Joy Global Inc.
JOY GLOBAL INC (Form: 10-Q, Received: 03/03/2017 11:30:05)
Table of Contents




 
 
 
 
 
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 January 27, 2017
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
 
February 24, 2017
Common Stock, $1 par value
 
99,620,355
 
 
 
 
 



Table of Contents




JOY GLOBAL INC.
FORM 10-Q INDEX
January 27, 2017
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Table of Contents




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:
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 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 28, 2016 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 the forward-looking statements. We undertake no obligation to update or revise any 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.


Table of Contents




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

January 27,
2017
 
January 29,
2016
Net sales
$
497,769

 
$
526,300

Cost of sales
389,108

 
438,256

Product development, selling and administrative expenses
111,111

 
110,413

Restructuring expenses
772

 
26,659

Other income
(1,472
)
 
(3,941
)
Operating loss
(1,750
)
 
(45,087
)
Interest income
1,588

 
807

Interest expense
(12,610
)
 
(12,923
)
Loss before income taxes
(12,772
)
 
(57,203
)
Benefit for income taxes
(12,495
)
 
(16,982
)
Net loss
$
(277
)
 
$
(40,221
)
 
 
 
 
Basic loss per share
$
0.00

 
$
(0.41
)
Diluted loss per share
$
0.00

 
$
(0.41
)
Dividends per share
$
0.01

 
$
0.01

Weighted average shares outstanding:
 
 
 
Basic
98,913

 
97,851

Diluted
98,913

 
97,851

See Notes to Condensed Consolidated Financial Statements.

3

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JOY GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
 
Quarter Ended
 
January 27,
2017
 
January 29,
2016
Net loss
$
(277
)
 
$
(40,221
)
Other comprehensive (loss) income:
 
 
 
Change in unrecognized prior service costs on pension and other postretirement obligations, net of taxes of $1 and $104
9

 
46

Derivative instrument fair market value adjustment, net of taxes (benefits) of $794 and ($146)
841

 
(346
)
Foreign currency translation adjustment on long-term intercompany foreign loans
(4,689
)
 
3,380

Other foreign currency translation adjustment
1,217

 
(35,443
)
Total other comprehensive loss, net of taxes
(2,622
)
 
(32,363
)
Comprehensive loss
$
(2,899
)
 
$
(72,584
)
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.


4

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JOY GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
January 27,
2017
 
October 28,
2016
 
 
 
(As adjusted)
 
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
321,909

 
$
276,709

Accounts receivable, net
639,881

 
683,958

Inventories
836,465

 
814,821

Other current assets
133,005

 
113,434

Assets held for sale
330

 
3,703

Total current assets
1,931,590

 
1,892,625

Property, plant and equipment, net
642,882

 
656,245

Other assets:
 
 
 
Other intangible assets, net
217,081

 
223,411

Goodwill
350,762

 
350,843

Deferred income taxes
179,539

 
171,775

Other non-current assets
123,650

 
128,401

Total other assets
871,032

 
874,430

Total assets
$
3,445,504

 
$
3,423,300

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings, including current portion of long-term obligations
$
43,006

 
$
41,611

Trade accounts payable
219,502

 
236,787

Employee compensation and benefits
72,532

 
91,224

Advance payments and progress billings
242,450

 
173,121

Accrued warranties
40,775

 
40,787

Other accrued liabilities
167,657

 
188,591

Total current liabilities
785,922

 
772,121

Long-term obligations
953,241

 
962,291

Other liabilities:
 
 
 
Liabilities for postretirement benefits
14,249

 
14,260

Accrued pension costs
169,471

 
175,120

Other non-current liabilities
127,930

 
117,802

Total other liabilities
311,650

 
307,182

Shareholders’ equity
1,394,691

 
1,381,706

Total liabilities and shareholders’ equity
$
3,445,504

 
$
3,423,300

See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents




JOY GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Quarter Ended
 
January 27,
2017
 
January 29,
2016
Operating Activities:
 
 
 
Net loss
$
(277
)
 
$
(40,221
)
Adjustments to operations:
 
 
 
Depreciation and amortization
26,217

 
40,087

Changes in deferred income taxes
3,148

 
(849
)
Contributions to defined benefit employee pension and postretirement plans
(1,457
)
 
(1,418
)
Defined benefit employee pension and postretirement plan (income) expense
(4,387
)
 
6,217

Share-based compensation expense
6,443

 
4,367

Changes in long-term receivables
6,336

 
6,740

Other adjustments to continuing operations, net
(2,657
)
 
3,589

Changes in working capital items:
 
 

Accounts receivable, net
44,290

 
146,678

Inventories
(19,623
)
 
26,917

Other current assets
(1,421
)
 
(2,658
)
Trade accounts payable
(18,598
)
 
(54,900
)
Employee compensation and benefits
(18,224
)
 
(8,883
)
Advance payments and progress billings
66,907

 
8,957

Accrued warranties
(174
)
 
(85
)
Other accrued liabilities
(45,050
)
 
