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(Exact Name of registrant as specified in its charter)
iDelaware
i88-3567996
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i6325 Ardrey Kell Road, iSuite 400,
iCharlotte, iNorth Carolinai28277
(Address of principal executive offices) (Zip Code)
(i980) i474-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class
Trading Symbols(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01
iSPXC
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes i☒ No.
Common
stock (i53,442,050 and i45,476,237 issued
and outstanding at April 1, 2023, respectively, and i53,350,918 and i45,291,989 issued and outstanding at December
31, 2022, respectively)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions, except per share data)
(1) iBASIS
OF PRESENTATION
Unless otherwise indicated, “we,”“us” and “our” mean SPX Technologies, Inc. and its consolidated subsidiaries (“SPX”).
iWe prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally
required by accounting principles generally accepted in the United States (“GAAP”) can be condensed or omitted. The financial statements represent our accounts after the elimination of intercompany transactions and, in our opinion, include the adjustments (consisting only of normal and recurring items) necessary for their presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only (see Note 3 for information on discontinued operations).
iWe account for investments in unconsolidated companies where we exercise significant
influence but do not have control using the equity method. In determining whether we are the primary beneficiary of a variable interest entity (“VIE”), we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties to determine which party has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and which party has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. All of our VIE’s are immaterial, individually and in aggregate, to our condensed consolidated financial statements.
Merger and Consummation of Holding Company Reorganization
As of August 15, 2022, SPX Technologies, Inc. (the “Company”) is the
successor registrant pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, to SPX Corporation (“Legacy SPX”) as a result of the completion on August 15, 2022 of a holding company reorganization (the “Holding Company Reorganization”) effected as a merger of Legacy SPX with and into SPX Merger, LLC, a subsidiary of the Company. Each share of Legacy SPX’s common stock, par value $i0.01 per share, issued and outstanding
immediately prior to the consummation of the Holding Company Reorganization was automatically converted into an equivalent corresponding share of the Company’s common stock having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Legacy SPX common stock being converted. Accordingly, upon consummation of the Holding Company Reorganization, Legacy SPX stockholders became stockholders of the Company. The terms “SPX,”“we” and “our” include Legacy SPX for periods prior to the consummation of the Holding Company Reorganization as the context requires.
Divestiture of Asbestos Liabilities and Certain Assets
On
November 1, 2022, we divested ithree wholly-owned subsidiaries that hold asbestos liabilities and certain assets, including related insurance assets, to Canvas Holdco LLC (“Canvas”), an entity formed by a joint venture of Global Risk Capital LLC and an affiliate of Premia Holdings Ltd. In connection with the divestiture (the “Asbestos Portfolio Sale”), the divested subsidiaries
have agreed to indemnify us and our affiliates for their asbestos-related liabilities, which encompassed all of our consolidated asbestos-related liabilities and contingent liabilities immediately prior to the divestiture. These indemnification obligations are not subject to any cap or time limitation. As a result of this transaction, the Company divested all obligations with respect to pending and future asbestos claims relating to these matters. The board of managers of the divested subsidiaries each received a solvency opinion from an independent advisory firm that the divested subsidiaries were solvent after giving effect to the Asbestos Portfolio Sale.
The
agreement for the Asbestos Portfolio Sale contains customary representations and warranties with respect to the divested subsidiaries, the Company, and Canvas. Pursuant to the agreement, the Company and Canvas will each indemnify the other for breaches of representation and warranties or breaches of covenants, subject to certain limitations as set forth in the agreement. Refer to Note 15 for additional details.
7
Acquisition
of ECS
On August 2, 2021, we completed the acquisition of Enterprise Control Systems Ltd (“ECS”), a leader in the design and manufacture of highly-engineered tactical datalinks and radio frequency (“RF”) countermeasures, including counter-drone and counter-improvised explosive device RF jammers. We purchased ECS for cash consideration of $i39.4, net of cash acquired of $i5.1.
Under the terms of the purchase and sales agreement, the seller was eligible for additional cash consideration of up to $i15.4, with payment to be made in the fourth quarter of 2022 upon successful achievement of certain financial performance milestones. The estimated fair value of such contingent consideration as of the date of acquisition was $i8.2.
During the fourth quarter of 2021, we concluded that the probability of achieving the above financial performance milestones had lessened due to a delay in the execution of a large order, resulting in a reduction of the estimated liability of $i6.7. During the first quarter of 2022, we further reduced the estimated liability by $i0.9,
with such amount recorded within “Other operating income.” The estimated fair value of such contingent consideration was $ii0.0/
at April 1, 2023 and December 31, 2022. The post-acquisition operating results of ECS are reflected within our Detection and Measurement reportable segment.
Acquisition of ITL
On March 31, 2022, we completed the acquisition of International Tower Lighting, LLC (“ITL”), a leader in the design and manufacture of highly-engineered Aids to Navigation systems, including obstruction lighting for telecommunications towers, wind turbines and numerous other terrestrial obstructions. We purchased ITL for cash proceeds of $i40.4,
net of (i) cash acquired of $i1.1 and (ii) an adjustment to the purchase price received during the third quarter of 2022 related to acquired working capital of $i1.4.
The post-acquisition operating results of ITL are reflected within our Detection and Measurement reportable segment.
Other
iPreparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K
for the year ended December 31, 2022 (“our 2022 Annual Report on Form 10-K”). Interim results are not necessarily indicative of full year results.
iWe establish actual interim closing dates using a fiscal calendar, which requires our businesses to close their books on the Saturday closest to the end of the first calendar quarter, with the second and third quarters being 91 days in length. Our fourth quarter ends on December 31. The interim closing dates for the first, second and third quarters of 2023 are April 1, July 1, and September 30, compared to the respective April 2, July
2, and October 1, 2022 dates. We had one less day in the first quarter of 2023 and will have one more day in the fourth quarter of 2023 than in the respective 2022 periods. It is not practicable to estimate the impact of the one less day on our consolidated operating results for the three months ended April 1, 2023, when compared to the consolidated operating results for the 2022 respective period.
8
Correction
of Prior-Year Classification and Disclosure
During the fourth quarter of 2022, we concluded that, although the assessment of our reportable segments was performed using the appropriate measures as defined by the Segment Reporting Topic of the Accounting Standards Codification (“Codification”), the disclosure of operating income for each of our reportable segments (“Segment Income”) was not consistent with the measure used by our Chief Operating Decision Maker (“CODM”) when evaluating the results of, or allocating resources to, our reportable segments. We previously disclosed that Segment Income was determined before considering impairments and special charges, long-term incentive compensation, certain other operating income/expense, and other indirect corporate expenses. Our CODM also excludes the impact of intangible asset amortization, inventory step-up charges, and certain other acquisition-related costs
from Segment Income. Accordingly, Segment Income, as presented in Note 6, now excludes all of the items noted above. This change had no impact to the amounts previously presented in our condensed consolidated statement of operations for the three months ended April 2, 2022. Although the impact of this change to previously disclosed Segment Income is not material, we revised the prior-year presentation to be consistent with the current-year disclosure. iThe impact of this change on the
Segment Income previously presented for the three months ended April 2, 2022 is summarized below:
(1)Represents
additional “Cost of products sold” related to the step-up of inventory (to fair value) acquired in connection with an acquisition of $i0.1 during the three months ended April 2, 2022.
(2) iiNEW
ACCOUNTING PRONOUNCEMENTS/
The following is a summary of new accounting pronouncements that apply or may apply to our business.
The London Interbank Offered Rate (“LIBOR”) is scheduled to be discontinued on June 30, 2023. In an effort to address the various challenges created by such discontinuance, the Financial Accounting Standards Board (“FASB”) issued three amendments to existing guidance, Accounting Standards Update (“ASU”) No. 2020-04, No. 2021-01, and No. 2022-06, Reference Rate Reform. The amended guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications
to agreements (e.g., loans, debt securities, derivatives, etc.) necessitated by the reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by the reference rate reform. Application of the guidance in the amendments is optional, is only available in certain situations, and is only available for companies to apply until December 31, 2024. In conjunction with entering into an amended and restated credit agreement on August 12, 2022, we adopted this guidance with no material impact on our condensed consolidated financial statements.
9
(3) iACQUISITIONS
AND DISCONTINUED OPERATIONS
As indicated in Note 1, on March 31, 2022, we completed the acquisition of ITL. The pro forma effects of this acquisition are not material to our condensed consolidated results of operations.
Sale of Transformer Solutions Business
On October 1, 2021, we completed the sale of SPX Transformer Solutions, Inc. During the first quarter of 2022, we agreed to the final adjustment of the purchase price which resulted in a payment to the buyer of $i13.9
and an increase to the gain on sale of $i0.2.
Wind-Down of DBT Business
We completed the wind-down of our DBT Technologies (PTY) LTD (“DBT”) business in the fourth quarter of 2021. As a result of completing the wind-down plan, we are reporting DBT as a discontinued operation for all periods presented.
i
The
assets and liabilities of DBT have been included within “Assets of DBT and Heat Transfer” and “Liabilities of DBT and Heat Transfer,” respectively, on the condensed consolidated balance sheets as of April 1, 2023 and December 31, 2022. The major line items constituting DBT’s assets and liabilities as of April 1, 2023 and December 31, 2022 are shown below:
We completed the wind-down of our SPX Heat Transfer (“Heat Transfer”) business in the fourth quarter of 2020. As a result of completing the wind-down plan, we are reporting Heat Transfer as a discontinued operation for all periods presented.
