NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE PLAN
The following description of the Terex Corporation and Affiliates’ 401(k) Retirement Savings Plan (the “Plan”) provides only general information. Employees covered by the Plan (“Participants" or "Participant”) should refer to the Plan document for a more complete description of the Plan’s provisions.
General – The Plan is a defined contribution plan that covers certain salaried and hourly employees of Terex Corporation and its subsidiaries (the “Company”) meeting minimum eligibility requirements (“Eligible Employees”). The investments of the Plan are held in a trust account by Fidelity Management Trust Company (“Fidelity”), the trustee of the Plan.
The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
A committee, consisting of at least three members appointed by the Company’s Board of Directors, administers the benefit structure of the Plan (“Administrative Committee”). The Administrative Committee is considered the plan administrator for purposes of ERISA.
Participant Eligibility – Eligible Employees may begin participation on the first day of the month following their hiring, with the exception of Powerscreen USA, LLC d/b/a Simplicity Engineering, Inc.'s Participants who are subject to collective bargaining agreements, who are eligible to participate in the Plan after 120 days of service.
Contributions – Participants may contribute a maximum of 80% of their compensation to the Plan in any combination of pre-tax, Roth or post-tax contributions. The maximum pre-tax and Roth contributions permitted under Internal Revenue Service (“IRS”) regulations in 2019 was $19,000. Participants age 50 and older can elect to make additional pre-tax and Roth contributions (“catch-up contributions”) up to the limits prescribed by IRS regulations. These additional catch-up contributions are not eligible for matching Company contributions and the maximum catch-up contributions permitted by IRS regulations in 2019 was $6,000.
The Company provides safe harbor matching contributions of 100% of Participant contributions to the Plan up to a maximum of 5% of their compensation.
The Company may make, at its sole discretion, supplementary contributions.
Contributions (excluding catch-up contributions) are limited in that the sum of: a) total Company contributions; b) total Participant pre-tax contributions; c) total Participant Roth contributions and d) total Participant post-tax contributions, cannot exceed the lesser of: i) $56,000 or ii) 100% of the Participant’s total compensation for the year. Participants are able to direct both Participant and Company contributions and redistribute accumulated contributions and earnings between investment alternatives.
For any plan year in which a Participant may make both pre-tax and Roth elective contributions, distribution of excess deferrals shall be made from the pre-tax elective contributions before the Roth elective contributions to the extent such type of elective contributions were made for the year, unless the Participant specifies otherwise.
All employees under the Plan are subject to automatic enrollment for Participant pre-tax contributions equal to 2% of their compensation. Participants may elect to opt out of automatic enrollment. The Plan provides for automatic elective contribution notices.
Vesting – Participants are fully vested immediately in their voluntary contributions and all Company safe harbor matching contributions, plus any actual earnings thereon.
Forfeitures – Nonvested (prior to safe harbor matching provisions) Company contributions of Participants who have separated from the Company become forfeitures and are held in a separate account and may be used to reduce future Company contributions or to pay the Plan’s administrative fees. However, Participants who return to service within five years from their separation date will be entitled to continue vesting in the Company contributions which were previously forfeited. At December 31, 2019 and 2018, respectively, forfeited nonvested accounts totaled $61,035 and $43,914. These accounts will be used to offset future Company contributions or pay the Plan’s administrative fees. During the year ended December 31, 2019, $24,609 of the forfeiture account was used to offset/adjust Company contributions or for payment of the Plan’s expenses.
Participant Accounts – Each Participant’s account is credited with the Participant's contributions and Company matching contributions, as well as an allocation of earnings (losses) from the respective investment funds. A Participant’s contributions and related Company matching contributions are used to purchase shares in the various investment alternatives. The value of and the earnings credited to a Participant’s account are based on the proportionate number of shares owned by the Participant and the fair value of the investment on the valuation date. Participant accounts are charged with an allocation of administrative expenses that are paid by the Plan. Allocations are based on participant earnings, account balances, or specific participant transactions. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
Payment of Benefits – Upon retirement, disability or death, the entire balance of the Participant’s account becomes payable to the Participant or designated beneficiary(ies). Upon any other termination of employment, the Participant receives the entire balance of his/her account; however, if the balance of the Participant’s account is greater than $5,000 the Participant can elect to keep the investments in the Plan. Withdrawals are also permitted for financial hardship, basic Roth contributions, rollover and after-tax contributions, as defined in the Plan document, or upon attainment of age 59-1/2.
