10-Q 1 tex331201810-q.htm 10-Q 03.31.2018 Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10–Q

(Mark One)

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

For the quarterly period ended March 31, 2018

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, a smaller reporting company or an emerging growth 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: 76.0 million as of April 30, 2018.
The Exhibit Index begins on page 51.






TEREX CORPORATION AND SUBSIDIARIES

GENERAL

This Quarterly Report on Form 10-Q filed by Terex Corporation generally speaks as of March 31, 2018 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;
we are dependent upon third-party suppliers, making us vulnerable to supply shortages and price increases;
the imposition of tariffs and related actions on trade by the U.S. and foreign governments;
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;
our ability to successfully implement our Execute to Win strategy; 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.





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
March 31,
 
2018
 
2017
Net sales
$
1,260.9

 
$
1,006.9

Cost of goods sold
(1,030.0
)
 
(854.6
)
Gross profit
230.9

 
152.3

Selling, general and administrative expenses
(159.6
)
 
(157.0
)
Income (loss) from operations
71.3

 
(4.7
)
Other income (expense)
 
 
 
Interest income
3.4

 
1.8

Interest expense
(16.0
)
 
(21.4
)
Loss on early extinguishment of debt
(0.7
)
 
(45.4
)
Other income (expense) – net 
1.0

 
(18.9
)
Income (loss) from continuing operations before income taxes
59.0

 
(88.6
)
(Provision for) benefit from income taxes
(11.4
)
 
28.3

Income (loss) from continuing operations
47.6

 
(60.3
)
Gain (loss) on disposition of discontinued operations – net of tax
2.7

 
55.7

Net income (loss)
$
50.3

 
$
(4.6
)
 
 
 
 
Basic earnings (loss) per share:
 
 
 
Income (loss) from continuing operations
$
0.60

 
$
(0.57
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 
0.53

Net income (loss)
$
0.63

 
$
(0.04
)
Diluted earnings (loss) per share:
 
 
 
Income (loss) from continuing operations
$
0.59

 
$
(0.57
)
Gain (loss) on disposition of discontinued operations – net of tax
0.03

 
0.53

Net income (loss)
$
0.62

 
$
(0.04
)
Weighted average number of shares outstanding in per share calculation
 
 
 
Basic
79.7

 
105.2

Diluted
81.7

 
105.2

 
 
 
 
Comprehensive income (loss)
$
76.5

 
$
423.5

 
 
 
 
Dividends declared per common share
$
0.10

 
$
0.08


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

4



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in millions, except par value)
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
447.9

 
$
626.5

Trade receivables (net of allowance of $15.9 and $16.2 at March 31, 2018 and December 31, 2017, respectively)
687.6

 
579.9

Inventories
1,009.1

 
969.6

Prepaid and other current assets
195.1

 
207.0

Total current assets
2,339.7

 
2,383.0

Non-current assets
 
 
 

Property, plant and equipment – net
334.6

 
311.0

Goodwill
279.1

 
273.6

Intangible assets – net
13.5

 
13.8

Other assets
453.2

 
481.1

Total assets
$
3,420.1

 
$
3,462.5

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 

 
 

Notes payable and current portion of long-term debt
$
5.2

 
$
5.2

Trade accounts payable
657.9

 
592.4

Other current liabilities
371.5

 
437.9

Total current liabilities
1,034.6

 
1,035.5

Non-current liabilities
 
 
 

Long-term debt, less current portion
1,077.8

 
979.6

Retirement plans
152.0

 
151.3

Other non-current liabilities
76.8

 
73.6

Total liabilities
2,341.2

 
2,240.0

Commitments and contingencies


 


Stockholders’ equity
 

 
 

Common stock, $.01 par value – authorized 300.0 shares; issued 131.2 and 130.4 shares at March 31, 2018 and December 31, 2017, respectively
1.3

 
1.3

Additional paid-in capital
1,315.1

 
1,322.0

Retained earnings
2,040.8

 
1,995.9

Accumulated other comprehensive income (loss)
(213.3
)
 
(239.5
)
Less cost of shares of common stock in treasury – 55.2 and 50.2 shares at March 31, 2018 and December 31, 2017, respectively
(2,065.5
)
 
(1,857.7
)
Total Terex Corporation stockholders’ equity
1,078.4

 
1,222.0

Noncontrolling interest
0.5

 
0.5

Total stockholders’ equity
1,078.9

 
1,222.5

Total liabilities and stockholders’ equity
$
3,420.1

 
$
3,462.5


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

5



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in millions)
 
Three Months Ended
March 31,
 
2018
 
2017
Operating Activities
 
 
 
Net income (loss)
$
50.3

 
$
(4.6
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
16.0

 
16.3

(Gain) loss on disposition of discontinued operations
(2.7
)
 
(55.7
)
Deferred taxes
(1.6
)
 
(24.9
)
Loss on early extinguishment of debt
0.7

 
45.4

Stock-based compensation expense
7.9

 
9.7

Inventory and other non-cash charges
(0.3
)
 
17.7

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

 
 

Trade receivables
(101.4
)
 
(130.7
)
Inventories
(26.2
)
 
(39.4
)
Trade accounts payable
59.7

 
24.9

Other assets and liabilities
(47.1
)
 
(20.7
)
Foreign exchange and other operating activities, net
0.3

 
(2.6
)
Net cash provided by (used in) operating activities
(44.4
)
 
(164.6
)
Investing Activities
 

 
 

Capital expenditures
(34.5
)
 
(10.6
)
Proceeds from disposition of investments
19.8

 

Proceeds (payments) from disposition of discontinued operations

 
764.3

Proceeds from sales of assets
(0.6
)
 
294.6

Net cash provided by (used in) investing activities
(15.3
)
 
1,048.3

Financing Activities
 

 
 

Repayments of debt
(118.2
)
 
(1,329.5
)
Proceeds from issuance of debt
215.5

 
999.0

Share repurchases
(205.3
)
 
(178.2
)
Dividends paid
(7.8
)
 
(8.3
)
Payment of debt extinguishment costs
(0.5
)
 
(31.5
)
Other financing activities, net
(12.0
)
 
(27.7
)
Net cash provided by (used in) financing activities
(128.3
)
 
(576.2
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
9.3

 
7.0

Net Increase (Decrease) in Cash and Cash Equivalents
(178.7
)
 
314.5

Cash and Cash Equivalents at Beginning of Period
630.1

 
501.9

Cash and Cash Equivalents at End of Period
$
451.4

 
$
816.4


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 March 31, 2018 and for the three months ended March 31, 2018 and 2017 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, 2017 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, 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. Certain prior period amounts have been reclassified to conform with the 2018 presentation.

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 months ended March 31, 2018 are not necessarily indicative of results that may be expected for the year ending December 31, 2018.

Cash and cash equivalents at March 31, 2018 and December 31, 2017 include $5.1 million and $5.0 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.

Recently Issued Accounting Standards

Accounting Standards Implemented in 2018

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. Subsequently, the FASB 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 provided additional guidance and clarity to ASU 2014-09 (collectively, the “New Revenue Standards”). The Company adopted the New Revenue Standards on January 1, 2018 using the modified retrospective approach and elected the significant financing component and costs of obtaining a contract practical expedients. Adoption of the New Revenue Standards did not have a material effect on the Company’s consolidated financial statements. The Company’s revenue recognition policy adopted as a result of the New Revenue Standards is presented below.


7



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 Company adopted ASU 2016-01 on January 1, 2018. Adoption did not 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 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 Company adopted ASU 2016-16 on January 1, 2018. Adoption did not have a material effect on the Company’s 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 Company adopted ASU 2016-18 on January 1, 2018. Adoption did not have a material effect on the Company’s consolidated financial statements.

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 Company adopted ASU 2017-01 on January 1, 2018. Adoption did not 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 Company early adopted ASU 2017-04 on January 1, 2018. Adoption did not 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. The Company adopted ASU 2017-05 on January 1, 2018 using the modified retrospective approach. Adoption did not 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 Company adopted ASU 2017-07 on January 1, 2018. Adoption did not have a material effect on the Company’s consolidated financial statements.


