Joy Global Inc.
JOY GLOBAL INC (Form: 10-Q, Received: 09/02/2016 12:59:57)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED July 29, 2016
OR  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD from                      to                      
Commission File number 001-09299
____________________________________________  
JOY GLOBAL INC.
(Exact Name of Registrant as Specified in Its Charter)
 ____________________________________________
Delaware
39-1566457
(State of Incorporation)
(I.R.S. Employer Identification No.)
100 East Wisconsin Ave, Suite 2780
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices) (Zip Code)
(414) 319-8500
(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   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files.)    Yes   ý     No   ¨
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 definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
LARGE ACCELERATED FILER
ý
 
ACCELERATED FILER
¨
 
 
 
 
 
NON-ACCELERATED FILER
¨
 
SMALLER REPORTING COMPANY
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
August 26, 2016
Common Stock, $1 par value
 
98,162,806
 
 
 
 
 



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JOY GLOBAL INC.
FORM 10-Q INDEX
July 29, 2016
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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Forward-Looking Statements

This document contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives, pending acquisitions, expected operating results and other non-historical information, and the assumptions on which those statements are based. These statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are identified by forward-looking terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “indicate,” “intend,” “may be,” “objective,” “plan,” “potential,” “predict,” “should,” “will be” and similar expressions. Forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from any forward-looking statement. In addition, certain market outlook information and other market statistical data contained herein is based on third party sources that we cannot independently verify, but that we believe to be reliable. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements include:

risks and uncertainties associated with our proposed Merger (as defined below) with a wholly owned subsidiary of Komatsu America Corp. (“Komatsu America”), including, without limitation:
our failure to obtain shareholder approval of the Merger;
the possibility that the closing conditions to the Merger may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant a necessary regulatory approval;
delay in closing the Merger or the possibility of non-consummation of the Merger;
the potential for regulatory authorities to require divestitures in connection with the proposed Merger;
the merger agreement's restrictions on the conduct of our business prior to the closing of the Merger;
the occurrence of any event that could give rise to termination of the merger agreement;
the possible adverse effect on our business and the trading price of our common stock if the Merger is not completed in a timely matter or at all;
the risk that shareholder litigation in connection with the Merger may affect the timing or occurrence of the Merger or result in significant costs of defense, indemnification and liability;
risks inherent in the achievement of cost synergies and the timing thereof;
risks related to the disruption of the Merger to us and our management; and
the effect of announcement of the Merger on our ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties.
risks associated with international operations, including regional or country specific conditions and fluctuations in currency exchange rates;
cyclical economic conditions affecting the global mining industry and competitive pressures and changes affecting our industry, including demand for coal, copper, iron ore, oil and other commodities, as well as their substitutes;
general economic conditions, including those affecting the global mining industry;
our ability to develop products to meet the needs of our customers and the global mining industry generally;
changes affecting our customers, including access to capital and regulations pertaining to mine safety, the environment or greenhouse gas emissions;
changes in laws and regulations or their interpretation and enforcement, including with respect to environmental matters;
changes in tax rates;
availability and cost of raw materials and manufactured components from third party suppliers;
our ability to protect our intellectual property;
our ability to hire and retain qualified employees and to avoid labor disputes and work stoppages;
our ability to generate cash from operations, obtain external funding on favorable terms and manage liquidity needs;
changes in credit markets, credit conditions and interest rates;
changes in accounting standards or practices;
interruption, failure or compromise of our information systems; and
challenges arising from acquisitions, including our ability to integrate businesses that we acquire.
In addition to the foregoing factors, the forward-looking statements contained herein are qualified with respect to the risks disclosed elsewhere in this document, including in Item 1A, Risk Factors , Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 3, Quantitative and Qualitative Disclosures about Market Risk, as well as the risks disclosed in Item 1A, Risk Factors , of our annual Report on Form 10-K for our fiscal year ended October 30, 2015 and in other filings that we make with the U.S. Securities and Exchange Commission (the "SEC"). Any or all of these factors could cause our results of operations, financial condition or liquidity for future periods to differ materially from those expressed in or implied by any forward-looking statement. Furthermore, there may be other factors that could cause our actual results to differ materially from the results referred to in any forward-looking statement. We undertake no obligation to update or revise any


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forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events, except as required by law.



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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
JOY GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 

Quarter Ended
 
Nine Months Ended

July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
Net sales
$
586,552

 
$
792,183

 
$
1,714,837

 
$
2,306,579

Cost of sales
454,594

 
574,838

 
1,351,329

 
1,668,633

Product development, selling and administrative expenses
114,377

 
128,553

 
341,433

 
390,089

Restructuring expenses
24,431

 
7,775

 
84,484

 
19,550

Other income
(1,681
)
 
(1,234
)
 
(7,828
)
 
(5,347
)
Operating (loss) income
(5,169
)
 
82,251

 
(54,581
)
 
233,654

Interest income
1,184

 
2,543

 
2,849

 
8,463

Interest expense
(12,291
)
 
(16,219
)
 
(37,651
)
 
(48,368
)
(Loss) income before income taxes
(16,276
)
 
68,575

 
(89,383
)
 
193,749

(Benefit) provision for income taxes
(16,404
)
 
17,239

 
(33,985
)
 
55,930

Net income (loss) from continuing operations
128

 
51,336

 
(55,398
)
 
137,819

Income from discontinued operations, net of income taxes

 

 
5,466

 

Net income (loss)
$
128

 
$
51,336

 
$
(49,932
)
 
$
137,819

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.00

 
$
0.53

 
$
(0.57
)
 
$
1.41

Income from discontinued operations

 

 
0.06

 

Net income (loss)
$
0.00

 
$
0.53

 
$
(0.51
)
 
$
1.41

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.00

 
$
0.52

 
$
(0.57
)
 
$
1.41

Income from discontinued operations

 

 
0.06

 

Net income (loss)
$
0.00

 
$
0.52

 
$
(0.51
)
 
$
1.41

 
 
 
 
 
 
 
 
Dividends per share
$
0.01

 
$
0.20

 
$
0.03

 
$
0.60

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
98,160

 
97,480

 
97,977

 
97,481

Diluted
99,224

 
98,033

 
97,977

 
98,052

See Notes to Condensed Consolidated Financial Statements.

