior year net operating loss carryforwards. The change in judgment regarding the realization of deferred tax assets in Germany and Italy was due to the anticipated disposition of the MHPS business pursuant to the SAPA, recent earnings history, and expected future income supporting the more likely than not assessment that the deferred tax assets will be realized.

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

MHPS

Pursuant to the SAPA on May 16, 2016, Terex has agreed to sell its entire MHPS business to Konecranes for total consideration of approximately $1.5 billion. See Note A - “Stock and Asset Purchase Agreement” for further information on this Transaction. The sale of the Company’s MHPS business to Konecranes represents 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. 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. Upon completion of the Transaction, Terex will own approximately 25% of the outstanding shares of Konecranes and have the right to nominate two directors to the Konecranes Board. Upon closing of the Transaction, Terex expects to account for the investment in Konecranes using the equity-method of accounting. The Transaction, which is subject to customary regulatory approvals, is expected to close in early 2017.

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. Even if the average Konecranes stock price had been 10% lower during this period, the Company would have reversed the entire pre-tax charge recognized in the prior quarter. Even if the U.S. Dollar versus the Euro exchange rate decreased 5%, the Company would have reversed the entire pre-tax charge recognized in the prior quarter. The Company can only reverse the prior pre-tax charge, however, no gain can be recorded until the Transaction closes. The volatility related to Konecranes’ stock price could result in recognition of a future pre-tax charge.

As a result of the SAPA, the Company has determined that amounts invested in the MHPS business are no longer indefinitely reinvested. Accordingly, the Company recorded previously unrecognized U.S. and foreign deferred taxes associated with its investment in MHPS subsidiaries.  The effective tax rate on income from discontinued operations in 2016 differs from the statutory rate, in part, due to the recognition of these deferred taxes.


13



In connection with the Company’s purchase of Demag Cranes AG (a component of MHPS), certain former shareholders of Demag Cranes AG initiated proceedings against the Company alleging that the Company did not pay fair value for the shares of Demag Cranes AG. Upon completion of the Transaction, the Company will retain any liability related to such proceedings. The Company believes it did pay fair value for the shares of Demag Cranes AG and that no further payment from the Company to any former shareholders of Demag Cranes AG is required. While the Company believes the position of the former shareholders of Demag Cranes AG is without merit and is vigorously opposing it, no assurance can be given as to the final resolution of this dispute or that the Company will not ultimately be required to make an additional payment as a result of such dispute, which amount could be material.
 
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 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
348.8

 
$
385.9

 
$
983.5

 
$
1,111.3

Cost of sales
(261.2
)
 
(301.7
)
 
(774.1
)
 
(869.8
)
Selling, general and administrative expenses
(63.7
)
 
(64.4
)
 
(222.2
)
 
(203.6
)
Reversal of impairment of MHPS disposal group
55.6

 

 

 

Net interest (expense)
(1.4
)
 
(0.2
)
 
(2.0
)
 
(1.1
)
Other income (expense)
(2.3
)
 
1.4

 
(0.1
)
 
0.5

Income (loss) from discontinued operations before income taxes
75.8

 
21.0

 
(14.9
)
 
37.3

(Provision for) benefit from income taxes
(11.7
)
 
(5.2
)
 
(18.5
)
 
(10.9
)
Income (loss) from discontinued operations – net of tax
64.1

 
15.8

 
(33.4
)
 
26.4

Net loss (income) attributable to noncontrolling interest
(0.6
)
 
(1.3
)
 
0.1

 
(3.1
)
Income (loss) from discontinued operations – net of tax attributable to Terex Corporation
$
63.5

 
$
14.5

 
$
(33.3
)

$
23.3

 
 
 
 
 
 
 
 

Construction

During June and July of 2016, the Company entered into agreements to sell certain portions of its former Construction segment, including the following products: midi/mini excavators, wheeled excavators, compact wheel loaders, and components, primarily in Europe. In the nine months ended September 30, 2016, the Company recognized a loss of  $8.1 million ($5.6 million after-tax) related to disposal of its components assets, of which $4.0 million was recorded in Cost of goods sold and $4.1 million was recorded in Selling, general and administrative expenses in the Condensed Consolidated Statement of Comprehensive Income (Loss). On September 30, 2016, the Company received total proceeds of approximately $60 million related to the sale of its midi/mini excavators, wheeled excavators, and compact wheel loader business shares and assets. Because the sale wasn’t effective until October 1, 2016, all of the proceeds were recorded in Other current liabilities in the Condensed Consolidated Balance Sheet. The remaining unsold assets and liabilities at September 30, 2016 are reported below and in the Condensed Consolidated Balance Sheet as held for sale. The operating results for construction product lines are reported in continuing operations, within the Corporate and Other category in our segment disclosures.