(25,949
)
Net cash provided by operating activities
41,473

 
108,589

Investing Activities:
 
 
 
Property, plant and equipment acquired
(6,611
)
 
(8,103
)
Proceeds from sale of property, plant and equipment
4,900

 
9,167

Other investing activities, net

 
122

Net cash (used) provided by investing activities
(1,711
)
 
1,186

Financing Activities:
 
 
 
Common stock issued
10,668

 

Dividends paid
(1,009
)
 
(997
)
Repayments of term loan
(9,375
)
 
(4,687
)
Payments on credit agreement

 
(58,600
)
Financing fees

 
(1,011
)
Other financing activities, net
5,284

 
(1,507
)
Net cash provided (used) by financing activities
5,568

 
(66,802
)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
(60
)
 
(5,925
)
Increase in Cash, Cash Equivalents and Restricted Cash
45,270

 
37,048

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
278,219

 
102,885

Cash, Cash Equivalents and Restricted Cash at End of Period
$
323,489

 
$
139,933


See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents




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 definitive proxy statement filed on September 2, 2016, as amended and supplemented on September 29, 2016 and October 3, 2016, the Merger Agreement, which is attached as Annex A to the definitive proxy statement filed on September 2, 2016, and our Current Reports on Form 8-K filed on July 21, 2016, October 13, 2016 and October 19, 2016. 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 28, 2016 . 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 first quarter fiscal 2017 retrospective adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which require the reclassification of debt issuance costs (other than such costs associated with our revolving credit agreement) from assets to debt on the balance sheet. Refer to Note 18, Recent Accounting Pronouncements , for additional information.

3.
Inventories
Consolidated inventories consist of the following:
 

7





In thousands
January 27,
2017
 
October 28,
2016
Finished goods
665,411

 
$
648,549

Work in process
131,770

 
122,674

Raw materials
39,284

 
43,598

Total inventories
$
836,465

 
$
814,821

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

4.
Assets Held for Sale
As of January 27, 2017 and October 28, 2016 , 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.
The value of the assets as of January 27, 2017 and October 28, 2016 was $0.3 million and $3.7 million , respectively, and was entirely comprised of property, plant and equipment. 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.
For the quarter ended January 27, 2017 , we recognized a gain of $0.8 million on the sale of certain held for sale assets associated with one of our electrical facilities.

5.
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 January 27, 2017 , October 28, 2016 or January 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. No impairment was identified related to our indefinite-lived intangible assets as of January 27, 2017 , October 28, 2016 or January 29, 2016 .
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 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 our annual fiscal 2016 analysis, which was completed for our Surface reporting unit, as all Underground goodwill was fully impaired previously. After completing our step one analysis using a discounted cash flow model, we concluded that the estimated fair value of our Surface reporting unit exceeded its carrying value by 54% . We determined that there were no indicators of impairment for the quarter ended January 27, 2017 that would warrant an interim impairment test. Although we have concluded that there is no impairment on the goodwill of $350.8 million associated with our Surface reporting unit as of January 27, 2017 , 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.

6.
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:

8





 
Quarter Ended
In thousands
January 27,
2017
 
January 29,
2016
Balance, beginning of period
40,787

 
$
52,146

Accrual for warranty expensed during the period
7,947

 
6,894

Settlements made during the period
(8,126
)
 
(6,992
)
Effect of foreign currency translation
167

 
(1,530
)
Balance, end of period
$
40,775

 
$
50,518


7.
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 in the first quarter of fiscal 2016 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 other returns of capital to shareholders if the consolidated leverage ratio exceeds the maximum amount set forth therein. As of January 27, 2017 , we were in compliance with all financial covenants of the Credit Agreement.
As of January 27, 2017 , there were no direct borrowings under the Credit Agreement. No interest expense was recognized for direct borrowings under the Credit Agreement for the quarter ended January 27, 2017 . Total interest expense recognized for direct borrowings under the Credit Agreement for the quarter ended January 29, 2016 was $0.5 million . As of January 27, 2017 , outstanding standby letters of credit issued under the Credit Agreement, which count toward the $850.0 million credit limit, totaled $125.2 million , and our available borrowing capacity under the Credit Agreement was $724.8 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 that began in fiscal 2016, of which $9.4 million and $4.7 million were paid during the quarters ended January 27, 2017 and January 29, 2016 , respectively. 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 January 27, 2017 , 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

9





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% .
In January 2017, the Company entered into a supplemental indenture to the 2021 Notes and the 2036 Notes that provides that if the Merger is completed, in the event that Komatsu decides, in its sole discretion, to provide an unconditional guarantee of the Company’s payment obligations under the 2021 and 2036 Notes, Komatsu will post on its website annual, quarterly and event-specific reports (prepared under applicable Japanese law and translated into English) that it is required to publish under the Financial Instruments and Exchange Act of Japan and the rules governing timely disclosure of corporate information by issuers of listed securities on the Tokyo Stock Exchange. These reports would be made available to holders of the Notes in lieu of the Company’s existing annual, quarterly and current reporting, which the Company would cease producing for so long as a Komatsu guarantee remains in force.
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
January 27,
2017
 
