TEX 9.30.2013 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

F O R M   10 – Q

(Mark One)

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

For the quarterly period ended September 30, 2013

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

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

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

Number of outstanding shares of common stock:  111.4 million as of October 23, 2013.
The Exhibit Index begins on page 59.






INDEX

TEREX CORPORATION AND SUBSIDIARIES

GENERAL

This Quarterly Report on Form 10-Q filed by Terex Corporation generally speaks as of September 30, 2013 unless specifically noted otherwise, and includes financial information with respect to the subsidiaries of the Company listed below (all of which are 100%-owned) which were guarantors on September 30, 2013 (the “Guarantors”) of the Company’s 4% Convertible Senior Subordinated Notes due 2015 (the “4% Convertible Notes”), its 6% Senior Notes Due 2021 (the “6% Notes”) and its 6-1/2% Senior Notes Due 2020 (the “6-1/2% Notes”).  See Note O – “Consolidating Financial Statements” to the Company’s September 30, 2013 Condensed Consolidated Financial Statements included in this Quarterly Report. Unless otherwise indicated, Terex Corporation, together with its consolidated subsidiaries, is hereinafter referred to as “Terex,” the “Registrant,” “us,” “we,” “our” or the “Company.”

Guarantor Information

Guarantor
State or other jurisdiction of
incorporation or organization
I.R.S. employer
identification number
A.S.V., Inc.
Minnesota
41-1459569
CMI Terex Corporation
Oklahoma
73-0519810
Fantuzzi Noell USA, Inc.
Illinois
36-3865231
Genie Financial Services, Inc.
Washington
91-1712115
Genie Holdings, Inc.
Washington
91-1666966
Genie Industries, Inc.
Washington
91-0815489
Genie International, Inc.
Washington
91-1975116
GFS National, Inc.
Washington
91-1959375
Loegering Mfg. Inc.
North Dakota
45-0310755
Powerscreen Holdings USA Inc.
Delaware
61-1265609
Powerscreen International LLC
Delaware
61-1340898
Powerscreen North America Inc.
Delaware
61-1340891
Powerscreen USA, LLC
Kentucky
31-1515625
Schaeff Incorporated
Iowa
42-1097891
Schaeff of North America, Inc.
Delaware
75-2852436
Terex Advance Mixer, Inc.
Delaware
06-1444818
Terex Aerials, Inc.
Wisconsin
39-1028686
Terex Financial Services, Inc.
Delaware
45-0497096
Terex South Dakota, Inc.
South Dakota
41-1603748
Terex USA, LLC
Delaware
75-3262430
Terex Utilities, Inc.
Oregon
93-0557703
Terex Washington, Inc.
Washington
91-1499412




Forward-Looking Information

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

our business is cyclical and weak general economic conditions affect the sales of our products and financial results;
our ability to successfully integrate acquired businesses, including Terex Material Handling & Port Solutions AG;
the 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 very competitive and is affected by our cost structure, pricing, product initiatives and other actions taken by competitors;
our ability to timely manufacture and deliver products to customers;
our retention of key management personnel;
the financial condition of suppliers and customers, and their continued access to capital;
our providing financing and credit support for some of our customers;
we may experience losses in excess of recorded reserves;
the carrying value of our goodwill and other indefinite-lived intangible assets could become impaired;
our ability to obtain parts and components from suppliers on a timely basis at competitive prices;
our business is global and subject to changes in exchange rates between currencies, 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, patent claims, class action lawsuits and other liabilities;
our ability to comply with an injunction and related obligations resulting from the settlement of an investigation by the United States Securities and Exchange Commission (“SEC”);
our implementation of a global enterprise system and its performance; and
other factors.

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

2



 
 
Page No.
 
 
 
 
 
 
 
TEREX CORPORATION AND SUBSIDIARIES
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements – September 30, 2013                                                                                                                            
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                          
Controls and Procedures                                                                                                                        
 
 
 
 
 
 
 
 
 
 
 
 

3



PART I.
FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
(in millions, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales
$
1,810.6

 
$
1,822.0

 
$
5,441.9

 
$
5,652.9

Cost of goods sold
(1,423.5
)
 
(1,443.4
)
 
(4,370.8
)
 
(4,514.9
)
Gross profit
387.1

 
378.6

 
1,071.1

 
1,138.0

Selling, general and administrative expenses
(246.2
)
 
(246.7
)
 
(776.5
)
 
(767.3
)
Income (loss) from operations
140.9

 
131.9

 
294.6

 
370.7

Other income (expense)
 
 
 

 
 
 
 
Interest income
1.5

 
1.3

 
5.0

 
6.4

Interest expense
(31.8
)
 
(42.6
)
 
(96.6
)
 
(130.0
)
Loss on early extinguishment of debt

 
(49.9
)
 
(5.2
)
 
(52.3
)
Other income (expense) – net 
(1.2
)
 
(3.6
)
 
(6.1
)
 
(2.7
)
Income (loss) from continuing operations before income taxes
109.4

 
37.1

 
191.7

 
192.1

(Provision for) benefit from income taxes
(20.8
)
 
(8.8
)
 
(64.2
)
 
(61.7
)
Income (loss) from continuing operations
88.6

 
28.3

 
127.5

 
130.4

Income (loss) from discontinued operations – net of tax
5.5

 

 
5.5

 
2.5

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

 
2.6

 
2.3

Net income (loss)
93.7

 
28.3

 
135.6

 
135.2

Net loss (income) attributable to noncontrolling interest
0.7

 
1.9

 
4.0

 
3.9

Net income (loss) attributable to Terex Corporation
$
94.4

 
$
30.2

 
$
139.6

 
$
139.1

Amounts attributable to Terex Corporation common stockholders:
 
 
 

 
 
 
 
Income (loss) from continuing operations
$
89.3

 
$
30.2

 
$
131.5

 
$
134.3

Income (loss) from discontinued operations – net of tax
5.5

 

 
5.5

 
2.5

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

 
2.6

 
2.3

Net income (loss) attributable to Terex Corporation
$
94.4

 
$
30.2

 
$
139.6

 
$
139.1

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

 
 
 
 
Income (loss) from continuing operations
$
0.80

 
$
0.27

 
$
1.19

 
$
1.22

Income (loss) from discontinued operations – net of tax
0.05

 

 
0.05

 
0.02

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

 

 
0.02

 
0.02

Net income (loss) attributable to Terex Corporation
$
0.85

 
$
0.27

 
$
1.26

 
$
1.26

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

 
 
 
 
Income (loss) from continuing operations
$
0.77

 
$
0.27

 
$
1.13

 
$
1.19

Income (loss) from discontinued operations – net of tax
0.04

 

 
0.05

 
0.02

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

 

 
0.02

 
0.02

Net income (loss) attributable to Terex Corporation
$
0.81

 
$
0.27

 
$
1.20

 
$
1.23

Weighted average number of shares outstanding in per share calculation
 

 
 

 
 
 
 
Basic
111.3

 
110.5

 
111.1

 
110.3

Diluted
116.2

 
113.3

 
116.0

 
113.2

Comprehensive income (loss)
$
183.3

 
$
71.8

 
$
113.5

 
$
152.1

Comprehensive loss (income) attributable to noncontrolling interest
0.7

 
1.9

 
4.0

 
3.9

Comprehensive income (loss) attributable to Terex Corporation
$
184.0

 
$
73.7

 
$
117.5

 
$
156.0


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

4



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in millions, except par value)

 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
370.6

 
$
678.0

Trade receivables (net of allowance of $46.3 and $38.8 at September 30, 2013 and
     December 31, 2012, respectively)
1,164.5

 
1,077.7

Inventories
1,742.9

 
1,715.6

Other current assets
325.5

 
326.1

Total current assets
3,603.5

 
3,797.4

Non-current assets
 
 
 

