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(Exact Name of registrant as specified in its charter)
iDelaware
i38-1016240
(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)
NOT APPLICABLE
(Former
name, former address, and former fiscal year, if changed since last report)
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 (i52,855,255 and i45,304,445 issued and outstanding at July 3, 2021, respectively, and i52,704,973
and i45,032,325 issued and outstanding at December 31, 2020, respectively)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions, except per share data and asbestos-related claims)
(1) iBASIS
OF PRESENTATION
Unless otherwise indicated, “we,”“us” and “our” mean SPX Corporation 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 fair 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 VIEs are considered immaterial, individually and in aggregate, to our condensed consolidated financial statements.
Agreement for Sale of Transformers Solutions Business
On June 8, 2021, we entered into a definitive agreement to sell our
SPX Transformer Solutions, Inc. subsidiary (“Transformer Solutions”), a business that engineers, designs, manufactures, and services transformers for the U.S. power transmission and distribution market, to GE-Prolec Transformers, Inc. and Prolec GE Internacional, S. de R.L. de C.V. for cash proceeds of $i645.0. The sale is subject to normal closing conditions and a potential adjustment to the sales price based on cash, debt, and working capital at the date of closing, with the closing expected to occur in the fourth quarter of 2021. After the sale of Transformer Solutions, we will
have only a limited presence in the power generation markets and will focus our efforts and investments on the HVAC and detection and measurement markets. Historically, Transformer Solutions’ operations have had a significant impact on our consolidated financial results, with revenues totaling approximately i25% of our total consolidated revenues. As we no longer will have a consequential presence in the power generation markets, and given its significance to our historical consolidated financial results, we have concluded that the sale of Transformer Solutions represents a strategic shift. Accordingly,
we have classified the business as a discontinued operation in the accompanying condensed consolidated financial statements. See Note 3 for additional details.
Change in Segment Reporting Structure
As noted above, Transformer Solutions is now being reported as a discontinued operation within the accompanying condensed consolidated financial statements. In addition, the remaining operations of the Engineered Solutions reportable segment, with annual income representing less than i5%
of the total annual income of our reportable segments, are being reported within our HVAC reportable segment, as these operations are now being managed, and evaluated by our Chief Operating Decision Maker, as part of our HVAC cooling business.
i
Wind-Down of the SPX Heat Transfer Business
As a continuation of our strategic shift away from power-generation markets, during the fourth quarter of 2020, we completed the wind-down of the SPX Heat Transfer business (“Heat Transfer”), which included providing
all products and services on the business’s remaining contracts with customers. As a result, we are reporting Heat Transfer as a discontinued operation in the accompanying condensed consolidated financial statements. See Note 3 for additional details.
Acquisition of ULC
On September 2, 2020, we completed the acquisition of ULC Robotics (“ULC”), a leading developer of robotic systems, machine learning applications, and inspection technology for the energy, utility, and industrial markets, for cash proceeds of $i89.2,
net of cash acquired of $i4.0. Under the terms of the purchase and sales agreement, the seller is eligible for additional cash consideration of up to $i45.0,
with payments scheduled to be made upon successful achievement of certain operational and financial performance milestones. The estimated fair value of such contingent consideration is $ii24.3/,
which is reflected as a liability in our condensed consolidated balance sheets as of July 3, 2021 and December 31, 2020. The post-acquisition operating results of ULC are reflected within our Detection and Measurement reportable segment.
7
Acquisition of Sensors & Software
On November 11, 2020, we completed the acquisition of Sensors & Software Inc. (“Sensors & Software”), a leading manufacturer and distributor of ground penetrating radar products used for locating underground utilities, detecting unexploded
ordinances, and geotechnical and geological investigations, for cash proceeds of $i15.5, net of cash acquired of $i0.3. Under the terms of the purchase and sales agreement, the seller is eligible for additional cash consideration
of up to $i4.0, with payment scheduled to be made in 2021 upon successful achievement of a financial performance milestone during the twelve months following the date of acquisition. The estimated fair value of such contingent consideration is $ii0.7/,
which is reflected as a liability in the accompanying condensed consolidated balance sheets as of July 3, 2021 and December 31, 2020. The post-acquisition operating results of Sensors & Software are reflected within our Detection and Measurement reportable segment.
Acquisition of Sealite
On April 19, 2021, we completed the acquisition of Sealite Pty Ltd and affiliated entities, including Sealite USA, LLC (doing business as Avlite Systems) and Star2M Pty Ltd (collectively, “Sealite”). Sealite is a leader in the design and manufacture of marine and aviation Aids to Navigation products. We purchased Sealite for cash proceeds of $i81.6,
net of cash acquired of $i2.3. The post-acquisition results of Sealite are reflected within our Detection and Measurement Reportable segment.
The assets acquired and liabilities assumed in the ULC, Sensors & Software, and Sealite transactions have been recorded at estimates of fair value as determined by management, based on information available and assumptions as to future operations and are subject to change, primarily for the final assessment and valuation of certain income tax amounts.
Impact
of the Coronavirus Disease (the “COVID-19 pandemic”)
We experienced adverse impacts of the COVID-19 pandemic during the first half of 2020 with diminishing impacts in the second half of 2020 and through the first half of 2021. There have been no indications that the COVID-19 pandemic has resulted in a material decline in the carrying value of any assets, or a material change in the estimate of any contingent amounts, recorded in our condensed consolidated balance sheet as of July 3, 2021. However, there is uncertainty as to the duration and overall impact of the COVID-19 pandemic, which could result in an adverse material change in a future period to the estimates we have made for the valuation of assets and contingent amounts.