8



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 reduces 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. The Company adopted ASU 2017-09 on January 1, 2018. Adoption did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards to be Implemented

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 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 2017-12, “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.

In January 2018, the FASB issued ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” (“ASU 2018-01”). ASU 2018-01 permits an entity to elect an optional transition practical expedient to exclude in their evaluation of Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840. The Company will adopt ASU 2018-01 in conjunction with its adoption of ASU 2016-02. The Company is evaluating the impact that adoption of ASU 2018-01 will have on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (“ASU 2018-2”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from H.R. 1 “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (formerly known as “Tax Cuts and Jobs Act”). The effective date will be the first quarter of fiscal year 2019. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

9




In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities,” (“ASU 2018-3”). ASU 2018-03 clarifies certain aspects of the guidance issued in ASU 2016-01. The effective date will be the third quarter of fiscal year 2018. 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 current portion of the product warranty liability is included in Other current liabilities and the non-current portion is included in Other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.  The liability is established using historical warranty claims experience for each product sold.  Historical claims experience may be adjusted for known design improvements or for the impact of unusual product quality issues.  Warranty reserves are reviewed quarterly to ensure critical assumptions are updated for known events that may affect the potential warranty liability.

The following table summarizes the changes in the consolidated product warranty liability (in millions):
 
Three Months Ended
 
March 31, 2018
Balance at beginning of period
$
52.6

Accruals for warranties issued during the period
16.0

Changes in estimates
(1.5
)
Settlements during the period
(13.9
)
Foreign exchange effect/other
0.3

Balance at end of period
$
53.5


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 foreign exchange contracts, cross currency swaps and a debt conversion feature on a convertible promissory note discussed in Note J – “Derivative Financial Instruments” and debt discussed in Note L – “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.

Revenue Recognition. The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.


10



In the United States, we have the ability to enter into a security agreement and receive a security interest in the product by filing an appropriate Uniform Commercial Code (“UCC”) financing statement. However, a significant portion of our revenue is generated outside of the United States. In many countries outside of the United States, as a matter of statutory law, a seller retains title to a product until payment is made. The laws do not provide for a seller’s retention of a security interest in goods in the same manner as established in the UCC. In these countries, we retain title to goods delivered to a customer until the customer makes payment so that we can recover the goods in the event of customer default on payment. In these circumstances, the Company considers the following events in order to determine when it is appropriate to recognize revenue: (i) the customer has physical possession of the product; (ii) the customer has legal title to the product; (iii) the customer has assumed the risks and rewards of ownership and (iv) the customer has communicated acceptance of the product. These events serve as indicators, along with the details contained within the contract, that it is appropriate to recognize revenue.

The Company generates revenue through the sale of machines, parts and service, and extended warranties. Revenue from product sales is recorded when the performance obligation is fulfilled, usually at the time of shipment, at the net sales price (transaction price). Estimates of variable consideration, such as volume discounts and rebates, are reviewed and revised periodically by management. The Company elected to present revenue net of sales tax and other similar taxes and account for shipping and handling activities as fulfillment costs rather than separate performance obligations. Payments are typically due either 30 or 60 days, depending on geography, following delivery of products or completion of services.

Revenue from extended warranties is recognized over time on a straight line basis because the customer benefits evenly from the extended warranty throughout the period; beginning upon expiration of the standard warranty and through end of the term. Revenue from services is recognized based on cost input method as the time and materials used in the repair portrays the most accurate depiction of completion of the performance obligation. During the period ended March 31, 2018 revenue generated from the sale of extended warranties and services were an immaterial portion of revenue.

Revenue from sales-type leases, which is accounted for under Topic 840, is recognized at the inception of the lease. Income from operating leases is recognized ratably over the lease term. The Company routinely sells equipment subject to operating leases and related lease payments. If a substantial risk of ownership in the equipment is not retained, the transaction is recorded as a sale. If a substantial risk of ownership is retained, the transaction is recorded as a borrowing, the operating lease payments are recognized as revenue over the term of the lease and the debt is amortized over a similar period.

For detailed sales information see Note B - “Business Segment Information”.

NOTE B – BUSINESS SEGMENT INFORMATION

Terex is a global manufacturer of aerial work platforms, cranes and materials processing machinery. The Company designs, builds and supports products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Terex’s products are manufactured in North and South America, Europe, Australia and Asia and sold worldwide. The Company engages with customers through all stages of the product life cycle, from initial specification and financing to parts and service support. 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.


11



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
March 31,
 
2018
 
2017
Net Sales
 
 
 
AWP
$
638.9

 
$
472.4

Cranes
314.0

 
263.9

MP
303.3

 
249.1

Corporate and Other / Eliminations
4.7

 
21.5

Total
$
1,260.9

 
$
1,006.9

Income (loss) from Operations
 
 
 
AWP
$
60.1

 
$
21.7

Cranes
(9.7
)
 
(31.9
)
MP
38.9

 
25.6

Corporate and Other / Eliminations
(18.0
)
 
(20.1
)
Total
$
71.3

 
$
(4.7
)

 
March 31,
2018
 
December 31,
2017
Identifiable Assets
 
 
 
AWP
$
1,470.6

 
$
1,358.5

Cranes
1,662.0

 
1,685.7

MP
1,293.2

 
1,219.5

Corporate and Other / Eliminations (1)
(1,005.7
)
 
(801.2
)
Total
$
3,420.1

 
$
3,462.5


(1) Decrease due to lower cash balances, primarily related to share repurchases during the first three months of 2018.

 
Three Months Ended March 31, 2018
 
AWP
 
Cranes
 
MP
 
Corporate and Other / Eliminations
 
Total
Net Sales by Product Type
 

 
 
 
 
 
 
 
 

Aerial Work Platforms
$
552.8

 
$

 
$

 
$
0.4

 
$
553.2

Mobile Cranes

 
177.1

 

 
0.5

 
177.6

Materials Processing Equipment

 

 
213.3

 
0.4

 
213.7

Other (1)
86.1

 
136.9

 
90.0

 
3.4

 
316.4

Total
$
638.9

 
$
314.0

 
$
303.3

 
$
4.7

 
$
1,260.9


(1) Includes other product types, intercompany sales and eliminations.


12



 
Three Months Ended March 31, 2017
 
AWP

Cranes

MP

Corporate and Other / Eliminations

Total
Net Sales by Product Type
 











 

Aerial Work Platforms
$
404.7


$


$


$
0.7


$
405.4

Mobile Cranes


148.0




0.5


148.5

Materials Processing Equipment
0.6




166.1


0.2


166.9

Other (1)
67.1


115.9


83.0


(10.1
)

255.9

Compact Construction Equipment (2)






30.2


30.2

Total
$
472.4


$
263.9


$
249.1


$
21.5


$
1,006.9


(1) Includes other product types, intercompany sales and eliminations.
(2) Remaining Compact Construction product lines divested in 2017.

 
Three Months Ended March 31, 2018
 
AWP

Cranes

MP

Corporate and Other / Eliminations

Total
Net Sales by Region
 











 

North America
$
358.0


$
131.1


$
137.4


$
16.3


$
642.8

Western Europe
204.2


60.2


82.4


0.2


347.0

Asia-Pacific
50.4


39.7


45.2


0.4


135.7

Rest of World (1)
26.3


83.0


38.3


(12.2
)

135.4

Total
$
638.9


$
314.0


$
303.3


$
4.7


$
1,260.9


(1) Includes intercompany sales and eliminations.

 
Three Months Ended March 31, 2017
 
AWP
 
Cranes
 
MP
 
Corporate and Other / Eliminations
 
Total
Net Sales by Region
 

 
 
 
 
 
 
 
 

North America
$
279.6

 
$
125.6

 
$
129.4

 
$
11.6

 
$
546.2

Western Europe
103.0

 
61.3

 
60.4

 
17.5

 
242.2

Asia-Pacific
56.4

 
24.2

 
32.8

 
8.4

 
121.8

Rest of World (1)
33.4

 
52.8

 
26.5

 
(16.0
)
 
96.7

Total
$
472.4

 
$
263.9

 
$
249.1

 
$
21.5

 
$
1,006.9


(1) Includes intercompany sales and eliminations.