Property, plant and equipment – net
793.4

 
813.3

Goodwill
1,241.9

 
1,245.3

Intangible assets – net
448.9

 
474.4

Other assets
401.8

 
415.8

Total assets
$
6,489.5

 
$
6,746.2

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 

 
 

Notes payable and current portion of long-term debt
$
90.5

 
$
83.8

Trade accounts payable
709.8

 
635.5

Accrued compensation and benefits
242.4

 
226.2

Accrued warranties and product liability
96.5

 
97.6

Customer advances
312.1

 
312.9

Other current liabilities
376.6

 
352.8

Total current liabilities
1,827.9

 
1,708.8

Non-current liabilities
 
 
 

Long-term debt, less current portion
1,815.4

 
2,014.9

Retirement plans
429.0

 
430.7

Other non-current liabilities
239.4

 
313.6

Total liabilities
4,311.7

 
4,468.0

Commitments and contingencies


 


Redeemable noncontrolling interest
57.8

 
246.9

Stockholders’ equity
 

 
 

Common stock, $.01 par value – authorized 300.0 shares; issued 123.6 and 122.9 shares at
    September 30, 2013 and December 31, 2012, respectively
1.2

 
1.2

Additional paid-in capital
1,231.8

 
1,260.7

Retained earnings
1,607.3

 
1,467.7

Accumulated other comprehensive income (loss)
(146.2
)
 
(124.1
)
Less cost of shares of common stock in treasury – 13.1 and 13.0 shares at September 30, 2013 and
     December 31, 2012, respectively
(599.9
)
 
(597.8
)
Total Terex Corporation stockholders’ equity
2,094.2

 
2,007.7

Noncontrolling interest
25.8

 
23.6

Total stockholders’ equity
2,120.0

 
2,031.3

Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
6,489.5

 
$
6,746.2


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

5



TEREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in millions)
 
Nine Months Ended
September 30,
 
2013
 
2012
Operating Activities of Continuing Operations
 
 
 
Net income
$
135.6

 
$
135.2

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

 
 

Discontinued operations
(8.1
)
 
(4.8
)
Depreciation and amortization
117.6

 
112.3

Deferred taxes
(6.1
)
 
9.7

(Gain) loss on sale of assets
4.4

 
(8.8
)
Loss on early extinguishment of debt
5.2

 
52.3

Stock-based compensation expense
30.0

 
22.1

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

 
 

Trade receivables
(95.9
)
 
19.3

Inventories
(114.3
)
 
(103.1
)
Trade accounts payable
79.0

 
(13.1
)
Customer advances
(3.3
)
 
41.5

Other assets and liabilities
(35.8
)
 
(174.9
)
Other operating activities, net
54.8

 
51.1

Net cash provided by (used in) operating activities of continuing operations
163.1

 
138.8

Investing Activities of Continuing Operations
 

 
 

Capital expenditures
(60.9
)
 
(56.1
)
Other investments

 
(14.1
)
Proceeds from sale of assets
45.2

 
31.3

Other investing activities, net
(0.7
)
 
(5.2
)
Net cash (used in) provided by investing activities of continuing operations
(16.4
)
 
(44.1
)
Financing Activities of Continuing Operations
 

 
 

Repayments of debt
(503.5
)
 
(654.5
)
Proceeds from issuance of debt
293.6

 
339.0

Purchase of noncontrolling interest
(228.1
)
 
(3.2
)
Distributions to noncontrolling interest
(18.4
)
 
(4.9
)
Other financing activities, net
8.5

 
(3.2
)
Net cash provided by (used in) financing activities of continuing operations
(447.9
)
 
(326.8
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(6.2
)
 
0.6

Net Increase (Decrease) in Cash and Cash Equivalents
(307.4
)
 
(231.5
)
Cash and Cash Equivalents at Beginning of Period
678.0

 
774.1

Cash and Cash Equivalents at End of Period
$
370.6

 
$
542.6


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

6



TEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(unaudited)
NOTE A – BASIS OF PRESENTATION

Basis of Presentation.  The accompanying unaudited Condensed Consolidated Financial Statements of Terex Corporation and subsidiaries as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 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 of the 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, 2012 has been derived from and should be read in conjunction with the audited Consolidated Balance Sheet as of that date.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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

In the opinion of management, all adjustments considered necessary for fair statement of these interim financial statements have been made.  Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature.  Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of results that may be expected for the year ending December 31, 2013.

Cash and cash equivalents at September 30, 2013 and December 31, 2012 include $13.6 million and $12.4 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.

Reclassification. Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Subsequent to December 31, 2012, the Company realigned certain operations, which were formerly included in the Aerial Work Platforms (“AWP”) and Material Handling & Port Solutions (“MHPS”) segments, in an effort to strengthen its ability to service customers and to recognize certain organizational efficiencies and are now included in the Cranes segment. See Note B – “Business Segment Information.”

Recent Accounting Pronouncements.  In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. In January 2013 the FASB issued ASU 2013-1, “Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities.” ASU 2013-1 limits the scope of ASU 2011-11 to disclosures about offsetting assets and liabilities related to derivatives accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Adoption of this guidance did not have a significant impact on the determination or reporting of the Company’s financial results.

In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” (“ASU 2012-02”). ASU 2012-02 amends the guidance in the ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment.  Under ASU 2012-02, an entity has the option of performing a qualitative assessment of whether it is more likely than not that the fair value of an entity’s indefinite-lived intangible asset is less than its carrying amount before calculating the fair value of the asset. If the conclusion is that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company would be required to calculate the fair value of the asset. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Adoption of this guidance did not have a significant impact on the determination or reporting of the Company’s financial results.

7




In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (“ASU 2013-02”). ASU 2013-02 adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). ASU 2013-02 intends to help the Company improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in the Company’s financial statements. ASU 2013-02 does not amend any existing requirements for reporting net income or OCI in the Company’s financial statements. ASU 2013-02 is effective for annual and interim reporting periods beginning after December 15, 2012. Adoption of this guidance did not have a significant impact on the determination or reporting of the Company’s financial results.

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (“ASU 2013-05”). The objective of ASU 2013-05 is to clarify the applicable guidance for the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU 2013-05 is effective for annual and interim reporting periods beginning after December 15, 2013 with early adoption permitted. Adoption of this guidance is not expected to have a significant impact on the determination or reporting of the Company’s financial results.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” (“ASU 2013-11”), an amendment to ASC 740, “Income Taxes.” ASU 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax benefit is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be netted with the deferred tax asset. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. Adoption of this guidance is not expected to have a significant impact on the determination or reporting of the Company’s financial results.

Accounts Receivable and Allowance for Doubtful Accounts.  Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable.  The Company determines the allowance based on historical customer review and current financial conditions.  The Company reviews its allowance for doubtful accounts at least quarterly.  Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.  All other balances are reviewed on a pooled basis by type of receivable.  Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered.  There can be no assurance that the Company’s historical accounts receivable collection experience will be indicative of future results.  The Company has off-balance sheet credit exposure related to guarantees provided to financial institutions as disclosed in Note M – “Litigation and Contingencies.”  Substantially all receivables were trade receivables at September 30, 2013 and December 31, 2012.

Impairment of Long-Lived Assets. The Company’s policy is to assess the realizability of its long-lived assets, including intangible assets, and to evaluate such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (or group of assets) may not be recoverable.  Impairment is determined to exist if the fair value based on the estimated future undiscounted cash flows are less than the carrying value.  Future cash flow projections include assumptions for future sales levels and the level of working capital needed to support each business.  The Company uses data developed by business segment management as well as macroeconomic data in making these calculations.  The amount of any impairment then recognized would be calculated as the difference between estimated fair value and the carrying value of the asset. The Company recognized $2.3 million and $2.4 million of asset impairments for the three and nine months ended September 30, 2013, respectively. The Company recognized $0.2 million and $1.4 million of asset impairments for the three and nine months ended September 30, 2012, respectively.