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, 2020. 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 2021 are April 3, July 3 and October 2, compared to the respective March 28, June 27 and September 26, 2020 dates. We had five more days in the first quarter of 2021 and will have six fewer days in the fourth quarter of 2021 than in the respective 2020 periods. It is not practicable to estimate the impact of the five additional days on our consolidated operating results for the six months ended July 3, 2021, when compared to the consolidated operating results for the 2020 respective period.
(2) iNEW
ACCOUNTING PRONOUNCEMENTS
The following is a summary of new accounting pronouncements that apply or may apply to our business.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13. ASU 2016-13 changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, based on historical experience, current conditions and reasonable and supportable forecasts. The requirements of ASU 2016-13 are to be applied on a modified retrospective basis, which entails recognizing the initial effect of adoption in retained earnings.We adopted ASU 2016-13 on January 1, 2020, which resulted in an increase of our retained
deficit of $i0.5.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-
8
date
loss limitations and changes in tax laws, and clarifying the accounting for the step-up in the tax basis of goodwill. The transition requirements are primarily prospective and the effective date is for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. We adopted this guidance on January 1, 2021, with no material impact on our condensed consolidated financial statements.
The London Interbank Offered Rate (“LIBOR”) is scheduled to be discontinued on June 30, 2023, with some tenors ceasing on December 31, 2021. In an effort to address the various challenges created by such discontinuance, the FASB issued two amendments to existing
guidance, ASU No. 2020-04 and No. 2021-01, 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, 2022. We are currently evaluating the impacts of reference rate reform and the new guidance on our condensed consolidated financial statements.
(3) iACQUISITIONS
AND DISCONTINUED OPERATIONS
As indicated in Note 1, on September 2, 2020, November 11, 2020 and April 19, 2021, we completed the acquisitions of ULC, Sensors & Software and Sealite, respectively. The pro forma effects of these acquisitions are not material to the condensed consolidated results of operations for the three and six months ended June 27, 2020.
Agreement to Sell Transformer Solutions Business
As discussed in Note 1, on June 8, 2021, we entered into a definitive agreement to sell Transformer
Solutions and, in connection with such, are reporting the business as a discontinued operation in the accompanying condensed consolidated financial statements.
i
Major line items constituting pre-tax income and after-tax income of Transformer Solutions for the three and six months ended July
3, 2021 and June 27, 2020 are shown below:
(1)
During the three and six months ended July 3, 2021, we recorded tax benefits of $ii33.0/
in “Income from discontinued operations, net of tax” including (i) $ii28.6/
for the excess tax basis in the stock of Transformer Solutions and (ii) $ii4.4/
for previously unrecognized state net operating losses, each as a result of the definitive agreement to sell the business.
/
9
i
The
assets and liabilities of Transformer Solutions have been classified as assets and liabilities of discontinued operations as of July 3, 2021 and December 31, 2020. The major line items constituting Transformer Solutions assets and liabilities as of July 3, 2021 and December 31, 2020 are shown below:
As discussed in Note 1, we completed the wind-down of Heat Transfer 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 prior periods presented.
Major line items constituting pre-tax income (loss) and after-tax income (loss) of Heat Transfer for the three and six months ended June 27, 2020, are shown below:
Income
(loss) from discontinued operations, net of tax
$
(i0.3)
$
i0.1
We
recognized net gains of $i4.1 and $i3.3
during the three and six months ended July 3, 2021 and a net loss of $ii1.3/
during the three and six months ended June 27, 2020 within “Gain (loss) on disposition of discontinued operations, net of tax” resulting primarily from revisions to liabilities, including income tax liabilities, retained in connection with prior businesses classified as discontinued operations.
We disaggregate revenue from contracts with customers by major product line and based on the timing of recognition for each of our reportable segments and our other operating segment, 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 and six months ended July 3, 2021 and June 27, 2020:
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 July 3, 2021 and December 31, 2020:
(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 $i19.0decrease in our net contract balance from December
31, 2020 to July 3, 2021 was due primarily to cash payments received from customers during the period, partially offset by revenue recognized during the period.
During the three and six months ended July 3, 2021, we recognized revenues of $i23.2 and $i38.3,
respectively, related to our contract liabilities at December 31, 2020.
Performance Obligations
As of July 3, 2021, the aggregate amount allocated to remaining performance obligations was $i103.4. We expect to recognize revenue on approximately
i56% and i86% of remaining performance obligations over the next i12
and i24 months, respectively, with the remaining recognized thereafter.
(5) iLEASES
There have been no material changes to our operating and finance leases during the three and six months ended July 3, 2021.
(6) iINFORMATION ON REPORTABLE SEGMENTS AND “OTHER” OPERATING SEGMENT
We
are a global supplier of highly specialized, engineered solutions with operations in over i15 countries and sales in over i100 countries
around the world.
Our DBT Technologies (PTY) LTD (“DBT”) operating segment is reported within an “Other” category outside of our reportable segments. We have aggregated our other 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. Operating income or loss for each of our operating segments is determined before considering impairment and special charges, long-term incentive compensation, certain other operating expenses, and other indirect corporate expenses. This is consistent with the way our Chief Operating Decision Maker evaluates the results of each segment.
HVAC Reportable Segment
Our HVAC reportable segment engineers, designs, manufactures, installs and services package and process cooling equipment products 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, bus fare collection systems, communication technologies, and obstruction lighting. 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.
Other
As
noted above, “Other” consists of our South African operating segment, DBT. Our DBT operating segment engineers, designs, manufactures, installs, and services equipment for the industrial and power generation markets, with its efforts focused primarily on two large power projects in South Africa that are in the final stages of completion (see Note 15 for additional details).