3

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JOY GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands)
 
 
Quarter Ended
 
July 29,
2016
 
July 31,
2015
Net income
$
128

 
$
51,336

Other comprehensive (loss) income:
 
 
 
Change in unrecognized prior service costs on pension and other postretirement obligations, net of taxes of $40 and $16
93

 
34

Derivative instrument fair market value adjustment, net of (benefits) taxes of ($4,485) and $1,312
(4,138
)
 
3,137

Foreign currency translation adjustment on long-term intercompany foreign loans
4,746

 
2,332

Other foreign currency translation adjustment
(13,861
)
 
(42,977
)
Total other comprehensive loss, net of taxes
(13,160
)
 
(37,474
)
Comprehensive (loss) income
$
(13,032
)
 
$
13,862

 
 
 
 
 
Nine Months Ended
 
July 29,
2016
 
July 31,
2015
Net (loss) income
$
(49,932
)
 
$
137,819

Other comprehensive (loss) income:
 
 
 
Change in unrecognized prior service costs on pension and other postretirement obligations, net of (benefits) taxes of ($59) and $48
(42
)
 
103

Derivative instrument fair market value adjustment, net of (benefits) taxes of ($4,850) and $2,791
(4,993
)
 
6,736

Foreign currency translation adjustment on long-term intercompany foreign loans
10,963

 
(1,414
)
Other foreign currency translation adjustment
(13,688
)
 
(151,797
)
Total other comprehensive loss, net of taxes
(7,760
)
 
(146,372
)
Comprehensive loss
$
(57,692
)
 
$
(8,553
)

See Notes to Condensed Consolidated Financial Statements.


4

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JOY GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
July 29,
2016
 
October 30,
2015
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
182,825

 
$
102,885

Accounts receivable, net
647,017

 
812,073

Inventories
896,257

 
1,007,925

Other current assets
91,400

 
145,559

Assets held for sale
33,724

 

Total current assets
1,851,223

 
2,068,442

Property, plant and equipment, net
673,943

 
792,032

Other assets:
 
 
 
Other intangible assets, net
229,703

 
255,710

Goodwill
350,740

 
354,621

Deferred income taxes
202,463

 
118,913

Other non-current assets
125,345

 
122,728

Total other assets
908,251

 
851,972

Total assets
$
3,433,417

 
$
3,712,446

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings, including current portion of long-term obligations
$
32,545

 
$
26,321

Trade accounts payable
231,713

 
275,789

Employee compensation and benefits
76,340

 
90,335

Advance payments and progress billings
197,437

 
229,470

Accrued warranties
41,288

 
52,146

Other accrued liabilities
209,869

 
225,277

Current liabilities of discontinued operations

 
11,582

Total current liabilities
789,192

 
910,920

Long-term obligations
974,247

 
1,060,643

Other liabilities:
 
 
 
Liabilities for postretirement benefits
17,546

 
19,540

Accrued pension costs
160,894

 
175,699

Other non-current liabilities
118,692

 
125,635

Total other liabilities
297,132

 
320,874

Shareholders’ equity
1,372,846

 
1,420,009

Total liabilities and shareholders’ equity
$
3,433,417

 
$
3,712,446

See Notes to Condensed Consolidated Financial Statements.

5

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JOY GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended
 
July 29,
2016
 
July 31,
2015
Operating Activities:
 
 
 
Net (loss) income
$
(49,932
)
 
$
137,819

Income from discontinued operations
(5,466
)
 

Adjustments to continuing operations:
 
 
 
Depreciation and amortization
117,902

 
102,914

Impairment charges
18,962

 

Changes in deferred income taxes
(735
)
 
18,123

Contributions to defined benefit employee pension and postretirement plans
(12,293
)
 
(14,786
)
Defined benefit employee pension and postretirement plan income
(1,745
)
 
(18,649
)
Share-based compensation expense
18,167

 
23,846

Changes in long-term receivables
(11,485
)
 
11,335

Other adjustments to continuing operations, net
14,497

 
2,878

Changes in working capital items attributed to continuing operations:
 
 
 
Accounts receivable, net
156,759

 
198,081

Inventories
84,469

 
(126,730
)
Other current assets
1,719

 
(17,265
)
Trade accounts payable
(39,081
)
 
(60,936
)
Employee compensation and benefits
(12,377
)
 
(55,106
)
Advance payments and progress billings
(30,991
)
 
35,462

Accrued warranties
(8,153
)
 
(9,800
)
Other accrued liabilities
(61,434
)
 
(58,472
)
Net cash provided by operating activities
178,783

 
168,714

Investing Activities:
 
 
 
Acquisition of business, net of cash acquired

 
(114,353
)
Property, plant and equipment acquired
(31,984
)
 
(57,821
)
Proceeds from sale of property, plant and equipment
20,078

 
4,071

Other investing activities, net
184

 
625

Net cash used by investing activities
(11,722
)
 
(167,478
)
Financing Activities:
 
 
 
Common stock issued

 
2,853

Dividends paid
(2,972
)
 
(58,456
)
Repayments of term loan
(18,750
)
 

Payments on credit agreement
(58,600
)
 

Repayments of short-term debt
(3,214
)
 
(11,545
)
Financing fees
(1,011
)
 

Treasury stock purchased

 
(50,000
)
Other financing activities, net

 
261

Net cash used by financing activities
(84,547
)
 
(116,887
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(2,574
)
 
(13,640
)
Increase (Decrease) in Cash and Cash Equivalents
79,940

 
(129,291
)
Cash and Cash Equivalents at Beginning of Period
102,885

 
270,191

Cash and Cash Equivalents at End of Period
$
182,825

 
$
140,900


See Notes to Condensed Consolidated Financial Statements.

6

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JOY GLOBAL INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Description of Business
Joy Global Inc. (the "Company," "we" and "us") is a leading manufacturer and servicer of high productivity mining equipment for the extraction of metals and minerals. We manufacture and market original equipment and parts and perform services for both underground and surface mining, as well as certain industrial applications. Our equipment is used in major mining regions throughout the world to mine coal, copper, iron ore, oil sands, gold and other minerals. We operate in two business segments: Underground Mining Machinery ("Underground") and Surface Mining Equipment ("Surface"). We are a major manufacturer of underground mining machinery for the extraction and haulage of coal and other bedded minerals. We are also a major producer of surface mining equipment for the extraction and haulage of copper, coal and other minerals and ores. We offer comprehensive direct service, which includes our smart service offerings, near major mining regions worldwide and provide extensive operational support for many types of equipment used in mining. Our principal manufacturing facilities are located in the United States, including facilities in Alabama, Texas and Wisconsin, and internationally, including facilities in Australia, Canada, China, France, South Africa and the United Kingdom.
Pending Merger with Komatsu America
On July 21, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Komatsu America, Pine Solutions Inc. (“Merger Sub”) and (solely for the purposes specified in the Merger Agreement) Komatsu Ltd., providing for the merger of Merger Sub with and into Joy Global (the “Merger”), with Joy Global surviving the Merger as a wholly owned subsidiary of Komatsu America. At the effective time of the Merger, each outstanding share of Joy Global common stock (other than dissenting shares and shares owned by Joy Global, Komatsu America or any of their respective subsidiaries) will be cancelled and converted into the right to receive $28.30 per share in cash, without interest.
For further information regarding the Merger and the Merger Agreement, please refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations , of this report, as well as our Current Report on Form 8-K filed on July 21, 2016, our preliminary proxy statement filed on August 15, 2016 and the Merger Agreement, which is attached as Annex A thereto. The foregoing description of the Merger does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Merger Agreement.