NOTE C – INCOME TAXES

During the three months ended March 31, 2018, the Company recognized an income tax expense of $11.4 million on income of $59.0 million, an effective tax rate of 19.3%, as compared to an income tax benefit of $28.3 million on a loss of $88.6 million, an effective tax rate of 31.9%, for the three months ended March 31, 2017. The lower effective tax rate for the three months ended March 31, 2018 is primarily due to a tax benefit for a non-U.S. interest deduction for the three months ended March 31, 2017.



13



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

MHPS

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. 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, which was undertaken by Konecranes in connection with the Disposition. During the three months ended March 31, 2017, the Company recognized a gain on the Disposition (net of tax) of $52.7 million.

During the three months ended March 31, 2017, the Company sold 7.5 million Konecranes shares for proceeds of approximately $272 million and recorded a $22.5 million net loss on sale of shares which included a loss of $9.3 million attributable to foreign exchange rate changes. The net loss 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 three months ended March 31, 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).

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 an original period of 12 months, which was subsequently amended for a total of 36 months on October 11, 2017. The Company recorded an expense of $6.3 million related to losses expected to be incurred over the original agreement’s life during the three months ended March 31, 2017.

Cranes

The Company is actively seeking a buyer for its utility hot lines tools business located in South America and, accordingly, assets and liabilities are reported as held for sale. During three months ended March 31, 2017, a non-cash impairment charge of $1.2 million was recorded to adjust net asset value to estimated fair value within 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 three months ended March 31, 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 $0.6 million within SG&A in the Condensed Consolidated Statement of Comprehensive Income (Loss) related to the sale.

During the three months ended March 31, 2017, the Company recognized a gain of $5.6 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 second quarter of 2017.

The operating results for these 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 portions of the Company’s Cranes 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 amount 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 related to our Cranes segment recorded in the Condensed Consolidated Balance Sheet (in millions):
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Cash and cash equivalents
$
3.5

 
$
3.6

Trade receivables – net
2.6

 
2.2

Inventories
2.3

 
1.7

Prepaid and other current assets
0.4

 
0.5

Impairment reserve
(4.4
)
 
(4.4
)
Included in Prepaid and other current assets
$
4.4

 
$
3.6

 
 
 
 
Property, plant and equipment – net
$
0.4

 
$
0.4

Intangible assets
2.9

 
2.9

Impairment reserve
(3.3
)
 
(3.3
)
Included in Other assets
$

 
$

 
 
 
 
Liabilities
 

 
 

Trade accounts payable
0.9

 
0.5

Accruals and other current liabilities
1.6

 
1.5

Included in Other current liabilities
$
2.5

 
$
2.0

 
 
 
 
Retirement plans and other non-current liabilities
0.8

 
0.7

Other non-current liabilities
0.3

 
0.3

Included in Other non-current liabilities
$
1.1

 
$
1.0


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

 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents:
 
 
 
Cash and cash equivalents - continuing operations
$
447.9

 
$
626.5

Cash and cash equivalents - held for sale
3.5

 
3.6

Total cash and cash equivalents
$
451.4

 
$
630.1


Cash and cash equivalents held for sale at March 31, 2018 and December 31, 2017 include no amounts which were not immediately available for use.


15



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

 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
Atlas
 
MHPS
Atlas
Total
Gain (loss) on disposition of discontinued operations
 
$
3.2

 
$
79.5

$
3.5

$
83.0

(Provision for) benefit from income taxes
 
(0.5
)
 
(26.8
)
(0.5
)
(27.3
)
Gain (loss) on disposition of discontinued operations – net of tax
 
$
2.7

 
$
52.7

$
3.0

$
55.7


During the three months ended March 31, 2018, the Company recognized a gain on disposition of discontinued operations - net of tax of $2.7 million, related to the sale of its Atlas heavy construction equipment and knuckle-boom cranes businesses (“Atlas”). The Company converted the earnout in the former agreement into a note receivable of $3.2 million, which is recorded in Other Assets in the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2017, the Company recognized a gain on disposition of discontinued operations - net of tax of $55.7 million, $52.7 million of which is due to the sale of the MHPS business. The remaining $3.0 million is related to the sale of Atlas.



16



NOTE E – EARNINGS PER SHARE
(in millions, except per share data)
Three Months Ended
March 31,
 
2018
 
2017
Income (loss) from continuing operations
$
47.6

 
$
(60.3
)
Gain (loss) on disposition of discontinued operations–net of tax
2.7

 
55.7

Net income (loss)
$
50.3

 
$
(4.6
)
Basic shares:
 
 
 

Weighted average shares outstanding
79.7

 
105.2

Earnings (loss) per share – basic:
 

 
 

Income (loss) from continuing operations
$
0.60

 
$
(0.57
)
Gain (loss) on disposition of discontinued operations–net of tax
0.03

 
0.53

Net income (loss)
$
0.63

 
$
(0.04
)
Diluted shares:
 

 
 

Weighted average shares outstanding - basic
79.7

 
105.2

Effect of dilutive securities:
 

 
 

Stock options and restricted stock awards
2.0

 

Diluted weighted average shares outstanding
81.7

 
105.2

Earnings (loss) per share – diluted:
 

 
 

Income (loss) from continuing operations
$
0.59

 
$
(0.57
)
Gain (loss) on disposition of discontinued operations–net of tax
0.03

 
0.53

Net income (loss)
$
0.62

 
$
(0.04
)
 
Weighted average options to purchase approximately 60 and 8,000 shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), were outstanding during the three months ended March 31, 2018 and March 31, 2017, respectively, but were not included in the computation of diluted shares as the effect would be anti-dilutive.  Weighted average restricted stock awards of 125,200 and 2,288,000 were outstanding during the three months ended March 31, 2018 and March 31, 2017, respectively, but were not included in the computation of diluted shares as 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.


17



NOTE F – 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 end customer.

The Company primarily conducts on-book business in the U.S., with limited business in China, 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, on an individual asset basis. During the three months ended March 31, 2018 and 2017, the Company transferred finance receivables of $91.3 million and $43.5 million, respectively, to third party financial institutions, which qualified for sales treatment under ASC 860. At March 31, 2018, the Company had $29.3 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):
 
March 31,
2018
 
December 31,
2017
Commercial loans
$
131.3

 
$
180.2

Sales-type leases
41.9

 
26.5

Total finance receivables, gross
173.2

 
206.7

Allowance for credit losses
(3.8
)
 
(6.6
)
Total finance receivables, net
$
169.4

 
$
200.1


Approximately $74 million and $85 million of finance receivables are recorded in Prepaid and other current assets and approximately $95 million and $116 million are recorded in Other assets in the Condensed Consolidated Balance Sheet at March 31, 2018 and December 31, 2017, respectively.

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.

18




The following table presents an analysis of the allowance for credit losses (in millions):
 
 
 
Three Months Ended
March 31, 2018
 
Three Months Ended
March 31, 2017
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Balance, beginning of period
 
$
5.7

 
0.9

 
$
6.6

 
$
5.9

 
$
0.4

 
$
6.3

Provision for credit losses
 
(2.3
)
 
0.6

 
(1.7
)
 
(0.3
)
 

 
(0.3
)
Charge offs
 
(1.1
)
 

 
(1.1
)
 

 

 

Balance, end of period
 
$
2.3

 
$
1.5

 
$
3.8

 
$
5.6

 
$
0.4

 
$
6.0


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):

 
 
March 31, 2018
 
December 31, 2017
 
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Recorded investment
 
$
1.0

 
$

 
$
1.0

 
$
6.0

 
$

 
$
6.0

Related allowance
 
0.2

 

 
0.2

 
2.4

 

 
2.4

Average recorded investment
 
4.4

 

 
4.4

 
3.7

 

 
3.7


The average recorded investment for impaired finance receivables was $2.4 million for commercial loans at March 31, 2017, which were fully reserved. There were no impaired sales-type leases at March 31, 2017.