October 28,
2016
 
 
 
(As adjusted)
Domestic:
 
 
 
Term Loan due 2019
345,770

 
355,034

5.125% Senior Notes due 2021
496,085

 
495,890

6.625% Senior Notes due 2036
148,396

 
148,384

Foreign:
 
 
 
Capital leases
116

 
109

Factoring arrangement
5,880

 
4,485

Total obligations
996,247

 
1,003,902

Less: Amounts due within one year
(43,006
)
 
(41,611
)
Long-term obligations
$
953,241

 
$
962,291

In the first quarter of fiscal 2017, the Company adopted Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Upon adoption, the Company reclassified debt issuance costs (other than such costs associated with our Credit Agreement) from assets to debt on the balance sheet. Refer to Note 18, Recent Accounting Pronouncements , for additional information.

8.
Accumulated Other Comprehensive Loss
Comprehensive loss and its components are presented in the Condensed Consolidated Statements of Comprehensive Loss. Changes in accumulated other comprehensive loss, net of taxes, consist of the following:

10





 
Quarter ended January 27, 2017
 
Quarter ended January 29, 2016
 
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
$
(417
)
 
$
5,079

 
$
(150,413
)
 
$
(145,751
)
 
$
(1,282
)
 
$
10,294

 
$
(156,084
)
 
$
(147,072
)
Other comprehensive (loss) income before reclassifications, net of taxes

 
807

 
(3,472
)
 
(2,665
)
 

 
(790
)
 
(32,063
)
 
(32,853
)
Amounts reclassified from accumulated other comprehensive loss, net of taxes
9

 
34

 

 
43

 
46

 
444

 

 
490

Total other comprehensive (loss) income, net of taxes
9

 
841

 
(3,472
)
 
(2,622
)
 
46

 
(346
)
 
(32,063
)
 
(32,363
)
Ending balance
$
(408
)
 
$
5,920

 
$
(153,885
)
 
$
(148,373
)
 
$
(1,236
)
 
$
9,948

 
$
(188,147
)
 
$
(179,435
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Details of the reclassifications from accumulated other comprehensive loss are disclosed below:
 
 
Amounts Reclassified from Accumulated Other Comprehensive Loss
 
 
 
 
Quarter Ended
 
Affected Line Items in the Statements of Operations
 
 
January 27,
2017
 
January 29,
2016
 
Change in unrecognized prior service costs on pension and other postretirement obligations:
 
 
 
 
 
 
Amortization of prior service cost
 
$
10

 
$
50

 
Cost of sales/Product development, selling and administrative expense*
Curtailment loss
 

 
100

 
Cost of sales/Product development, selling and administrative expense*
Deferred tax
 
(1
)
 
(104
)
 
Provision for income taxes
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 
$
9

 
$
46

 
 
 
 
 
 
 
 
 
Derivative instrument fair market value adjustment:
 
 
 
 
 
 
Foreign exchange cash flow hedges
 
$
67

 
$
631

 
Net sales/Cost of sales**
Deferred tax
 
(33
)
 
(187
)
 
Provision for income taxes
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 
$
34

 
$
444

 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
43

 
$
490

 
 

* 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 11, Retiree Benefits, for additional information.

** Amounts are included in either net sales or cost of sales as appropriate. Refer to Note 12, Derivatives, for additional information.

9.
Share-Based Compensation
Total share-based compensation expense recognized for the quarters ended January 27, 2017 and January 29, 2016 was $ 6.4 million and $ 4.4 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 . The corresponding deferred tax assets recognized

11





related to the share-based compensation were $1.9 million and $ 1.3 million for the quarters ended January 27, 2017 and January 29, 2016 , respectively.
For the quarter ended January 27, 2017 , we had stock option exercises of $10.7 million . There were no stock option exercises for the quarters ended January 29, 2016 .

10.
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 and 2017 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 have costs forecasted under the Restructuring Program through the end of fiscal 2017.
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 for fiscal 2017 and 2016 by line item:
In thousands
Quarter ended January 27, 2017
 
Quarter ended January 29, 2016
 
Restructuring Expenses
 
Cost of Sales
 
Total
 
Restructuring Expenses
 
Cost of Sales
 
Total
Employee severance and termination costs
$
743

 
$

 
$
743

 
$
21,153

 
$

 
$
21,153

Accelerated depreciation

 

 

 
4,779

 

 
4,779

Other costs
29

 
3,263

 
3,292

 
727

 

 
727

Total restructuring and related charges
$
772

 
$
3,263

 
$
4,035

 
$
26,659

 
$

 
$
26,659

 
 
 
 
 
 
 
 
 
 
 
 
The following tables summarize the amounts incurred for the period by segment:
In thousands
Quarter ended January 27, 2017
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
474

 
$
269

 
$

 
$
743

Other costs
3,292

 

 

 
3,292

Total restructuring and related charges
$
3,766

 
$
269

 
$

 
$
4,035

In thousands
Quarter ended January 29, 2016
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs *
$
20,194