Corporate Expense
Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters.
i
Financial
data for our reportable segments and our other operating segment for the three and six months ended July 3, 2021 and June 27, 2020 are presented below:
(1)
For the three and six months ended July 3, 2021, includes a charge of $ii2.7/
related to revisions of recorded assets for asbestos-related claims. For the six months ended June 27, 2020, includes a gain of $i0.4 related to revisions to estimates of certain liabilities retained in connection with the 2016 sale of the dry cooling business.
14
(7) iSPECIAL
CHARGES, NET
iSpecial charges, net, for the three and six months ended July 3, 2021 and June 27, 2020 are described in more detail below:
HVAC
— Charges for the three and six months ended July 3, 2021 related to severance costs associated with a restructuring action at one of the segment's heating businesses. Charges for the three and six months ended June 27, 2020 related primarily to severance costs associated with restructuring actions at the segment's Patterson-Kelley and Cooling Americas businesses.
Detection and Measurement — Charges for the three and six months ended July 3, 2021 related to severance costs for restructuring actions at the segment's location and inspection businesses. Charges for the three and six months ended June
27, 2020 related to severance costs for a restructuring action at the segment's bus fare collection systems business.
Other — Charges for the three and six months ended July 3, 2021 and the six months ended June 27, 2020 related to severance costs incurred in connection with the wind-down activities at DBT, our South African subsidiary.
Corporate — Charges for the three and six months ended June 27, 2020 related to asset impairment and other charges associated with the move to a new corporate headquarters.
No significant future charges are expected to be incurred under actions approved as of July 3,
2021.
i
The following is an analysis of our restructuring liabilities for the six months ended July 3, 2021 and June 27, 2020:
iInventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated net realizable values. Certain inventories are valued using the last-in, first-out (“LIFO”) method. These inventories were approximately i31%
and i35% of total inventory at July 3, 2021 and December 31, 2020, respectively. Other inventories are valued using the first-in, first-out (“FIFO”) method.
15
(9) iGOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
i
The changes in the carrying amount of goodwill for the six months ended July 3, 2021 were as follows:
(1)Reflects
(i) goodwill acquired with the Sealite acquisition of $i39.6, (ii) an increase in ULC's goodwill during 2021 of $i0.8 resulting from revisions to the valuation of certain assets and liabilities, and (iii)
an increase in Sensors & Software's goodwill of $i2.4 resulting from revisions to the valuation of certain assets and income tax accounts. As indicated in Note 1, the acquired assets, including goodwill, and liabilities assumed in the Sealite, ULC and Sensors & Software acquisitions have been recorded at estimates of fair value and are subject to change upon completion of acquisition accounting.
(1)The
identifiable intangible assets associated with the Sealite acquisition consist of customer backlog of $i1.9, customer relationships of $i12.1
and technology of $i6.6.
/
(2)Changes during the six months ended July 3, 2021 related primarily to the acquisition of Sealite
trademarks of $i11.6.
16
In connection with the acquisition of Sealite, which has definite-lived intangibles as noted above, we updated our estimated annual amortization expense related to intangible
assets to approximately $i20.0 for the full year 2021, and $iiiiii17.0/////
for 2022 and each of the four years thereafter.
At July 3, 2021, the net carrying value of intangible assets with determinable lives consisted of $i23.1 in the HVAC reportable segment and $i127.7
in the Detection and Measurement reportable segment. At July 3, 2021, trademarks with indefinite lives consisted of $i105.6 in the HVAC reportable segment and $i69.4
in the Detection and Measurement reportable segment.
i
We perform our annual goodwill impairment testing 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. 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.
Based on our annual goodwill impairment testing during the fourth quarter of 2020, we concluded that the estimated fair value of each of our reporting units, exclusive of Cues, Inc. (“Cues”), Patterson-Kelley, LLC (“Patterson-Kelley”) and ULC, exceeded the carrying value of their respective net assets by over i75%.
The estimated fair values of Cues and Patterson-Kelley exceeded the carrying value of their respective net assets by approximately i12% and i3%,
while given the recent acquisition of ULC, its fair value approximated the carrying value of its net assets. The total goodwill for Cues, Patterson-Kelley and ULC was $i47.9, $i14.2 and $i38.4,
respectively, as of July 3, 2021. A change in assumptions used in valuing Cues, Patterson-Kelley, or ULC (e.g., projected revenues and profit growth rates, discount rates, industry price multiples, etc.) could result in these reporting units estimated fair value being less than the respective carrying value of their net assets. If any of these reporting units 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.
/
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 values of our trademarks are
determined by applying estimated royalty rates to projected revenues, with the 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.
As indicated in Note 1, the COVID-19 pandemic could have an adverse impact on our future operating results. As of July 3, 2021, there are no indications that the carrying value of our goodwill and other intangible assets may not be recoverable. However, a prolonged adverse impact of the COVID-19 pandemic on our future operating results may require an impairment charge related to one or more of these assets in a future period.
(10) iWARRANTY
iThe
following is an analysis of our product warranty accrual for the periods presented:
(1)While
not due for repayment until December 2024 under the terms of our senior credit agreement, we have classified 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, including proceeds from the expected sale of Transformer Solutions in the fourth quarter of 2021.
(2)The term loan is repayable in quarterly installments beginning in the first quarter of 2021, with the quarterly installments equal to i0.625%
of the initial term loan balance of $i250.0 during 2021, i1.25% in each of the four quarters of 2022 and 2023, and i1.25%
during the first three quarters of 2024. The remaining balance is payable in full on December 17, 2024. Balances are net of unamortized debt issuance costs of $i1.2 and $i1.4 at July 3,
2021 and December 31, 2020, respectively.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $i50.0, as available. At July 3, 2021, we had $i24.0
of available borrowing capacity under this facility after giving effect to outstanding borrowings of $i26.0. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses.