The assets and liabilities of Heat Transfer have been included within “Assets of DBT and Heat Transfer” and “Liabilities of DBT and Heat Transfer,” respectively, on the condensed consolidated balance sheets as of April 1, 2023 and December 31, 2022. The major line items constituting Heat Transfer’s
assets and liabilities as of April 1, 2023 and December 31, 2022 are shown below:
Changes
in estimates associated with liabilities retained in connection with a business divestiture (e.g. income taxes) may occur. As a result, it is possible that the resulting gains/losses on these and other previous divestitures may be materially adjusted in subsequent periods.
For the three months ended April 1, 2023 and April 2, 2022, results of operations from our businesses reported as discontinued operations were as follows:
(1)
Income for the three months ended April 1, 2023 resulted primarily from income recorded in connection with a dispute resolution matter (see Note 15 for additional details), partially offset by legal costs incurred in connection with various dispute resolution matters related to two large power projects. The loss for the three months ended April 2, 2022 resulted primarily from legal costs incurred in connection with various dispute resolution matters related to two large power projects.
(2) Loss for the three months ended April 2, 2022 resulted primarily from revisions to liabilities retained in connection with prior dispositions.
We disaggregate revenue from contracts with customers by major product line and based on the timing of recognition for each of our reportable segments, as we believe such disaggregation best depicts how the nature, amount, timing, and uncertainty of our revenues and cash flows are
affected by economic factors, with such disaggregation presented below for the three months ended April 1, 2023 and April 2, 2022:
Our customers are invoiced for products and services at the time of delivery or based on contractual milestones, resulting in outstanding receivables with payment terms from these customers (“Contract Accounts Receivable”). In some cases, the timing of revenue recognition, particularly for revenue recognized over time, differs from when such amounts are invoiced to customers, resulting in a contract asset (revenue recognition precedes the invoicing of the related revenue amount) or a contract liability (payment from the customer precedes recognition of the related revenue amount). Contract
assets and liabilities are generally classified as current. On a contract-by-contract basis, the contract assets and contract liabilities are reported net within our condensed consolidated balance sheets. iOur
contract balances consisted of the following as of April 1, 2023 and December 31, 2022:
(1)
Included in “Accounts receivable, net” within the accompanying condensed consolidated balance sheets.
(2) Included in “Other long-term liabilities” within the accompanying condensed consolidated balance sheets.
The $i7.4 increase in our net contract asset balance from December 31,
2022 to April 1, 2023 was due primarily to revenue recognized during the period, partially offset by cash payments received from customers during the period.
As of April 1, 2023, the aggregate amount allocated to remaining performance obligations was $i227.0. We expect to recognize revenue on approximately i80%
and i91% of remaining performance obligations over the next i12 and i24
months, respectively, with the remaining recognized thereafter.
(5) iiLEASES/
There have been no material changes to our operating and finance leases during the three months ended April 1, 2023.
(6) iINFORMATION ON REPORTABLE SEGMENTS
We are a global supplier of highly specialized,
engineered solutions with operations in i15 countries and sales in over i100
countries around the world.
We have aggregated our operating segments into the following itwo reportable segments: HVAC and Detection and Measurement. The factors considered in determining our aggregated segments are the economic similarity of the businesses, the nature of products sold or services provided, production processes, types of customers, distribution methods, and regulatory environment. In determining our reportable segments, we apply the threshold criteria of the Segment Reporting Topic of the Codification.
Segment Income is determined before considering, if applicable, impairment and special charges, long-term incentive compensation, certain other operating income/expense, other indirect corporate expenses, intangible asset amortization expense, inventory step-up charges, and certain other acquisition-related costs. This is consistent with the way our CODM evaluates the results of each segment.
HVAC Reportable Segment
Our HVAC reportable segment engineers, designs, manufactures, installs and services package and process cooling products and engineered air movement solutions for the HVAC industrial and power generation markets, as well as boilers and comfort heating and ventilation products for the residential and commercial markets. The primary distribution channels for the segment’s products are direct to customers, independent manufacturing representatives, third-party distributors,
and retailers. The segment serves a customer base in North America, Europe, and Asia.
13
Detection and Measurement Reportable Segment
Our Detection and Measurement reportable segment engineers, designs, manufactures, services, and installs underground pipe and cable locators, inspection and rehabilitation equipment, robotic systems, transportation systems, communication technologies, and aids to navigation. The primary distribution channels for the segment’s products are direct to customers and third-party distributors. The segment serves a global customer base, with a strong presence in North America, Europe, Africa, and Asia.
Corporate Expense
Corporate
expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters.
Financial data for our reportable segments for the three months ended April 1, 2023 and April 2, 2022 are presented below:
(1)Includes
certain acquisition-related costs incurred during the three months ended April 1, 2023 and April 2, 2022 of $i0.6 and $i0.1,
respectively, including additional “Cost of products sold” related to the step-up of inventory (to fair value) acquired in connection with an acquisition of $i0.1 during the three months ended April 2, 2022.
(7) iSPECIAL
CHARGES, NET
There were no special charges for the three months ended April 1, 2023 and April 2, 2022. No significant future charges are expected to be incurred under actions approved as of April 1, 2023.
i
The following is an analysis of our restructuring liabilities for the three months ended April 1,
2023 and April 2, 2022:
At
April 1, 2023, the net carrying value of intangible assets with determinable lives consisted of $i92.7 in the HVAC reportable segment and $i134.5
in the Detection and Measurement reportable segment. At April 1, 2023, trademarks with indefinite lives consisted of $i105.2 in the HVAC reportable segment and $i63.8
in the Detection and Measurement reportable segment.
i
We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter in conjunction with our annual financial planning process, with such testing based primarily on events and circumstances existing as of the end of the third quarter. In addition, we test goodwill for impairment on a more frequent basis if there are indications of potential impairment. In reviewing goodwill and indefinite-lived intangible assets
for impairment, we initially perform a qualitative analysis. If there is an indication of impairment, we then perform a quantitative analysis. A significant amount of judgment is involved in determining if an indication of impairment has occurred between annual testing dates. Such indication may include: a significant decline in expected future cash flows; a significant adverse change in legal factors or the business climate; unanticipated competition; and a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit.
During the fourth quarter of 2022, we performed a quantitative analysis on the goodwill of our Cincinnati Fan reporting unit. The Cincinnati Fan analysis indicated that the fair value of its net assets exceeded the related carrying value by less than i10%.
A change in assumptions used in Cincinnati Fan’s quantitative analysis (e.g., projected revenues and profit growth rates, discount rates, industry price multiples, etc.) could result in the reporting unit’s estimated fair value being less than the carrying value. If Cincinnati Fan is unable to achieve its current financial forecast, we may be required to record an impairment charge in a future period related to its goodwill. As of April 1, 2023, Cincinnati Fan’s goodwill totaled $i54.8.
/
We
perform our annual trademarks impairment testing during the fourth quarter, or on a more frequent basis, if there are indications of potential impairment. The fair value of our trademarks is based on applying estimated royalty rates to projected revenues, with resulting cash flows discounted at a rate of return that reflects current market conditions (fair value based on unobservable inputs - Level 3, as defined in Note 17). The primary basis for these projected revenues is the annual operating plan for each of the related businesses, which is prepared in the fourth quarter of each year.
(10) iWARRANTY
iThe
following is an analysis of our product warranty accrual for the periods presented:
On February 17, 2022, we transferred our existing liability under the SPX Postretirement Benefit Plans (the “Plans”) for a group of participants with retiree life insurance benefits to an insurance carrier for consideration payable to the insurance carrier of approximately $i10.0. Of this consideration, $i9.0
was paid during the quarter ended April 2, 2022, with the remainder paid in the second quarter of 2022. This transaction resulted in a settlement charge of $i0.7 recorded to “Other income, net” during the first quarter of 2022. In addition, and in connection with this transfer, we remeasured the assets and liabilities of the Plans as of the transfer date, which resulted in a benefit of $i0.4
recorded to “Other income, net” for the three months ended April 2, 2022.
16
i
Net
periodic benefit (income) expense for our pension and postretirement plans include the following components:
(1)While
not due for repayment until August 2027 under the terms of our senior credit agreement, we classify within current liabilities the portion of the outstanding balance that we believe will be repaid over the next year, with such amount based on an estimate of cash that is expected to be generated over such period.
(2)The term loan is repayable in quarterly installments equal to i0.625% of the initial term loan balance of $i245.0,
beginning in December 2023 and in each of the first three quarters of 2024, and i1.25% during the fourth quarter of 2024, all quarters of 2025 and 2026, and the first two quarters of 2027. The remaining balance is payable in full on August 12, 2027. Balances are net of unamortized debt issuance costs of $ii0.7/
at April 1, 2023 and December 31, 2022.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $i50.0, as available. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses. At April 1, 2023, we had $i0.9
of available borrowing capacity under this facility after giving effect to outstanding borrowings of $i47.0.
(4)Primarily includes balances under a purchase card program of $i1.9
and $i1.8 and finance lease obligations of $i0.7 and $i0.7
at April 1, 2023 and December 31, 2022, respectively. The purchase card program allows for payment beyond the normal payment
/
17
terms for goods and services acquired under the program. As this arrangement extends the payment of these purchases beyond their normal payment terms through third-party lending institutions, we have classified these amounts as short-term debt.
Senior Credit Facilities
A detailed description of our senior credit facilities is included
in our 2022 Annual Report on Form 10-K.