 
$
564

 
$
395

 
$
21,153

Accelerated depreciation
4,779

 

 

 
4,779

Other costs
727

 

 

 
727

Total restructuring and related charges
$
25,700

 
$
564

 
$
395

 
$
26,659

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* The employee severance and termination costs incurred during the quarter ended January 29, 2016 includes $9.6 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 following table summarizes the cumulative amounts incurred from inception through the first quarter of fiscal 2017 by segment:

12





In thousands
January 27, 2017
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
57,929

 
$
17,769

 
$
2,980

 
$
78,678

Asset impairment charges
18,962

 

 

 
18,962

Accelerated depreciation
15,404

 
6,740

 

 
22,144

Other costs
12,983

 
895

 

 
13,878

Total restructuring and related charges
$
105,278

 
$
25,404

 
$
2,980

 
$
133,662

The following table summarizes the total expected costs from inception of the Restructuring Program through the end of fiscal 2017 by segment:
In thousands
January 27, 2017
 
Underground
 
Surface
 
Corporate
 
Total
Employee severance and termination costs
$
62,000

 
$
18,000

 
$
3,000

 
$
83,000

Asset impairment charges
19,000

 

 

 
19,000

Accelerated depreciation
19,000

 
7,000

 

 
26,000

Other costs
14,000

 
2,000

 

 
16,000

Total restructuring and related charges
$
114,000

 
$
27,000

 
$
3,000

 
$
144,000

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
January 27, 2017
 
January 29, 2016
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
 
Employee Severance and Termination Costs
 
Other Costs
 
Total
Beginning accrual
$
5,979

 
$

 
$
5,979

 
$
13,613

 
$

 
$
13,613

Costs incurred
743

 
263

 
1,006

 
11,471

 
727

 
12,198

Costs paid/settled
(4,527
)
 
(263
)
 
(4,790
)
 
(11,303
)
 
(727
)
 
(12,030
)
Other adjustments

 

 

 
(2,544
)
 

 
(2,544
)
Effect of foreign currency translation
(27
)
 

 
(27
)
 
(46
)
 

 
(46
)
Ending accrual
$
2,168

 
$

 
$
2,168

 
$
11,191

 
$

 
$
11,191

 
 
 
 
 
 
 
 
 
 
 
 
Included in other adjustments for the quarter ended January 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 $ 144 million through fiscal 2017, with total expected cash costs related to the Restructuring Program estimated to be approximately $ 90 million .

11.
Retiree Benefits
The components of the net periodic benefit (income) cost associated with our pension and other postretirement plans are as follows:

13





 
Pension Benefits
 
Postretirement Benefits
 
Quarter Ended
 
Quarter Ended
In thousands
January 27,
2017
 
January 29,
2016
 
January 27,
2017
 
January 29,
2016
Service cost
$
1,343

 
$
1,226

 
$
149

 
$
191

Interest cost
14,982

 
18,736

 
210

 
305

Expected return on assets
(20,932
)
 
(23,844
)
 
(149
)
 
(147
)
Amortization of prior service cost
14

 
17

 
(4
)
 
33

Curtailment loss

 

 

 
100

Contractual termination benefits

 
9,600

 

 

Net periodic benefit (income) cost
$
(4,593
)
 
$
5,735

 
$
206

 
$
482

 
 
 
 
 
 
 
 
For the quarter ended January 27, 2017 , we contributed $1.5 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.
During the quarter ended January 29, 2016 , we recognized $9.6 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.

12.
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 January 27, 2017 is $ 712.4 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 .
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 January 27, 2017 and January 29, 2016 , we recorded a gain of $0.4 million and a loss of $1.6 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 January 27, 2017 and January 29, 2016 , we recorded a gain of $1.5 million and a gain of $4.6 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:

14





In thousands
 
Effective Portion
 
 
Amount of Gain (Loss) Recognized in Other Comprehensive Loss
 
Loss Reclassified from Accumulated Other Comprehensive Loss into Earnings
Derivative Hedging Relationship
 
 
Location
 
Amount
Foreign currency forward contracts
 
 
 
 
 
 
Quarter ended January 27, 2017
 
$
1,567

 
Cost of sales
 
$
(48
)
 
 
 
 
Sales
 
(19
)
Quarter ended January 29, 2016
 
$
(1,124
)
 
Cost of sales
 
$
(485
)
 
 
 
 
Sales
 
(146
)
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.

13.
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 quarters ended January 27, 2017 and January 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 resulting from modest changes in forecasted annual pre-tax results. Therefore, the Company recorded a tax benefit for the quarters ended January 27, 2017 and January 29, 2016 based on the actual effective rate ( i.e., the “cut-off” method).
For the quarter ended January 27, 2017 , the Company recorded a benefit for income taxes of $12.5 million that resulted in an effective tax rate of 97.8% . A net discrete tax benefit of $11.6 million was recorded in the first quarter of fiscal 2017 primarily resulting from tax benefits in connection with the Company's footprint rationalization activities. For the quarter ended January 29, 2016 , the Company recorded a benefit for income taxes of $17.0 million that resulted in an effective tax rate of 29.7% . A net discrete tax benefit of $0.8 million was recorded in the first quarter of fiscal 2016 .