19



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

 
 
March 31, 2018
 
December 31, 2017
Allowance for credit losses, ending balance:
 
Commercial Loans
 
Sales-Type Leases
 
Total
 
Commercial Loans
 
Sales-Type Leases
 
Total
Individually evaluated for impairment
 
$
0.2

 
$

 
$
0.2

 
$
2.4

 
$

 
$
2.4

Collectively evaluated for impairment
 
2.1

 
1.5

 
3.6

 
3.3

 
0.9

 
4.2

Total allowance for credit losses
 
$
2.3

 
$
1.5

 
$
3.8

 
$
5.7

 
$
0.9

 
$
6.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables, ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1.0

 
$

 
$
1.0

 
$
6.0

 
$

 
$
6.0

Collectively evaluated for impairment
 
130.3

 
41.9

 
172.2

 
174.2

 
26.5

 
200.7

Total finance receivables
 
$
131.3

 
$
41.9

 
$
173.2

 
$
180.2

 
$
26.5

 
$
206.7


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):

 
March 31, 2018
 
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
$
118.4

 
$
4.2

 
$
7.3

 
$
1.4

 
$
12.9

 
$
131.3

Sales-type leases
41.6

 
0.3

 

 

 
0.3

 
41.9

Total finance receivables
$
160.0

 
$
4.5

 
$
7.3

 
$
1.4

 
$
13.2

 
$
173.2


 
December 31, 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
$
174.2

 
$
2.1

 
$

 
$
3.9

 
$
6.0

 
$
180.2

Sales-type leases
26.5

 

 

 

 

 
26.5

Total finance receivables
$
200.7

 
$
2.1

 
$

 
$
3.9

 
$
6.0

 
$
206.7


Commercial loans in the amount of $5.6 million and $10.5 million were on non-accrual status as of March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, 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.

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.


20



Finance receivables by risk rating (in millions):

Rating
 
March 31, 2018
 
December 31, 2017
Superior
 
$
4.2

 
$
3.3

Above Average
 
32.3

 
31.8

Average
 
35.3

 
73.1

Below Average
 
82.3

 
79.6

Sub Standard
 
19.1

 
18.9

Total
 
$
173.2


$
206.7


During the three months ended March 31, 2018, the Company reduced its portfolio relative to 2017 by syndicating its finance receivables to financial institutions. The receivables sold were primarily rated Average. The Company believes the finance receivables retained, net of allowance for credit losses, are collectible.


NOTE G – INVENTORIES

Inventories consist of the following (in millions):
 
March 31,
2018
 
December 31,
2017
Finished equipment
$
407.1

 
$
419.6

Replacement parts
161.8

 
163.3

Work-in-process
190.9

 
165.6

Raw materials and supplies
249.3

 
221.1

Inventories
$
1,009.1

 
$
969.6


Reserves for lower of cost or net realizable value and excess and obsolete inventory were $87.0 million and $85.8 million at March 31, 2018 and December 31, 2017, respectively.

NOTE H – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment – net consist of the following (in millions):
 
March 31,
2018
 
December 31,
2017
Property
$
48.3

 
$
43.3

Plant
180.5

 
144.7

Equipment
470.6

 
479.3

Property, plant and equipment – gross 
699.4

 
667.3

Less: Accumulated depreciation
(364.8
)
 
(356.3
)
Property, plant and equipment – net
$
334.6

 
$
311.0



21



NOTE I – 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, 2017, gross
$
140.2

 
$
179.3

 
$
195.2

 
$
514.7

Accumulated impairment
(38.6
)
 
(179.3
)
 
(23.2
)
 
(241.1
)
Balance at December 31, 2017, net
101.6

 

 
172.0

 
273.6

Foreign exchange effect and other
0.7

 

 
4.8

 
5.5

Balance at March 31, 2018, gross
140.9

 
179.3

 
200.0

 
520.2

Accumulated impairment
(38.6
)
 
(179.3
)
 
(23.2
)
 
(241.1
)
Balance at March 31, 2018, net
$
102.3

 
$

 
$
176.8

 
$
279.1


Intangible assets, net were comprised of the following as of March 31, 2018 and December 31, 2017 (in millions):
 
 
 
March 31, 2018
 
December 31, 2017
 
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
 
$
19.3

 
$
(18.3
)
 
$
1.0

 
$
18.8

 
$
(17.8
)
 
$
1.0

Customer Relationships
20
 
33.5

 
(28.9
)
 
4.6

 
33.2

 
(28.3
)
 
4.9

Land Use Rights
81
 
4.8

 
(0.6
)
 
4.2

 
4.8

 
(0.6
)
 
4.2

Other
8
 
26.7

 
(23.0
)
 
3.7

 
26.5

 
(22.8
)
 
3.7

Total definite-lived intangible assets
 
 
$
84.3

 
$
(70.8
)
 
$
13.5

 
$
83.3

 
$
(69.5
)
 
$
13.8


 
Three Months Ended
March 31,
(in millions)
2018
 
2017
Aggregate Amortization Expense
$
0.5

 
$
0.5


Estimated aggregate intangible asset amortization expense (in millions) for each of the next five years below is:
2018
$
2.0

2019
$
1.7

2020
$
1.7

2021
$
1.6

2022
$
1.4




22



NOTE J – 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 March 31, 2018 mature on or before March 31, 2019.  At March 31, 2018 and December 31, 2017, the Company had $345.7 million and $313.4 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 (“COGS”) 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 $86.4 million and $113.2 million notional amount of foreign exchange contracts outstanding that were not designated as hedging instruments at March 31, 2018 and December 31, 2017, 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 and a debt conversion feature on a convertible promissory note. Changes in the fair value of our cross currency 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. 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).


23



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):
 
 
March 31,
2018
 
December 31,
2017
 
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

 
$
5.8

$
0.3

Cross currency swap
Other current assets
0.7


 
0.7


Debt conversion feature
Other assets

1.9

 

1.5

Foreign exchange contracts
Other current liabilities
(1.6
)
(0.2
)
 
(1.6
)

Cross currency swap
Other non-current liabilities
(7.6
)

 
(5.3
)

Net derivative asset (liability)
$
(2.7
)
$
1.8

 
$
(0.4
)
$
1.8

 
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
March 31,
Cash Flow Derivatives
 
2018
 
2017
Foreign exchange contracts
 
$
(0.5
)
 
$
1.1

Cross currency swap
 
(0.8
)
 

Total
 
$
(1.3
)
 
$
1.1

Gain (Loss) Reclassified from AOCI into Income (Effective):
Three Months Ended
March 31,
Account
 
2018
 
2017
Cost of goods sold
 
$
2.2

 
$
(2.0
)
Other income (expense) – net
(1.3
)
 

Total
 
$
0.9

 
$
(2.0
)
Gain (Loss) Recognized on Derivatives (Ineffective) in Income :
Three Months Ended
March 31,
Account
 
2018
 
2017
Cost of goods sold
 
$
1.0

 
$
0.4

Other income (expense) – net
 
0.7

 
0.2

Total
 
$
1.7

 
$
0.6


Derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The following table provides the effect of non-designated derivatives outstanding at the end of the period in the Condensed Consolidated Statement of Comprehensive Income (Loss) (in millions):
Gain (Loss) Recognized in Income on Derivatives not designated as hedges:
Three Months Ended
March 31,
Account
2018
 
2017
Other income (expense) – net
$
0.1

 
$
(0.8
)

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

Counterparties to the Company’s foreign exchange contracts are major financial institutions with credit ratings of investment grade or better and no collateral is required.  There are no significant risk concentrations.  Management continues to monitor counterparty

24



risk and believes the risk of incurring losses on derivative contracts related to credit risk is unlikely and any losses would be immaterial.
 