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

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

8



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.

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

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

The following table summarizes the changes in the consolidated product warranty liability (in millions):
 
Nine Months Ended
 
September 30, 2013
Balance at beginning of period
$
110.4

Accruals for warranties issued during the period
58.0

Changes in estimates
0.6

Settlements during the period
(63.9
)
Foreign exchange effect/other
0.7

Balance at end of period
$
105.8


NOTE B – BUSINESS SEGMENT INFORMATION

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

The AWP segment designs, manufactures, markets and services aerial work platform equipment, telehandlers, light towers and bridge inspection equipment as well as their related replacement parts and components. 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 Construction segment designs, manufactures and markets heavy and compact construction equipment, roadbuilding equipment, as well as their related replacement parts and components. Customers use these products in construction and infrastructure projects, in building roads and bridges, in quarrying and mining operations and for material handling applications.

In 2013, the Company divested its Roadbuilding operations in Brazil and most of its Roadbuilding operations in Oklahoma City.

The Cranes segment designs, manufactures, markets, services and refurbishes rough terrain cranes, all terrain cranes, truck cranes, tower cranes, lattice boom crawler cranes, lattice boom truck cranes, utility equipment and truck-mounted cranes (boom trucks), as well as their related replacement parts and components. Customers use these products 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 segment also provides service and support for industrial cranes and aerial products in North America.


9



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

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

The Company assists customers in renting, leasing and acquiring its products through Terex Financial Services (“TFS”). TFS uses its equipment financing experience to provide financing solutions to the Company’s customers.

Subsequent to December 31, 2012, the Company realigned certain operations in an effort to strengthen its ability to service customers and to recognize certain organizational efficiencies. The Company’s Utilities business, formerly part of its AWP segment, is now consolidated within its Cranes segment. The Company’s Crane America Services business, formerly part of its MHPS segment, and its legacy AWP services business, formerly part of its AWP segment, are now consolidated within the Company’s Cranes segment and are run together as the Company’s Terex Services North America business. The historical results have been reclassified to give effect to these changes.

Business segment information is presented below (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net Sales
 
 
 
 
 
 
 
AWP
$
533.3

 
$
437.7

 
$
1,649.0

 
$
1,374.1

Construction
241.7

 
290.4

 
796.3

 
1,042.3

Cranes
453.0

 
516.1

 
1,445.1

 
1,476.4

MHPS
460.6

 
444.9

 
1,169.6

 
1,325.8

MP
147.7

 
149.9

 
478.3

 
509.4

Corporate and Other / Eliminations
(25.7
)
 
(17.0
)
 
(96.4
)
 
(75.1
)
Total
$
1,810.6

 
$
1,822.0

 
$
5,441.9

 
$
5,652.9

Income (loss) from Operations
 
 
 

 
 
 
 
AWP
$
80.7

 
$
57.9

 
$
254.3

 
$
175.2

Construction
(4.3
)
 
(8.3
)
 
(22.4
)
 
1.3

Cranes
28.9

 
51.5

 
84.8

 
114.1

MHPS
18.5

 
17.4

 
(67.8
)
 
28.8

MP
18.9

 
15.2

 
55.1

 
59.1

Corporate and Other / Eliminations
(1.8
)
 
(1.8
)
 
(9.4
)
 
(7.8
)
Total
$
140.9

 
$
131.9

 
$
294.6

 
$
370.7



10



 
September 30,
2013
 
December 31,
2012
Identifiable Assets
 
 
 
AWP
$
909.5

 
$
835.8

Construction
1,120.4

 
1,124.7

Cranes
2,045.9

 
1,912.5

MHPS
2,939.0

 
2,946.4

MP
978.3

 
982.0

Corporate and Other / Eliminations
(1,503.6
)
 
(1,055.2
)
Total
$
6,489.5

 
$
6,746.2


NOTE C – INCOME TAXES

During the three months ended September 30, 2013, the Company recognized income tax expense of $20.8 million on income of $109.4 million, an effective tax rate of 19.0% as compared to income tax expense of $8.8 million on income of $37.1 million, an effective tax rate of 23.7%, for three months ended September 30, 2012.  The lower effective tax rate for the three months ended September 30, 2013 was primarily due to reductions in the provision for uncertain tax positions partially offset by the greater impact that income tax benefit items had in the three months ended September 30, 2012 due to the substantially lower profit before tax in that period.

During the nine months ended September 30, 2013, the Company recognized income tax expense of $64.2 million on income of $191.7 million, an effective tax rate of 33.5% as compared to income tax expense of $61.7 million on income of $192.1 million, an effective tax rate of 32.1%, for the nine months ended September 30, 2012.  The higher effective tax rate for the nine months ended September 30, 2013 was primarily due to losses that did not produce tax benefits having a greater impact in the current period than in the prior year period.

The Company and its subsidiaries conduct business globally and file income tax returns in U.S. federal, state and foreign jurisdictions, as required. From a tax perspective, major jurisdictions where the Company is often subject to examination by tax authorities include Australia, Germany, Italy, the United Kingdom and the U.S. Currently, various entities of the Company are under audit in Germany, Italy, the United Kingdom, the U.S. and elsewhere. With few exceptions, including certain subsidiaries in Germany that are under audit, the statute of limitations for the Company and its subsidiaries has, as a practical matter, expired for tax years prior to 2010.

The Company assesses uncertain tax positions for recognition, measurement and effective settlement. Where the Company has determined that its tax return filing position does not satisfy the more likely than not recognition threshold of ASC 740, “Income Taxes,” it has recorded no tax benefits. Where the Company has determined that a tax return filing position is more likely than not to be sustained, the Company has measured and recorded the largest amount of tax benefit greater than 50% likely to be realized. The Company recognizes accrued interest and penalties, if any, related to income taxes as (Provision for) benefit from income taxes in its Condensed Consolidated Statement of Income. The Company recorded an income tax benefit of $22.9 million for the three months ended September 30, 2013, from a net reduction in the provision for uncertain tax positions.

The Company evaluates each reporting period whether it is reasonably possible that material changes to its uncertain tax position liability could occur in the next twelve months. Changes may occur as a result of uncertain tax positions being considered effectively settled, re-measured, paid, acquired or divested, as the result of a change in the accounting rules, tax law or judicial decision, or due to the expiration of the relevant statute of limitations. It is not possible to predict which uncertain tax positions, if any, may be challenged by tax authorities. The timing and impact of income tax audits and their resolution is highly uncertain. New facts, laws and judicial decisions can change assessments concerning technical merit and measurement. The amounts of, or periods in which, changes to reserves for uncertain tax positions will occur is not generally ascertainable.


11



The Company evaluates the net realizable value of its deferred tax assets each reporting period. The Company must consider all objective evidence, both positive and negative, in evaluating the future realization of its deferred tax assets, including tax loss carry forwards. Historical information is supplemented by currently available information about future tax years. Realization requires sufficient taxable income to use deferred tax assets. The Company records a valuation allowance for each deferred tax asset for which realization is not assessed as more likely than not. In particular, the assessment by the Company that deferred tax assets will be realized consider available evidence including: (i) estimates of future taxable income generated from various sources, including the continued recovery of operations in the United Kingdom and anticipated future recovery in Brazil, (ii) the reversal of taxable temporary differences, (iii) the anticipated combination of certain businesses in the United Kingdom in the future, which were weighed against losses in the United Kingdom in late 2008 through 2010 and, (iv) 2011 losses in Brazil. If the current estimates of future taxable income are not realized or future estimates of taxable income are reduced, then the assessment regarding the realization of deferred tax assets in certain jurisdictions, including Brazil and the United Kingdom, could change and have a material impact on the statement of income.