14.
Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding during each period. Diluted loss per share is computed similar to basic 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 loss per share:
 
Quarter Ended
In thousands, except per share amounts
January 27,
2017
 
January 29,
2016
Numerator:
 
 
 
Net loss
$
(277
)
 
$
(40,221
)
Denominator:
 
 
 
Weighted average shares outstanding
98,913

 
97,851

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

 

Weighted average shares outstanding assuming dilution
98,913

 
97,851

 
 
 
 
Basic loss per share
$
0.00

 
$
(0.41
)
Diluted loss per share
$
0.00

 
$
(0.41
)
For the quarters ended January 27, 2017 and January 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 net losses

15





existed and thus the results would have been antidilutive. Weighted average shares outstanding used for diluted earnings per share therefore excludes 3.6 million and 5.3 million shares for these antidilutive items for the quarters ended January 27, 2017 and January 29, 2016 , respectively.

15.
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 January 27, 2017 and October 28, 2016 . As of January 27, 2017 and October 28, 2016 , we did not have any Level 3 assets or liabilities.

Fair Value Measurements as of January 27, 2017
 
 
 
 
 
 
 
In thousands
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
Current Assets
 
 
 
 
 
 
 
Cash equivalents
$
302

 
$
302

 
$
302

 
$

Other Current Assets
 
 
 
 
 
 
 
Derivatives
$
6,614

 
$
6,614

 
$

 
$
6,614

Other Accrued Liabilities
 
 
 
 
 
 
 
Derivatives
$
19,071

 
$
19,071

 
$

 
$
19,071

Long-term Obligations Including Amounts due within One Year
 
 
 
 
 
 
 
Term Loan due 2019
$
345,770

 
$
335,251

 
$

 
$
335,251

5.125% Senior Notes due 2021
$
496,085

 
$
542,170

 
$

 
$
542,170

6.625% Senior Notes due 2036
$
148,396

 
$
182,895

 
$

 
$
182,895


Fair Value Measurements as of October 28, 2016 (As adjusted)
 
 
 
 
 
 
 
In thousands
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
Current Assets
 
 
 
 
 
 
 
Cash equivalents
$
302

 
$
302

 
$
302

 
$

Other Current Assets
 
 
 
 
 
 
 
Derivatives
$
13,067

 
$
13,067

 
$

 
$
13,067

Other Accrued Liabilities
 
 
 
 
 
 
 
Derivatives
$
27,127

 
$
27,127

 
$

 
$
27,127

Long-term Obligations Including Amounts due within One Year
 
 
 
 
 
 
 
Term Loan due 2019
$
355,034

 
$
344,398

 
$

 
$
344,398

5.125% Senior Notes due 2021
$
495,890

 
$
546,635

 
$

 
$
546,635

6.625% Senior Notes due 2036
$
148,384

 
$
177,185

 
$

 
$
177,185

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash equivalents : The carrying value of cash equivalents approximates fair value based on the short-term nature of these instruments.

16





Derivatives : The fair value of forward foreign exchange contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.
Term Loan : The fair value of the Term Loan is estimated using discounted cash flows and market conditions.
Senior Notes : The fair market value of the senior notes is estimated based on market quotations of similar instruments at the respective period end.

16.
Contingent Liabilities
We establish reserves based on our assessment of contingencies related to legal claims asserted against us, as required by GAAP. Developments during the course of legal proceedings may affect our assessments and estimates of our contingencies, which in turn may require us to record or change the amount of a reserve, or make a payment that is different than the amount that we have reserved. In addition, as a normal part of operations, our subsidiaries undertake contractual obligations, warranties and guarantees in connection with the sale of products or services. Although the outcome of these matters cannot be predicted with certainty and favorable or unfavorable resolutions may affect the results of operations on a quarter-to-quarter basis, we believe that the outcome of such legal and other matters will not have a materially adverse effect on our future consolidated financial position, results of operations or liquidity.
We and our subsidiaries are involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to product liability (including 3,711 asbestos and silica-related cases), employment and commercial matters. We and our subsidiaries also become involved from time to time in proceedings relating to environmental matters and litigation arising outside of the ordinary course of business.
As of January 27, 2017 , we were contingently liable to banks, financial institutions and others for approximately $138.7 million for outstanding standby letters of credit, surety bonds and bank guarantees to secure the performance of sales contracts and other third party provided guarantees in the ordinary course of business. Of this amount, approximately $11.5 million relates to surety bonds and $2.0 million relates to outstanding letters of credit or other guarantees issued by non-U.S. banks for non-U.S. subsidiaries under locally provided credit facilities.
As a result of the steps the Company has taken to reorganize the business in China , which includes idling manufacturing facilities in Jixi, Jiamusi, Huainan and Wuxi, vendors have placed liens on certain assets of the Company, covering obligations of $7.3 million and $8.1 million as January 27, 2017 and October 28, 2016 . As of January 27, 2017 and October 28, 2016 , restricted cash of $1.6 million and $1.5 million has been recorded in Other current assets on the Consolidated Balance Sheets to reflect the Company's bank accounts that have been frozen due to these liens.