14



Assets and liabilities held for sale

Assets and liabilities held for sale consist of the Company’s MHPS assets and liabilities that are being sold to Konecranes and certain assets and liabilities of the Company’s former Construction segment, primarily in Europe, which were sold on October 1, 2016. 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, 2016
 
December 31, 2015
 
MHPS
Construction
Total
 
MHPS
Assets
 
 
 
 
 
Cash and cash equivalents
$
94.5

$
0.4

$
94.9

 
$
95.3

Trade receivables – net
222.9

13.4

236.3

 
236.0

Inventories
403.7

37.5

441.2

 
382.1

Prepaid and other current assets
34.2

0.2

34.4

 
36.2

Current assets held for sale
$
755.3

$
51.5

$
806.8

 
$
749.6

 
 
 
 
 
 
Property, plant and equipment – net
$
308.9

$
15.7

$
324.6

 
$
303.9

Goodwill
606.9


606.9

 
564.1

Intangible assets
227.8


227.8

 
226.9

Other assets
70.4

1.7

72.1

 
65.6

Non-current assets held for sale
$
1,214.0

$
17.4

$
1,231.4

 
$
1,160.5

 
 
 
 
 
 
Liabilities
 

 

 
 
 

Notes payable and current portion of long-term debt
$
21.9

$

$
21.9

 
$
13.8

Trade accounts payable
145.0

7.1

152.1

 
177.0

Accruals and other current liabilities
315.8

7.2

323.0

 
255.2

Current liabilities held for sale
$
482.7

$
14.3

$
497.0

 
$
446.0

 
 
 
 
 
 
Long-term debt, less current portion
$
2.6

$

$
2.6

 
$
0.1

Retirement plans and other non-current liabilities
312.0

0.4

312.4

 
298.4

Non-current liabilities held for sale
$
314.6

$
0.4

$
315.0

 
$
298.5

 
 
 
 
 
 

15



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

 
September 30, 2016
 
December 31, 2015
Cash and cash equivalents:
 
 
 
Cash and cash equivalents - continuing operations
$
248.8

 
$
371.2

Cash and cash equivalents - held for sale
94.9

 
95.3

Total cash and cash equivalents:
$
343.7

 
$
466.5

 
 
 
 

Cash and cash equivalents held for sale at September 30, 2016 and December 31, 2015 include $10.4 million and $9.8 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.

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
 
2015
 
2016
 
2015
Non-cash operating items:
 
 
 
 
 
 
 
Depreciation and amortization
$

 
$
13.8

 
$
22.4

 
$
41.9

Impairment of MHPS disposal group
$
(55.6
)
 
$

 
$

 
$

Deferred taxes
$
4.5

 
$
(0.5
)
 
$
8.8

 
$
(0.3
)
Investing activities:
 
 
 
 
 
 
 
Capital expenditures
$
2.6

 
$
3.3

 
$
11.1

 
$
13.9

 
 
 
 
 
 
 
 

Other

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Gain (loss) on disposition of discontinued operations
$

 
$
(1.3
)
 
$
4.6

 
$
1.9

(Provision for) benefit from income taxes

 
0.1

 
(1.1
)
 
(0.4
)
Gain (loss) on disposition of discontinued operations – net of tax
$

 
$
(1.2
)
 
$
3.5

 
$
1.5

 
 
 
 
 
 
 
 

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 related to the sale of its Atlas heavy construction equipment and knuckle-boom cranes businesses, due to contractual earnout payments, and from our truck business. During the nine months ended September 30, 2015 the Company recognized a gain on disposition of discontinued operations - net of tax of $1.5 million due primarily to a gain of $2.8 million 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, partially offset by a loss of $1.3 million related to sale of its truck business, including settlement of certain disputes in the asset sale agreement.