At April 1, 2023, we had $i469.2 of available borrowing capacity under our revolving credit facilities, after giving effect to borrowings under the domestic revolving loan facility of $i20.0
and $i10.8 reserved for outstanding letters of credit. In addition, at April 1, 2023, we had $i10.7 of available issuance capacity under our foreign
credit instrument facilities after giving effect to $i14.3 reserved for outstanding letters of credit.
The weighted-average interest rate of outstanding borrowings under our senior credit agreement was approximately i6.4%
at April 1, 2023.
At April 1, 2023, we were in compliance with all covenants of our senior credit agreement.
(13) iDERIVATIVE FINANCIAL INSTRUMENTS
Interest
Rate Swaps
We maintain interest rate swap agreements (“Swaps”) that have a remaining notional amount of $i228.1, cover the period through November 2024, and effectively convert this portion of the borrowings under our senior credit facilities to a fixed rate of i1.077%,
plus the applicable margin. We have designated and are accounting for our Swaps as cash flow hedges.
As of April 1, 2023 and December 31, 2022, the unrealized gain, net of tax, recorded in accumulated other comprehensive income (“AOCI”) was $i9.1
and $i11.0, respectively. In addition, the fair value of our Swaps was $i12.2 (with $i9.1
recorded as a current asset and $i3.1 as a non-current asset) as of April 1, 2023, and $i14.7 (with $i8.7
recorded as a current asset and $i6.0 as a non-current asset) as of December 31, 2022. Changes in the fair value of our Swaps are reclassified into earnings as a component of interest expense, when the forecasted transaction impacts earnings.
We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the South African Rand, British Pound Sterling, and Euro.
From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional
currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries (“FX forward contracts”).
We had FX forward contracts with an aggregate notional amount of $i7.5
and $i6.9 outstanding as of April 1, 2023 and December 31, 2022, respectively, with all of the $i7.5 scheduled to mature within one year. The fair value of our FX forward
contracts was less than $ii0.1/
at April 1, 2023 and December 31, 2022.
(14) iSTOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE COMPENSATION
Income Per Share
i
The
following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income per share:
Weighted-average number of common shares used in basic income per share
i45.382
i45.554
Dilutive
securities — Employee stock options and restricted stock units
i1.020
i0.891
Weighted-average
number of common shares and dilutive securities used in diluted income per share
i46.402
i46.445
/
18
The
weighted-average number of restricted stock units and stock options excluded from the computation of diluted income per share because the assumed proceeds for these instruments exceed the average market value of the underlying common stock for the related period were i0.173 and i0.534,
respectively, for the three months ended April 1, 2023, and i0.243 and i0.737,
respectively, for the three months ended April 2, 2022.
Long-Term Incentive Compensation
Long-term incentive compensation awards may be granted to certain eligible employees or non-employee directors. A detailed description of the awards granted prior to 2023 is included in our 2022 Annual Report on Form 10-K.
Awards granted on March 1, 2023 to executive officers and other members of senior management were comprised of performance stock units (“PSU’s”), stock options, and time-based restricted stock units (“RSU’s”), while other eligible employees were granted PSU’s and RSU’s. The PSU’s are eligible to vest at the end of a ithree-year
performance period, with performance based on the total return of our stock over the ithree-year performance period against a peer group within the S&P 600 Capital Goods Index. Stock options and RSU’s vest ratably over the ithree-year
period subsequent to the date of grant.
Non-employee directors receive annual long-term incentive awards at the time of our annual meeting of stockholders, with the 2023 meeting scheduled for May 9, 2023.
Compensation expense within income from continuing operations related to long-term incentive awards totaled $ii3.1/
for the three months ended April 1, 2023 and April 2, 2022. The related tax benefit was $ii0.5/
for the three months ended April 1, 2023 and April 2, 2022.
PSU’s and RSU’s
We use the Monte Carlo simulation model valuation technique to determine the fair value of our restricted stock units that contain a market condition (i.e., the PSU’s). The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each PSU.
As
of April 1, 2023, there was $i18.3 of unrecognized compensation cost related to PSU’s and RSU’s. We expect this cost to be recognized over a weighted-average period of i2.5
years.
Stock Options
On March 1, 2023, we granted i0.074 stock options, all of which were outstanding (but not exercisable) as of April 1, 2023. The exercise
price per share of these options is $i71.93 and the maximum contractual term of these options is i10
years.
i
The fair value per share of the stock options granted on March 1, 2023 was $i31.20.
The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
Annual expected stock price volatility
i37.15
%
Annual
expected dividend yield
i—
%
Risk-free interest rate
i4.18
%
Expected
life of stock option (in years)
i6.0
/
Annual expected stock price volatility is based on a weighted average of SPX’s stock volatility of the most recent
isix-year historical volatility of a peer company group. There is no annual expected dividend yield as we discontinued dividend payments in 2015 and do not expect to pay dividends for the foreseeable future. The average risk-free interest rate is based on
19
the
ifive-year and iseven-year
treasury constant maturity rates. The expected option life is based on a ithree-year pro-rata vesting schedule and represents the period of time that awards are expected to be outstanding.
As of April 1, 2023, there was $i3.4
of unrecognized compensation cost related to stock options. We expect this cost to be recognized over a weighted-average period of i2.7 years.
Accumulated Other Comprehensive Income
i
The
changes in the components of accumulated other comprehensive income, net of tax, for the three months ended April 1, 2023 were as follows:
Foreign Currency Translation Adjustment
Net Unrealized Gains
on Qualifying Cash
Flow Hedges(1)
Pension and
Postretirement
Liability
Adjustment(2)
Total
Balance
at beginning of period
$
i239.1
$
i11.0
$
i7.4
$
i257.5
Other
comprehensive income (loss) before reclassifications
i4.4
(i0.3)
i—
i4.1
Amounts
reclassified from accumulated other comprehensive income
iThe
following summarizes amounts reclassified from each component of accumulated other comprehensive income for the three months ended April 1, 2023 and April 2, 2022:
Affected Line Item in the Condensed Consolidated Statements of Operations
(Gains) losses on qualifying cash flow hedges:
Swaps
$
(i2.1)
$
i0.5
Interest
expense
Pre-tax
(i2.1)
i0.5
Income
taxes
i0.5
(i0.1)
$
(i1.6)
$
i0.4
Gains
on pension and postretirement items:
Amortization of unrecognized prior service credits - Pre-tax
$
(i1.0)
$
(i1.1)
Other
income, net
Income taxes
i0.3
i0.2
$
(i0.7)
$
(i0.9)
(15) iCONTINGENT
LIABILITIES AND OTHER MATTERS
General
Numerous claims, complaints and proceedings arising in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (collectively, “claims”). These claims relate to litigation matters (e.g., class actions, derivative lawsuits and contracts, intellectual property and competitive claims), environmental matters, product liability matters (which, prior to the Asbestos Portfolio Sale, were predominately associated with alleged exposure to asbestos-containing materials), and other risk management matters (e.g., general liability, automobile, and workers’ compensation claims). Additionally, we may become subject
to other claims of which we are currently unaware, which may be significant, or the claims of which we are aware may result in our incurring significantly greater loss than we anticipate. While we (and our subsidiaries) maintain property, cargo, auto, product, general liability, environmental, and directors’ and officers’ liability insurance and have acquired rights under similar policies in connection with acquisitions that we believe cover a significant portion of these claims, this insurance may be insufficient or unavailable (e.g., in the case of insurer insolvency) to protect us against potential loss exposures. Also, while we believe we are entitled to indemnification from third parties for some of these claims, these rights may be insufficient or unavailable to protect us against potential loss exposures.
Our recorded liabilities
related to these matters totaled $i38.9 and $i39.5 at April 1, 2023 and December 31, 2022, respectively. Of
these amounts, $i31.6 and $i30.8 are included in “Other long-term liabilities” within our condensed consolidated balance sheets at April 1,
2023 and December 31, 2022, respectively, with the remainder included in “Accrued expenses.” The liabilities we record for these matters are based on a number of assumptions, including historical claims and payment experience. While we base our assumptions on facts currently known to us, they entail inherently subjective judgments and uncertainties. As a result, our current assumptions for estimating these liabilities may not prove accurate, and we may be required to adjust these liabilities in the future, which could result in charges to earnings. These variances relative to current expectations could have a material impact on our financial position and results of operations.
Asbestos Matters
As indicated in Note 1, we completed the Asbestos Portfolio
Sale on November 1, 2022, which resulted in the divestiture of ithree wholly-owned subsidiaries that hold asbestos liabilities and certain assets, including related insurance assets. As a result of this transaction, the Company divested all obligations with respect to pending and future asbestos claims relating to these subsidiaries.
During
the three months ended April 2, 2022, our payments for asbestos-related claims, net of respective insurance recoveries of $i7.4, were $i7.2.
During
the three months ended April 2, 2022, there were ino other changes in estimates associated with our assets and liabilities related to our asbestos product liability matters.
21
Large
Power Projects in South Africa
Overview - Since 2008, DBT had been executing on itwo large power projects in South Africa (Kusile and Medupi), on which it has substantially completed its scope of work. Over such time, the business environment surrounding these projects was difficult, as DBT, along with many other contractors on the projects, experienced delays, cost over-runs, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors,
various subcontractors (including DBT and its subcontractors), and various suppliers. DBT’s remaining responsibilities relate largely to resolution of various claims, primarily between itself and one of its prime contractors, Mitsubishi Heavy Industries Power—ZAF (f.k.a. Mitsubishi-Hitachi Power Systems Africa (PTY) LTD), or “MHI.”