17.
Segment Information
We operate in two reportable segments: Underground and Surface. Crushing and conveying operating results related to surface applications are reported as part of the Surface segment, while total crushing and conveying operating results are included in the Underground segment. Eliminations primarily consist of the surface applications of crushing and conveying included in both operating segments.
Operating (loss) income of segments does not include interest income and expense, corporate administration expenses or the provision for income taxes.

17





In thousands
Underground
 
Surface
 
Corporate
 
Eliminations
 
Total
Quarter ended January 27, 2017
 
 
 
 
 
 
 
 
 
Net sales
$
252,336

 
$
267,343

 
$

 
$
(21,910
)
 
$
497,769

Operating (loss) income
$
(5,819
)
 
$
20,672

 
$
(12,193
)
 
$
(4,410
)
 
$
(1,750
)
Interest income

 

 
1,588

 

 
1,588

Interest expense

 

 
(12,610
)
 

 
(12,610
)
(Loss) income before income taxes
$
(5,819
)
 
$
20,672

 
$
(23,215
)
 
$
(4,410
)
 
$
(12,772
)
Depreciation and amortization
$
13,041

 
$
12,460

 
$
716

 
$

 
$
26,217

Capital expenditures
$
3,291

 
$
3,221

 
$
99

 
$

 
$
6,611

 
 
 
 
 
 
 
 
 
 
Quarter ended January 29, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
274,494

 
$
276,572

 
$

 
$
(24,766
)
 
$
526,300

Operating (loss) income
$
(38,450
)
 
$
7,788

 
$
(7,529
)
 
$
(6,896
)
 
$
(45,087
)
Interest income

 

 
807

 

 
807

Interest expense

 

 
(12,923
)
 

 
(12,923
)
(Loss) income before income taxes
$
(38,450
)
 
$
7,788

 
$
(19,645
)
 
$
(6,896
)
 
$
(57,203
)
Depreciation and amortization
$
22,420

 
$
16,741

 
$
926

 
$

 
$
40,087

Capital expenditures
$
6,774

 
$
1,089

 
$
240

 
$

 
$
8,103

 
 
 
 
 
 
 
 
 
 

18.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, Classification of Certain Cash Receipts and Cash Payments , which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. As a result of this ASU, cash payments for debt prepayment or extinguishment costs must be classified as cash outflows for financing activities; the cash outflows for the settlement of a zero-coupon bond must be bifurcated into operating and financing activities for the accreted interest and the principal, respectively; contingent consideration payments that were not made soon after a business combination must be separated and classified in financing and operating activities for cash payments up to the amount of the contingent consideration liability recognized as of the acquisition date and any excess cash payments, respectively; cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss; cash proceeds from the settlement of corporate owned life insurance ("COLI") and bank owned life insurance ("BOLI") polices must be classified in investing activities (however, an entity is permitted to align the classification of premium payments on COLI and BOLI policies with the classification of COLI and BOLI proceeds); distributions received from equity method investees should be classified under the cumulative earnings approach or the nature of distribution approach through an accounting policy election; and a transferor’s beneficial interests received as proceeds from the securitization of an entity’s financial assets should be disclosed as a noncash activity with subsequent cash receipts of beneficial interests from the securitization of an entity’s trade receivables classified as cash inflows from investing activities. In addition, the guidance provides a three-step approach for classifying cash receipts and payments that have aspects of more than one class of cash flows. An entity should first apply specific guidance in U.S. GAAP, if applicable. If there is no specific guidance related to the cash receipt or payment, an entity should bifurcate the cash payment or receipt into each separately identifiable source or use of cash on the basis of the nature of the underlying cash flows that will be classified as operating, investing, or financing activities. If the cash payment or receipt cannot be bifurcated, the entire payment or receipt should be classified as operating, investing, or financing activities on the basis of the activity that is likely to be the predominant source or use of cash. The ASU should be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for all entities. The ASU is effective for the Company beginning on October 27, 2018. We are continuing to evaluate the impact that the adoption of this guidance will have on the presentation of our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments , which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first