In the event the Participant does not direct the distribution, the Administrative Committee is allowed to designate an individual retirement plan for a mandatory distribution greater than $1,000. For amounts less than $1,000 a distribution is made to the Participant.
Notes Receivable from Participants – Participants may obtain loans between $1,000 and an amount up to the lesser of $50,000 or 50% of the vested portion of their account balance, subject to the discretion of the plan administrator and certain other restrictions. Terms of all loans are established by the Administrative Committee. As of December 31, 2019, interest rates on Participant loans ranged from 4.25% to 9.00% with maturities at various dates through 2034.
Participant-directed Investments – All assets of the Plan are Participant-directed investments. Participants have the option of directing their account balance to one or more different investment options. The investment options include various mutual funds, the Fidelity Managed Income Portfolio Class II common collective trust and the Fidelity Growth Company Commingled Pool common collective trust (collectively referred to as the "Common Collective Trusts" or "Trusts"), Terex Corporation common stock (limited to no more than 25% of Participant’s investment allocation beginning on November 15, 2019) or a self-directed brokerage account. If a Participant does not elect an investment option in which to invest their deferrals, the Plan will invest their contributions in a Qualified Default Investment Alternative.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting – The accompanying financial statements have been prepared on the accrual basis of accounting.
Expenses – Fees and expenses related to administering the Plan are generally paid by the Company. Investment management fees and loan administration fees are paid by Participants. The trust agreement between the Plan and Fidelity includes a Revenue Credit Program. Under this program, in situations where Fidelity earns record keeping fees in excess of the agreed-upon compensation, Fidelity is required to remit those excess fees (“Revenue Credits”) to the Plan to be used to pay ERISA qualified expenses (See Note 6). Fidelity funds the Revenue Credits quarterly in arrears, generally 15 days after quarter-end. The Plan recorded Other receivables of $5,461 and $6,124 related to Revenue Credits at December 31, 2019 and 2018, respectively.
Payment of Benefits – Benefits are recorded when paid.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of investment income and expenses during the reporting period. Actual results could differ significantly from those estimates.
Investment Valuation and Income Recognition – The Plan’s investments in mutual funds, self-directed brokerage accounts, Terex Corporation common stock and the Trusts are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the Trusts are recorded as net asset value ("NAV"). The Administrative Committee determines the Plan’s valuation policies utilizing information provided by the investment advisers and trustee (see Note 3). Shares of mutual funds are valued at the NAV of shares held by the Plan at year-end. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Net appreciation/(depreciation) in the aggregate fair value of investments is comprised of all realized and unrealized gains and losses during the year. Dividends are recorded on the ex-dividend date.
Notes Receivable from Participants – Notes receivable from Participants are measured at their unpaid principal balance plus accrued but unpaid interest. Interest income is recorded on the accrual basis. Delinquent Participant loans are reclassified as distributions based upon the terms of the Plan document. No allowance for credit losses has been recorded as of December 31, 2019 or 2018.
3. FAIR VALUE MEASUREMENT
The Plan performs fair value measurements in accordance with Financial Accounting Standards Board issued Accounting Standards Codification ASC 820, “Fair Value Measurement and Disclosure” (“ASC 820”), which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Plan considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
ASC 820 also establishes a fair value hierarchy that requires the Plan to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Determining which category an asset or liability falls within this hierarchy requires judgment. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The Plan’s valuation methodology used to measure the fair value of common stock is the closing price reported on the active market on which the individual securities are traded. The Plan’s valuation methodology used to measure the fair value of mutual funds is the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the SEC. These funds are required to publish their daily NAV and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded. The Trusts are valued at NAV and are not included in the fair value hierarchy.