See Note O - “Stockholders’ Equity” for unrealized net gains (losses), net of tax, included in AOCI. Within the unrealized net gains (losses) included in AOCI as of March 31, 2018, it is estimated that $3.3 million of gains are expected to be reclassified into earnings in the next twelve months.

NOTE K – RESTRUCTURING AND OTHER CHARGES

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

Restructuring

During 2016, the Company established restructuring programs in its Cranes segment to transfer production between existing facilities and close certain facilities in order to maximize labor efficiencies and reduce overhead costs. The programs are expected to cost $56.5 million, result in the reduction of approximately 550 team members and be completed in 2018.

The following table provides information for all restructuring activities by segment regarding the amount of expense incurred during the three months ended March 31, 2018, the cumulative amount of expenses incurred since inception of the programs through March 31, 2018, and the total amount expected to be incurred (in millions):
 
Amount incurred
during the
three months ended
March 31, 2018
 
Cumulative amount
incurred through
March 31, 2018
 
Total amount expected to be incurred
AWP
$

 
$
0.2

 
$
0.2

Cranes
(4.6
)
 
56.5

 
56.5

MP

 
0.1

 
0.1

Corp & Other
0.5

 
2.6

 
3.0

Total
$
(4.1
)
 
$
59.4

 
$
59.8


The following table provides information by type of restructuring activity with respect to the amount of expense incurred during the three months ended March 31, 2018, the cumulative amount of expenses incurred since inception of the programs and the total amount expected to be incurred (in millions):
 
Employee
Termination Costs
 
Facility
Exit Costs
 
Asset Disposal and Other Costs
 
Total
Amount incurred during the three months ended March 31, 2018
$
(5.1
)
 
$
1.0

 
$

 
$
(4.1
)
Cumulative amount incurred through March 31, 2018
$
40.5

 
$
6.1

 
$
12.8

 
$
59.4

Total amount expected to be incurred
$
40.9

 
$
6.1

 
$
12.8

 
$
59.8


During the three months ended March 31, 2018, restructuring charges/(reductions) of ($2.7) million and $(1.4) million, were included in COGS and SG&A, respectively. During the three months ended March 31, 2017, restructuring charges/(reductions) of $(0.6) million and $0.6 million were included in COGS and SG&A, respectively.


25



The following table provides a roll forward of the restructuring reserve by type of restructuring activity for the three months ended March 31, 2018 (in millions):
 
Employee
Termination Costs
Restructuring reserve at December 31, 2017
$
29.7

Restructuring reserve increase (decrease)
(5.1
)
Cash expenditures
(6.0
)
Foreign exchange
0.6

Restructuring reserve at March 31, 2018
$
19.2


Other Charges

During the three months ended March 31, 2018, the Company recorded $0.2 million and $1.8 million as components of COGS and SG&A, respectively, for severance charges across all segments and corporate functions. During the three months ended March 31, 2017, the Company recorded $0.1 million and $2.1 million as components of COGS and SG&A, respectively, for severance charges across all segments and corporate functions.

NOTE L – LONG-TERM OBLIGATIONS

2017 Credit Agreement

On January 31, 2017, the Company entered into a new credit agreement (as amended, the “2017 Credit Agreement”), with the lenders and issuing banks party thereto and Credit Suisse AG, Cayman Islands Branch (“CSAG”), as administrative agent and collateral agent. The 2017 Credit Agreement includes a revolving line of credit as further described below and a $400 million senior secured term loan (the “Term Loan”), which will mature on January 31, 2024. In connection with the 2017 Credit Agreement, the Company terminated its 2014 Credit Agreement (as defined below), among the Company and certain of its subsidiaries, the lenders thereunder and CSAG, as administrative agent and collateral agent, and related agreements and documents.

On August 17, 2017, the Company entered into an Incremental Assumption Agreement and Amendment No. 1 to the 2017 Credit Agreement which lowered the interest rate on the Company’s Term Loan by 0.25%. On February 28, 2018, the Company entered into an Incremental Assumption Agreement and Amendment No. 2 (“Amendment No. 2”) to the 2017 Credit Agreement which lowered the interest rate on the Company’s Term Loan by an additional 0.25%. The Term Loan portion of the 2017 Credit Agreement bears interest at a rate of London Interbank Offered Rate (“LIBOR”) plus 2.00% with a 0.75% LIBOR floor. On April 10, 2018, the Company entered into an Incremental Revolving Credit Assumption Agreement to the 2017 Credit Agreement which increased the size of the revolving line of credit from $450 million to $600 million available through January 31, 2022. The 2017 Credit Agreement allows unlimited incremental commitments, which may be extended at the option of the existing or new lenders and can be in the form of revolving credit commitments, term loan commitments, or a combination of both, with incremental amounts in excess of $300 million as long as the Company satisfies a senior secured leverage ratio contained in the 2017 Credit Agreement.

The 2017 Credit Agreement requires the Company to comply with a number of covenants, which limit, in certain circumstances, the Company’s ability to take a variety of actions, including but not limited to: incur indebtedness; create or maintain liens on its property or assets; make investments, loans and advances; repurchase shares of its common stock; engage in acquisitions, mergers, consolidations and asset sales; redeem debt; and pay dividends and distributions. If the Company’s borrowings under its revolving line of credit are greater than 30% of the total revolving credit commitments, the 2017 Credit Agreement requires the Company to comply with certain financial tests, as defined in the 2017 Credit Agreement. If applicable, the minimum required levels of the interest coverage ratio would be 2.5 to 1.0 and the maximum permitted levels of the senior secured leverage ratio would be 2.75 to 1.0. The 2017 Credit Agreement also contains customary default provisions.

During the three months ended March 31, 2018, the Company recorded a loss on early extinguishment of debt related to Amendment No. 2 to the 2017 Credit Agreement of approximately $0.7 million.


26



As of March 31, 2018 and December 31, 2017, the Company had $394.2 million and $395.1 million, net of discount, respectively, in the Term Loan outstanding under the 2017 Credit Agreement. The weighted average interest rate on the Term Loan at March 31, 2018 and December 31, 2017 was 3.99% and 3.94%, respectively. The Company had $98.5 million revolving credit amounts outstanding as of March 31, 2018. The weighted average interest rate on the revolving credit amounts at March 31, 2018 was 5.08%. The Company had no revolving credit amounts outstanding as of December 31, 2017.

The 2017 Credit Agreement incorporates facilities for issuance of letters of credit up to $400 million.  Letters of credit issued under the 2017 Credit Agreement letter of credit facility decrease availability under the revolving line of credit (which was increased to $600 million on April 10, 2018).  As of March 31, 2018 and December 31, 2017, the Company had no letters of credit issued under the 2017 Credit Agreement.  The 2017 Credit Agreement also permits the Company to have additional letter of credit facilities up to $300 million, and letters of credit issued under such additional facilities do not decrease availability under the revolving lines of credit. The Company had letters of credit issued under the additional letter of credit facilities of the 2017 Credit Agreement that totaled $34.7 million and $34.3 million as of March 31, 2018 and December 31, 2017, respectively.

The Company also has bilateral arrangements to issue letters of credit with various other financial institutions.  These additional letters of credit do not reduce the Company’s availability under the 2017 Credit Agreement.  The Company had letters of credit issued under these additional arrangements of $23.9 million and $23.1 million as of March 31, 2018 and December 31, 2017, respectively.

In total, as of March 31, 2018 and December 31, 2017, the Company had letters of credit outstanding of $58.6 million and $57.4 million, respectively. The letters of credit generally serve as collateral for certain liabilities included in the Condensed Consolidated Balance Sheet. Certain letters of credit serve as collateral guaranteeing the Company’s performance under contracts.

Furthermore, the Company and certain of its subsidiaries agreed to take certain actions to secure borrowings under the 2017 Credit Agreement. As a result, on January 31, 2017, Terex and certain of its subsidiaries entered into a Guarantee and Collateral Agreement with CSAG, as collateral agent for the lenders, granting security and guarantees to the lenders for amounts borrowed under the 2017 Credit Agreement. Pursuant to the Guarantee and Collateral Agreement, Terex is required to (a) pledge as collateral the capital stock of the Company’s material domestic subsidiaries and 65% of the capital stock of certain of the Company’s material foreign subsidiaries, and (b) provide a first priority security interest in substantially all of the Company’s domestic assets.