NOTE D – DISCONTINUED OPERATIONS

On February 19, 2010, the Company completed the disposition of its Mining business to Bucyrus International, Inc. In 2010, the Company sold all of its Atlas heavy construction equipment and knuckle-boom cranes businesses (collectively, “Atlas”) to Atlas Maschinen GmbH (“Atlas Maschinen”).

The following amounts related to the discontinued operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Statement of Comprehensive Income (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales
$

 
$

 
$

 
$

Loss from discontinued operations before income taxes
$

 
$

 
$

 
$

(Provision for) benefit from income taxes
5.5

 

 
5.5

 
2.5

Income (loss) from discontinued operations – net of tax
$
5.5

 
$

 
$
5.5

 
$
2.5

 
 
 
 
 
 
 
 
Gain (loss) on disposition of discontinued operations
$

 
$

 
$
3.5

 
$
2.7

(Provision for) benefit from income taxes
(0.4
)
 

 
(0.9
)
 
(0.4
)
Gain (loss) on disposition of discontinued operations – net of tax
$
(0.4
)
 
$

 
$
2.6

 
$
2.3


During the nine months ended September 30, 2013 and 2012, the Company recorded pre-tax gains of $3.5 million and $2.7 million, respectively, related to the sale of its Atlas business based on contractually obligated earnings based payments from the purchaser. The Company recorded a cumulative net loss on the sale of Atlas of approximately $11.0 million, net of tax, through September 30, 2013. During the three and nine months ended September 30, 2013, a tax benefit of $5.5 million was recognized in discontinued operations for the resolution of uncertain tax positions for certain pre-divestiture years in the Mining business. During the nine months ended September 30, 2012, a tax benefit of $2.5 million was recognized in discontinued operations for the resolution of uncertain tax positions for certain pre-divestiture years in the Mining business. During the three and nine months ended September 30, 2013 the company recorded a $0.4 million tax provision related to the sale of the Company’s Mining business. No assets and liabilities were remaining in discontinued operations entities in the Condensed Consolidated Balance Sheet as of September 30, 2013 and December 31, 2012.

12



NOTE E – EARNINGS PER SHARE
(in millions, except per share data)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) from continuing operations attributable to Terex Corporation common stockholders
$
89.3

 
$
30.2

 
$
131.5

 
$
134.3

Income (loss) from discontinued operations–net of tax
5.5

 

 
5.5

 
2.5

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

 
2.6

 
2.3

Net income (loss) attributable to Terex Corporation
$
94.4

 
$
30.2

 
$
139.6

 
$
139.1

Basic shares:
 
 
 

 
 
 
 
Weighted average shares outstanding
111.3

 
110.5

 
111.1

 
110.3

Earnings per share – basic:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.80

 
$
0.27

 
$
1.19

 
$
1.22

Income (loss) from discontinued operations–net of tax
0.05

 

 
0.05

 
0.02

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

 

 
0.02

 
0.02

Net income (loss) attributable to Terex Corporation
$
0.85

 
$
0.27

 
$
1.26

 
$
1.26

Diluted shares:
 

 
 

 
 
 
 
Weighted average shares outstanding
111.3

 
110.5

 
111.1

 
110.3

Effect of dilutive securities:
 

 
 

 
 
 
 
Stock options, restricted stock awards and convertible notes
4.9

 
2.8

 
4.9

 
2.9

Diluted weighted average shares outstanding
116.2

 
113.3

 
116.0

 
113.2

Earnings per share – diluted:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.77

 
$
0.27

 
$
1.13

 
$
1.19

Income (loss) from discontinued operations–net of tax
0.04

 

 
0.05

 
0.02

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

 

 
0.02

 
0.02

Net income (loss) attributable to Terex Corporation
$
0.81

 
$
0.27

 
$
1.20

 
$
1.23


The following table provides information to reconcile amounts reported on the Condensed Consolidated Statement of Comprehensive Income to amounts used to calculate earnings per share attributable to Terex Corporation common stockholders (in millions):
Reconciliation of Amounts Attributable to Common Stockholders
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Income (loss) from continuing operations
$
88.6

 
$
28.3

 
$
127.5

 
$
130.4

Noncontrolling interest attributed to (income) loss from continuing operations
0.7

 
1.9

 
4.0

 
3.9

Income (loss) from continuing operations attributable to common stockholders
$
89.3

 
$
30.2

 
$
131.5

 
$
134.3



13



Weighted average options to purchase 0.2 million of the Company’s common stock, par value $0.01 per share (“Common Stock”), were outstanding during each of the three and nine months ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted shares as the effect would be anti-dilutive.  Weighted average restricted stock awards of 0.4 million shares were outstanding during the three and nine months ended September 30, 2013, respectively, but were not included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not yet achieved for awards contingent upon performance. Weighted average restricted stock awards of 0.3 million shares were outstanding during the three and nine months ended September 30, 2012, respectively, but were not included in the computation of diluted shares because the effect would be anti-dilutive or performance targets were not yet achieved for awards contingent upon performance. ASC 260, “Earnings per Share,” requires that employee stock options and non-vested restricted shares granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.  The Company includes the impact of pro forma deferred tax assets in determining the amount of tax benefits for potential windfalls and shortfalls (the differences between tax deductions and book expense) in this calculation.

The 4% Convertible Senior Subordinated Notes due 2015 (the “4% Convertible Notes”) described in Note K – “Long-Term Obligations” are dilutive to the extent the volume-weighted average price of the Common Stock for the period evaluated was greater than $16.25 per share and earnings from continuing operations were positive. The volume-weighted average price of the Common Stock was greater than $16.25 per share for each of the three and nine months ended September 30, 2013 and 2012. The number of shares that were contingently issuable for the 4% Convertible Notes during the three and nine months ended September 30, 2013 was 3.8 million. The number of shares that were contingently issuable for the 4% Convertible Notes during the three and nine months ended September 30, 2012 was 2.2 million. In August 2012, the Company repurchased approximately 25% of the principal amount outstanding of the 4% Convertible Notes. See Note K – “Long-Term Obligations.”

NOTE F – INVENTORIES

Inventories consist of the following (in millions):
 
September 30,
2013
 
December 31,
2012
Finished equipment
$
468.4

 
$
485.4

Replacement parts
190.4

 
201.4

Work-in-process
586.2

 
507.4

Raw materials and supplies
497.9

 
521.4

Inventories
$
1,742.9

 
$
1,715.6


Reserves for lower of cost or market value, excess and obsolete inventory were $149.1 million and $135.6 million at September 30, 2013 and December 31, 2012, respectively.

NOTE G – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment – net consist of the following (in millions):
 
September 30,
2013
 
December 31,
2012
Property
$
120.6

 
$
123.0

Plant
409.9

 
396.9

Equipment
753.0

 
713.3

Property, plant and equipment – gross 
1,283.5

 
1,233.2

Less: Accumulated depreciation
(490.1
)
 
(419.9
)
Property, plant and equipment – net
$
793.4

 
$
813.3



14



NOTE H – GOODWILL AND INTANGIBLE ASSETS, NET

An analysis of changes in the Company’s goodwill by business segment is as follows (in millions):
 
AWP
 
Construction
 
Cranes
 
MHPS
 
MP
 
Total
Balance at December 31, 2012, gross
$
139.9

 
$
438.8

 
$
233.9

 
$
732.8

 
$
204.7

 
$
1,750.1

Accumulated impairment
(38.6
)
 
(438.8
)
 
(4.2
)
 

 
(23.2
)
 
(504.8
)
Balance at December 31, 2012, net (1)
101.3

 

 
229.7

 
732.8

 
181.5

 
1,245.3

Foreign exchange effect and other
0.3

 

 
0.5

 
(3.6
)
 
(0.6
)
 
(3.4
)
Balance at September 30, 2013, gross
140.2


438.8

 
234.4

 
729.2

 
204.1

 
1,746.7

Accumulated impairment
(38.6
)
 
(438.8
)
 
(4.2
)
 

 
(23.2
)
 
(504.8
)
Balance at September 30, 2013, net
$
101.6

 
$

 
$
230.2

 
$
729.2

 
$
180.9

 
$
1,241.9

(1)
Includes a $10.8 million net reclassification of goodwill from AWP to Cranes and a net $20.5 million reclassification from MHPS to Cranes related to segment realignment. See Note A – “Basis of Presentation.”