The challenges related to the projects have resulted in (i) significant adjustments to our revenue and cost estimates for the projects, (ii) DBT’s submission of numerous change orders to the prime contractors, (iii) various claims and disputes between DBT and other parties involved with the projects (e.g., prime contractors, subcontractors, suppliers, etc.), and (iv) the possibility that DBT may become subject to additional claims, which could be significant. It is possible that some outstanding claims may not be resolved until after the prime contractors
complete their scopes of work. Our future financial position, operating results, and cash flows could be materially impacted by the resolution of current and any future claims.
Claims by DBT - DBT has asserted claims against MHI of approximately South African Rand i1,000.0 (or $i55.3).
As DBT prepares these claims for dispute resolution processes, the amounts, along with the characterization, of the claims could change. Of these claims, South African Rand i606.0 (or $i33.5),
which is inclusive of the amounts awarded in the adjudications referred to below, are currently proceeding through contractual dispute resolution processes and DBT is likely to initiate additional dispute resolution processes. DBT is also pursuing several claims to force MHI to abide by its contractual obligations and provide DBT with certain benefits that MHI may have received from its customer on the projects. In addition to existing asserted claims, DBT believes it has additional claims and rights to recovery based on its performance under the contracts with, and actions taken by, MHI. DBT is continuing to evaluate the claims and the amounts owed to it under the contracts based on MHI’s failure to comply with its contractual obligations. The amounts DBT may recover for current and potential
future claims against MHI are not currently known given (i) the extent of current and potential future claims by MHI against DBT (see below for further discussion) and (ii) the unpredictable nature of any dispute resolution processes that may occur in connection with these current and potential future claims. No revenue has been recorded in the accompanying condensed consolidated financial statements with respect to current or potential future claims against MHI.
On July 23, 2020, a dispute adjudication panel issued a ruling in favor of DBT on certain matters related to the Kusile and Medupi projects. The panel (i) ruled that DBT had achieved takeover on i9
of the units; (ii) ordered MHI to return $i2.3 of bonds (which have been subsequently returned by MHI); (iii) ruled that DBT is entitled to the return of an additional $i4.3 of bonds upon the completion of certain administrative milestones; (iv) ordered MHI to pay
South African Rand i18.4 (or $i1.1 at the time of the ruling) in incentive payments for work performed by DBT (which MHI has subsequently paid);
and (v) ruled that MHI waived its rights to assert delay damages against DBT on ione of the units of the Kusile project. The ruling is subject to MHI’s rights to seek further arbitration in the matter, as provided in the contracts. As such, the incentive payments noted above have not been recorded in our accompanying condensed consolidated statements of operations.
On February 22,
2021, a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on itwo units of the Kusile project. In connection with the ruling, MHI paid DBT South African Rand i126.6
(or $i8.6 at the time of payment). This ruling was subject to final and binding arbitration in this matter. In March 2023, an arbitrator upheld the decision of the dispute adjudication panel. As a result, the South African Rand i126.6
(or $i7.0) was recorded as income during the quarter ended April 1, 2023, with such amount recorded within “Gain (loss) on disposition of discontinued operations, net of tax.”
On April 28, 2021, a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on itwo
units of the Medupi project. In connection with the ruling, MHI paid DBT South African Rand i82.0 (or $i6.0 at the time of payment). This ruling
is subject to MHI’s rights to seek further arbitration in the matter and, thus, the amount awarded has not been reflected in our accompanying condensed consolidated statements of operations.
Claims by MHI - On February 26, 2019, DBT received notification of an interim claim consisting of both direct and consequential damages from MHI alleging, among other things, that DBT (i) provided defective product and (ii) failed to meet certain project milestones. In September 2020, MHI made a demand on certain bonds issued in its favor by DBT, based solely on these alleged defects, but without further substantiation or other justification (see further discussion below). On December 30, 2020, MHI notified DBT of its intent to take these claims to binding arbitration even though
the vast majority of these claims had not been brought appropriately before a dispute adjudication board as required under the relevant subcontracts. On June 4, 2021, in connection with the arbitration, DBT received a revised version of the claim. Similar to the interim claim, we believe the vast majority of the damages summarized in the revised claim are unsubstantiated and, thus, any loss for the majority of these claims is considered remote. The remainder of the claims in both the interim notification and the revised
22
version largely appear to be direct in nature. On September 21, 2022, an arbitration tribunal ruled that only South African Rand i349.6
(or $i19.3) of MHI’s revised claim had been brought appropriately before a dispute adjudication board as required under the relevant subcontracts, with MHI’s other claims dismissed from the arbitration proceedings. MHI subsequently referred the claims dismissed from the arbitration, with approximately South African Rand i400.2
(or $i22.1) related to claims that are direct in nature, to a new dispute adjudication panel. DBT has numerous defenses and, thus, we do not believe that DBT has a probable loss associated with any of these claims. As such, no loss has been recorded in the accompanying condensed consolidated financial statements with respect to these claims. DBT intends to vigorously defend itself against these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable to estimate the potential loss or range of potential loss associated
with these claims due to the (i) lack of support provided by MHI for these claims; (ii) complexity of contractual relationships between the end customer, MHI, and DBT; (iii) legal interpretation of the contract provisions and application of South African law to the contracts; and (iv) unpredictable nature of any dispute resolution processes that may occur in connection with these claims.
In April and July 2019, DBT received notifications of intent to claim liquidated damages totaling South African Rand i407.2
(or $i22.5) from MHI alleging that DBT failed to meet certain project milestones related to the construction of the filters for both the Kusile and Medupi projects. DBT has numerous defenses against these claims and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the accompanying condensed consolidated financial statements with respect to these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable
to estimate the potential loss or range of potential loss.
In March 2023, MHI submitted to DBT notices of intent to claim totaling South African Rand i1,664.0 (or $i92.0)
related to DBT’s filter and heater scopes of work, alleging that DBT provided defective product. MHI has provided minimal support for these allegations and DBT believes it has numerous defenses against them. Thus, we do not believe that DBT has a probable loss associated with these allegations and DBT intends to vigorously defend itself against them. As such, no amounts have been recorded in the accompanying condensed consolidated financial statements with respect to these allegations. We currently are unable to estimate the range of potential loss, if any, associated with these allegations due to the (i) lack of support provided by MHI; (ii) complexity of contractual relationships between the end customer, MHI, and DBT; (iii) legal interpretation of the contract provisions and application of South African law to the contracts;
and (iv) unpredictable nature of any dispute resolution processes that may occur in connection with these claims.
Bonds Issued in Favor of MHI - DBT was obligated with respect to bonds issued by banks in favor of MHI. In September of 2020, MHI made a demand, and received payment of South African Rand i239.6 (or $i14.3
at the time of payment), on certain of these bonds. In May 2021, MHI made an additional demand, and received payment of South African Rand i178.7 (or $i12.5 at the time of payment), on certain of the remaining
bonds at such time. In both cases, we funded the payment as required under the terms of the bonds and our senior credit agreement. In its demands, MHI purported that DBT failed to carry out its obligations to rectify certain alleged product defects and that DBT failed to meet certain project milestones. DBT denies liability for such allegations and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of the South African Rand i418.3 (or $i23.1)
that has been paid. On October 11, 2022, a dispute adjudication panel ruled MHI drew on amounts in excess of the bond values stipulated in the contracts and was required to refund DBT South African Rand i90.8 (or $i5.0
at the time of payment) of the previously demanded amounts, plus interest of South African Rand i12.5 (or $i0.7 at the time of payment). MHI paid these amounts on October 14, 2022. We have reflected the remaining South African Rand ii327.5/
(or $i18.1 and $i19.1 as of April 1, 2023 and December 31, 2022, respectively) within “Assets of DBT and Heat Transfer” on the accompanying
condensed consolidated balance sheets as of April 1, 2023 and December 31, 2022.
All other bonds previously issued in favor of MHI have been returned or cancelled by the issuing banks.
In addition, SPX Technologies, Inc. has guaranteed DBT’s performance on these projects to the prime contractors, including MHI.
Claim against Surety - On February 5, 2021, DBT received payment of $i6.7
on bonds issued in support of performance by one of DBT’s sub-contractors. The sub-contractor maintains a right to seek recovery of such amount and, thus, the amount received by DBT has not been reflected in our condensed consolidated statements of operations.
Claim for Contingent Consideration Related to ULC Robotics (“ULC”) Acquisition
In connection with our acquisition of ULC in September 2020, the seller of ULC was eligible for additional cash consideration of up to $i45.0
upon achievement of certain operating and financial performance milestones. During the third quarter of 2021, we concluded that the operational and financial performance milestones noted above were not achieved and, thus, no amount is due to the seller.
23
On August 23, 2022, the seller of ULC initiated a breach-of-contract lawsuit against us in the United States District Court for the Eastern District of New York claiming that it is entitled to a portion of the additional cash consideration linked to certain operating performance milestones totaling $i15.0.
SPX has numerous defenses against this claim and, thus, we do not believe we have a probable loss associated with the claim.
Litigation Matters
We are subject to other legal matters that arise in the normal course of business. We believe these matters are either without merit or of a kind that should not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows; however, we cannot assure you that these proceedings or claims will not have a material effect on our financial position, results of operations or cash flows.
Environmental Matters
Our operations and properties are subject to federal, state, local and foreign regulatory requirements relating to environmental protection. It is our policy to comply
fully with all applicable requirements. As part of our effort to comply, we have a comprehensive environmental compliance program that includes environmental audits conducted by internal and external independent professionals, as well as regular communications with our operating units regarding environmental compliance requirements and anticipated regulations. Based on current information, we believe that our operations are in substantial compliance with applicable environmental laws and regulations, and we are not aware of any violations that could have a material effect, individually or in the aggregate, on our business, financial condition, and results of operations or cash flows. We had liabilities for site investigation and/or remediation at ii17/sites that we own or control, as of April 1, 2023 and December 31, 2022. In addition, while we believe that we maintain adequate accruals to cover the costs of site investigation and/or remediation, we cannot provide assurance that new matters, developments, laws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future.