2014 Credit Agreement

On August 13, 2014 the Company entered into a credit agreement (as amended, the “2014 Credit Agreement”), with the lenders party thereto and CSAG, as administrative agent and collateral agent. The 2014 Credit Agreement provided the Company with a senior secured revolving line of credit of up to $600 million that was available through August 13, 2019, a $230.0 million senior secured term loan and a €200.0 million senior secured term loan, which both matured on August 13, 2021.

On January 31, 2017, in connection with the 2017 Credit Agreement, the Company terminated its 2014 Credit Agreement, among the Company and certain of its subsidiaries, the lenders thereunder and CSAG, as administrative agent and collateral agent, and related agreements and documents.

During the three months ended March 31, 2017, the Company recorded a loss on early extinguishment of debt related to its 2014 Credit Agreement of approximately $8.2 million.

6-1/2% Senior Notes

On March 27, 2012, the Company sold and issued $300.0 million aggregate principal amount of Senior Notes Due 2020 (“6-1/2% Notes”) at par. The proceeds from these notes were used for general corporate purposes. The 6-1/2% Notes became redeemable by the Company beginning in April 2016 at an initial redemption price of 103.25% of principal amount. The Company redeemed $45.8 million principal amount of the 6-1/2% Notes in the first quarter of 2017 for $47.9 million, including market premiums of $1.2 million and accrued but unpaid interest of $0.9 million. The Company redeemed the remaining $254.2 million principal amount of the 6-1/2% Notes on April 3, 2017 for $266.7 million, including accrued but unpaid interest of $8.4 million and a call premium of $4.1 million (which was recorded as Loss on early extinguishment of debt on that date). The 6-1/2% Notes were jointly and severally guaranteed by certain of the Company’s domestic subsidiaries.


27



6% Senior Notes

On November 26, 2012, the Company sold and issued $850.0 million aggregate principal amount of Senior Notes due 2021 (“6% Notes”) at par. The proceeds from this offering plus other cash were used to redeem all $800.0 million principal amount of the outstanding 8% Senior Subordinated Notes. During the first quarter of 2017, the Company redeemed all $850.0 million of the 6% Notes for $887.2 million including redemption premiums of $25.9 million and accrued but unpaid interest of $11.3 million.

5-5/8% Senior Notes

On January 31, 2017, the Company sold and issued $600.0 million aggregate principal amount of Senior Notes Due 2025 (“5-5/8% Notes”) at par in a private offering. The proceeds from the 5-5/8% Notes, together with cash on hand, including cash from the sale of our MHPS business, was used: (i) to complete a tender offer for up to $550.0 million of our 6% Notes, (ii) to redeem and discharge such portion of the 6% Senior Notes not purchased in the tender offer, (iii) to fund a $300.0 million partial redemption of the 6% Notes, (iv) to fund repayment of all $300.0 million aggregate principal amount outstanding of our 6-1/2% Notes on or before April 3, 2017, (v) to pay related premiums, fees, discounts and expenses, and (vi) for general corporate purposes, including repayment of borrowings outstanding under the 2014 Credit Agreement. The 5-5/8% Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries.

During the three months ended March 31, 2017, the Company recorded a loss on early extinguishment of debt related to its 6% Notes and its 6-1/2% Notes of $37.2 million.

Fair Value of Debt

Based on indicative price quotations from financial institutions multiplied by the amount recorded on the Company’s Condensed Consolidated Balance Sheet (“Book Value”), the Company estimates the fair values (“FV”) of its debt set forth below as of March 31, 2018, as follows (in millions, except for quotes):
 
Book Value
 
Quote
 
FV
5-5/8% Notes
$
600.0

 
$
0.99250

 
$
596

2017 Credit Agreement Term Loan (net of discount)
$
394.2

 
$
1.00594

 
$
397


The fair value of debt reported in the table above is based on price quotations on the debt instrument in an active market and therefore categorized under Level 1 of the ASC 820 hierarchy. See Note A – “Basis of Presentation,” for an explanation of the ASC 820 hierarchy. The Company believes that the carrying value of its other borrowings, including amounts outstanding, if any, for the revolving credit line under the 2017 Credit Agreement approximate fair market value based on maturities for debt of similar terms. The fair value of these other borrowings are categorized under Level 2 of the ASC 820 hierarchy.


28



NOTE M – RETIREMENT PLANS AND OTHER BENEFITS

The Company maintains defined benefit plans in the United States, France, Germany, India, Switzerland and the United Kingdom for some of its subsidiaries, including a nonqualified Supplemental Executive Retirement Plan (“SERP”) in the United States. In Italy there are mandatory termination indemnity plans providing a benefit that is payable upon termination of employment in substantially all cases of termination. The Company also has several programs that provide postemployment benefits, including health and life insurance benefits, to certain former salaried and hourly employees. Information regarding the Company’s plans, including the SERP, was as follows (in millions):
 
Three Months Ended
March 31,
 
2018
 
2017
 
U.S. Pension
 
Non-U.S. Pension
 
Other
 
U.S. Pension
 
Non-U.S. Pension
 
Other
Components of net periodic cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
0.1

 
$
0.7

 
$

 
$
0.2

 
$
0.7

 
$

Interest cost
1.5

 
1.2

 

 
1.7

 
1.2

 

Expected return on plan assets
(2.0
)
 
(1.3
)
 

 
(2.0
)
 
(1.2
)
 

Amortization of actuarial loss
1.0

 
0.9

 

 
1.1

 
0.8

 

Net periodic cost 
$
0.6

 
$
1.5

 
$

 
$
1.0

 
$
1.5

 
$


Components of Net periodic cost other than the Service cost component are included in Other income (expense) - Net in the Condensed Consolidated Statement of Comprehensive Income.

NOTE N – LITIGATION AND CONTINGENCIES

General

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

Securities and Stockholder Derivative Lawsuits

In 2010, the Company received complaints seeking certification of class action lawsuits as follows:

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

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


29



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

On March 31, 2018, the securities lawsuit was dismissed against all of the named defendants except Mr. Riordan and Terex. In addition, certain claims were also narrowed. However, as all claims against Mr. Riordan were not dismissed, the case will continue against both Mr. Riordan and as a result Terex as well. The Company believes that the remaining allegations in the securities suit and allegations in the stockholder derivative claim are without merit, and Terex, its directors and the named executives will vigorously defend against them. The Company believes that it has acted, and continues to act, in compliance with federal securities laws and Delaware law with respect to these matters. However, the outcome of the lawsuits cannot be predicted and, if determined adversely, could ultimately result in the Company incurring significant liabilities.

Demag Cranes AG Appraisal Proceedings

In connection with the Company’s purchase of Demag Cranes AG (“DCAG”) in 2011, certain former shareholders of DCAG initiated appraisal proceedings relating to (i) a domination and profit loss transfer agreement between DCAG and Terex Germany GmbH & Co. KG (the “DPLA Proceeding”) and (ii) the squeeze out of the former DCAG shareholders (the “Squeeze out Proceeding”) alleging that the Company did not pay fair value for the shares of DCAG. In April 2018, the Company reached an agreement with the former shareholders of DCAG to settle the DPLA Proceeding for an amount not material to the Company’s consolidated financial statements. The Squeeze out Proceeding will continue and is still in the relatively early stages. While the Company believes the position of the former shareholders of DCAG is without merit and is vigorously opposing it, no assurance can be given as to the final resolution of the Squeeze out Proceeding or that the Company will not ultimately be required to make an additional payment as a result of such dispute.