Intangible assets, net were comprised of the following as of September 30, 2013 and December 31, 2012 (in millions):
 
 
 
September 30, 2013
 
December 31, 2012
 
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
8
 
$
88.6

 
$
46.3

 
$
42.3

 
$
87.9

 
$
36.5

 
$
51.4

Customer Relationships
15
 
353.5

 
98.2

 
255.3

 
353.5

 
78.9

 
274.6

Land Use Rights
57
 
18.2

 
1.4

 
16.8

 
17.0

 
1.1

 
15.9

Other
7
 
52.0

 
39.3

 
12.7

 
51.9

 
38.1

 
13.8

Total definite-lived intangible assets
 
 
$
512.3

 
$
185.2

 
$
327.1

 
$
510.3

 
$
154.6

 
$
355.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
 
$
121.8

 
 
 
 
 
$
118.7

 
 
 
 
Total indefinite-lived intangible assets
 
 
$
121.8

 
 
 
 
 
$
118.7

 

 
 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2013
 
2012
 
2013
 
2012
Aggregate Amortization Expense
$
10.4

 
10.3

 
$
32.3

 
32.0


Estimated aggregate intangible asset amortization expense (in millions) for the next five years is as follows:
2013
$
37.5

2014
$
36.2

2015
$
35.0

2016
$
33.5

2017
$
29.7


NOTE I – DERIVATIVE FINANCIAL INSTRUMENTS

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


15



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

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

Changes in the fair value of derivatives designated as fair value hedges are recognized in earnings as offsets to changes in fair value of exposures being hedged.  The change in fair value of derivatives designated as cash flow hedges are deferred in Accumulated other comprehensive income and are recognized in earnings as hedged transactions occur.  Contracts deemed ineffective are recognized in earnings immediately.

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

The Company is also a party to currency exchange forward contracts that generally mature within one year to manage its exposure to changing currency exchange rates.  At September 30, 2013, the Company had $536.3 million notional amount of currency exchange forward contracts outstanding, most of which mature on or before September 30, 2014.  The fair market value of these contracts at September 30, 2013 was a net gain of $4.8 million.  At September 30, 2013, $454.9 million notional amount ($4.5 million of fair value gains) of these forward contracts have been designated as, and are effective as, cash flow hedges of forecasted and specifically identified transactions.  During 2013 and 2012, the Company recorded the change in fair value for these cash flow hedges to Accumulated other comprehensive income and reclassified to earnings a portion of the deferred gain or loss from Accumulated other comprehensive income as the hedged transactions occurred and were recognized in earnings.

The Company records the interest rate swap and foreign exchange contracts at fair value on a recurring basis.  There were no interest rate swaps recorded as of September 30, 2013 and December 31, 2012. The foreign exchange contracts designated as hedging instruments are categorized under Level 1 of the ASC 820 hierarchy and are recorded at September 30, 2013 and December 31, 2012 as a net asset of $4.8 million and net liability of $0.4 million, respectively.  See Note A – “Basis of Presentation,” for an explanation of the ASC 820 hierarchy. The fair values of these foreign exchange forward contracts are based on quoted forward foreign exchange prices at the reporting date. The fair values of these contracts are based on the contract rate specified at the anticipated contracts’ settlement date and quoted forward foreign exchange prices at the reporting date.

The Company uses forward foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates on third party and intercompany forecasted transactions. Certain of these contracts have not been designated as hedging instruments. The foreign exchange contracts are accounted for as financial assets or financial liabilities and measured at fair value at the balance sheet date and are categorized under Level 1 of the ASC 820 hierarchy. The fair values of these foreign exchange forward contracts are based on quoted forward foreign exchange prices at the reporting date. Changes in the fair value of derivative financial instruments are recognized as gains or losses in Cost of goods sold or Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income.


16



The following table provides the location and fair value amounts of derivative instruments designated as hedging instruments that are reported in the Condensed Consolidated Balance Sheet (in millions):
Asset Derivatives
Balance Sheet Account
September 30,
2013
 
December 31,
2012
Foreign exchange contracts
Other current assets
$
10.3

 
$
5.2

Liability Derivatives
 
 

 
 

Foreign exchange contracts
Other current liabilities
$
5.5

 
$
5.6

Total Derivatives
 
$
4.8

 
$
(0.4
)

The following table provides the location and fair value amounts of derivative instruments not designated as hedging instruments that are reported in the Condensed Consolidated Balance Sheet (in millions):
Asset Derivatives
Balance Sheet Account
September 30,
2013
 
December 31,
2012
Foreign exchange contracts
Other current assets
$
2.3

 
$
1.2

Liability Derivatives
 
 

 
 

Foreign exchange contracts
Other current liabilities
$
2.0

 
$

Total Derivatives
 
$
0.3

 
$
1.2


The following tables provide the effect of derivative instruments that are designated as hedges in the Condensed Consolidated Statement of Comprehensive Income and AOCI (in millions):
Gain (Loss) Recognized on Derivatives in Income:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Fair Value Derivatives
Location
2013
 
2012
 
2013
 
2012
Interest rate contract
Interest expense
$

 
$
4.7

 
$

 
$
14.0

Gain (Loss) Recognized on Derivatives in AOCI:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Cash Flow Derivatives
 
2013
 
2012
 
2013
 
2012
Foreign exchange
   contracts
 
$
0.6

 
$
1.5

 
$
3.5

 
$
3.3

(Loss) Gain Reclassified from AOCI into Income (Effective):
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Account
 
2013
 
2012
 
2013
 
2012
Cost of goods sold
 
$
1.2

 
$
(1.8
)
 
$
0.6

 
$
(4.7
)
Other income (expense) – net
1.1

 
(1.9
)
 
0.3

 
(6.0
)
Total
 
$
2.3

 
$
(3.7
)
 
$
0.9

 
$
(10.7
)
Gain (Loss) Recognized on Derivatives (Ineffective) in Income:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Account
 
2013
 
2012
 
2013
 
2012
Other income (expense) – net
$
(1.6
)
 
$
2.6

 
$
0.5

 
$
4.9


The following table provides the effect of derivative instruments that are not designated as hedges in the Condensed Consolidated Statement of Comprehensive Income (in millions):
Gain (Loss) Recognized on Derivatives not
   designated as hedges in Income:
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Account
2013
 
2012
 
2013
 
2012
Cost of goods sold
$
0.5

 
$
0.6

 
$
0.8

 
$
(1.4
)
Other income (expense) – net
(0.5
)
 
0.3

 
(1.4
)
 
(0.7
)
Total
$

 
$
0.9

 
$
(0.6
)
 
$
(2.1
)


17



Counterparties to the Company’s interest rate swap agreement and currency exchange forward 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 risk and believes the risk of incurring losses on derivative contracts related to credit risk is unlikely and any losses would be immaterial.