Our environmental accruals cover anticipated costs, including investigation, remediation, and maintenance of clean-up sites. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. Accordingly, our estimates may change based on future
developments, including new or changes in existing environmental laws or policies, differences in costs required to complete anticipated actions from estimates provided, future findings of investigation or remediation actions, or alteration to the expected remediation plans. It is our policy to revise an estimate once it becomes probable and the amount of change can be reasonably estimated. We generally do not discount our environmental accruals and do not reduce them by anticipated insurance recoveries. We take into account third-party indemnification from financially viable parties in determining our accruals where there is no dispute regarding the right to indemnification.
In the case of contamination at offsite, third-party disposal sites, as of April 1, 2023 and December 31, 2022 , we have been notified that we are potentially
responsible and have received other notices of potential liability pursuant to various environmental laws at ii9/
sites, at which the liability has not been settled, and all of which have been active in the past few years. These laws may impose liability on certain persons that are considered jointly and severally liable for the costs of investigation and remediation of hazardous substances present at these sites, regardless of fault or legality of the original disposal. These persons include the present or former owners or operators of the site and companies that generated, disposed of or arranged for the disposal of hazardous substances at the site. We are considered a “de minimis” potentially responsible party at most of the sites, and we estimate that our aggregate liability, if any, related to these sites is not material to our condensed consolidated financial statements. We conduct extensive environmental due diligence with respect to potential acquisitions, including environmental site assessments and such further testing as we may deem warranted. If an environmental
matter is identified, we estimate the cost and either establish a liability, purchase insurance or obtain an indemnity from a financially sound seller; however, in connection with our acquisitions or dispositions, we may assume or retain significant environmental liabilities, some of which we may be unaware. The potential costs related to these environmental matters and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of various clean-up technologies, the uncertain level of insurance or other types of recovery, and the questionable level of our responsibility. We record a liability when it is both probable and the amount can be reasonably estimated.
In our opinion, after considering accruals established for such purposes, the cost of remedial actions for compliance with the present laws and regulations
governing the protection of the environment are not expected to have a material impact, individually or in the aggregate, on our financial position, results of operations or cash flows.
24
Self-Insured Risk Management Matters
We are self-insured for certain of our workers’ compensation, automobile, product and general liability, disability and health costs, and we believe that we maintain adequate accruals to cover our retained liability. Our accruals for risk management matters are determined by us, are based on claims filed and estimates of claims incurred but not yet reported, and generally are not discounted. We consider a number of factors, including third-party actuarial valuations, when making these determinations. We maintain
third-party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts. This insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against loss exposures.
(16)iINCOME AND OTHER TAXES
Uncertain Tax Benefits
As
of April 1, 2023, we had gross unrecognized tax benefits of $i4.5 (net unrecognized tax benefits of $i4.1). All of these net unrecognized tax benefits would impact our effective
tax rate from continuing operations if recognized.
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of April 1, 2023, gross accrued interest totaled $i2.1 (net accrued interest of $i1.8).
As of April 1, 2023, we had ino accrual for penalties included in our unrecognized tax benefits.
Based on the outcome of certain examinations or as a result of the expiration of statutes of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by up to $i3.0.
The previously unrecognized tax benefits relate to a variety of tax matters including transfer pricing and various state matters.
Other Tax Matters
For the three months ended April 1, 2023, we recorded an income tax provision of $i11.3 on $i50.4
of pre-tax income from continuing operations, resulting in an effective rate of i22.4%. This compares to an income tax provision for the three months ended April 2, 2022 of $i2.6
on $i15.6 of pre-tax income from continuing operations, resulting in an effective rate of i16.7%.
The most significant item impacting the income tax provision for the first quarter of 2023 and 2022 was $i0.9 and $i0.7,
respectively, of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the periods.
i
We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain positions when we determine that an uncertain position meets the criteria of the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions are recorded in “Income taxes payable” and “Deferred and other income taxes” in the accompanying condensed consolidated balance sheets based on the expectation
as to the timing of when the matters will be resolved. As events change and resolutions occur, these accruals are adjusted, such as in the case of audit settlements with taxing authorities.
U.S. Federal income tax returns are subject to examination for a period of three years after filing the return. We are not currently under examination by the Internal Revenue Service and believe any contingencies in open years are adequately provided for.
State income tax returns generally are subject to examination for a period of three to five years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We regularly have various state income tax returns in the process of examination. We believe
any uncertain tax positions related to these examinations have been adequately provided for.
We regularly have various foreign income tax returns under examination. We believe that any uncertain tax positions related to these examinations have been adequately provided for.
An unfavorable resolution of one or more of the above matters could have a material impact on our results of operations or cash flows in the quarter and year in which an adjustment is recorded or the tax is due or paid. As audits and examinations are still in process, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.
25
(17) iFAIR
VALUE
i
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. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
•Level 1 — Quoted prices for identical instruments in active markets.
•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 — Significant inputs to the valuation model are unobservable.
There were no changes during the periods presented to the valuation techniques we use to measure
asset and liability fair values on a recurring or nonrecurring basis. There were no transfers between the three levels of the fair value hierarchy for the periods presented.
Valuation Methods Used to Measure Fair Value on a Non-Recurring Basis
Contingent Consideration for Sensors & Software and ECS Acquisitions — In connection with the acquisition of Sensors & Software, the sellers were eligible for additional cash consideration of up to $i3.7,
with payment of such contingent consideration dependent upon the achievement of certain milestones. Such contingent consideration totaled $i1.3, and was paid during the quarter ended April 2, 2022.
In connection with the acquisition of ECS, the seller was eligible for additional cash consideration of up to $i15.4,
with payment of such contingent consideration dependent upon the achievement of certain milestones. During the first quarter of 2022, we concluded the probability of achieving the financial performance milestones had lessened due to a delay in the execution of certain large orders. Thus, during the quarter ended April 2, 2022, we reduced the fair value/liability by $i0.9, with such amount recorded in “Other operating income.”The estimated fair value of such contingent
consideration was $ii0.0/
at April 1, 2023 and December 31, 2022.
We estimate the fair value of contingent consideration based on the probability of the acquired business achieving the applicable milestones.
Goodwill, Indefinite-Lived Intangible and Other Long-Lived Assets —Certain of our non-financial assets are subject to impairment analysis, including long-lived assets, indefinite-lived intangible assets and goodwill. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the instrument
be recorded at its fair value.
Valuation Methods Used to Measure Fair Value on a Recurring Basis
Derivative Financial Instruments — Our financial derivative assets and liabilities include interest rate swaps and FX forward contracts, valued using valuation models based on observable market inputs such as forward rates, interest rates, our own credit risk and the credit risk of our counterparties, which comprise investment-grade financial institutions. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. We have not made any adjustments to the inputs obtained from the independent sources. Based on our continued ability to enter into forward contracts,
we consider the markets for our fair value instruments active. We primarily use the income approach, which uses valuation techniques to convert future amounts to a single present amount.
As of April 1, 2023, there has been no significant impact to the fair value of our derivative liabilities due to our own credit risk, as the related instruments are collateralized under our senior credit facilities. Similarly, there has been no significant impact to the fair value of our derivative assets based on our evaluation of our counterparties’ credit risks.
Equity Security — We estimate the fair value of an equity security that we hold utilizing a practical expedient under existing guidance, with such estimated fair value based on our ownership percentage applied to the net asset value as provided quarterly by the
investee. The value is updated annually, during the first quarter, based on the investee’s most recent audited financial statements. During the three months ended April 1, 2023 and April 2, 2022, we recorded gains of $i3.6 and $i4.4,
respectively, to “Other income, net” to reflect an increase in the estimated fair value of the equity security. As of April 1, 2023 and December 31, 2022, the equity security had an estimated fair value of $i39.4 and $i35.8,
respectively.
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Indebtedness and Other — The estimated fair value of our debt instruments as of April 1, 2023 and December 31, 2022 approximated the related carrying values due primarily to the variable market-based interest rates for such instruments. See Note 12 for further details.
(18) iSUBSEQUENT
EVENTS
On April 3, 2023, we completed the acquisition of T. A. Morrison & Co. Inc. (“TAMCO”), a market leader in motorized and non-motorized dampers that control airflow in large-scale specialty applications in commercial, industrial, and institutional markets. We purchased TAMCO for cash proceeds of approximately $i125.0, net of cash acquired of $i0.8.
The post-acquisition operating results of TAMCO will be reflected within our HVAC reportable segment.
On April 21, 2023 (the “Incremental Amendment Effective Date”), we entered into an Incremental Facility Activation Notice (the “Incremental Amendment”) with Bank of America, N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto, which amends the Amended and Restated Credit Agreement, dated as of August 12, 2022 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Deutsche Bank AG, as foreign trade facility agent, and the Administrative Agent.
The
Incremental Amendment provides for additional senior secured term loans in the aggregate amount of $i300.0 (the “Incremental Term Loans”), which are available in up to ithree
drawings (subject to customary conditions) from the Incremental Amendment Effective Date to October 18, 2023. The proceeds of the Incremental Term Loans will be used to finance, in part, permitted acquisitions, to pay related fees, costs and expenses and for other lawful corporate purposes. The Incremental Term Loans will mature on August 12, 2027. We may voluntarily prepay the Incremental Term Loans, in whole or in part, without premium or penalty.