2.
Basis of Presentation
The Condensed Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q are unaudited and are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to SEC rules and regulations. In our opinion, all adjustments necessary for the fair presentation on a going concern basis of the results of operations, cash flows and financial position for all periods presented have been made. All such adjustments made are of a normal recurring nature. The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate realization of assets and settlement of liabilities in the future could differ from those estimates.
These financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended October 30, 2015 . The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. Further, results for all periods presented reflect the voluntary change in our method of accounting for actuarial gains and losses and the calculation of our expected return on plan assets for all of our pension and other post-retirement benefit plans as discussed further in our Form 10-K for the fiscal year ended October 30, 2015.

3.
Acquisitions
Acquisition of Montabert S.A.S.
On June 1, 2015 , we completed the acquisition of 100% of the equity of Montabert S.A.S. ("Montabert") for approximately $ 121.5 million , gross of cash acquired of $ 7.1 million . Montabert specializes in the design, production and distribution of high quality hydraulic rock breakers, pneumatic equipment, drilling attachments, drifters and related parts and tools. This acquisition expanded our product and service capabilities for hard rock mining, tunneling and rock excavation, which further diversified our commodity and end market exposures. Montabert's results of operations have been included as part of the Underground segment from the date of the acquisition forward.

7





In connection with the acquisition, we recorded goodwill of approximately $ 55.5 million and intangible assets of approximately $ 35.1 million . The intangible assets are comprised primarily of customer relationships, trade names and patents, which are being amortized over their respective estimated useful lives. Other assets acquired consisted of working capital related items and property, plant and equipment, with values that were not individually significant.

4.
Inventories
Consolidated inventories consist of the following:
 
In thousands
July 29,
2016
 
October 30,
2015
Finished goods
697,055

 
$
814,306

Work in process
151,788

 
135,310

Raw materials
47,414

 
58,309

Total inventories
$
896,257

 
$
1,007,925

Finished goods include finished components and parts in addition to any finished equipment.

5.
Held for Sale Assets
As of July 29, 2016 , our steel mill business and certain assets associated with several of our U.S. facilities met the held for sale criteria in both the Surface and Underground segments. We are disposing of these non-core assets in response to adverse market conditions. The disposal groups have been recognized at the lower of cost or fair value less costs to sell. No gain or loss was recognized in the quarter ended July 29, 2016 . On August 5, 2016, we completed the sale of our steel mill business. Refer to Note 23, Subsequent Events , for additional information.
The value of the assets consist of the following:
In thousands
July 29,
2016
Inventories
3,789

Property, plant and equipment, net
23,254

Other intangible assets, net
2,336

Goodwill
4,345

Total
$
33,724

We have recorded these assets as current in the Assets held for sale line of the Condensed Consolidated Balance Sheet, as we expect these assets to be sold within the next year.

6.
Goodwill and Other Intangible Assets
Finite-lived intangible assets are amortized to reflect the pattern of economic benefits consumed, which is principally the straight-line method. Intangible assets that are subject to amortization are evaluated for potential impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. No impairment was identified related to our finite-lived intangible assets as of July 29, 2016 .
Indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more frequently if events or changes occur that suggest an impairment in carrying value, such as a significant adverse change in the business climate. Due to the Company's decision to idle certain facilities in China and the continued market challenges in that region, we conducted an assessment of our indefinite-lived trademarks as of April 29, 2016 using the relief-from-royalty methodology, which evaluates the estimated licensing cost of an intangible asset as an alternative to ownership. This valuation concluded that the carrying value of the Company's indefinite-lived trademarks exceeded the estimated licensing cost. As a result, the Company recorded a $6.6 million non-cash, pre-tax impairment charge to its Underground segment in the nine months ended July 29, 2016 . This resulted in the full impairment of our indefinite-lived intangible assets. Assumptions critical to the process include forecasted information and discount rates. This fair value determination is categorized as Level 3 in the fair value hierarchy. Refer to Note 17, Fair Value Measurements , for the definition of Level 3 inputs. This charge is recorded in the Condensed Consolidated Statement of Operations under the heading Restructuring expenses .
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is assigned to specific reporting units, and is tested for impairment at least annually during the fourth

8





quarter of our fiscal year or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. The most recent goodwill impairment test was performed as of January 29, 2016, as our total shareholders’ equity exceeded our market capitalization based on our stock price of $9.97 per share at that point in time, and therefore indicated the possibility of an impairment to goodwill. This interim goodwill impairment test focused on our Surface reporting unit, as all Underground goodwill was fully impaired in the fourth quarter of fiscal 2015 . After completing our step one analysis, we concluded that the estimated fair value of our Surface reporting unit exceeded its carrying value by 15% . We determined that there were no indicators of impairment for the quarter ended July 29, 2016 that would warrant an additional interim impairment test at that point in time. Although we have concluded that there is no impairment on the goodwill of $350.7 million associated with our Surface reporting unit as of July 29, 2016 , we will continue to closely monitor this in the future considering the volatility and uncertainty in the global commodity markets that our surface mining equipment services. Should there be further market declines, particularly in Latin American copper or North American coal and iron ore, which are the most significant markets serviced by our Surface reporting unit, there would be an increased risk that we would be required to recognize impairment to the Surface reporting unit's goodwill. We will be performing our annual goodwill impairment test in the fourth quarter of fiscal 2016.

7.
Warranties
We provide for the estimated costs that may be incurred under product warranties to remedy deficiencies of quality or performance of our products. Warranty costs are accrued at the time revenue is recognized. These product warranties extend over either a specified period of time, units of production or machine hours depending on the product subject to the warranty. We accrue a provision for estimated future warranty costs based on the historical relationship of warranty costs to sales. We periodically review the adequacy of the accrual for product warranties and adjust the warranty percentage and accrued warranty reserve for actual experience as necessary.
The following table reconciles the changes in the product warranty reserve:
 
Quarter Ended
 
Nine Months Ended
In thousands
July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
Balance, beginning of period
46,981

 
$
58,194

 
$
52,146

 
$
67,272

Accrual for warranty expensed during the period
6,109

 
7,701

 
18,074

 
26,554

Settlements made during the period
(9,989
)
 
(9,933
)
 
(26,251
)
 
(36,320
)
Effect of foreign currency translation
(1,813
)
 
(359
)
 
(2,681
)
 