Unrealized net gains (losses), net of tax, included in AOCI are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
2.5

 
$
(1.8
)
 
$
(0.4
)
 
$
(3.6
)
Additional gains (losses) – net
2.4

 
(0.4
)
 
4.3

 
(2.7
)
Amounts reclassified to earnings
(1.8
)
 
1.9

 
(0.8
)
 
6.0

Balance at end of period
$
3.1

 
$
(0.3
)
 
$
3.1

 
$
(0.3
)

The estimated amount of existing gains for derivative contracts recorded in AOCI as of September 30, 2013 that are expected to be reclassified into earnings in the next twelve months is $3.1 million.

NOTE J – RESTRUCTURING AND OTHER CHARGES

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

During the second quarter of 2013, the Company established a restructuring program in the Construction segment related to the distribution organization for Europe, the Middle East and Asia. This program will result in a more decentralized distribution function. The program is expected to cost $1.9 million, result in the reduction of 19 team members and be completed in 2013.

During the second quarter of 2013, the Company established a restructuring program in the MHPS segment resulting in the consolidation of certain production facilities and the redesign of certain back office functions. The program is expected to cost $24.7 million, result in the reduction of 299 team members and be completed in 2014.

During the fourth quarter of 2012, the Company established a restructuring program in the Construction segment related to its compact construction operations in Germany to concentrate the segment on its core processes and competencies. This program resulted in the sale, closure or phase-out of several businesses in Germany. The program is expected to cost $11.7 million, result in the reduction of 250 team members and be completed in 2013.

During the fourth quarter of 2012, the Company established a restructuring program in the MHPS segment to realize cost synergies and to optimize the selling, general and administrative expense structure. This program resulted in the closing of a production site in Spain and outsourcing of the related future production. The program is expected to cost $3.0 million, result in the reduction of 26 team members and is expected to be completed in 2013.

During the second quarter of 2011, the Company established a restructuring program within the MHPS segment to optimize facility utilization and consolidate certain manufacturing operations. These programs are expected to cost $25.6 million and result in the reduction of 206 team members. This program was completed in 2012, except for the payment of certain benefits mandated by governmental agencies.

The following table provides information for all restructuring activities by segment of the amount of expense incurred during the nine months ended September 30, 2013, the cumulative amount of expenses incurred since inception of the programs from 2011 through 2013 and the total amount expected to be incurred (in millions):
 
Amount incurred
during the
nine months ended
September 30, 2013
 
Cumulative amount
incurred through
September 30, 2013
 
Total amount expected to be incurred
Construction
$
2.1

 
$
15.5

 
$
15.5

MHPS
26.0

 
65.5

 
65.5

Total
$
28.1

 
$
81.0

 
$
81.0



18



The following table provides information by type of restructuring activity with respect to the amount of expense incurred during the nine months ended September 30, 2013, the cumulative amount of expenses incurred since inception and the total amount expected to be incurred (in millions):
 
Employee
Termination Costs
 
Facility
Exit Costs
 
Asset Disposal and Other Costs
 
Total
Amount incurred in the nine months ended September 30, 2013
$
27.8

 
$
0.3

 
$

 
$
28.1

Cumulative amount incurred through September 30, 2013
$
64.4

 
$
6.8

 
$
9.8

 
$
81.0

Total amount expected to be incurred
$
64.4

 
$
6.8

 
$
9.8

 
$
81.0


The following table provides a roll forward of the restructuring reserve by type of restructuring activity for the nine months ended September 30, 2013 (in millions):
 
Employee
Termination Costs
 
Facility
Exit Costs
 
Asset Disposal and Other Costs
 
Total
Restructuring reserve at December 31, 2012
$
17.1

 
$
0.2

 
$

 
$
17.3

Restructuring charges
27.8

 
0.3

 

 
28.1

Cash expenditures
(6.2
)
 
(0.5
)
 

 
(6.7
)
Restructuring reserve at September 30, 2013
$
38.7

 
$

 
$

 
$
38.7


NOTE K – LONG-TERM OBLIGATIONS

2011 Credit Agreement

The Company entered into an amended and restated credit agreement (the “2011 Credit Agreement”) on August 5, 2011, with the lenders party thereto and Credit Suisse AG, as administrative agent and collateral agent.

The 2011 Credit Agreement provided the Company with a $460.1 million term loan and a €200.0 million term loan. The term loans are scheduled to mature on April 28, 2017. In addition, the 2011 Credit Agreement provides the Company with a revolving line of credit of up to $500 million. The revolving line of credit consists of $250 million of available domestic revolving loans and $250 million of available multicurrency revolving loans. The revolving lines of credit are scheduled to mature on April 29, 2016.

On October 12, 2012, the Company and its lenders entered into an amendment of the 2011 Credit Agreement (the “Amendment”). As a result of the Amendment, the Company reduced the interest rates on its U.S. Dollar and Euro denominated term loans. Additionally, the Amendment also provided greater flexibility for the Company (i) for complying with its financial covenants, (ii) in issuing additional debt under the credit agreement and (iii) in the Company’s covenant baskets for additional letter of credit facilities, maximum letter of credit exposure, acquired debt, foreign subsidiary debt, general debt, restricted payments, receivables transactions and prepayment of other debt.

The 2011 Credit Agreement allows unlimited incremental commitments, which may be extended at the option of the lenders and can be in the form of revolving credit commitments, term loan commitments, or a combination of both as long as the Company satisfies a secured debt financial ratio contained in the credit facilities.

The 2011 Credit Agreement requires the Company to comply with a number of covenants which include certain financial tests, as defined in the 2011 Credit Agreement. The minimum required levels of the interest coverage ratio shall be 2.5 to 1.00. The maximum permitted levels of the senior secured leverage ratio shall be 2.5 to 1.00.


19



The covenants also limit, in certain circumstances, the Company’s ability to take a variety of actions, including: 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. The 2011 Credit Agreement also contains customary default provisions. The Company’s future compliance with its financial covenants under the 2011 Credit Agreement will depend on its ability to generate earnings and manage its interest expense and senior secured debt effectively. The 2011 Credit Agreement also has various non-financial covenants, both requiring the Company to refrain from taking certain future actions (as described above) and requiring the Company to take certain actions, such as keeping in good standing its corporate existence, maintaining insurance, and providing its bank lending group with financial information on a timely basis.

On May 16, 2013, the Company repaid $110.0 million of the outstanding U.S. dollar denominated term loan and €83.5 million of the outstanding Euro denominated term loan under the 2011 Credit Agreement. As a result of the repayment the Company recorded a loss on early extinguishment of debt of $5.2 million in the Condensed Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2013. During the three months ended September 30, 2013 the Company borrowed €170.0 million on its revolving credit line to fund its purchase of noncontrolling interest shares in Terex Material Handling & Port Solutions AG (“TMHPS AG”). The Company repaid €135.0 million of this borrowing with available cash during the three months ended September 30, 2013.

As of September 30, 2013 and December 31, 2012, the Company had $493.8 million and $710.1 million in U.S. dollar and Euro denominated term loans outstanding under the 2011 Credit Agreement. The Company had €35.0 million in revolving credit amounts outstanding as of September 30, 2013. The Company had no revolving credit amounts outstanding as of December 31, 2012.

The 2011 Credit Agreement incorporates facilities for issuance of letters of credit up to $300 million.  Letters of credit issued under the 2011 Credit Agreement letter of credit facility decrease availability under the $500 million revolving line of credit.  As of September 30, 2013 and December 31, 2012, the Company had letters of credit issued under the 2011 Credit Agreement that totaled $57.0 million and $45.4 million, respectively.  The 2011 Credit Agreement also permits the Company to have additional letter of credit facilities up to $200 million, and letters of credit issued under such additional facilities do not decrease availability under the revolving line of credit.   The Company had letters of credit issued under the additional letter of credit facilities of the 2011 Credit Agreement that totaled $3.1 million as of September 30, 2013 and December 31, 2012.

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 2011 Credit Agreement.  The Company had letters of credit issued under these additional arrangements of $239.2 million and $275.5 million as of September 30, 2013 and December 31, 2012, respectively.