/
18
(4)Primarily
includes balances under a purchase card program of $i2.3 and $i1.7 and finance lease obligations of $i2.7
and $i2.6 at July 3, 2021 and December 31, 2020, respectively. The purchase card program allows for payment beyond the normal payment 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.
(5)“Other” primarily includes debt assumed, foreign currency translation on
any debt instruments denominated in currencies other than the U.S. dollar, and the impact of amortization of debt issuance costs associated with the term loan.
Senior Credit Facilities
A detailed description of our senior credit facilities is included in our 2020 Annual Report on Form 10-K.
On May 24, 2021 we elected to reduce our participating foreign credit instrument facility and bilateral foreign credit instrument facility, available for performance letters of credit and guarantees, by an aggregate amount of $i20.0
and $i25.0, respectively. The facility reduction resulted in a write-off of deferred finance costs of $ii0.2/,
recorded to “Interest expense” in the condensed consolidated statement of operations for the three and six months ended July 3, 2021.
At July 3, 2021, we had $ii297.8/
of available borrowing capacity under our revolving credit facilities after giving effect to borrowings under the domestic revolving loan facility of $ii140.0/ and $ii12.2/
reserved for domestic letters of credit. In addition, at July 3, 2021, we had $ii28.8/
of available issuance capacity under our foreign credit instrument facilities after giving effect to $i26.2 reserved for outstanding letters of credit.
The weighted-average interest rate of outstanding borrowings under our senior credit agreement was approximately i1.5%
at July 3, 2021.
At July 3, 2021, we were in compliance with all covenants of our senior credit agreement.
(13) iDERIVATIVE FINANCIAL INSTRUMENTS
Interest
Rate Swaps
We previously maintained interest rate swap agreements that matured in March 2021 and effectively converted borrowings under our senior credit facilities to a fixed rate of i2.535%, plus the applicable margin.
In February 2020, and as a result of a December 2019 amendment that extended the maturity date of our senior credit facilities to December 17, 2024, we entered into additional interest swap agreements (“Swaps”).
The Swaps have a notional amount of $i246.9, cover the period from March 2021 to November 2024, and effectively convert borrowings under our senior credit facilities to a fixed rate of i1.061%, plus the applicable margin.
We
have designated and are accounting for our interest rate swap agreements as cash flow hedges. As of July 3, 2021 and December 31, 2020, the unrealized loss, net of tax, recorded in AOCI was $i2.5 and $i5.9,
respectively. In addition, as of July 3, 2021, the fair value of our interest rate swap agreements totaled $i3.3, with $i2.4 recorded as a current liability and the
remainder in long-term liabilities, and $i7.8 at December 31, 2020 (with $i1.4 recorded as a current liability and the remainder in long-term liabilities). Changes in
fair value of our interest rate swap agreements 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 (“GBP”), 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”).
None of our FX forward contracts are designated as cash flow hedges.
19
We had FX forward contractswith an aggregate notional amount of $i22.8 and $i6.3
outstanding as of July 3, 2021 and December 31, 2020, respectively, with all of the $i22.8 scheduled to mature within one year.
From time to time, we enter into commodity contracts to manage the exposure on forecasted
purchases of commodity raw materials. At July 3, 2021 and December 31, 2020, the outstanding notional amount of commodity contracts, which relate solely to Transformer Solutions, were i3.0 and i3.2
pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent the commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify amounts associated with our commodity contracts out of AOCI when the forecasted transaction impacts earnings. As of July 3, 2021 and December 31, 2020, the fair value of these contracts were current assets of $i0.6
and $i2.4, respectively. Since these commodity contracts relate to our Transformer Solutions business, the amounts have been recorded within assets of discontinued operations in the accompanying condensed consolidated balance sheets. The unrealized gains, net of taxes, recorded in AOCI were $ii0.5/
and $i1.5 as of July 3, 2021 and December 31, 2020, respectively.
(14) iEQUITY
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
i45.271
i44.590
i45.201
i44.452
Dilutive
securities — Employee stock options and restricted stock units
i1.274
i1.058
i1.207
i1.168
Weighted-average
number of common shares and dilutive securities used in diluted income per share
i46.545
i45.648
i46.408
i45.620
/
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 i0.307 and i0.652,
respectively, for the three months ended July 3, 2021, and i0.269 and i0.632,
respectively, for the six months ended July 3, 2021.
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 i0.409 and i0.944,
respectively, for the three months ended June 27, 2020, and i0.345 and i0.803,
respectively, for the six months ended June 27, 2020.
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 2021 is included in our 2020 Annual Report on Form 10-K.
Awards granted on March 1, 2021 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.
Effective May 11, 2021, we granted i0.017 RSU's to our non-employee directors, which vest in their entirety immediately prior to the annual meeting of stockholders in May 2022.
Compensation
expense within income from continuing operations related to long-term incentive awards totaled $i3.3and $i3.1 for the three months ended July
3, 2021 and June 27, 2020 and $i6.1 and $i6.4 for the six months ended July 3, 2021 and
June 27, 2020, respectively. The related tax benefit was $i0.6 and $i0.8
for the three months ended July 3, 2021 and June 27, 2020 and $i1.0 and $i1.6
for the six months ended July 3, 2021 and June 27, 2020, respectively.