(1,903
)
Balance, end of period
$
41,288

 
$
55,603

 
$
41,288

 
$
55,603


8.
Borrowings and Credit Facilities
On July 29, 2014, we entered into a revolving credit agreement that matures on July 29, 2019 (the "Credit Agreement"). On December 14, 2015, we entered into an amendment to our Credit Agreement that increased the maximum consolidated leverage ratio for the period beginning in the second quarter of fiscal 2016 through the first quarter of fiscal 2018. The amendment increased the permitted ratio from 3.0 x to 3.5 x in the second quarter of fiscal 2016 and to 4.25 x in the third quarter of fiscal 2016, and will further increase the permitted ratio to 4.5 x in the fourth quarter of fiscal 2016. The ratio will begin to decline on a quarterly basis beginning in the third quarter of fiscal 2017 and return to 3.0 x in the second quarter of fiscal 2018. The amendment also reduced the aggregate amount of revolving commitments of the lenders from $ 1.0 billion to $ 850.0 million and added a letter of credit sublimit of $ 500.0 million . In addition, we also agreed to limit priority debt (secured indebtedness and the unsecured indebtedness of our foreign subsidiaries) to 10% of consolidated net worth and to limit cash dividends to $ 25.0 million per year in the aggregate. We may continue to request an increase of up to $250.0 million of additional aggregate revolving commitments, subject to the terms and conditions contained in the Credit Agreement. Under the terms of the Credit Agreement, we pay a commitment fee ranging from 0.09% to 0.30% on the unused portion of the revolving credit facility based on our credit rating. Letters of credit issued under applicable provisions of the Credit Agreement represent an unfunded utilization of the Credit Agreement for purposes of calculating the periodic commitment fee due. Eurodollar rate loans bear interest for a period from the applicable borrowing date until a date one week or one , two , three or six months thereafter, as selected by the Company, at the corresponding Eurodollar rate plus a margin of 1.0% to 2.0% depending on the Company's credit rating. Base rate loans bear interest from the applicable borrowing date at a rate equal to (i) the highest of (a) the federal funds rate plus 0.5% , (b) the rate of interest in effect for such day as publicly announced by the administrative agent as its "prime rate," or (c) a daily rate equal to the one-month Eurodollar rate plus 1.0% , plus (ii) a margin that varies according to the Company's credit rating. Swing line loans bear interest at either the base rate described above or the daily floating Eurodollar rate plus the applicable margin, as selected by the Company. The Credit Agreement is guaranteed by each of our current and future material domestic subsidiaries and requires the maintenance of certain financial covenants, including leverage and interest coverage ratios. The Credit Agreement also restricts payment of dividends or

9





other returns of capital to shareholders if the consolidated leverage ratio exceeds the maximum amount set forth therein. As of July 29, 2016 , we were in compliance with all financial covenants of the Credit Agreement.
As of July 29, 2016 , there were no direct borrowings under the Credit Agreement. Total interest expense recognized for direct borrowings under the Credit Agreement for the quarters ended July 29, 2016 and July 31, 2015 was less than $0.1 million and $0.4 million , respectively. For the nine months ended July 29, 2016 and July 31, 2015 , total interest expense recognized for direct borrowings under the Credit Agreement was $0.5 million and $0.9 million , respectively. As of July 29, 2016 , outstanding standby letters of credit issued under the Credit Agreement, which count toward the $850.0 million credit limit, totaled $110.9 million , and our available borrowing capacity under the Credit Agreement was $739.1 million .
On July 29, 2014, we also entered into a term loan agreement that matures July 29, 2019 and provides for a commitment of up to $375.0 million . The Term Loan replaced our prior term loan, dated as of June 16, 2011. The prior term loan had been scheduled to mature on July 16, 2016 and provided an initial commitment of $500.0 million , which had been drawn in full in conjunction with our fiscal 2011 acquisition of LeTourneau Technologies, Inc. and had been amortized to $375.0 million at the date that we entered into the Term Loan. We utilized the $375.0 million commitment under the Term Loan to repay the balance outstanding under the prior term loan. On December 14, 2015, the Term Loan was amended to be consistent with the revolving Credit Agreement with respect to the maximum leverage ratio, restrictions on priority debt and dividends, and other restricted payments. The Term Loan requires quarterly principal payments beginning in fiscal 2016. No payments were made during the quarter ended July 29, 2016 , as we prepaid $9.4 million in the second quarter of fiscal 2016 for the payments due in the third and fourth quarter of fiscal 2016. Payments of $18.8 million were made on the Term Loan during the nine months ended July 29, 2016 . The Term Loan contains terms and conditions that are the same as the terms and conditions of the Credit Agreement. The Term Loan is guaranteed by each of our current and future material domestic subsidiaries and requires the maintenance of certain financial covenants, including leverage and interest coverage ratios. As of July 29, 2016 , we were in compliance with all financial covenants of the Term Loan.
On October 12, 2011, we issued $500.0 million aggregate principal amount of 5.125% Senior Notes due in 2021 (the "2021 Notes") in an offering that was registered under the Securities Act. Interest on the 2021 Notes is paid semi-annually in arrears on October 15 and April 15 of each year, and the 2021 Notes are guaranteed by each of our current and future material domestic subsidiaries. At our option, we may redeem some or all of the 2021 Notes at a redemption price of the greater of 100% of the principal amount of the 2021 Notes to be redeemed or the sum of the present values of the principal amounts and the remaining scheduled interest payments using a discount rate equal to the sum of a treasury rate of a comparable treasury issue plus 0.5% .
In November 2006, we issued $150.0 million aggregate principal amount of 6.625% Senior Notes due in 2036 (the "2036 Notes"). Interest on the 2036 Notes is paid semi-annually in arrears on May 15 and November 15 of each year, and the 2036 Notes are guaranteed by each of our current and future material domestic subsidiaries, as well as certain current immaterial domestic subsidiaries. The 2036 Notes were originally issued in a private placement under an exemption from registration under the Securities Act. In the second quarter of fiscal 2007, the 2036 Notes were exchanged for substantially identical 2036 Notes in an exchange that was registered under the Securities Act. At our option, we may redeem some or all of the 2036 Notes at a redemption price of the greater of 100% of the principal amount of the 2036 Notes to be redeemed or the sum of the present values of the principal amounts and the remaining scheduled interest payments using a discount rate equal to the sum of a treasury rate of a comparable treasury issue plus 0.375% .
Our borrowings also include amounts related to transfers of certain receivables under factoring arrangements with recourse related to our French operations.
Direct borrowings and capital lease obligations consist of the following:
In thousands
July 29,
2016
 
October 30,
2015
Domestic:
 
 
 
Term Loan due 2019
356,250

 
375,000

5.125% Senior Notes due 2021
497,500

 
497,195

6.625% Senior Notes due 2036
148,577

 
148,553

Credit Agreement

 
58,600

Foreign:
 