16



NOTE F – EARNINGS PER SHARE
(in millions, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
 
2015
2016
 
2015
Income (loss) from continuing operations attributable to Terex Corporation Common Stockholders
$
33.3

 
$
30.3

$
120.9

 
$
104.6

Income (loss) from discontinued operations–net of tax
63.5

 
14.5

(33.3
)
 
23.3

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

 
(1.2
)
3.5

 
1.5

Net income (loss) attributable to Terex Corporation
$
96.8

 
$
43.6

$
91.1

 
$
129.4

Basic shares:
 
 
 

 
 
 
Weighted average shares outstanding
107.6

 
108.5

108.5

 
107.0

Earnings (loss) per share – basic:
 

 
 

 
 
 
Income (loss) from continuing operations
$
0.31

 
$
0.28

$
1.12

 
$
0.98

Income (loss) from discontinued operations–net of tax
0.59

 
0.13

(0.31
)
 
0.22

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

 
(0.01
)
0.03

 
0.01

Net income (loss) attributable to Terex Corporation
$
0.90

 
$
0.40

$
0.84

 
$
1.21

Diluted shares:
 

 
 

 
 
 
Weighted average shares outstanding - basic
107.6

 
108.5

108.5

 
107.0

Effect of dilutive securities:
 

 
 

 
 
 
Stock options, restricted stock awards and convertible notes
1.0

 
0.7

0.8

 
2.7

Diluted weighted average shares outstanding
108.6

 
109.2

109.3

 
109.7

Earnings (loss) per share – diluted:
 

 
 

 
 
 
Income (loss) from continuing operations
$
0.31

 
$
0.28

$
1.10

 
$
0.95

Income (loss) from discontinued operations–net of tax
0.58

 
0.13

(0.30
)
 
0.22

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

 
(0.01
)
0.03

 
0.01

Net income (loss) attributable to Terex Corporation
$
0.89

 
$
0.40

$
0.83

 
$
1.18


The following table provides information to reconcile amounts reported on the Condensed Consolidated Statement of Comprehensive Income (Loss) 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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Income (loss) from continuing operations
$
33.2

 
$
30.3

 
$
120.8

 
$
104.5

Net loss (income) from continuing operations attributable to noncontrolling interest
0.1

 

 
0.1

 
0.1

Income (loss) from continuing operations attributable to Common Stockholders
$
33.3

 
$
30.3

 
$
120.9

 
$
104.6



17



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 nine months ended September 30, 2016 , but were not included in the computation of diluted shares as the effect would be anti-dilutive.  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 and nine months ended September 30, 2015 , respectively, but were not included in the computation of diluted shares as the effect would be anti-dilutive.  Weighted average restricted stock awards of 0.5 million and 0.7 million 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 yet achieved for awards contingent upon performance. Weighted average restricted stock awards of 0.8 million were outstanding during the three and nine months ended September 30, 2015, 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.” Included in the computation of diluted shares for the nine months ended September 30, 2015 was 1.9 million shares that were contingently issuable prior to conversion.

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. 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, 2016 the Company sold finance receivables of $81.1 million and $191.3 million, respectively, to third party financial institutions. During the three and nine months ended September 30, 2015 the Company sold finance receivables of $13.1 million and $34.5 million, respectively, to third party financial institutions. At September 30, 2016, the Company had $10.9 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 is recognized on the accrual basis using the effective interest method. 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. The Company has a history of enforcing the terms of these separate financing agreements.

18




Finance receivables, net consisted of the following (in millions):
 
September 30,
2016
 
December 31,
2015
Commercial loans
$
274.3

 
$
331.4

Sales-type leases
19.9

 
21.9

Total finance receivables, gross
294.2

 
353.3

Allowance for credit losses
(7.5
)
 
(7.3
)
Total finance receivables, net
$
286.7

 
$
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
September 30, 2016
 
Three Months Ended
September 30, 2015
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Balance, beginning of period
 
$
6.9

 
$
0.5

 
$
7.4

 
$
3.6

 
$
1.3

 
$
4.9

Provision for credit losses
 
(0.5
)
 
0.6

 
0.1

 
0.8

 
(0.1
)
 
0.7

Charge offs
 

 

 

 

 

 

Recoveries
 

 

 

 

 

 

Balance, end of period
 
$
6.4

 
$
1.1

 
$
7.5

 
$
4.4

 
$
1.2

 
$
5.6


 
 
Nine Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 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

 
2.5

 
0.1

 
2.6

Charge offs
 

 

 

 

 

 

Recoveries
 

 

 

 

 

 

Balance, end of period
 
$
6.4

 
$
1.1

 
$
7.5

 
$
4.4

 
$
1.2

 
$
5.6


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.