Investments measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2019:
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12/31/2019
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Level 1
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Investments measured in the fair value hierarchy:
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Mutual Funds
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$
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446,988,184
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$
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446,988,184
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Self-directed - Fidelity Brokerage Link
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3,468,876
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3,468,876
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Terex Corporation Common Stock
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39,314,772
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39,314,772
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Total investments measured in the fair value hierarchy
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489,771,832
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$
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489,771,832
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Investments measured at NAV:
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Common Collective Trusts
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76,223,138
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Total investments at fair value
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$
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565,994,970
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Investments measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2018:
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12/31/2018
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Level 1
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Investments measured in the fair value hierarchy:
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Mutual Funds
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$
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371,657,781
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$
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371,657,781
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Self-directed - Fidelity Brokerage Link
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3,527,378
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3,527,378
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Terex Corporation Common Stock
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39,893,658
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39,893,658
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Total investments measured in the fair value hierarchy
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415,078,817
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$
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415,078,817
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Investments measured at NAV:
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Common Collective Trusts
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62,860,778
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Total investments at fair value
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$
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477,939,595
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4. INVESTMENTS MEASURED AT NAV
The Plan has an interest in the Trusts. The Trusts consist of a stable value fund and a growth fund that are open-end commingled pools dedicated exclusively to the management of assets of defined contribution plans. The Trusts are valued using NAV provided by the trustees in order to estimate fair value. The NAV is based on the fair value of the underlying investments held by the funds less liabilities. Were the Plan to initiate a full redemption of the Trusts, the trustees reserve the right to temporarily delay withdrawal from the Trusts in order to ensure that securities' liquidations will be carried out in an orderly business manner. The Trusts have no unfunded commitments, other redemption restrictions, or redemption notice periods.
5. RISKS AND UNCERTAINTIES
The Plan provides for various investment options in investment securities. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Statements of Net Assets Available for Benefits.
For details on risks facing the Company, see Item 1A in both the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
6. PARTY-IN-INTEREST
Certain Plan investments are shares of mutual funds managed by Fidelity. In addition to serving as trustee, Fidelity also serves as custodian and, therefore, these transactions qualify as party-in-interest transactions. Fees paid by the Plan to Fidelity for the investment management services, loan administration and other record keeping services were $506,398 for the year ended December 31, 2019. Fees paid for legal, accounting and consulting services were $93,023 for the year ended December 31, 2019. In addition, transactions in common stock and notes receivable from Participants qualify as party-in-interest transactions. During 2019, the Plan recorded $35,053 in Revenue Credits (see Note 2), which resulted in the Plan showing net administrative fees for the year of $564,368.
7. INCOME TAX STATUS
The Plan received a determination letter, dated June 26, 2012, in which the IRS stated that the Plan, as amended and restated on January 24, 2012, met the qualification requirements of Sections 401(c) and 401(k) of the Internal Revenue Code and that the Plan is exempt from Federal income taxation. The Plan has been amended subsequent to receiving the determination letter. The plan administrator believes that the Plan is designed and is being operated in compliance with the applicable requirements of the IRS.
Accounting principles generally accepted in the United States of America require Plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
8. TERMINATION OF THE PLAN
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event that such discontinuance results in the complete or partial termination of the Plan, the balance in each Participant’s account will be distributed as directed by the trustee.
9. SUBSEQUENT EVENT
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) creating risks to the international community as the virus spread globally beyond its point of origin. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. This pandemic has adversely affected global economic activity and greatly contributed to significant deterioration and instability in financial markets. Because the values of the Plan’s individual investments have and will fluctuate in response to changing market conditions, the amount of losses that will be recognized in subsequent periods, if any, and the related impact on the Plan’s liquidity cannot be determined at this time.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes several relief provisions available to tax-qualified retirement plans and their participants. The Administrative Committee has evaluated the relief provisions available to plan participants under the CARES Act and has implemented the following provisions:
◦Special coronavirus distributions up to $100,000
◦Increased the available loan amount as described in Note 1 to the lesser of $100,000 or 100% of the participant’s vested account balance
◦Extended the period for loan repayments, if applicable, up to one year