 
 
Capital leases
116

 
159

Factoring arrangement
4,349

 
7,457

Total obligations
1,006,792

 
1,086,964

Less: Amounts due within one year
(32,545
)
 
(26,321
)
Long-term obligations
$
974,247

 
$
1,060,643


10





     

9.
Accumulated Other Comprehensive Loss
Comprehensive (loss) income and its components are presented in the Condensed Consolidated Statements of Comprehensive (Loss) Income. Changes in accumulated other comprehensive (loss) income, net of taxes, consist of the following:
 
Quarter ended July 29, 2016
 
Quarter ended July 31, 2015
 
Change in Unrecognized Prior Service Costs on Pension and Other Postretirement Obligations
 
Derivative Instrument Fair Market Value Adjustment
 
Foreign Currency Translation Adjustment
 
Total
 
Change in Unrecognized Prior Service Costs on Pension and Other Postretirement Obligations
 
Derivative Instrument Fair Market Value Adjustment
 
Foreign Currency Translation Adjustment
 
Total
Beginning balance
$
(1,417
)
 
$
9,439

 
$
(149,693
)
 
$
(141,671
)
 
$
(1,417
)
 
$
8,335

 
$
(122,096
)
 
$
(115,178
)
Other comprehensive (loss) income before reclassifications, net of taxes

 
(4,458
)
 
(9,115
)
 
(13,573
)
 

 
1,979

 
(40,645
)
 
(38,666
)
Amounts reclassified from accumulated other comprehensive (loss) income, net of taxes
93

 
320

 

 
413

 
34

 
1,158

 

 
1,192

Total other comprehensive (loss) income, net of taxes
93

 
(4,138
)
 
(9,115
)
 
(13,160
)
 
34

 
3,137

 
(40,645
)
 
(37,474
)
Ending balance
$
(1,324
)
 
$
5,301

 
$
(158,808
)
 
$
(154,831
)
 
$
(1,383
)
 
$
11,472

 
$
(162,741
)
 
$
(152,652
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended July 29, 2016
 
Nine months ended July 31, 2015
 
Change in Unrecognized Prior Service Costs on Pension and Other Postretirement Obligations
 
Derivative Instrument Fair Market Value Adjustment
 
Foreign Currency Translation Adjustment
 
Total
 
Change in Unrecognized Prior Service Costs on Pension and Other Postretirement Obligations
 
Derivative Instrument Fair Market Value Adjustment
 
Foreign Currency Translation Adjustment
 
Total
Beginning balance
$
(1,282
)
 
$
10,294

 
$
(156,083
)
 
$
(147,071
)
 
$
(1,486
)
 
$
4,736

 
$
(9,530
)
 
$
(6,280
)
Other comprehensive (loss) income before reclassifications, net of taxes

 
(7,203
)
 
(2,725
)
 
(9,928
)
 

 
4,192

 
(153,211
)
 
(149,019
)
Amounts reclassified from accumulated other comprehensive loss (income), net of taxes
(42
)
 
2,210

 

 
2,168

 
103

 
2,544

 

 
2,647

Total other comprehensive (loss) income, net of taxes
(42
)
 
(4,993
)
 
(2,725
)
 
(7,760
)
 
103

 
6,736

 
(153,211
)
 
(146,372
)
Ending balance
$
(1,324
)
 
$
5,301

 
$
(158,808
)
 
$
(154,831
)
 
$
(1,383
)
 
$
11,472

 
$
(162,741
)
 
$
(152,652
)
Details of the reclassifications from accumulated other comprehensive (loss) income are disclosed below:

11





 
 
Amounts Reclassified from Accumulated Other Comprehensive (Loss) Income
 
 
 
 
Quarter Ended
 
Nine Months Ended
 
Affected Line Items in the Statements of Operations
 
 
July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
 
Change in unrecognized prior service costs on pension and other postretirement obligations:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
$
46

 
$
50

 
$
157

 
$
151

 
Cost of sales/Product development, selling and administrative expense*
Curtailment loss (gain)
 
87

 

 
(258
)
 

 
Cost of sales/Product development, selling and administrative expense*
Deferred tax
 
(40
)
 
(16
)
 
59

 
(48
)
 
Provision for income taxes
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 
$
93

 
$
34

 
$
(42
)
 
$
103

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instrument fair market value adjustment:
 
 
 
 
 
 
 
 
 
 
Foreign exchange cash flow hedges
 
$
666

 
$
1,642

 
$
3,369

 
$
3,606

 
Net sales/Cost of sales**
Deferred tax
 
(346
)
 
(484
)
 
(1,159
)
 
(1,062
)
 
Provision for income taxes
Amounts reclassified from accumulated other comprehensive income, net of taxes
 
$
320

 
$
1,158

 
$
2,210

 
$
2,544

 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
413

 
$
1,192

 
$
2,168

 
$
2,647

 
 

* Amounts are included in the computation of net periodic benefits costs as either cost of sales or product development, selling and administrative expense as appropriate. Refer to Note 13, Retiree Benefits, for additional information.

** Amounts are included in either net sales or cost of sales as appropriate. Refer to Note 14, Derivatives, for additional information.

10.
Shareholders' Equity
In August 2013, our Board of Directors authorized the repurchase of up to $1.0 billion in shares of our common stock until August 2016. Under the program, we were permitted to repurchase shares in the open market in accordance with applicable SEC rules and regulations. During the quarter and nine months ended July 29, 2016 , we did not repurchase any shares of common stock. During the quarter ended July 31, 2015 , we did not repurchase any shares of common stock. During the nine months ended July 31, 2015 , we repurchased 954,580 shares of common stock for approximately $50.0 million . Cumulatively, we repurchased 9,771,605 shares of common stock under the program for approximately $533.4 million . The repurchase program expired in August 2016.

11.
Share-Based Compensation
Total share-based compensation expense recognized for the quarters ended July 29, 2016 and July 31, 2015 was $ 6.9 million and $ 7.9 million , respectively. Total share-based compensation expense recognized for the nine months ended July 29, 2016 and July 31, 2015 was $18.2 million and $23.8 million , respectively. The total share-based compensation expense is reflected in our Condensed Consolidated Statements of Cash Flows in operating activities as an add back to net (loss) income .
The corresponding deferred tax assets recognized related to the share-based compensation were $1.7 million and $ 2.1 million for the quarters ended July 29, 2016 and July 31, 2015 , respectively. The corresponding deferred tax assets recognized related to the share-based compensation expense were $5.0 million and $6.2 million for the nine months ended July 29, 2016 and July 31, 2015 , respectively.