19



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. Generally, the Company does not change the terms and conditions of existing finance receivables.

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

 
 
September 30, 2016
 
December 31, 2015
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Recorded investment
 
$
1.5

 
$
0.6

 
$
2.1

 
$
1.9

 
$
1.8

 
$
3.7

Related allowance
 
1.5

 
0.6

 
2.1

 
1.9

 
0.5

 
2.4

Average recorded investment
 
1.7

 
1.2

 
2.9

 
1.0

 
2.5

 
3.5


The average recorded investment for impaired finance receivables was $1.4 million for sales-type leases and $0.2 million for commercial loans at September 30, 2015, which were fully reserved.

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, 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
 
$
1.5

 
$
0.6

 
$
2.1

 
$
1.9

 
$
0.5

 
$
2.4

Collectively evaluated for impairment
 
4.9

 
0.5

 
5.4

 
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
 
$
1.5

 
$
0.6

 
$
2.1

 
$
1.9

 
$
1.8

 
$
3.7

Collectively evaluated for impairment
 
272.8

 
19.3

 
292.1

 
329.5

 
20.1

 
349.6

Total finance receivables
 
$
274.3

 
$
19.9

 
$
294.2

 
$
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.


20



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

 
September 30, 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
$
270.9

 
$
3.1

 
$
0.1

 
$
0.2

 
$
3.4

 
$
274.3

Sales-type leases
18.9

 
0.6

 

 
0.4

 
1.0

 
19.9

Total finance receivables
$
289.8

 
$
3.7

 
$
0.1

 
$
0.6

 
$
4.4

 
$
294.2


 
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 September 30, 2016 and December 31, 2015, $0.2 million and $1.0 million, respectively, of commercial loans were 90 days or more past due. Commercial loans in the amount of $6.9 million and $4.8 million were on non-accrual status as of September 30, 2016 and December 31, 2015, respectively.

At September 30, 2016 and December 31, 2015 there were $0.4 million and $1.2 million, respectively, of sales-type lease receivables which were 90 days or more past due. Sales-type leases in the amount of $0.9 million and $1.3 million were on non-accrual status as of September 30, 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
 
September 30, 2016
 
December 31, 2015
Superior
 
$
16.3

 
$
21.5

Above Average
 
100.1

 
159.4

Average
 
126.6

 
117.9

Below Average
 
47.3

 
44.2

Sub Standard
 
3.9

 
10.3

Total
 
$
294.2


$
353.3




21




NOTE H – INVENTORIES

Inventories consist of the following (in millions):
 
September 30,
2016
 
December 31,
2015
Finished equipment
$
365.7

 
$
429.1

Replacement parts
158.5

 
168.3

Work-in-process
220.0

 
190.4

Raw materials and supplies
234.2

 
275.8

Inventories
$
978.4

 
$
1,063.6


Reserves for lower of cost or market value, excess and obsolete inventory were $95.1 million and $76.8 million at September 30, 2016 and December 31, 2015, respectively.

NOTE I – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment – net consist of the following (in millions):
 
September 30,
2016
 
December 31,
2015
Property
$
34.1

 
$
37.2

Plant
155.0

 
161.9

Equipment
522.5

 
545.2

Property, plant and equipment – gross 
711.6

 
744.3

Less: Accumulated depreciation
(355.8
)
 
(372.4
)
Property, plant and equipment – net
$
355.8

 
$
371.9


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 (1)
 
    Cranes (1)
 
MP
 
Total
Balance at December 31, 2015, gross
$
137.7

 
$
183.1

 
$
204.3

 
$
525.1

Accumulated impairment
(38.6
)
 
(4.2
)
 
(23.2
)
 
(66.0
)
Balance at December 31, 2015, net
99.1

 
178.9

 
181.1

 
459.1

Foreign exchange effect and other
(0.6
)
 
4.6

 
(14.4
)
 
(10.4
)
Balance at September 30, 2016, gross
137.1

 
187.7

 
189.9

 
514.7

Accumulated impairment
(38.6
)
 
(4.2
)
 
(23.2
)
 
(66.0
)
Balance at September 30, 2016, net (2)
$
98.5

 
$
183.5

 
$
166.7

 
$
448.7


(1) Includes a $17.9 million reclassification of goodwill from Cranes to discontinued operations, and a $0.9 million reclassification of goodwill from Cranes to AWP as a result of segment realignments. See Note C - “Business Segment Information”.
(2) During the second quarter of 2016 the Company wrote off $132.8 million of fully impaired goodwill associated with its former Construction segment.