20
Accumulated Other Comprehensive Income
i
The changes in the
components of accumulated other comprehensive income, net of tax, for the three months ended July 3, 2021 were as follows:
Foreign Currency Translation Adjustment
Net Unrealized Losses
on Qualifying Cash
Flow Hedges(1)
Pension and
Postretirement
Liability
Adjustment(2)
Total
Balance
at beginning of period
$
i239.2
$
(i1.4)
$
i13.4
$
i251.2
Other
comprehensive income before reclassifications
i0.9
i0.2
i—
i1.1
Amounts
reclassified from accumulated other comprehensive income (loss)
The following summarizes amounts reclassified from each component of accumulated comprehensive income for the three months ended July 3, 2021 and June 27, 2020:
Amortization of unrecognized prior service credits - Pre-tax
$
(i1.2)
$
(i1.2)
Other
income, net
Income taxes
i0.3
i0.3
$
(i0.9)
$
(i0.9)
The
following summarizes amounts reclassified from each component of accumulated comprehensive income for the six months ended July 3, 2021 and June 27, 2020:
Amortization of unrecognized prior service credits - Pre-tax
$
(i2.4)
$
(i2.4)
Other
income, net
Income taxes
i0.6
i0.6
$
(i1.8)
$
(i1.8)
/
22
(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 (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 $i551.1
and $i575.7 at July 3, 2021 and December 31, 2020, respectively. Of these amounts, $i477.1
and $i499.8 are included in “Other long-term liabilities” within our condensed consolidated balance sheets at July 3, 2021 and December 31, 2020, 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.
Our asbestos-related claims are typical in certain of the industries in which we operate or pertain to legacy businesses we no longer operate. It is not unusual in these cases for ififty
or more corporate entities to be named as defendants. We vigorously defend these claims, many of which are dismissed without payment, and the significant majority of costs related to these claims have historically been paid pursuant to our insurance arrangements. iOur recorded assets and liabilities related to asbestos-related claims were as follows at July 3, 2021 and December 31, 2020:
(1)Of
these amounts, $i428.7 and $i446.4 are included in "Other assets" at July 3, 2021 and December 31,
2020, respectively, while the remainder is included in “Other current assets.”
(2)Of these amounts, $i458.1 and $i479.9 are
included in “Other long-term liabilities" at July 3, 2021 and December 31, 2020, respectively, while the remainder is included in “Accrued expenses.”
The liabilities we record for asbestos-related claims are based on a number of assumptions. In estimating our liabilities for asbestos-related claims, we consider, among other things, the following:
• The number of pending claims by disease type and jurisdiction.
• Historical information by disease type and jurisdiction with regard to:
◦ Average number of claims settled with payment (versus dismissed without payment);
and
◦ Average claim settlement amounts.
• The period over which we can reasonably project asbestos-related claims (currently projecting through 2057).
23
The following table presents information regarding activity for the asbestos-related claims for the six months ended July 3, 2021 and June 27, 2020:
The
assets we record for asbestos-related claims represent amounts that we believe we are or will be entitled to recover under agreements we have with insurance companies. The amount of these assets are based on a number of assumptions, including the continued solvency of the insurers and our legal interpretation of our rights for recovery under the agreements we have with the insurers. Our current assumptions for estimating these assets may not prove accurate, and we may be required to adjust these assets in the future. These variances relative to current expectations could have a material impact on our financial position and results of operations.
During the six months ended July 3, 2021 and June 27, 2020, our payments for asbestos-related claims, net of respective insurance recoveries of $i15.3and $i16.3, were $i8.1 and $i11.8,
respectively. A significant increase in claims, costs and/or issues with existing insurance coverage (e.g., dispute with or insolvency of insurer(s)) could have a material adverse impact on our share of future payments related to these matters, and, as a result, have a material impact on our financial position, results of operations and cash flows.
During the three months and six months ended July 3, 2021, we recorded a charge of $ii2.7/
related to revisions of recorded assets for asbestos-related claims. There were no other changes in estimates associated with our assets and liabilities related to our asbestos product liability matters during the three and six months ended July 3, 2021, nor were there any such changes during the three and six months ended June 27, 2020.
Large Power Projects in South Africa
Overview - Since 2008, DBT has been executing contracts on two large power projects in South Africa (Kusile and Medupi). Over such time, the business environment surrounding these projects has been difficult, as DBT, along with many other contractors on the projects,
have 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 has substantially completed its scope of work, with its remaining responsibilities related largely to resolution of various claims, primarily between itself and one of its prime contractors, Mitsubishi Heavy Industries Power—ZAF, 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 i1,100.0 (or $i76.9).
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 i534.2 (or $i37.4),
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 in 2021. 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.
24
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 $i4.8 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 one 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 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
is subject to MHI’s rights to seek further arbitration in the matter and, thus, the amount awarded has not been reflected in our condensed consolidated statement of operations for the six months ended July 3, 2021. On July 5, 2021, DBT received notice from MHI of its intent to seek final and binding arbitration in this matter.
On April 28, 2021, a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on two 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 condensed consolidated financial statements of operations for the three and six months ended July 3, 2021.
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. 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. For the remainder of the claims in both the interim notification and the revised version,
which largely appear to be direct in nature (approximately South African Rand i950.0 or $i66.4), DBT has numerous defenses 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 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 $i28.5) 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 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.
MHI has made other claims against DBT totaling South African Rand i176.2
(or $i12.3). 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 condensed consolidated financial statements with respect to these claims.
Bonds Issued in Favor of MHI - We are 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 $i29.3)
that has been paid. However, given the extent and complexities of the claims between DBT and MHI, reimbursement of the South African Rand i418.3 (or $i29.3) is unlikely to occur over the next twelve months. As such, we have reflected the South African Rand ii418.3/
(or $ii29.3/) as a non-current asset within our condensed consolidated balance sheet as of July 3, 2021.