18





reporting period in which the guidance is effective. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The ASU is effective for the Company beginning on October 31, 2020. This guidance is not expected to have a significant impact on our financial condition, results of operations or presentation of our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , which changes how companies account for certain aspects of share-based payments to employees. Companies will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled (should be applied prospectively). In addition, the guidance eliminates the requirement that excess tax benefits be realized before companies can recognize them (should use a modified retrospective transition method, with a cumulative-effect adjustment to retained earnings). Excess tax benefits will be presented as an operating activity on the statement of cash flows rather than as a financing activity (can be applied either retrospectively or prospectively). The guidance also allows companies to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting (should use a modified retrospective transition method, with a cumulative-effect adjustment to retained earnings). Companies will classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (should be applied retrospectively). Furthermore, the guidance allows companies to make a policy election to account for forfeitures as they occur (should use a modified retrospective transition method, with a cumulative-effect adjustment to retained earnings). The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The ASU is effective for the Company beginning on October 28, 2017. We are continuing to evaluate the impact that the adoption of this guidance will have on our financial condition, results of operations and the presentation of our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which requires lessees to record most leases on their balance sheets. Lessees initially recognize a lease liability (measured at the present value of the lease payments over the lease term) and a right-of-use ("ROU") asset (measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs). Lessees can make an accounting policy election to not recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities. The ASU is effective for the Company beginning on October 26, 2019 and the standard requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited . We are continuing to evaluate the impact that the adoption of this guidance will have on our financial condition, results of operations and the presentation of our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities , which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The most notable disclosure revisions for public companies include (1) removing the requirement to disclose the methods for and any changes to significant assumptions used to estimate fair value, (2) requiring an "exit" price to be used when disclosing fair values of financial assets and liabilities measured at amortized cost, and (3) requiring entities to disclose either on the balance sheet or in the notes to the financial statements all financial assets and liabilities grouped by measurement category ( i.e., amortized cost or fair value through net income or other comprehensive (loss) income) and form ( i.e. securities, loans, receivables, etc.). The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for public entities only as it relates to certain provisions for changes in fair value due to instrument specific credit risk for liabilities measured under the fair value option. The ASU is effective for the Company beginning on October 27, 2018. This guidance is not expected to have a significant impact on our financial condition, results of operations or presentation of our financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments , which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determined the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The ASU is applied prospectively to adjustments to provisional amounts that occur after the effective date. The ASU is effective for the Company on October 29, 2016, with early adoption permitted. This guidance is not expected to have a significant impact on our financial condition, results of operations or presentation of our financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory , which requires entities to measure inventories at the lower of cost or net realizable value ("NRV"). This simplifies the evaluation from the current method of lower of cost or market, where market is based on one of three measures ( i.e. replacement cost, net realizable value, or net realizable value less a normal profit margin). The ASU does not apply to inventories measured under the last-in, first-out method or the retail

19





inventory method, and defines NRV as the "estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation." The ASU is effective on a prospective basis for the Company beginning on October 28, 2017, with early adoption permitted. This guidance is not expected to have a significant impact on our financial condition, results of operations or presentation of our financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in the financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Further, in June 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements , which clarified guidance from the SEC on the presentation of debt issuance costs on revolving debt arrangements, permitting entities to elect that such costs be classified as an asset. T he guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The standard requires retrospective adoption to all prior periods. The Company adopted ASU 2015-03 retrospectively in the first quarter of fiscal 2017. As a result, debt issuance costs related to our Term Loan and Senior Notes are now classified as a reduction to the carrying amount of the related debt on the balance sheet. Debt issuance costs previously recorded on the balance sheet in Other current assets and Other non-current assets of $0.4 million and $2.7 million , respectively, have been reclassified to Short-term borrowings, including current portion of long-term obligations and Long-term obligations, respectively, to reflect the adoption of the new guidance. The required disclosures are also presented in Note 7, Borrowings and Credit Facilities . The Company will continue to classify debt issuance costs related to our line of credit arrangement as an asset, regardless of whether we have any outstanding borrowings on it.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. ASU 2014-09 provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are to (i) identify the contracts with the customer, (ii) identify the performance obligations in the contact, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. In July 2015, the FASB agreed to delay the effective date of ASU 2014-09 for one year and to permit early adoption by entities as of the original effective dates. Considering the one year deferral, ASU 2014-09 will be effective for the Company beginning on October 27, 2018 and the standard allows for either full retrospective adoption or modified retrospective adoption. We have performed an initial analysis of revenue streams and are evaluating the potential impacts of the standard on our financial condition, results of operations and the presentation of our financial statements.

19.
Subsidiary Guarantors for Credit Agreement, Term Loan and 2021 Notes
The following tables present condensed consolidated financial information as of January 27, 2017 and October 28, 2016 and for the quarters ended January 27, 2017 and January 29, 2016 for: (a) the Company; (b) on a combined basis, the guarantors of the Credit Agreement, the Term Loan and the 2021 Notes issued in October 2011, which include Joy Global Underground Mining LLC, Joy Global Surface Mining Inc, N.E.S. Investment Co., Joy Global Conveyors Inc. and Joy Global Longview Operations LLC (the "Subsidiary Guarantors"); and (c) on a combined basis, the non-guarantors, which include all of the Company's foreign subsidiaries and a number of small domestic subsidiaries ("Non-Guarantor Subsidiaries").
The borrowings are fully and unconditionally guaranteed on a joint and several unsecured basis by the Subsidiary Guarantors, which are direct and indirect 100% owned subsidiaries of the Company. We conduct all of our business and derive essentially all of our income from our subsidiaries. Therefore, our ability to make payments on the obligations is dependent on the earnings and distribution of funds from our subsidiaries. There are no restrictions on the ability of any of our domestic subsidiaries to transfer funds to the parent company. Separate financial statements of the Subsidiary Guarantors are not presented because we believe such separate statements or disclosures would not be useful to investors.