The interest rates applicable to the Incremental Term Loans are, at our option, equal to either (x) an alternate base rate (the highest of (a) the federal funds effective rate plus i0.50%,
(b) the prime rate of Bank of America, N.A., and (c) the one-month Term SOFR rate plus i1.00%) or (y) the Term SOFR rate for the applicable interest period plus i0.10%,
plus, in each case, an applicable margin percentage, which varies based on the Company’s Consolidated Leverage Ratio (defined in the Credit Agreement generally as the ratio of consolidated total debt (excluding the face amount of undrawn letters of credit, bank undertakings or analogous instruments and net of unrestricted cash and cash equivalents) at the date of determination to Consolidated EBITDA for the four fiscal quarters ended most recently before such date). SPX may elect interest periods of one, three or isix
months (and, if consented to by all relevant lenders, any other period not greater than twelve months) for Term SOFR borrowings. SPX will also pay a commitment fee to the incremental lenders on the daily unused amount of the commitments for the Incremental Term Loans, payable quarterly at a per annum rate which also varies based on the Company’s Consolidated Leverage Ratio. iThe commitment fee rate and interest rate margins are as follows:
Consolidated
Leverage Ratio
Commitment Fee
Term SOFR Loans
ABR Loans
Less than i2.00 to 1.0
i0.225
%
i1.500
%
i0.500
%
Greater
than or equal to i2.00 to 1.0 but less than i3.00 to 1.0
i0.250
%
i1.625
%
i0.625
%
Greater
than or equal to i3.00 to 1.0
i0.275
%
i1.875
%
i0.875
%
The
Incremental Term Loans will be guaranteed by certain domestic material subsidiaries of the Company and secured by a first priority pledge and security interest in i100% of the capital stock of our domestic subsidiaries or the domestic subsidiary guarantors
and i65% of the voting capital stock (and i100%
of the non-voting capital stock) of material first-tier foreign subsidiaries, all subject to certain exceptions and on a pari passu basis with the other credit facilities under the Credit Agreement.
On April 28, 2023, we, through SPX Electric Heat, Inc., a wholly owned subsidiary of SPX (“Merger Sub”), entered into an Agreement and Plan of Merger with ASPEQ Parent Holdings, Inc. (“ASPEQ”), and Industrial Growth Partners V, L.P., as representative of the stockholders of ASPEQ, providing for the acquisition by SPX of ASPEQ for aggregate consideration of approximately $i418.0
in cash (subject to closing date adjustments) pursuant to a merger of Merger Sub with and into ASPEQ, with ASPEQ being the surviving corporation of the merger (the “Merger”). Consummation of the Merger is subject to various conditions and regulatory approvals. The post-acquisition operating results of ASPEQ will be reflected within our HVAC reportable segment.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(in millions)
FORWARD-LOOKING
STATEMENTS
Some of the statements in this document and any documents incorporated by reference, including any statements as to operational and financial projections, constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our businesses’ or our industries’ actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements may address our plans, our strategies, our prospects, changes and trends in our business and the markets in which we operate under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) or in other sections of this document. In some cases, you can identify forward-looking statements by terminology such as “may,”“could,”“would,”“should,”“expect,”“plan,”“anticipate,”“intend,”“believe,”“estimate,”“predict,”“project,”“potential” or “continue” or the negative of those terms or other comparable terminology. Risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, include the following: cyclical changes and specific industry events in the Company’s markets; changes in anticipated capital investment and maintenance expenditures by customers; availability, limitations or cost increases of raw materials and/or
commodities that cannot be recovered in product pricing; the impact of competition on profit margins and the Company’s ability to maintain or increase market share; inadequate performance by third-party suppliers and subcontractors for outsourced products, components and services and other supply-chain risks; the uncertainty of claims resolution with respect to the large power projects in South Africa, as well as claims with respect to, environmental and other contingent liabilities; the impact of climate change and any legal or regulatory actions taken in response there to; cyber-security risks; risks with respect to the protection of intellectual property, including with respect to the Company’s digitalization initiatives; the impact of overruns, inflation and the incurrence of delays with respect to long-term
fixed-price contracts; defects or errors in current or planned products; the impact of the COVID-19 pandemic and governmental and other actions taken in response; domestic economic, political, legal, accounting and business developments adversely affecting the Company’s business, including regulatory changes; changes in worldwide economic conditions; uncertainties with respect to the Company’s ability to identify acceptable acquisition targets; uncertainties surrounding timing and successful completion of any announced acquisition or disposition transactions, including with respect to integrating acquisitions and achieving cost savings or other benefits from acquisitions; the impact of retained liabilities of disposed
businesses; potential labor disputes; and extreme weather conditions and natural and other disasters. These statements are only predictions and actual events or results may differ materially. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. In addition, management’s estimates of future operating results are based on our current complement of businesses, which is subject to change as management selects strategic markets.
All the forward-looking statements are qualified in their entirety by reference to the factors discussed under the heading “Risk Factors” in our 2022 Annual Report on Form 10-K, in any subsequent filing with the U.S. Securities and Exchange Commission, as well as in any documents incorporated by reference that describe risks, uncertainties and other factors that
could cause results to differ materially from those projected in these forward-looking statements. We caution you that these risk factors may not be exhaustive. We operate in a continually changing business environment and frequently enter into new businesses and product lines. We cannot predict these new risk factors, and we cannot assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, you should not rely on forward-looking statements as a prediction of actual results. We disclaim any responsibility to update or publicly revise any forward-looking statements to reflect events or circumstances that arise after the date of this document.
COVID-19 PANDEMIC, SUPPLY CHAIN DISRUPTIONS, LABOR SHORTAGES,
AND COST INCREASES
The impact of the COVID-19 pandemic on our operating results for the first quarter of 2023 was minimal. However, during January 2022, there was an increase in COVID-19 cases at certain of our manufacturing facilities, which resulted in a high-level of absenteeism at such facilities during the month. In addition, certain of our businesses experienced supply chain disruptions, as well as labor shortages, while all of our businesses experienced increases in raw material, component, and transportation costs. The combination of these matters negatively impacted our operating results during the first quarter of 2022, as we experienced lower absorption of manufacturing costs and, in some cases, the negative impact of cost increases on fixed-price customer contracts. During the first quarter
of 2023, we experienced more stable labor and supply chain environments and continue to actively manage these matters.
POTENTIAL IMPACTS OF RUSSIA/UKRAINE CONFLICT
The Russia/Ukraine conflict, and governmental actions implemented in response to the conflict, did not have a significant adverse impact on our operating results during the three months ended April 1, 2023 and April 2, 2022. We are
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monitoring the availability of certain raw materials that are supplied by businesses in these countries. However, at this time,
we do not expect the potential impact to be material to our operating results.
OTHER SIGNIFICANT MATTERS
•Acquisitions
◦Enterprise Control Systems Ltd (“ECS”)
▪Acquired on August 2, 2021 for cash consideration of $39.4, net of cash acquired of $5.1.
▪The seller was eligible for additional cash consideration of up to $15.4, upon achievement of certain financial performance milestones.
▪During
the first quarter of 2022, we reduced the estimated fair value/liability by $0.9, with such amount recorded to “Other operating income.”
▪The financial performance milestones were not achieved and, thus, as of April 1, 2023 the estimated fair value/liability related to the contingent consideration was $0.0.
▪Post-acquisition operating results of ECS are included within our Detection and Measurement reportable segment.
◦International Tower Lighting, LLC (“ITL”)
▪Acquired on March 31, 2022 for cash consideration of $40.4, net of
(i) cash acquired of $1.1 and (ii) an adjustment to the purchase price received during the third quarter of 2022 related to acquired working capital of $1.4.
▪Post-acquisition operating results of ITL are included within our Detection and Measurement reportable segment.
•Disposition of SPX Transformer Solutions, Inc. (“Transformer Solutions”)
◦On October 1, 2021, we completed the sale of Transformer Solutions, which is included in discontinued operations for all periods presented.
◦During the first quarter of 2022, we paid $13.9 to the buyer of Transformer Solutions related primarily to
the settlement of the final working capital balances of the business.
•Transfer of Postretirement Life Insurance Benefit Obligation
◦On February 17, 2022, we transferred our obligation for life insurance benefits under our postretirement benefit plans to an insurance carrier for total cash consideration of $10.0.
◦We paid $9.0 at the time of transfer and an additional $1.0 during the second quarter of 2022.
◦In connection with the transfer, we recorded a net charge of $0.3 within our first quarter 2022 results.
◦See Note
11 to our condensed consolidated financial statements for additional details.
•Changes in Estimated Fair Value of an Equity Security
◦We recorded gains of $3.6 and $4.4 during the three months ended April 1, 2023 and April 2, 2022, respectively.
◦See Note 17 to our condensed consolidated financial statements for additional details.
OVERVIEW OF OPERATING
RESULTS
Revenues for the three months ended April 1, 2023 totaled $399.8, compared to $307.1 during the respective period in 2022. The increase in revenues during the three months ended April 1, 2023, compared to the respective prior-year period, was due primarily to the impact of organic revenue growth within the HVAC and Detection and Measurement reportable segments and, to a much lesser extent, the impact of the ITL acquisition. The organic revenue growth within the HVAC reportable segment was due to increased sales of cooling and heating products associated with both price and volume increases. Organic revenue growth within the Detection and Measurement reportable segment was due to the execution of large projects within the communication technologies, transportation and aids to navigation businesses and, to a lesser extent,
strong order trends within most of our short-cycle businesses.