25
The
remaining bond of $i2.0 issued to MHI as a performance guarantee could be exercised by MHI for an alleged breach of DBT's obligation. In the event that MHI were to receive payment on a portion, or all, of the remaining bond, we would be required to reimburse the respective issuing bank.
In addition to this bond, SPX Corporation 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 statement of operations for the six months ended July 3, 2021.
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. As of July 3, 2021, we had liabilities for site investigation and/or remediation at i25sites
(i25 sites at December 31, 2020) that we own or control, or formerly owned and controlled. 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 the revision 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 July 3, 2021, we have been notified that we are potentially responsible and have received other notices of potential liability pursuant to various environmental laws at i11 sites at which the liability has not been settled, of which i9
sites 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.
26
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.
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. The insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against loss exposure.
27
(16)iINCOME
AND OTHER TAXES
Uncertain Tax Benefits
As of July 3, 2021, we had gross unrecognized tax benefits of $i7.3 (net unrecognized tax benefits of $i6.4).
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 July 3, 2021, gross accrued interest totaled $i3.0 (net accrued interest of $i2.4).
As of July 3, 2021, 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 $i5.0.
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 July 3, 2021, we recorded an income tax provision of $i2.0 on $i16.7
of pre-tax income from continuing operations, resulting in an effective rate of i12.0%. This compares to an income tax provision for the three months ended June 27, 2020 of $i3.0
on $i18.2 of pre-tax income from continuing operations, resulting in an effective rate of i16.5%.
The most significant item impacting the income tax provision for the second quarter of 2021 was a benefit of $i2.2 related to the resolution of certain liabilities for uncertain tax positions and interest associated with various refund claims. The most significant items impacting the income tax provision for the second quarter of 2020 were (i) $i0.5
of tax benefits associated with statute expirations in certain jurisdictions and (ii) $i0.3 of excess tax benefits resulting from stock option awards that were exercised during the period.
For the six months ended July 3, 2021, we recorded an income tax provision of $i6.1
on $i39.8 of pre-tax income from continuing operations, resulting in an effective rate of i15.3%.
This compares to an income tax provision for the six months ended June 27, 2020 of $i5.3 on $i30.0
of pre-tax income from continuing operations, resulting in an effective rate of i17.7%. The most significant items impacting the income tax provision for the first half of 2021 were (i) a benefit of $i2.2
noted above recorded during the second quarter of 2021 and (ii) $i1.0 of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the period. The most significant items impacting the income tax provision for the first half of 2020 were (i) $i1.5
of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the period and (ii) the $i0.5 of tax benefits associated with the statute expirations noted above.
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.
The Internal Revenue Service (“IRS”) concluded its audit of our 2013, 2014, 2015, 2016 and 2017 federal income tax returns. In connection with such, we recorded a tax benefit of $i2.2
during the three months ended July 3, 2021 related to the resolution of certain liabilities for uncertain tax positions and interest associated with various refund claims.
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 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 have various foreign income tax returns under examination. The most significant of these is in Germany for the 2010 through 2014 tax years. 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.
/
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(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 Methodologies Used to Measure Fair Value on a Non-Recurring Basis
Parent Guarantees and Bonds Associated with Balcke Dürr —In connection with the 2016 sale of Balcke Dürr, existing parent company guarantees and bank surety bonds, which totaled approximately Euro i79.0
and Euro i79.0, respectively, remained in place at the time of sale. These guarantees and bonds provided protections for Balcke Dürr customers in regard to advance payments, performance, and warranties on projects in existence at the time of sale. In addition, certain bonds related to lease obligations and foreign tax matters in existence at the time of sale. Balcke Dürr and the acquirer of Balcke Dürr provided us an indemnity in the event that any of the bonds were called or payments were made under the guarantees. Also, at the time of sale, Balcke Dürr provided cash collateral
of Euro i4.0 and the parent company of the buyer provided a guarantee of Euro i5.0 as a security for the above indemnifications (Euro i0.0
and Euro i1.0, respectively, at July 3, 2021). In connection with the sale, we recorded a liability for the estimated fair value of the guarantees and bonds and an asset for the estimated fair value of the cash collateral and indemnities provided. Since the sale of Balcke Dürr, the guarantees expired and bonds have been periodically returned. As ofJuly 3, 2021, all remaining bonds have been returned.iSummarized below are changes in the liability and asset during the six months ended July 3, 2021 and June 27, 2020.
(1)In
connection with the sale, we estimated the fair value of the existing parent company guarantees and bank and surety bonds considering the probability of default by Balcke Dürr and an estimate of the amount we would be obligated to pay in the event of a default. Additionally, we estimated the fair value of the cash collateral provided by Balcke Dürr and guarantee provided by mutares AG based on the terms and conditions and relative risk associated with each of these securities (unobservable inputs - Level 3).
(2)We reduced the liability generally at the earlier of the completion of the related underlying project milestones or the expiration of the guarantees or bonds. We amortized the asset based on the expiration terms of each of the securities. We recorded the reduction of the liability and the amortization of the asset to “Other income, net.”