12.
Restructuring Charges
During fiscal 2015, in response to the adverse market conditions, management implemented further cost reduction initiatives, which we refer to as the Restructuring Program. Expected and actual costs related to the Restructuring Program have continued into 2016 as more activities have been planned and initiated. These costs include entering into severance and termination agreements and full or partial closures and idling of certain facilities in order to better align the Company's overall cost structure with anticipated levels of future demand. We currently expect to complete the Restructuring Program by the end of fiscal 2017.

12





Restructuring charges incurred to date related to the Restructuring Program have consisted primarily of employee severance and termination costs, asset impairment charges and accelerated depreciation. Other costs consist primarily of equipment and inventory relocation costs, site clean-up costs, production readiness testing costs, and transition costs, as well as inventory and other asset write-downs. The following tables summarize restructuring costs by line item:
In thousands
Quarter ended July 29, 2016
 
Quarter ended July 31, 2015
 
Restructuring Expenses
 
Cost of Sales
 
Total
 
Restructuring Expenses
 
Cost of Sales
 
Total
Employee severance and termination costs
$
10,908

 
$

 
$
10,908

 
$
7,775

 
$

 
$
7,775

Asset impairment charges
1,817

 

 
1,817

 

 

 

Accelerated depreciation
10,189

 

 
10,189

 

 

 

Other costs
1,517

 
300

 
1,817

 

 

 

Total restructuring and related charges
$
24,431

 
$
300

 
$
24,731

 
$
7,775

 
$

 
$
7,775

In thousands
Nine months ended July 29, 2016
 
Nine months ended July 31, 2015
 
Restructuring Expenses
 
Cost of Sales
 
Total
 
Restructuring Expenses
 
Cost of Sales
 
Total
Employee severance and termination costs
$
41,973

 
$

 
$
41,973

 
$
19,550

 
$

 
$
19,550

Asset impairment charges
18,962

 

 
18,962

 

 

 

Accelerated depreciation
20,057

 

 
20,057

 

 

 

Other costs
3,492

 
1,606

 
5,098

 

 

 

Total restructuring and related charges
$
84,484

 
$
1,606

 
$
86,090

 
$
19,550

 
$

 
$
19,550

The following tables summarize the amounts incurred for the period by segment:
In thousands
Quarter ended July 29, 2016
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
8,393

 
$
2,515

 
$

 
$
10,908

Asset impairment charges
1,817

 

 

 
1,817

Accelerated depreciation
3,455

 
6,734

 

 
10,189

Other costs
936

 
881

 

 
1,817

Total restructuring and related charges
$
14,601

 
$
10,130

 
$

 
$
24,731

In thousands
Quarter ended July 31, 2015
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
6,896

 
$
879

 
$

 
$
7,775

Total restructuring and related charges
$
6,896

 
$
879

 
$

 
$
7,775

In thousands
Nine months ended July 29, 2016
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs*
$
37,415

 
$
4,163

 
$
395

 
$
41,973

Asset impairment charges
18,962

 

 

 
18,962

Accelerated depreciation
13,323

 
6,734

 

 
20,057

Other costs
4,217

 
881

 

 
5,098

Total restructuring and related charges
$
73,917

 
$
11,778

 
$
395

 
$
86,090

In thousands
Nine months ended July 31, 2015
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
12,312

 
$
6,986

 
$
252

 
$
19,550

Total restructuring and related charges
$
12,312

 
$
6,986

 
$
252

 
$
19,550


13





* The amount incurred during the nine months ended July 29, 2016 includes $9.4 million of expense for contractual termination benefits under the Joy Global qualified pension plan as part of continued restructuring activities in our Underground division. As noted below, amounts accrued for contractual termination benefits are included in our retiree benefit liabilities.
The impairment charges above relate to both property, plant and equipment and indefinite-lived trademarks. During the second and third quarters of fiscal 2016, we assessed for impairment the long-lived assets of an asset group in China. This assessment was performed as a result of our decision to idle certain facilities in China in both the second and third quarters of fiscal 2016 due to the continued market challenges in that region. As a result of such assessment, it was determined that the cash flows associated with this asset group would be insufficient to support their carrying values. Valuations were performed over property, plant and equipment using the market approach for real property. Personal property was valued primarily using the cost approach. As a result of this analysis, we recorded non-cash, pre-tax impairment charges of $1.8 million and $12.4 million for the quarter and nine months ended July 29, 2016 , respectively, for our Underground segment related to such property, plant, and equipment. These fair value determinations are categorized as Level 3 in the fair value hierarchy. Refer to Note 17, Fair Value Measurements , for the definition of Level 3 inputs.
As discussed in Note 6, Goodwill and Other Intangible Assets , we also assessed our indefinite-lived trademarks using the relief-from-royalty methodology during the second quarter of fiscal 2016 due to our decision to idle certain facilities in China and the continued market challenges in that region. As a result, a valuation was performed over trademarks using the relief-from-royalty methodology and a non-cash, pre-tax impairment charge of $6.6 million was recorded for the nine months ended July 29, 2016 by our Underground segment.
The following table summarizes the cumulative amounts incurred from inception to date by segment:
In thousands
July 29, 2016
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
53,755

 
$
16,614

 
$
2,980

 
$
73,349

Asset impairment charges
18,962

 

 

 
18,962

Accelerated depreciation
15,402

 
6,734

 

 
22,136

Other costs
4,944

 
881

 

 
5,825

Total restructuring and related charges
$
93,063

 
$
24,229

 
$
2,980

 
$
120,272

The following table summarizes the total expected costs from inception of the Restructuring Program through fiscal 2017 by segment:
In thousands
July 29, 2016
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
56,000

 
$
17,000

 
$
3,000

 
$
76,000

Asset impairment charges
19,000

 

 

 
19,000

Accelerated depreciation
15,000

 
7,000

 

 
22,000

Other costs
8,000

 
1,000

 

 
9,000

Total restructuring and related charges
$
98,000

 
$
25,000

 
$
3,000

 
$
126,000

Amounts impacting the Company's reserves for restructuring charges for its Restructuring Program relate to employee severance and termination and other costs as follows:
 
Quarter Ended
In thousands
July 29, 2016
 
July 31, 2015
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
Beginning accrual
$
15,279

 
$
138

 
$
15,417

 
$
9,328

 
$

 
$
9,328

Costs incurred
10,908

 
1,986

 
12,894

 
7,775

 

 
7,775

Costs paid/settled
(16,138
)
 
(2,124
)
 
(18,262
)
 
(7,963
)
 

 
(7,963
)
Other adjustments
7

 

 
7

 

 

 

Effect of foreign currency translation
(172
)
 

 
(172
)
 
(118
)
 