In total, as of September 30, 2013 and December 31, 2012, the Company had letters of credit outstanding of $299.3 million and $324.0 million, respectively.

The Company and certain of its subsidiaries agreed to take certain actions to secure borrowings under the 2011 Credit Agreement.  As a result, the Company and certain of its subsidiaries entered into a Guarantee and Collateral Agreement with Credit Suisse, as collateral agent for the lenders, granting security to the lenders for amounts borrowed under the 2011 Credit Agreement.  The Company is required to (a) pledge as collateral the capital stock of the Company’s material domestic subsidiaries and 65% of the capital stock of certain of the Company’s material foreign subsidiaries, and (b) provide a first priority security interest in, and mortgages on, substantially all of the Company’s domestic assets.

6-1/2% Senior Notes

On March 27, 2012, the Company sold and issued $300 million aggregate principal amount of Senior Notes Due 2020 (“6-1/2% Notes”) at par. The proceeds from these notes were used for general corporate purposes, including cash requirements resulting from the termination of the Demag Cranes AG Credit Agreement. The 6-1/2% Notes are redeemable by the Company beginning in April 2016 at an initial redemption price of 103.250% of principal amount. The 6-1/2% Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries (see Note O – “Consolidating Financial Statements”).


20



6% Senior Notes

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

4% Convertible Senior Subordinated Notes

On June 3, 2009, the Company sold and issued $172.5 million aggregate principal amount of 4% Convertible Notes.  In certain circumstances and during certain periods, the 4% Convertible Notes will be convertible at an initial conversion rate of 61.5385 shares of Common Stock per $1,000 principal amount of convertible notes, equivalent to an initial conversion price of approximately $16.25 per share of Common Stock, subject to adjustment in some events.  Upon conversion, Terex will deliver cash up to the aggregate principal amount of the 4% Convertible Notes to be converted and shares of Common Stock with respect to the remainder, if any, of Terex’s convertible obligation in excess of the aggregate principal amount of the 4% Convertible Notes being converted. The 4% Convertible Notes are jointly and severally guaranteed by certain of the Company’s domestic subsidiaries (see Note O – “Consolidating Financial Statements”).

The Company, as issuer of the 4% Convertible Notes, must separately account for the liability and equity components of the 4% Convertible Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods.  The Company allocated $54.3 million of the $172.5 million principal amount of the 4% Convertible Notes to the equity component, which represents a discount to the debt and will be amortized into interest expense using the effective interest method through June 2015.  The Company recorded a related deferred tax liability of $19.4 million on the equity component. During the third quarter of 2012, the Company purchased approximately 25% of the outstanding 4% Convertible Notes.  The balance of the 4% Convertible Notes was $114.7 million at September 30, 2013.  The Company recognized interest expense of $9.4 million on the 4% Convertible Notes for the nine months ended September 30, 2013.  The interest expense recognized for the 4% Convertible Notes will increase as the discount is amortized using the effective interest method, which accretes the debt balance over its term to $128.8 million at maturity.  Interest expense on the 4% Convertible Notes throughout its term includes 4% annually of cash interest on the maturity balance of $128.8 million plus non-cash interest expense accreted to the debt balance as described.

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 September 30, 2013, as follows (in millions, except for quotes):
 
Book Value
 
Quote
 
FV
6% Notes
$
850.0

 
$
1.01500

 
$
863

4% Convertible Notes (net of discount)
$
114.7

 
$
2.12125

 
$
243

6-1/2% Notes
$
300.0

 
$
1.05250

 
$
316

2011 Credit Agreement Term Loan (net of discount) – USD
$
341.1

 
$
1.00500

 
$
343

2011 Credit Agreement Term Loan (net of discount) – EUR
$
200.1

 
$
1.00750

 
$
202


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 approximates 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.


21



NOTE L – RETIREMENT PLANS AND OTHER BENEFITS

Pension Plans

U.S. Plans – As of September 30, 2013, the Company maintained one qualified defined benefit pension plan covering certain domestic employees (the “Terex Plan”).  Participation in the Terex Plan for all employees has been frozen. Participants are credited with post-freeze service for purposes of determining vesting and retirement eligibility only. The benefits covering salaried employees are based primarily on years of service and employees’ qualifying compensation during the final years of employment. The benefits covering bargaining unit employees are based primarily on years of service and a flat dollar amount per year of service. It is the Company’s policy generally to fund the Terex Plan based on the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Plan assets consist primarily of common stocks, bonds and short-term cash equivalent funds.

The Company maintains a nonqualified Supplemental Executive Retirement Plan (“SERP”). The SERP provides retirement benefits to certain senior executives of the Company. Generally, the SERP provides a benefit based on average salary and bonus earned over a participant’s final five years of employment and years of service reduced by benefits earned under any Company retirement program, excluding salary deferrals and matching contributions. In addition, benefits are reduced by Social Security Primary Insurance Amounts attributable to Company contributions. The SERP is unfunded and participation in the SERP has been frozen. The Company also maintains a non-qualified unfunded defined contribution plan for certain other senior executives who are not eligible for the SERP.

Other Postemployment Benefits

The Company has several non-pension post-retirement benefit programs. The Company provides postemployment health and life insurance benefits to certain former salaried and hourly employees. The health care programs are contributory, with participants’ contributions adjusted annually, and the life insurance plan is noncontributory.

Information regarding the Company’s U.S. plans, including the SERP, was as follows (in millions):
 
Pension Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
0.3

 
$
0.3

 
$
0.8

 
$
0.9

Interest cost
1.7

 
1.8

 
5.1

 
5.4

Expected return on plan assets
(2.3
)
 
(2.2
)
 
(6.8
)
 
(6.6
)
Amortization of prior service cost

 

 
0.1

 
0.1

Amortization of actuarial loss
1.1

 
1.3

 
3.3

 
3.8

Net periodic cost 
$
0.8

 
$
1.2

 
$
2.5

 
$
3.6


 
Other Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Components of net periodic cost:
 
 
 
 
 
 
 
Interest cost
$
0.1

 
$
0.1

 
$
0.2

 
$
0.3

Amortization of actuarial loss

 

 
0.1

 
0.1

Net periodic cost 
$
0.1

 
$
0.1

 
$
0.3

 
$
0.4



22



Non-U.S. Plans – The Company maintains defined benefit plans in France, Germany, India, Switzerland and the United Kingdom for some of its subsidiaries. The United Kingdom plan is a funded plan and the Company funds this plan in accordance with funding regulations in the United Kingdom and a negotiated agreement between the Company and the plan’s trustees. The plans in France, Germany and India are unfunded plans. For the Company’s operations in Austria, Italy and Korea there are mandatory termination indemnity plans providing a benefit that is payable upon termination of employment in substantially all cases of termination. The Company records this obligation based on the mandated requirements. The measure of the current obligation is not dependent on the employees’ future service and therefore is measured at current value.

Information regarding the Company’s non-U.S. plans was as follows (in millions):
 
Pension Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
2.1

 
$
1.5

 
$
6.2

 
$
4.8

Interest cost
4.1

 
4.1

 
12.2

 
12.4

Expected return on plan assets
(1.8
)
 
(1.7
)
 
(5.2
)
 
(5.0
)
Employee contributions
(0.3
)
 
(0.1
)
 
(0.5
)
 
(0.3
)
Amortization of actuarial loss
1.4

 
0.2

 
4.1

 
0.6

Net periodic cost
$
5.5

 
$
4.0

 
$
16.8

 
$
12.5


NOTE M – 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 has recorded and maintains an estimated liability in the amount of management’s estimate of the Company’s aggregate exposure for such retained liabilities and deductibles. For such retained liabilities and deductibles, the Company determines its exposure based on probable loss estimations, which requires such losses to be both probable and the amount or range of probable loss to be estimable. The Company believes it has made appropriate and adequate reserves and accruals for its current contingencies and that the likelihood of a material loss beyond the amounts accrued is remote except for those cases disclosed below where the Company includes a range of the possible loss. The Company believes that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on its consolidated financial position. However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could ultimately result in the Company incurring significant liabilities which could have a material adverse effect on its results of operations.