Contingent
Consideration for ULC and Sensors & Software Acquisitions - In connection with the acquisition of ULC and Sensors & Software, the respective sellers are eligible for additional cash consideration of up to $i45.0 and $i4.0,
respectively, with payment of such contingent consideration dependent upon the achievement of certain milestones. The estimated fair value of such contingent consideration is $ii24.3/
and $ii0.7/,
respectively, with such amounts reflected as liabilities within our condensed consolidated balance sheets as of July 3, 2021 and December 31, 2020. We estimated the fair value of the contingent consideration for these acquisitions based on the probability of ULC and Sensors & Software achieving these 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
29
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 Methodologies Used to Measure Fair Value on a Recurring Basis
Derivative Financial Instruments — Our financial derivative assets and liabilities include interest rate swaps, FX forward contracts, and commodity 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 July 3, 2021, 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 of the investee as presented in the investee’s most recent audited financial statements. During the three and six months ended July 3, 2021 and June 27, 2020, we recorded a gain of $i2.2
and $i5.3, respectively and $i7.4 and $i5.3,
respectively, to “Other income, net” to reflect an increase in the estimated fair value of the equity security. As of July 3, 2021 and December 31, 2020, the equity security had an estimated fair value of $i34.4 and $i27.0,
respectively.
Indebtedness and Other — The estimated fair value of our debt instruments as of July 3, 2021 and December 31, 2020 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
EVENT
On August 2, 2021, we completed the acquisition of Enterprise Control Systems Ltd (“ECS”). ECS is a leader in the design and manufacture of highly-engineered tactical datalinks and radio frequency (“RF”) countermeasures, including counter-drone and counter-IED RF jammers. We purchased ECS for net cash proceeds of GBP i27.5 (or $i38.2
at the time of payment). Under the terms of the purchase and sales agreement, the seller is eligible for additional cash consideration of up to GBP i12.5, with payment to occur in 2022 upon successful achievement of certain financial performance milestones. The post-acquisition results of ECS will be reflected within our Detection and Measurement 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. Particular risks facing us include economic, business and other risks stemming from our internal operations,
legal and regulatory risks, costs of raw materials, pricing pressures, pension funding requirements, integration of acquisitions, and changes in the economy, as well as the impacts of the coronavirus disease (the “COVID-19 pandemic”) and governmental responses to stem further outbreaks of the COVID-19 pandemic, which is further discussed below and in other sections of this document. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors, and 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 2020 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 and 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.
IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic had an adverse impact on our consolidated results of operations in the first and second quarters of 2020, with diminishing impacts during the second half of 2020. Any impacts of the pandemic on our first half of 2021 operating results were generally limited to some delays for the project-related businesses within our Detection and Measurement reportable segment. However, we could experience an increase in adverse impacts during the remainder of 2021, including (i) disruption to our supply chain, (ii) increased cost for certain components, commodities, or services, (iii) labor shortages,
and (iv) temporarily closing facilities if incidents of the COVID-19 pandemic increase. We have taken actions to manage near-term costs and other potential impacts. We will continue to assess the actual and expected impacts of the COVID-19 pandemic and the need for further actions.
See Notes 1 and 9 to our condensed consolidated financial statements for additional considerations regarding the current and potential impacts of the COVID-19 pandemic.
OTHER SIGNIFICANT MATTERS
•Acquisitions
◦ULC Robotics (“ULC”)
▪Acquired
on September 2, 2020 for cash proceeds of $89.2, net of cash acquired of $4.0.
▪Revenues for the twelve months prior to the date of acquisition totaled approximately $40.0.
▪Post-acquisition operating results are included within the Detection and Measurement reportable segment.
◦Sensors & Software, Inc. (“Sensors & Software”)
▪Acquired on November 11, 2020 for cash proceeds of $15.5, net of cash acquired of $0.3.
▪Revenues for the twelve months prior to
the date of acquisition totaled approximately $7.0.
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▪Post-acquisition operating results are included within the Detection and Measurement reportable segment.
◦Sealite Pty Ltd and Affiliated Entities (“Sealite”)
▪Acquired on April 19, 2021 for cash proceeds of $81.6, net of cash acquired of $2.3.
▪Revenues
for the twelve months prior to the date of acquisition totaled approximately $33.0.
▪Post-acquisition operating results are included within the Detection and Measurement reportable segment.
•Planned Disposition of SPX Transformer Solutions, Inc. (“Transformer Solutions”)
◦On June 8, 2021, we signed a definitive agreement to sell Transformer Solutions for cash proceeds of $645.0.
◦Transformer Solutions has been included in discontinued operations for all periods presented.
◦We
expect the transaction to close during the fourth quarter of 2021.
•Change in Segment Reporting Structure
◦In connection with the planned disposition of Transformer Solutions and its classification as a discontinued operation, we have eliminated the Engineered Solutions reportable segment.
◦The remaining operations of the Engineered Solutions reportable segment have been reflected within our HVAC reportable segment for all periods presented.
•Large Power Projects in South Africa
◦On February
22, 2021 and April 28, 2021, our South African subsidiary, DBT, received favorable rulings from dispute adjudication panels.
▪In connection with the rulings, DBT received South African Rand 126.6 (or $8.6 at the time of payment) and South African Rand 82.0 (or $6.0 at the time of payment), respectively.
▪As the rulings are subject to further arbitration, such amounts have not been reflected in our condensed consolidated statements of operations.
▪On July 5,
2021, DBT received notice from MHI of its intent to seek final and binding arbitration in the Kusile matter.
◦In May 2021, and in connection with certain claims made against DBT, MHI made a demand and received payment of South African Rand 178.7 (or $12.5 at the time of payment) on bonds issued by a bank.
▪Under the terms of the bonds and our senior credit agreement, we were required to fund the above payment.
▪DBT denies liability for these claims and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of the South African Rand 178.7.
▪As
such, the amount has been reflected as a non-current asset in our condensed consolidated balance sheet as of July 3, 2021.