During the three months ended April 1, 2023, we generated operating income of $49.8, compared to $11.4 for the respective period in 2022. The increase in operating income during the three months ended April 1, 2023 was due primarily to higher income for both our HVAC and Detection and Measurement reportable segments and decreases in corporate and intangible amortization expense. The increase in income for our HVAC reportable segment was primarily due to the organic revenue growth mentioned above and greater absorption of manufacturing costs resulting from higher volumes and more stable labor and supply chain environments. The increase in income for our Detection and Measurement reportable segment was due
29
primarily
to the organic revenue growth mentioned above. The decrease in corporate expense was due to higher costs incurred during the first quarter of 2022 related to various strategic and transformational initiatives as well as asbestos matters, partially offset by higher short-term incentive compensation during the first quarter of 2023.
Cash flows from operating activities associated with continuing operations totaled $0.8 for the three months ended April 1, 2023, compared to cash flows used in operating activities of $48.6 during the three months ended April 2, 2022. The increase in cash flows from operating activities was due primarily to (i) the increase in income during the period discussed above, (ii) a cash payment of $9.0 during the first quarter of 2022 in connection with the transfer
of our postretirement life insurance benefit obligation to an insurance carrier (see Note 11 to our condensed consolidated financial statements for additional details), (iii) net payments for asbestos-related matters made prior to the divestiture of our wholly owned subsidiaries that hold asbestos liabilities and certain assets, including related insurance assets, of $8.2, (iv) working capital improvements at certain of our project-related businesses, as cash flows for these businesses are often subject to contract milestones that can impact the timing of cash flows from period to period, and (v) a reduction in the level of elevated purchases of raw materials and components, primarily within our HVAC reportable segment, during the first quarter of 2023 due to a more
stable supply chain environment.
RESULTS OF CONTINUING OPERATIONS
The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2022 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year. We establish actual interim closing dates using a fiscal calendar, which requires our businesses to close their books on the Saturday closest to the end of the first calendar quarter, with the first, second, and third quarters being 91 days in length. Our fourth quarter ends on December 31. The interim closing dates for the first, second and third quarters of 2023 are April 1, July 1 and September
30, compared to the respective April 2, July 2, and October 1, 2022 dates. We had one less day in the first quarter of 2023 and will have one more day in the fourth quarter of 2023 than in the respective 2022 periods.
Cyclicality of End Markets, Seasonality and Competition — The financial results of our businesses closely follow changes in the industries in which they operate and end markets in which they serve. In addition, certain of our businesses have seasonal fluctuations. For example, our heating businesses tend to be stronger in the third and fourth quarters, as customer buying habits are driven largely by seasonal weather patterns. In aggregate, our businesses tend to be stronger in the second half of the year.
Although our businesses operate in highly competitive markets, our competitive position cannot
be determined accurately in the aggregate or by segment since none of our competitors offer all the same product lines or serve all the same markets as we do. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors.
Non-GAAP Measures — Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations and acquisitions/divestitures. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented as, when considered
in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool they can use to evaluate our management of assets held from period to period. In addition, organic revenue growth (decline) is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted in the United States (“GAAP”), should not be considered a substitute for net revenue growth (decline) as determined in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.
30
The
following table provides selected financial information for the three months ended April 1, 2023 and April 2, 2022, including the reconciliation of organic revenue increase to the net revenue increase:
Income
from continuing operations before income taxes
50.4
15.6
223.1
Income tax provision
(11.3)
(2.6)
334.6
Income from continuing operations
39.1
13.0
200.8
Components
of revenue increase:
Organic
30.6
Foreign currency
(1.1)
Acquisitions
0.7
Net
revenue increase
30.2
_________________________________
* Not meaningful for comparison purposes.
Revenues — For the three months ended April 1, 2023, the increase in revenues, compared to the respective period in 2022, was due to the impact of organic revenue growth within the HVAC and Detection and Measurement reportable segments and, to a much lesser extent, the impact of the ITL acquisition. The organic revenue growth within
the HVAC reportable segment was due to increased sales of cooling and heating products associated with both price and volume increases. Organic revenue growth within the Detection and Measurement reportable segment was due primarily to the execution of large projects within the communication technologies, transportation and aids to navigation businesses and, to a lesser extent, strong order trends within most of our short-cycle businesses.
See “Results of Reportable Segments” for additional details.
Gross Profit— For the three months ended April 1, 2023, the increase in gross profit and gross profit as a percentage of revenues, compared to the respective period in 2022, was due primarily to the revenue
growth mentioned above and greater absorption of manufacturing costs as a result of higher volumes and more stable labor and supply chain environments, particularly within our HVAC reportable segment.
Selling, General and Administrative (“SG&A”) Expense — For the three months ended April 1, 2023, the increase in SG&A expense, compared to the respective period in 2022, was due primarily to (i) increases in sales incentive plan expense driven by the higher revenues mentioned above, (ii) higher employee compensation, inclusive of increases in short-term incentive compensation expense, and (iii) higher travel expense, partially offset by lower corporate expense resulting from higher costs incurred during the first quarter of 2022
related to various strategic and transformational initiatives, as well as expense related to asbestos matters.
Intangible Amortization— For the three months ended April 1, 2023, the decrease in intangible amortization, compared to the respective period in 2022, was due to the 2022 period including incremental amortization related to the backlog intangible asset associated with the Cincinnati Fan acquisition.
Other Operating Income— Other operating income for the three months ended April 2, 2022 was due to a reduction
in the fair value / liability associated with the contingent consideration related to the ECS acquisition.
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Other Income, net — Other income, net, for the three months ended April 1, 2023 was composed primarily of a gain of $3.6 related to a change in the estimated fair value of an equity security that we hold, partially offset by foreign currency transaction losses of $0.6 and pension and postretirement expense of $0.2.
Other income, net, for the three months ended April 2, 2022
was composed primarily of a gain of $4.4 related to a change in the estimated fair value of an equity security that we hold, income associated with a transition services agreement of $0.9, pension and postretirement income of $0.8, and income derived from company owned life insurance policies of $0.7.
Interest Expense, net — Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during the three months ended April 1, 2023, compared to the respective period in 2022, was the result of an increase in interest income associated with higher interest rates on cash balances.
Income Tax Provision
— For the three months ended April 1, 2023, we recorded an income tax provision of $11.3 on $50.4 of pre-tax income from continuing operations, resulting in an effective rate of 22.4%. This compares to an income tax provision for the three months ended April 2, 2022 of $2.6 on $15.6 of pre-tax income from continuing operations, resulting in an effective rate of 16.7%. The most significant item impacting the income tax provision for the first quarters of 2023 and 2022 was $0.9 and $0.7, respectively, of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the periods.
RESULTS
OF REPORTABLE SEGMENTS
The following information should be read in conjunction with our condensed consolidated financial statements and related notes. These results exclude the operating results of discontinued operations for all periods presented. See Note 6 to our condensed consolidated financial statements for a description of our reportable segments.
Non-GAAP Measures — Throughout the following discussion of segment results, we use “organic revenue” growth (decline) to facilitate explanation of the operating performance of our segments. Organic revenue growth (decline) is a non-GAAP financial measure and is not a substitute for revenue growth (decline). Refer to the explanation of this measure and purpose of use by management under “Results of Continuing Operations—Non-GAAP Measures.”
Presentation
of Segment Income — During 2022, we concluded that, although the assessment of our reportable segments was performed using the appropriate measures as defined by the Segment Reporting Topic of the Accounting Standards Codification (“Codification”), the disclosure of operating income for each of our reportable segments (“Segment Income”) was not consistent with these measures or the measures used by our Chief Operating Decision Maker (“CODM”) when evaluating the results of, or allocating resources to, our reportable segments. We previously disclosed that Segment Income was determined before considering impairment and special charges, long-term incentive compensation, certain other operating income/expense, and other indirect corporate expenses. Our CODM also excludes the impact of intangible asset amortization, inventory step-up charges, and other acquisition-related costs from Segment Income. Accordingly, these amounts have
now been excluded, for all periods presented, from Segment Income and presented separately in our reconciliation of Segment Income to consolidated operating income within this quarterly report on Form 10-Q. Refer to Notes 1 and 6 to our condensed consolidated financial statements for additional details.
Revenues — For the three months ended April 1, 2023,
the increase in revenues, compared to the respective period in 2022, was due to organic revenue growth driven by increased sales of both cooling and heating products. The increase in organic revenue was associated with price increases implemented across our cooling and heating businesses as well as volume increases resulting from greater plant throughput and more stable labor and supply chain environments.
Income — For the three months ended April 1, 2023, the increase in income and margin, compared to the respective period in 2022, was due primarily to the organic revenue growth mentioned above and greater absorption of manufacturing costs resulting from the higher volumes and more stable labor and supply chain environments.
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Backlog
— The segment had backlog of $270.3 and $263.4 as of April 1, 2023 and April 2, 2022, respectively.
Revenues —
For the three months ended April 1, 2023, the increase in revenues, compared to the respective period in 2022, was due primarily to organic revenue growth resulting from the execution of large projects within the communication technologies, transportation and aids to navigation businesses and, to a lesser extent, strong order trends within most of our short-cycle businesses.
Income — For the three months ended April 1, 2023, the increase in income and margin, compared to the respective period in 2022, was primarily due to the organic revenue growth mentioned above.
Backlog — The segment had backlog of $244.7
and $153.1 as of April 1, 2023 and April 2, 2022, respectively.