ERISA, Securities and Stockholder Derivative Lawsuits

The Company has received complaints seeking certification of class action lawsuits in an ERISA lawsuit, a securities lawsuit and a stockholder derivative lawsuit as follows:

A consolidated complaint in the ERISA lawsuit was filed in the United States District Court, District of Connecticut on September 20, 2010 and is entitled In Re Terex Corp. ERISA Litigation.

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

23




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.

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

The Company believes that the allegations in the suits are without merit, and Terex, its directors and the named executives will continue to vigorously defend against them. The Company believes that it has acted, and continues to act, in compliance with federal securities laws and ERISA law with respect to these matters. Accordingly, on November 19, 2010 the Company filed a motion to dismiss the ERISA lawsuit and on January 18, 2011 the Company filed a motion to dismiss the securities lawsuit. These motions are currently pending before the court. The plaintiff in the stockholder derivative lawsuit has agreed with the Company to put this lawsuit on hold pending the outcome of the motion to dismiss in connection with the securities lawsuit.

Powerscreen Patent Infringement Lawsuit

On December 6, 2010, the Company received an adverse jury verdict in the amount of $15.8 million in a patent infringement lawsuit brought against Powerscreen International Distribution Limited and Terex by Metso Minerals Inc. in the United States District Court for the Eastern District of New York. The Company previously reported that it had appealed the verdict and believed that it would ultimately succeed on appeal. On May 14, 2013, the Company prevailed on appeal and the jury verdict and judgment were reversed in the Company’s favor.

Other

The Company’s outstanding letters of credit totaled $299.3 million at September 30, 2013.  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.

Credit Guarantees

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

As of September 30, 2013 and December 31, 2012, the Company’s maximum exposure to such credit guarantees was $54.3 million and $64.3 million, respectively, including total guarantees issued by Terex Cranes Germany GmbH, part of the Cranes segment, of $36.2 million and $45.8 million, respectively; and Genie Holdings, Inc. and its affiliates (“Genie”), part of the AWP segment, of $7.8 million and $9.7 million, respectively. The terms of these guarantees coincide with the financing arranged by the customer and generally do not exceed five years. Given the Company’s position as the original equipment manufacturer and its knowledge of end markets, the Company, when called upon to fulfill a guarantee, generally has been able to liquidate the financed equipment at a minimal loss, if any, to the Company.

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


24



Residual Value and Buyback 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.  The maximum exposure for residual value guarantees issued by the Company totaled $2.6 million and $5.7 million as of September 30, 2013 and December 31, 2012, respectively.  The Company is generally able to mitigate some of the risk associated with these guarantees because the maturity of the guarantees is staggered, limiting the amount of used equipment entering the marketplace at any one time.

The Company from time to time guarantees that it will buy equipment from its customers in the future at a stated price if certain conditions are met by the customer.  Such guarantees are referred to as buyback guarantees.  These conditions generally pertain to the functionality and state of repair of the machine.  As of September 30, 2013 and December 31, 2012, the Company’s maximum exposure pursuant to buyback guarantees was $44.8 million and $73.8 million, respectively, including total guarantees issued by Genie of $9.9 million and $25.3 million, respectively. Included in the September 30, 2013 and December 31, 2012 amounts are guarantees issued by entities in the MHPS segment of $34.3 million and $43.6 million, respectively. The Company is generally able to mitigate some of the risk of these guarantees by staggering the timing of the buybacks and through leveraging its access to the used equipment markets provided by the Company’s original equipment manufacturer status.

The Company has recorded an aggregate liability within Other current liabilities and Other non-current liabilities in the Condensed Consolidated Balance Sheet of approximately $4 million and $6 million as of September 30, 2013 and December 31, 2012, respectively, for the estimated fair value of all guarantees provided.

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

NOTE N – STOCKHOLDERS’ EQUITY

Total non-stockholder changes in equity (comprehensive income) include all changes in equity during a period except those resulting from investments by, and distributions to, stockholders.  The specific components include: net income, deferred gains and losses resulting from foreign currency translation, pension liability adjustments, equity security adjustments and deferred gains and losses resulting from derivative hedging transactions.  Total non-stockholder changes in equity were as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
93.7

 
$
28.3

 
$
135.6

 
$
135.2

Other comprehensive income (loss), net of tax:
 
 
 

 
 
 
 
Cumulative translation adjustment, net of (provision for) benefit from taxes of $1.1, $0.4, $(1.8) and $(2.8) respectively
90.7

 
43.0

 
(26.4
)
 
10.3

Derivative hedging adjustment, net of (provision for) benefit from taxes of $(1.5), $(1.4), $(0.9) and $(2.3) respectively
0.6

 
1.6

 
3.5

 
3.4

Debt and equity securities adjustment, net of (provision for) benefit from taxes of $0, $0.2, $0.6 and $(0.6), respectively

 
(0.4
)
 
(1.9
)
 
1.0

Pension Liability adjustment:
 
 
 
 
 
 
 
Amortization of actuarial (gain) loss, net of provision for (benefit from) taxes of $(0.8), $(5.5), $(2.3) and $(6.2) respectively
1.7

 
(4.0
)
 
5.2

 
(1.7
)
Amortization of prior service cost, net of provision for (benefit from) taxes of $0, $0, $0 and $0 respectively

 

 
0.1

 
0.1

Foreign exchange and other effects, net of (provision for) benefit from taxes of $1.4, $4.5, $1.2 and $4.9, respectively
(3.4
)
 
3.3

 
(2.6
)
 
3.8

Total pension liability adjustment
(1.7
)

(0.7
)
 
2.7

 
2.2

Other comprehensive income (loss)
89.6

 
43.5

 
(22.1
)
 
16.9

Comprehensive income (loss)
183.3

 
71.8

 
113.5

 
152.1

Comprehensive loss (income) attributable to noncontrolling interest
0.7

 
1.9

 
4.0

 
3.9

Comprehensive income (loss) attributable to Terex Corporation
$
184.0

 
$
73.7

 
$
117.5

 
$
156.0


25




Changes in Accumulated Other Comprehensive Income
The table below presents changes in AOCI by component for the three and nine months ended September 30, 2013. All amounts are net of tax (in millions).
 
 
Cumulative Translation Adjustments
Derivative Hedging Adjustments
Unrealized Gains and Losses on Debt and Equity Securities
Pension Liability Adjustments
 
Total
Beginning balance - January 1, 2013
 
$
14.1

$
(0.4
)
$
1.9

(139.7
)
 
$
(124.1
)
Other comprehensive income before reclassifications
 
(75.6
)
(2.9
)

1.7

 
(76.8
)
Amounts reclassified from AOCI (1)
 
(2.6
)
0.6

(1.9
)
1.8

 
$
(2.1
)
Net Other Comprehensive Income (Loss)
 
(78.2
)
(2.3
)
(1.9
)
3.5


(78.9
)
Ending balance - March 31, 2013
 
(64.1
)
(2.7
)

(136.2
)
 
(203.0
)
Other comprehensive income before reclassifications
 
(38.9
)
4.8


(0.9
)
 
(35.0
)
Amounts reclassified from AOCI (1)
 

0.4


1.8

 
2.2

Net Other Comprehensive Income (Loss)
 
(38.9
)
5.2


0.9

 
(32.8
)
Ending balance - June 30, 2013
 
(103.0
)
2.5


(135.3
)