20





Condensed Consolidating Statement of Operations
Quarter ended January 27, 2017
In thousands
Parent
Company
 

Subsidiary
Guarantors
 

Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
258,298

 
$
388,369

 
$
(148,898
)
 
$
497,769

Cost of sales

 
201,114

 
303,944

 
(115,950
)
 
389,108

Product development, selling and administrative expenses
12,089

 
46,544

 
52,478

 

 
111,111

Restructuring expenses

 
357

 
415

 

 
772

Other (income) expense

 
620

 
(2,092
)
 

 
(1,472
)
Operating (loss) income
(12,089
)
 
9,663

 
33,624

 
(32,948
)
 
(1,750
)
Intercompany items
(14,809
)
 
(29,565
)
 
4,692

 
39,682

 

Interest (expense) income, net
12,522

 
707

 
(24,251
)
 

 
(11,022
)
(Loss) income before income taxes and equity in income of subsidiaries
(14,376
)
 
(19,195
)
 
14,065

 
6,734

 
(12,772
)
(Benefit) income for income taxes
(10,370
)
 
3,642

 
(5,767
)
 

 
(12,495
)
Equity in income of subsidiaries
3,729

 
10,859

 

 
(14,588
)
 

Net (loss) income
$
(277
)
 
$
(11,978
)
 
$
19,832

 
$
(7,854
)
 
$
(277
)
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(2,899
)
 
$
(12,421
)
 
$
15,168

 
$
(2,747
)
 
$
(2,899
)

Condensed Consolidating Statement of Operations
Quarter ended January 29, 2016
In thousands
Parent
Company
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
263,598

 
$
390,749

 
$
(128,047
)
 
$
526,300

Cost of sales

 
233,004

 
309,335

 
(104,083
)
 
438,256

Product development, selling and administrative expenses
7,380

 
40,679

 
62,354

 

 
110,413

Restructuring expenses
395

 
20,016

 
6,248

 

 
26,659

Other income

 
(694
)
 
(3,247
)
 

 
(3,941
)
Operating (loss) income
(7,775
)
 
(29,407
)
 
16,059

 
(23,964
)
 
(45,087
)
Intercompany items
15,148

 
(47,734
)
 
(6,071
)
 
38,657

 

Interest (expense) income, net
(12,720
)
 
235

 
369

 

 
(12,116
)
(Loss) income before income taxes and equity in income of subsidiaries
(5,347
)
 
(76,906
)
 
10,357

 
14,693

 
(57,203
)
(Benefit) provision for income taxes
(11,505
)
 
412

 
(5,889
)
 

 
(16,982
)
Equity in (loss) income of subsidiaries
(46,379
)
 
17,897

 

 
28,482

 

Net (loss) income
$
(40,221
)
 
$
(59,421
)
 
$
16,246

 
$
43,175

 
$
(40,221
)
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
$
(72,584
)
 
$
(60,701
)
 
$
(15,030
)
 
$
75,731

 
$
(72,584
)


 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 


21





Condensed Consolidating Balance Sheet
As of January 27, 2017
In thousands
Parent
Company
 

Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
134,757

 
$
63,715

 
$
123,437

 
$

 
$
321,909

Accounts receivable, net

 
174,912

 
473,377

 
(8,408
)
 
639,881

Inventories

 
381,306

 
522,410

 
(67,251
)
 
836,465

Other current assets
64,567

 
6,203

 
62,235

 

 
133,005

Assets held for sale

 
330

 

 

 
330

Total current assets
199,324

 
626,466

 
1,181,459

 
(75,659
)
 
1,931,590

Property, plant and equipment, net
17,904

 
207,293

 
421,979

 
(4,294
)
 
642,882

Other assets:
 
 
 
 
 
 
 
 
 
Other intangible assets, net

 
176,195

 
40,886

 

 
217,081

Goodwill

 
341,984

 
8,778

 

 
350,762

Deferred income taxes
123,068

 

 
56,471

 

 
179,539

Other non-current assets
2,321,894

 
2,374,734

 
4,276,573

 
(8,849,551
)
 
123,650

Total other assets
2,444,962

 
2,892,913

 
4,382,708

 
(8,849,551
)
 
871,032

Total assets
$
2,662,190

 
$
3,726,672

 
$
5,986,146

 
$
(8,929,504
)
 
$
3,445,504

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term borrowings, including current portion of long-term obligations
$
37,057

 
$

 
$
5,949

 
$

 
$
43,006

Trade accounts payable
2,157

 
88,399

 
128,946

 

 
219,502

Employee compensation and benefits
10,311

 
17,361

 
44,860

 

 
72,532

Advance payments and progress billings

 
120,733

 
133,984

 
(12,267
)
 
242,450

Accrued warranties

 
17,239