The Company performs its annual goodwill impairment test during the fourth quarter.  This testing has not yet been completed for 2016, and while there is no evidence of impairment, due to uncertainty and short-term volatility in the cranes market, the Company will be closely monitoring the Cranes reporting unit in the coming quarters. If the Cranes reporting unit is unable to achieve its projected cash flows, the outcome of any prospective test may result in the Company recording goodwill impairment charges in future periods.


22



Intangible assets, net were comprised of the following as of September 30, 2016 and December 31, 2015 (in millions):
 
 
 
September 30, 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
7
 
$
18.1

 
$
(16.6
)
 
$
1.5

 
$
17.3

 
$
(15.7
)
 
$
1.6

Customer Relationships
21
 
34.2

 
(25.3
)
 
8.9

 
34.8

 
(24.9
)
 
9.9

Land Use Rights
68
 
8.2

 
(0.9
)
 
7.3

 
8.2

 
(0.9
)
 
7.3

Other
6
 
28.0

 
(24.4
)
 
3.6

 
28.0

 
(24.2
)
 
3.8

Total definite-lived intangible assets
 
 
$
88.5

 
$
(67.2
)
 
$
21.3

 
$
88.3

 
$
(65.7
)
 
$
22.6


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Aggregate Amortization Expense
$
0.7

 
$
0.7

 
$
2.1

 
2.2


Estimated aggregate intangible asset amortization expense (in millions) for each of the five years below is:
2016
$
2.9

2017
$
2.8

2018
$
2.3

2019
$
2.2

2020
$
2.2



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, 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.


23



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 U.S. prime rate, Commercial Paper rate, London Interbank Offered Rate (“LIBOR”) and Euro Interbank Offered Rate (“EURIBOR”). The effective portion of interest rate derivatives designated as cash flow hedges is deferred in AOCI and is 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 September 30, 2016, the Company had $256.6 million notional amount of currency exchange forward contracts outstanding that were initially designated as hedge contracts, most of which mature on or before September 30, 2017.  The fair market value of these contracts at September 30, 2016 was a net loss of $3.1 million.  At September 30, 2016, $185.0 million notional amount ($3.0 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 September 30, 2016 and December 31, 2015 as a net liability of $3.1 million and net asset of $3.1 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 2014 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 categorized under Level 2 of the ASC 820 hierarchy and 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 entered 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, which was terminated on May 31, 2016. See Note M – “Long-Term Obligations,” for additional information on the Securitization Facility. The interest rate swaps were 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 were recognized as gains or losses in Cost of goods sold in the Condensed Consolidated Statement of Comprehensive Income. The Company recorded these contracts at fair value on a recurring basis.  At September 30, 2016, the Company had no interest rate swap contracts outstanding, because it terminated the Securitization Facility and concurrently settled its outstanding interest rate swap contracts. The interest rate swap contracts designated as hedging instruments were categorized under Level 2 of the ASC 820 hierarchy and were recorded at December 31, 2015 as a net asset of $0.2 million. The fair value of these contracts was derived using quoted interest rate swap prices at the reporting date based on their maturities.


24



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
September 30,
2016
 
December 31,
2015
Foreign exchange contracts
Other current assets
$
3.3

 
$
4.0

Interest rate swap
Other assets

 
0.9

Total asset derivatives
 
3.3

 
4.9

Liability Derivatives
 
 

 
 

Foreign exchange contracts
Other current liabilities
(6.4
)
 
(0.8
)
Interest rate swap
Other current liabilities

 
(0.7
)
Total liability derivatives
 
(6.4
)
 
(1.5
)
Total Derivatives
 
$
(3.1
)
 
$
3.4


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
September 30,
2016
 
December 31,
2015
Foreign exchange contracts
Other current assets
$
0.5

 
$