 
(118
)
Ending accrual
$
9,884

 
$

 
$
9,884

 
$
9,022

 
$

 
$
9,022


14





 
Nine Months Ended
In thousands
July 29, 2016
 
July 31, 2015
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
Beginning accrual
$
13,614

 
$

 
$
13,614

 
$

 
$

 
$

Costs incurred
32,565

 
3,781

 
36,346

 
19,550

 

 
19,550

Costs paid/settled
(33,238
)
 
(3,781
)
 
(37,019
)
 
(10,528
)
 

 
(10,528
)
Other adjustments
(2,908
)
 

 
(2,908
)
 

 

 

Effect of foreign currency translation
(149
)
 

 
(149
)
 

 

 

Ending accrual
$
9,884

 
$

 
$
9,884

 
$
9,022

 
$

 
$
9,022

Included in other adjustments for the nine months ended July 29, 2016 is $ 2.6 million of contractual termination benefits recognized in fiscal 2015 under the Joy Global qualified pension plan for benefits to be provided to certain employees as part of restructuring activities in our Underground division. Those amounts are recorded in our retiree benefit liabilities and are therefore excluded from the restructuring accrual roll-forward above.
For the Restructuring Program, total restructuring charges are currently anticipated to be approximately $ 126 million through fiscal 2017, with total expected cash costs related to the Restructuring Program estimated to be approximately $ 83 million .

13.
Retiree Benefits
The components of the net periodic benefit (income) cost associated with our pension and other postretirement plans are as follows:
 
Pension Benefits
 
Postretirement Benefits
 
Quarter Ended
 
Quarter Ended
In thousands
July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
Service cost
$
1,227

 
$
1,028

 
$
153

 
$
204

Interest cost
18,742

 
18,344

 
279

 
290

Expected return on assets
(23,803
)
 
(25,897
)
 
(143
)
 
(155
)
Amortization of prior service cost
16

 
17

 
30

 
33

Curtailment loss

 

 
178

 

Mark to market adjustment on curtailed plans

 

 
(123
)
 

Special termination benefits

 

 
40

 

Net periodic benefit (income) cost
$
(3,818
)
 
$
(6,508
)
 
$
414

 
$
372

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended
 
Nine Months Ended
In thousands
July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
Service cost
$
3,679

 
$
2,978

 
$
466

 
$
613

Interest cost
56,224

 
57,690

 
839

 
872

Expected return on assets
(71,478
)
 
(80,487
)
 
(437
)
 
(466
)
Amortization of prior service cost
50

 
52

 
107

 
99

Curtailment gain

 

 
(484
)
 

Mark to market adjustment on curtailed plans

 

 
(159
)
 

Special termination benefits

 

 
40

 

Contractual termination benefits
9,408

 

 

 

Net periodic benefit (income) cost
$
(2,117
)
 
$
(19,767
)
 
$
372

 
$
1,118

For the nine months ended July 29, 2016 , we contributed $12.3 million to our defined benefit employee pension and other postretirement benefit plans, and we expect contributions to be approximately $15.0 million for the full fiscal year.

15





During the quarter ended July 29, 2016 , we recognized $0.2 million of curtailment losses and $0.1 million of mark to market gains under the Joy Global other postretirement plans as part of continued restructuring activities in our Surface division.
During the nine months ended July 29, 2016 , we recognized $9.4 million of estimated contractual termination benefits under the Joy Global qualified pension plan for benefits to be provided to certain employees as part of restructuring activities in our Underground division.

14.
Derivatives
We are exposed to certain foreign currency risks in the normal course of our global business operations. We enter into derivative contracts that are foreign currency forward contracts to hedge the risks of certain identified and anticipated transactions in currencies other than the functional currency of the respective operating unit. The types of risks hedged are those arising from the variability of future earnings and cash flows caused by fluctuations in foreign currency exchange rates. These contracts are for forecasted transactions and committed receivables and payables denominated in foreign currencies and are not entered into for speculative purposes. Consequently, any market-related losses on the forward contract would be offset by changes in the value of the hedged item, and, as a result, we are generally not exposed to net market risk associated with these instruments.
Each derivative is classified as either a cash flow hedge, a fair value hedge or an undesignated instrument. All derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets under the heading Other current assets or under the heading Other accrued liabilities, as appropriate. Cash flows from fair value and cash flow hedges are classified within the same category as the item being hedged on the Condensed Consolidated Statements of Cash Flows. Cash flows from undesignated derivative instruments are included in operating activities on the Condensed Consolidated Statements of Cash Flows.
The total notional amount of our derivatives as of July 29, 2016 is $ 772.9 million .
For derivative contracts that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative contract is recorded as a component of other comprehensive (loss) income, net of tax. This amount is reclassified into the statement of operations on the line associated with the underlying transaction for the periods in which the hedged transaction affects earnings. The amounts recorded in accumulated other comprehensive loss for existing cash flow hedges are generally expected to be reclassified into earnings within one year, and all of the existing hedges will be reclassified into earnings by November 2017 . Ineffectiveness related to these derivative contracts was not material to the Condensed Consolidated Statements of Operations for the quarters and nine months ended July 29, 2016 and July 31, 2015 .
For derivative contracts that are designated and qualify as a fair value hedge, the gain or loss is recorded in the Condensed Consolidated Statements of Operations under the heading Cost of sales . For the quarters ended July 29, 2016 and July 31, 2015 , we recorded a gain of $0.7 million and a gain of $1.4 million , respectively, related to fair value hedges, which were offset by foreign exchange fluctuations of the underlying hedged item. For the nine months ended July 29, 2016 and July 31, 2015 , we recorded a loss of $5.7 million and a gain of $0.8 million , respectively, related to fair value hedges, which were offset by foreign exchange fluctuations of the underlying hedged item.
For derivative contracts entered into in order to hedge revaluation of net balance sheet exposures in non-functional currency that are not designated as a fair value hedge or a cash flow hedge, the gain or loss is recorded in the Condensed Consolidated Statements of Operations under the heading Cost of sales . For the quarters ended July 29, 2016 and July 31, 2015 , we recorded a loss of $0.3 million and a gain of $9.8 million , respectively, related to undesignated hedges, which were offset by foreign exchange fluctuations. For the nine months ended July 29, 2016 and July 31, 2015 , we recorded a loss of $2.5 million and a gain of $17.8 million , respectively, related to undesignated hedges, which were offset by foreign exchange fluctuations.
The following table summarizes the effect of cash flow hedges on the Condensed Consolidated Financial Statements:

16





In thousands
 
Effective Portion
 
 
Amount of (Loss) Gain Recognized in Other Comprehensive (Loss) Income
 
Loss Reclassified from Accumulated Other Comprehensive Loss into Earnings
Derivative Hedging Relationship
 
 
Location
 
Amount
Foreign currency forward contracts
 
 
 
 
 
 
Quarter ended July 29, 2016
 
$
(9,291
)
 
Cost of sales
 
$
(232
)
 
 
 
 
Sales
 
(434
)
Nine months ended July 29, 2016
 
$
(13,214
)
 
Cost of sales
 
$
(2,817
)
 
 
 
 
Sales
 
(552
)
Quarter ended July 31, 2015
 
$
2,807

 
Cost of sales
 
$
(1,642
)
 
 
 
 
Sales
 

Nine months ended July 31, 2015
 
$
5,911

 
Cost of sales
 
$
(3,606
)
 
 
 
 
Sales
 

We are exposed to credit risk in the event of nonperformance by counterparties to the forward contracts. The contract amount, along with the other terms of the forward, determines the amount and timing of amounts to be exchanged, and the contract is generally subject to credit risk only when it has a positive fair value.