Other

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

Credit Guarantees

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

As of March 31, 2018 and December 31, 2017, the Company’s maximum exposure to such credit guarantees was $50.5 million and $49.2 million, respectively. Terms of these guarantees coincide with the financing arranged by the customer and generally do not exceed five years. Given the Company’s position as original equipment manufacturer and its knowledge of end markets, the Company, when called upon to fulfill a guarantee, generally has been able to liquidate the financed equipment at a minimal loss, if any, to the Company.

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

Residual Value Guarantees

The Company issues residual value guarantees under sales-type leases. A residual value guarantee involves a guarantee that a piece of equipment will have a minimum fair market value at a future date if certain conditions are met by the customer. Maximum exposure for residual value guarantees issued by the Company totaled $4.2 million as of March 31, 2018 and December 31, 2017. The Company is generally able to mitigate some risk associated with these guarantees because the maturity of guarantees is staggered, limiting the amount of used equipment entering the marketplace at any one time.

30




The Company has recorded an aggregate liability within Other current liabilities and Other non-current liabilities in the Condensed Consolidated Balance Sheet of approximately $4 million as of March 31, 2018 and December 31, 2017, respectively, for estimated fair value of all guarantees provided.

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

NOTE O – STOCKHOLDERS’ EQUITY
 
Changes in Accumulated Other Comprehensive Income (Loss)

The table below presents changes in AOCI by component for the three months ended March 31, 2018 and 2017. All amounts are net of tax (in millions).
 
Three Months Ended
March 31, 2018
 
Three Months Ended
March 31, 2017
 
CTA
Derivative Hedging Adj.
Debt & Equity Securities Adj.
Pension Liability Adj.
Total
 
CTA (1)
Derivative Hedging Adj.
Debt & Equity Securities Adj.
Pension Liability Adj. (2)
Total
Beginning balance
$
(144.7
)
$
2.1

$
4.3

$
(101.2
)
$
(239.5
)
 
$
(615.3
)
$
(2.4
)
$
0.6

$
(162.3
)
$
(779.4
)
Other comprehensive income (loss) before reclassifications
31.4

(0.9
)
(3.5
)
(1.9
)
25.1

 
18.9

(0.6
)

(0.8
)
17.5

Amounts reclassified from AOCI

(0.4
)

1.5

1.1

 
352.1

1.7

0.1

56.7

410.6

Net Other Comprehensive Income (Loss)
31.4

(1.3
)
(3.5
)
(0.4
)
26.2

 
371.0

1.1

0.1

55.9

428.1

Ending balance
$
(113.3
)
$
0.8

$
0.8

$
(101.6
)
$
(213.3
)
 
$
(244.3
)
$
(1.3
)
$
0.7

$
(106.4
)
$
(351.3
)
 

(1) Reclassification of $352.1 million of losses (net of $1.5 million of tax benefits) from AOCI to Gain (loss) on disposition of discontinued operations - net of tax in connection with the sale of the MHPS business during the three months ended March 31, 2017.
(2) Reclassification of AOCI during the three months ended March 31, 2017 primarily relates to $55.4 million of losses (net of $23.9 million of tax benefits) reclassified from AOCI to Gain (loss) on disposition of discontinued operations - net of tax in connection with the sale of the MHPS business.

Stock-Based Compensation

During the three months ended March 31, 2018, the Company awarded 1.0 million shares of restricted stock to its employees with a weighted average grant date fair value of $40.13 per share.  Approximately 60% of these awards are time-based and vest ratably on each of the first three anniversary dates. Approximately 26% cliff vest at the end of a three year period and are subject to performance targets that may or may not be met and for which the performance period has not yet been completed. Approximately 14% cliff vest and are based on performance targets containing a market condition determined over a three year period. The Company used the Monte Carlo method to determine grant date fair value of $41.57 per share for the awards with a market condition granted on March 8, 2018.  The Monte Carlo method is a statistical simulation technique used to provide the grant date fair value of an award.  The following table presents the weighted-average assumptions used in the valuation:
 
Grant date
 
March 8, 2018
Dividend yields
1.00
%
Expected volatility
40.41
%
Risk free interest rate
2.38
%
Expected life (in years)
3



31



Share Repurchases and Dividends

In February 2015, the Company announced authorization by its Board of Directors for the repurchase of up to $200 million of the Company’s outstanding shares of common stock of which approximately $131 million of this authorization was utilized prior to January 1, 2017. In February 2017, the Company announced authorization by its Board of Directors for the repurchase of up to an additional $350 million of the Company’s outstanding shares of common stock. In May 2017, the Company announced the completion of the February 2015 and February 2017 authorizations and subsequently that the Company’s Board of Directors had authorized the repurchase of up to an additional $280 million of the Company’s outstanding shares of common stock. In September 2017, the Company announced the completion of the May 2017 authorization and subsequently that the Company’s Board of Directors authorized a repurchase of up to an additional $225 million of the Company’s outstanding shares of common stock. In February 2018, the Company announced authorization by its Board of Directors for the repurchase of up to an additional $325 million of the Company’s outstanding shares of common stock. During the three months ended March 31, 2018, the Company repurchased 5.1 million shares for $209.2 million under this program. A portion of the share repurchases was executed prior to March 31, 2018 but cash settled in April. In the first quarter of 2018, the Company’s Board of Directors declared a dividend of $0.10 per share, which was paid to its shareholders.

32



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS DESCRIPTION

Terex is a global manufacturer of aerial work platforms, cranes and materials processing machinery. We design, build and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Our products are manufactured in North and South America, Europe, Australia and Asia and sold worldwide. We engage with customers through all stages of the product life cycle, from initial specification and financing to parts and service support.

We manage and report our business in the following segments: (i) Aerial Work Platforms (“AWP”); (ii) Cranes; and (iii) Materials Processing (“MP”). Further information about our industry and reportable segments, including geographic information, appears below and in Note B – “Business Segment Information” in the Notes to the Condensed Consolidated Financial Statements.

Non-GAAP Measures

In this document, we refer to various GAAP (U.S. generally accepted accounting principles) and non-GAAP financial measures. These non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies. We present non-GAAP financial measures in reporting our financial results to provide investors with additional analytical tools which we believe are useful in evaluating our operating results and the ongoing performance of our underlying businesses. We do not, nor do we suggest that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Non-GAAP measures we may use include translation effect of foreign currency exchange rate changes on net sales, gross profit, selling, general & administrative (“SG&A”) costs and operating profit, as well as the net sales, gross profit, SG&A costs and operating profit excluding the impact of acquisitions.

As changes in foreign currency exchange rates have a non-operating impact on our financial results, we believe excluding effects of these changes assists in assessment of our business results between periods. We calculate the translation effect of foreign currency exchange rate changes by translating current period results at rates that the comparable prior periods were translated at to isolate the foreign exchange component of the fluctuation from the operational component. Similarly, the impact of changes in our results from acquisitions that were not included in comparable prior periods may be subtracted from the absolute change in results to allow for better comparability of results between periods.

We calculate a non-GAAP measure of free cash flow. We define free cash flow as Net cash provided by (used in) operating activities, plus (minus) increases (decreases) in Terex Financial Services finance receivables consisting of sales-type leases and commercial loans (“TFS Assets”), less Capital expenditures (excluding the acquisition of our Northern Ireland properties). We believe that this measure of free cash flow provides management and investors further useful information on cash generation or use in our primary operations.

We discuss forward looking information related to expected earnings per share (“EPS”) excluding restructuring charges and other items. Our 2018 outlook for earnings per share is a non-GAAP financial measure because it excludes items such as restructuring and other related charges, transformation costs, the impact of the release of tax valuation allowances, gains and losses on divestitures and other unusual items such as the impact of H.R. 1 “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (formerly known as “Tax Cuts and Jobs Act” and is referred to as the “2017 Federal Tax Act”). The Company is not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because the Company is unable to predict with a reasonable degree of certainty the exact timing and impact of such items. The unavailable information could have a significant impact on the Company’s full-year 2018 GAAP financial results. Adjusted EPS provides guidance to investors about our EPS expectations excluding restructuring and other charges that we do not believe are reflective of our ongoing operations.