Corporate Expense — Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters. The
decrease in corporate expense during the three months ended April 1, 2023, compared to the respective period in 2022, was due primarily to higher costs incurred during the first quarter of 2022 related to various strategic and transformational initiatives as well as asbestos matters, partially offset by higher short-term incentive compensation during the first quarter of 2023.
Long-Term Incentive Compensation Expense — Long-term incentive compensation expense represents our consolidated expense, which we do not allocate for segment reporting purposes.
LIQUIDITY AND FINANCIAL CONDITION
Listed
below are the cash flows from (used in) operating, investing, and financing activities and discontinued operations, as well as the net change in cash and equivalents for the three months ended April 1, 2023 and April 2, 2022.
Change in cash and equivalents due to changes in foreign currency exchange rates
1.0
(0.1)
Net change in cash and equivalents
$
55.6
$
(126.5)
Operating
Activities — The increase in cash flows from operating activities during the three months ended April 1, 2023, compared to the respective period in 2022, was due primarily to (i) the increase in income previously mentioned, (ii) a
33
cash payment of $9.0 during the first quarter of 2022 in connection with the transfer of our postretirement life insurance benefit obligation to an insurance carrier (see Note 11 to our condensed consolidated financial statements for additional details), (iii) net payments for asbestos-related matters made prior to the divestiture of our wholly owned subsidiaries
that hold asbestos liabilities and certain assets, including related insurance assets, of $8.2, (iv) working capital improvements at certain of our project-related businesses, as cash flows for these businesses are often subject to contract milestones that can impact the timing of cash flows from period to period, and (v) a reduction in the level of elevated purchases of raw materials and components, primarily within our HVAC reportable segment, during the first quarter of 2023 due to a more stable supply chain environment.
Investing Activities — Cash flows used in investing activities for the three months ended April 1, 2023 were comprised primarily of capital expenditures of
$4.0.
Cash flows used in investing activities for the three months ended April 2, 2022 were comprised of cash utilized in the acquisition of ITL of $41.8 and capital expenditures of $2.1.
Financing Activities — Cash flows from financing activities for the three months ended April 1, 2023 were comprised of borrowings under our credit facilities of $67.0 in connection with the T.A. Morrison & Co. Inc. acquisition, partially offset by minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $4.1.
Cash flows
used in financing activities for the three months ended April 2, 2022 were comprised of minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $6.4, net repayments under our various debt instruments of $3.3, and contingent consideration paid of $1.3 related to a prior acquisition.
Discontinued Operations — Cash used in discontinued operations for the three months ended April 1, 2023 relate primarily to disbursements for professional fees incurred in connection with claim activities related to the large power projects in South Africa (see Note 15 to the condensed consolidated financial statements for additional details).
Cash
flows used in discontinued operations for the three months ended April 2, 2022relate primarily to (i) disbursements for liabilities retained in connection with dispositions and (ii) a payment of $13.9 to the buyer of Transformer Solutions related to the settlement of the final working capital balances for the business.
Change in Cash and Equivalents due to Changes in Foreign Currency Exchange Rates — Changes in foreign currency exchange rates did not have a significant impact on our cash and equivalents during the first quarter of 2023 and 2022.
Borrowings and Availability
Borrowings — The following summarizes our debt activity (both current
and non-current) for the three months ended April 1, 2023.
(1)While
not due for repayment until August 2027 under the terms of our senior credit agreement, we classify within current liabilities the portion of the outstanding balance that we believe will be repaid over the next year, with such amount based on an estimate of cash that is expected to be generated over such period.
(2)The term loan is repayable in quarterly installments equal to 0.625% of the initial term loan balance of $245.0, beginning in December 2023 and in each of the first three quarters of 2024, and 1.25% during the fourth quarter of 2024, all quarters of 2025 and 2026, and the first two quarters of 2027. The remaining balance is payable in full on August 12, 2027. Balances are net of unamortized debt issuance costs of $0.7 at April 1, 2023 and December 31,
2022.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses. At April 1, 2023, we had $0.9 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $47.0.
(4)Primarily includes balances under a purchase card program of $1.9 and $1.8 and finance lease obligations of $0.7 and $0.7 at April 1, 2023 and December 31, 2022, respectively. The purchase card program allows for payment beyond the normal payment
34
terms
for goods and services acquired under the program. As this arrangement extends the payment of these purchases beyond their normal payment terms through third-party lending institutions, we have classified these amounts as short-term debt.
At April 1, 2023, we were in compliance with all covenants of our senior credit agreement.
Availability — At April 1, 2023, we had $469.2 of available borrowing capacity under our revolving credit facilities, after giving effect to borrowings under the domestic revolving loan facility of $20.0 and $10.8 reserved for outstanding letters of credit. In addition, at April 1, 2023, we had $10.7 of available issuance capacity under our foreign credit instrument facilities after giving
effect to $14.3 reserved for outstanding letters of credit.
On April 21, 2023, we entered into an amendment to the agreement governing our senior credit facilities to provide for additional senior secured term loans in the aggregate amount of up to $300.0 (the “Incremental Term Loans”), which are available in up to three drawings (subject to customary conditions) through October 18, 2023. The proceeds of the Incremental Term Loans will be used to finance, in part, permitted acquisitions, to pay related fees, costs and expenses and for other lawful corporate purposes. The Incremental Term Loans, if drawn, will mature on August 12, 2027. We may voluntarily prepay the Incremental Term Loans, in whole
or in part, without premium or penalty. Refer to Note 18 to our condensed consolidated financial statements for additional details of the amendment to provide for the Incremental Term Loans.
Financing instruments may be used from time to time including, but not limited to, public and private debt and equity offerings, operating leases, finance leases and securitizations. We expect that we will continue to access these markets as appropriate to maintain liquidity and to provide sources of funds for general corporate purposes, acquisitions or to refinance existing debt.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and equivalents, trade accounts
receivable, and interest rate swap and foreign currency forwards contracts. These financial instruments, other than trade accounts receivable, are placed with high-quality financial institutions. We periodically evaluate the credit standing of these financial institutions.
We maintain cash levels in bank accounts that, at times, may exceed federally-insured limits. We have not experienced, and believe we are not exposed to, significant risk of loss in these accounts.
We have credit loss exposure in the event of nonperformance by counterparties to the above financial instruments, but have no other off-balance-sheet credit risk of accounting loss. We anticipate, however, that counterparties will be able to fully satisfy their obligations under the contracts.
We do not obtain collateral or other security to support financial instruments subject to credit risk, but we do monitor the credit standing of counterparties.
Concentrations of credit risk arising from trade accounts receivable are due to selling to customers in a particular industry. Credit risks are mitigated by performing ongoing credit evaluations of our customers’ financial conditions and obtaining collateral, advance payments, or other security when appropriate. No one customer, or group of customers that to our knowledge are under common control, accounted for more than 10% of our revenues for any period presented.
Other Matters
Contractual Obligations — There have been no material changes in the amounts of our contractual obligations from those disclosed in our
2022 Annual Report on Form 10-K. Our total net liabilities for unrecognized tax benefits including interest were $5.9 as of April 1, 2023. Based on the outcome of certain examinations or as a result of the expiration of statutes of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by up to $3.0.
Contingencies and Other Matters — Numerous claims, complaints and proceedings arising in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (collectively, “claims”). These claims relate to litigation matters (e.g., contracts,
intellectual property, and competitive claims), environmental matters, claims with respect to the large power projects in South Africa, product liability matters, and other risk management matters (e.g., general liability, automobile, and workers’ compensation claims). Additionally, we may become subject to other claims of which we are currently unaware, which may be significant, or the claims of which we are aware may result in our incurring significantly greater loss than we anticipate. We accrue for these contingencies when we believe a liability is probable and can be reasonably estimated. As events change and resolutions occur, these accruals may be adjusted and could differ materially from amounts originally estimated. See Note 15 to the condensed consolidated financial statements for a further discussion of contingencies and other matters.
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Our
Certificate of Incorporation provides that we shall indemnify our officers and directors to the fullest extent permitted by the Delaware General Corporation Law for any personal liability in connection with their employment or service with us. While we maintain insurance for this type of liability, the liability could exceed the amount of the insurance coverage.
In addition, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters” herein, and “Risk Factors” in our 2022 Annual Report on Form 10-K, as well as similar sections in any future filings for an understanding of the risks, uncertainties, and trends facing our businesses.
Critical Accounting Policies and Use of Estimates
The
preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties are discussed in our 2022 Annual Report on Form 10-K, the discussion within which is incorporated herein by reference. We have affected no material change in either our critical accounting policies or use of estimates since the filing of our
2022 Annual Report on Form 10-K.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Management does not believe our exposure to market risk has significantly changed since December 31, 2022 and does not believe that such risks will result in significant adverse impacts to our financial condition, results of operations or cash flows.
ITEM
4. Controls and Procedures
SPX management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(b), as of April 1, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 1, 2023.
Changes in Internal Control Over Financial Reporting
In connection with the evaluation by SPX management, including the Chief Executive Officer and the Chief Financial Officer, of our internal control over
financial reporting, pursuant to Exchange Act Rule 13a-15(d), no changes during the quarter ended April 1, 2023 were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by this Item is incorporated
by reference from the footnotes to the condensed consolidated financial statements, specificallyNote 15, included under Part I of this Form 10-Q.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2022
Annual Report on Form 10-K, which could materially affect our business, financial condition or future results.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL)
Cover Page Interactive Data File (formatted as Inline
XBRL and contained in the Interactive Data Files submitted as Exhibit 101.*)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