15.
Income Taxes
In accordance with FASB Accounting Standards Codification 740, Income Taxes , each interim period is considered integral to the annual period and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim period. If, however, the entity is unable to reliably estimate its annual effective tax rate due to the Company’s inability to forecast income by jurisdiction or as a result of rate volatility caused by minor changes in income when projecting near break-even earnings, then the actual effective tax rate for the year-to-date period may be the best annual effective tax rate estimate. For the quarter and nine months ended July 29, 2016 , the Company determined that the estimated annual effective rate method would not provide a reliable estimate due to the volatility of income tax (benefit) expense resulting from modest changes in forecasted annual pre-tax results. Therefore, the Company recorded a tax benefit for the quarter and nine months ended July 29, 2016 based on the actual effective rate ( i.e., the “cut-off” method). The effective tax rate for the quarter and nine months ended July 31, 2015 was calculated based on an estimated annual effective tax rate in addition to discrete items.
For the quarter ended July 29, 2016 , the Company recorded a benefit for income taxes from continuing operations of $16.4 million that resulted in an effective tax rate of 100.8% on a GAAP basis. A net discrete tax benefit of $11.2 million was recorded in the third quarter of fiscal 2016 primarily related to the reversal of unrecognized tax benefit reserves upon the lapse of the statute of limitations. For the quarter ended July 31, 2015 , the Company recorded a provision for income taxes from continuing operations of $17.2 million that resulted in an effective tax rate of 25.1% . A net discrete tax benefit of $0.8 million was recorded in the third quarter of fiscal 2015 .
For the nine months ended July 29, 2016 , the Company recorded a benefit for income taxes from continuing operations of $34.0 million that resulted in an effective tax rate of 38.0% . A net discrete tax benefit of $18.2 million was recorded in the nine months ended July 29, 2016 , primarily related to the revision of prior year fourth quarter valuation allowance calculations on our domestic China business' deferred tax assets and the reversal of unrecognized tax benefit reserves upon the lapse of the statute of limitations. For the nine months ended July 31, 2015 , the Company recorded a provision for income taxes from continuing operations of $55.9 million that resulted in an effective tax rate of 28.9% . A net discrete tax expense of $0.8 million was recorded in the nine months ended July 31, 2015 .

16.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share, except that the weighted average number of shares outstanding is increased to include additional shares from the assumed exercise of stock options, performance shares and restricted stock units, if dilutive.
The following table sets forth the computation of basic and diluted earnings (loss) per share:

17





 
Quarter Ended
 
Nine Months Ended
In thousands, except per share amounts
July 29,
2016
 
July 31,
2015
 
July 29,
2016
 
July 31,
2015
Numerator:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
128

 
$
51,336

 
$
(55,398
)
 
$
137,819

Income from discontinued operations, net of income taxes

 

 
5,466

 

Net income (loss)
$
128

 
$
51,336

 
$
(49,932
)
 
$
137,819

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
98,160

 
97,480

 
97,977

 
97,481

Dilutive effect of stock options, performance shares and restricted stock units
1,064

 
553

 

 
571

Weighted average shares outstanding assuming dilution
99,224

 
98,033

 
97,977

 
98,052

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.00

 
$
0.53

 
$
(0.57
)
 
$
1.41

Income from discontinued operations

 

 
0.06

 

Net income (loss)
$
0.00

 
$
0.53

 
$
(0.51
)
 
$
1.41

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.00

 
$
0.52

 
$
(0.57
)
 
$
1.41

Income from discontinued operations

 

 
0.06

 

Net income (loss)
$
0.00

 
$
0.52

 
$
(0.51
)
 
$
1.41

In the nine months ended July 29, 2016 , the computation of weighted average shares outstanding assuming dilution does not include the effect of stock options, performance shares and restricted stock units because a net loss existed from continuing operations and thus the result would have been antidilutive. Weighted average shares outstanding used for diluted earnings per share from both continuing operations and discontinued operations therefore excludes 4.5 million shares for these antidilutive items as of the nine months ended July 29, 2016 .
Options to purchase a weighted average of 2.6 million and 2.7 million shares were excluded from the calculation of diluted earnings per share for continuing operations for the quarters ended July 29, 2016 and July 31, 2015 , respectively, as the effect would have been antidilutive. Options to purchase a weighted average of 2.6 million shares were excluded from the calculation of diluted earnings per share for continuing operations for the nine months ended July 31, 2015 , as the effect would have been antidilutive.

17.
Fair Value Measurements
GAAP establishes a three level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Quoted prices in active markets for identical instruments;
Level 2: Inputs, other than quoted prices in active markets, that are observable for the instrument either directly or indirectly or quoted prices for similar instruments in active markets; and
Level 3: Unobservable inputs for the instrument where there is little or no market data, which requires the reporting entity to develop its own assumptions.
GAAP requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The following tables present the fair value hierarchy for those assets and liabilities measured at fair value and disclose the fair value of long-term obligations recorded at cost as of July 29, 2016 and October 30, 2015 . As of July 29, 2016 and October 30, 2015 , we did not have any Level 3 assets or liabilities.


18





Fair Value Measurements as of July 29, 2016
 
 
 
 
 
 
 
In thousands
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
Current Assets
 
 
 
 
 
 
 
Cash equivalents
$
301

 
$
301

 
$
301

 
$

Other Current Assets
 
 
 
 
 
 
 
Derivatives
$
13,191

 
$
13,191

 
$

 
$
13,191

Other Accrued Liabilities
 
 
 
 
 
 
 
Derivatives
$
25,489

 
$
25,489

 
$

 
$
25,489

Long-term Obligations Including Amounts due within One Year
 
 
 
 
 
 
 
Term Loan due 2019
$
356,250

 
$
348,535

 
$

 
$
348,535

5.125% Senior Notes due 2021
$
497,500

 
$
537,750

 
$

 
$
537,750

6.625% Senior Notes due 2036
$
148,577

 
$
174,077

 
$

 
$