Working capital is calculated using the Condensed Consolidated Balance Sheet amounts for Trade receivables (net of allowance) plus Inventories (net of allowance), less Trade accounts payable and Customer advances. We view excessive working capital as an inefficient use of resources, and seek to minimize the level of investment without adversely impacting the ongoing operations of the business. Trailing three months annualized net sales is calculated using the net sales for the most recent quarter end multiplied by four. The ratio calculated by dividing working capital by trailing three months annualized net sales is a non-GAAP measure that we believe measures our resource use efficiency.

33




Non-GAAP measures we also use include Net Operating Profit After Tax (“NOPAT”) as adjusted, income (loss) from operations as adjusted, annualized effective tax rate as adjusted, cash and cash equivalents as adjusted, Debt as defined below and Terex Corporation stockholders’ equity as adjusted, which are used in the calculation of our after tax return on invested capital (“ROIC”) (collectively the “Non-GAAP Measures”), which are discussed in detail below.

Overview

Focus, Simplify and Execute to Win are the three pillars of our business strategy. With the Focus element of the Terex Strategy complete, we remain committed to Simplifying the company and deploying our Execute to Win business system. We believe we are entering a period of broad-based growth potential. In this environment, it is important that our operations execute at a high level, and in parallel continue to drive the transformational improvements that will fundamentally improve Terex for the long term. We continued to invest in our Execute to Win business system, which remains focused on enhancing our capabilities in Commercial Excellence, Lifecycle Solutions and Strategic Sourcing. We are seeing benefits from Commercial Excellence in our performance, and expect to start to realize benefits from Strategic Sourcing in the second half of 2018.

We had a very strong start to 2018. We increased sales, operating margin and backlog in all three segments. AWP continued to gain momentum in the first quarter of 2018, building off its strong finish in 2017. Cranes got off to a slower start than we expected, driven largely by supply chain challenges in our mobile cranes operations. MP continued to execute, notching its sixth consecutive quarter of year-over-year margin expansion. We see positive momentum in our backlog (firm orders expected to be filled within one year) for our segments, which was up 54% year-over-year, excluding Corporate and Other. This is the fifth consecutive quarter of backlog growth in each of our business segments.

An important development in the first quarter of 2018 was the announcement of the Section 232 tariffs on steel imports into the United States. Steel prices had been trending up and market prices and futures prices for steel rose dramatically in the first quarter of 2018. We addressed the significant increase in steel prices by implementing surcharges on product lines that were impacted by these increases. We are working closely with our customers, being open and transparent, to share increases equitably with them.

Our AWP segment’s first quarter 2018 results included better than expected net sales and improved operating margins, although increased commodity prices, mostly for steel, were a headwind. We believe we are at an early point in the growth cycle for aerial work platforms, both in North America and Western Europe. China and other developing markets are still in the early phase of adopting the products, and there we expect significant growth ahead. Detailed modeling of the AWP fleet, macro-economic fundamentals, and discussions with our customers, all suggest we are entering a multi-year growth period. This can be seen in AWP’s backlog, which is up $266 million, or 43% on a year-over-year basis. We expect margins to improve in 2018 on the incremental sales volume.

While our Cranes segment’s financial performance improved year-over-year, it performed below our expectations for the quarter. Global crane markets were fairly stable with pockets of growth as expected. We increased sales and backlog in mobile cranes, tower cranes and utilities equipment. However, our mobile cranes operations performed below our expectations, driven by challenges in the supply chain. After several years of lower production schedules, elements of the supply base were not able to ramp up as quickly as we needed. We are working closely with our suppliers and have a team focused on addressing supply continuity issues and expect productivity to normalize by the fourth quarter. While we expect Cranes financial performance to improve over the balance of the year, it is likely Cranes will generate an operating loss in the second quarter before returning to profitability in the second half of the year.

Our MP segment had an excellent start to 2018, with its operating profit improving on increased net sales. Growth was driven by our crushing and screening and scrap material handling product lines. Construction activity and aggregate consumption continue to be primary drivers of demand for our crushing and screening equipment. We expect global demand for crushing and screening equipment to continue to grow. We also expect demand to grow for our scrap material handling product line due to improving markets. We are encouraged by our backlog for the segment, which is up 77% compared to prior year. We expect margins to improve in 2018 on incremental sales volume, although strengthening of the British Pound and higher material costs are potential headwinds.

Geographically, our largest market is North America, which represents approximately 50% of our global sales in continuing operations. Our sales grew globally, with sales up significantly in Europe, Middle East and Africa and Latin America.


34



We continued to execute on our disciplined capital allocation strategy in the first quarter of 2018. We also continued to invest in our Transformation priority areas. These targeted investments in high-impact areas are starting to pay off, and are expected to result in performance improvements over the longer term. We also repurchased approximately 5 million Terex shares in the first quarter for approximately $205 million. See Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” for further information on our share repurchases.

We continue to improve our balance sheet and we repriced our U.S. Dollar term loan in the first quarter, improving upon the favorable terms we put in place last year. In April, we also increased our revolving line of credit to $600 million providing $150 million of additional liquidity. We believe our liquidity continues to be sufficient to meet our business plans. See “Liquidity and Capital Resources” for a detailed description of liquidity and working capital levels, including the primary factors affecting such levels.

As a result of the Company’s strong operational performance and capital market actions we took in the first quarter of 2018, we are increasing our full year 2018 guidance. We now expect 2018 earnings per share (“EPS”) to be between $2.70 and $3.00, excluding restructuring and other unusual items and any additional share repurchases, on net sales of approximately $5 billion.

ROIC

ROIC and Non-GAAP Measures (as calculated below) assist in showing how effectively we utilize capital invested in our operations. ROIC is determined by dividing the sum of NOPAT for each of the previous four quarters by the average of Debt less Cash and cash equivalents plus Terex Corporation stockholders’ equity for the previous five quarters. NOPAT for each quarter is calculated by multiplying Income (loss) from operations as adjusted by one minus the annualized effective tax rate.

In the calculation of ROIC, we adjust income (loss) from operations, annualized effective tax rate, cash and cash equivalents, debt and Terex Corporation stockholders’ equity to remove the effects of the impact of certain transactions in order to create a measure that is useful to understanding our operating results and the ongoing performance of our underlying business without the impact of unusual items as shown in the tables below. Furthermore, we believe returns on capital deployed in TFS do not represent our primary operations and, therefore, TFS Assets and results from operations have been excluded from the Non-GAAP Measures. Debt is calculated using amounts for Notes payable and current portion of long-term debt plus Long-term debt, less current portion. We calculate ROIC using the last four quarters’ adjusted NOPAT as this represents the most recent 12-month period at any given point of determination. In order for the denominator of the ROIC ratio to properly match the operational period reflected in the numerator, we include the average of five quarters’ ending balance sheet amounts so that the denominator includes the average of the opening through ending balances (on a quarterly basis) thereby providing, over the same time period as the numerator, four quarters of average invested capital.

Terex management and Board of Directors use ROIC as one measure to assess operational performance, including in connection with certain compensation programs. We use ROIC as a metric because we believe it measures how effectively we invest our capital and provides a better measure to compare ourselves to peer companies to assist in assessing how we drive operational improvement. We believe ROIC measures return on the amount of capital invested in our primary businesses, excluding TFS, as opposed to another metric such as return on stockholders’ equity that only incorporates book equity, and is thus a more accurate and descriptive measure of our performance. We also believe adding Debt less Cash and cash equivalents to Terex Corporation stockholders’ equity, as adjusted provides a better comparison across similar businesses regarding total capitalization, and ROIC highlights the level of value creation as a percentage of capital invested. As the tables below show, our ROIC at March 31, 2018 was 12.1%.


35



Amounts described below are reported in millions of U.S. dollars, except for the annualized effective tax rates.  Amounts are as of and for the three months ended for the periods referenced in the tables below.
 
Mar '18
Dec '17
Sep '17
Jun '17
Mar '17
Annualized effective tax rate, as adjusted
23.0
%
26.9
%
26.9
%
26.9
%