◦On June 4, 2021, DBT received a revised version of an interim claim from MHI that was provided on February 26, 2019. DBT has numerous defenses and, thus, does not believe it has a probable liability associated with these claimed damages.
◦See Note 15 to our condensed consolidated financial statements for additional details.
OVERVIEW
OF OPERATING RESULTS
Revenues for the three and six months ended July 3, 2021 totaled $296.7 and $584.6, respectively, compared to $258.0 and $514.8 during the respective periods in 2020. The increase in revenues during the three and six months ended July 3, 2021, compared to the respective prior-year periods, was due primarily to an increase in organic revenue and, to a lesser extent, the impact of the ULC, Sensors & Software, and Sealite acquisitions. The increase in organic revenue was due primarily to higher sales of heating products and location and inspection equipment, partially offset by lower sales of bus fare collection systems. During the first half of 2020, sales of heating products and location and inspection equipment were impacted negatively by the COVID-19 pandemic. The decline in sales of bus fare collection
systems was due primarily to the timing of large projects, as the extent of such projects can fluctuate from period to period.
During the three and six months ended July 3, 2021, we generated operating income of $12.9 and $32.9, respectively, compared to $17.5 and $33.6 for the respective periods in 2020. The decrease in operating income during the three and six months ended July 3, 2021, compared to the respective prior-year periods, was due primarily to higher corporate expense, other operating expense of $2.7 during the second quarter of 2021 related to revisions of recorded assets for asbestos-related claims,
32
and
decreases in profitability within our Detection and Measurement reportable segment, partially offset by increases in profitability within our HVAC reportable segment associated with organic revenue growth. The higher corporate expense was due primarily to increased investments in continuous improvement and other strategic initiatives and an increase in incentive compensation expense. The decline in profitability within our detection and measurement reportable segment was due primarily to increased amortization expense associated with the acquisitions of Sealite, ULC, and Sensors & Software and the impact of the decline in sales of bus fare collection systems, partially offset by the impact of the organic revenue growth associated with location and inspection equipment.
Cash flows from operating activities associated with continuing operations totaled $38.9 for the six months ended
July 3, 2021, compared to cash flows used in operating activities of $9.9 during the six months ended June 27, 2020. The increase in cash flows from operating activities was due primarily to improved cash flows within our heating and location and inspection businesses associated with improved profitability and decreases in working capital.
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 2020 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 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 2021 are April 3, July 3 and October 2, compared to the respective March 28, June 27 and September 26, 2020 dates. We had five more days in the first quarter of 2021 and will have six fewer days in the fourth quarter of 2021 than in the respective 2020 periods. It is not practicable to estimate the impact of the five additional days on our consolidated operating results for the six months ended July 3, 2021, when compared to the consolidated operating results for the 2020 respective period.
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, acquisitions/divestitures, and the impact of a reduction in revenue during the second quarter of 2021 associated with the settlement of claims on a legacy dry cooling project. 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.
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The
following table provides selected financial information for the three and six months ended July 3, 2021 and June 27, 2020, respectively, including the reconciliation of organic revenue increase to the net revenue increase:
Revenues — For the three and six months ended July 3, 2021, the increase in revenues, compared to the respective periods in 2020, was primarily due to an increase in organic revenue and, to a lesser extent, the impact of the ULC, Sensors & Software, and Sealite acquisitions. The increase in organic revenue was due primarily to higher sales of heating products and location and inspection equipment, partially offset by lower sales of bus fare collection systems. During the first half of 2020, sales of heating products and location and inspection equipment were impacted negatively by the COVID-19 pandemic. The decline in sales of bus fare collection systems was due primarily to the timing of large projects, as the extent of such projects can fluctuate from period-to-period.
See
“Results of Reportable Segments and Other Operating Segment” for additional details.
Gross Profit — For the three and six months ended July 3, 2021, the increase in gross profit and gross profit as a percentage of revenues, compared to the respective periods in 2020, was due primarily to the increase in revenues noted above, including the impact of the additional absorption of fixed costs associated with such revenue increase.
Selling, General and Administrative (“SG&A”) Expense — For the three and six months ended July 3, 2021, the increase in SG&A expense, compared to the respective periods in 2020, was due
primarily to the incremental SG&A resulting from the acquisitions noted above and the increase in corporate expense related to additional investments in connection with continuous improvement and other strategic initiatives and an increase in incentive compensation.
Intangible Amortization— For the three and six months ended July 3, 2021, the increase in intangible amortization, compared to the respective periods in 2020, was due to the incremental amortization of $4.0 and $5.6 during the three and six months ended July 3, 2021, respectively, related to the acquisitions noted above.
Special
Charges, net — Special charges, net, related primarily to restructuring initiatives to consolidate manufacturing, distribution, sales and administrative facilities, reduce workforce and rationalize certain product lines. See Note 7 to our condensed consolidated financial statements for the details of actions taken in the first six months of 2021 and 2020.
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Other Operating (Income) Expense — Other operating expense for the three and six months ended July 3, 2021 related to revisions to recorded assets for asbestos-related claims. Other operating income for the six months ended June 27, 2020 related to
revisions to estimates of certain liabilities retained in connection with the 2016 sale of the dry cooling business.
Other Income, net — Other income, net, for the three months ended July 3, 2021 was composed primarily of income derived from company-owned life insurance policies of $2.7, a gain of $2.2 related to changes in the estimated fair value of an equity security we hold, and pension and postretirement income of $1.6.
Other income, net, for the three months ended June 27, 2020 was composed primarily of a gain of $5.3 related to changes in the estimated fair value of an equity security that we hold and pension and postretirement income of $1.0, partially
offset by foreign currency transaction losses of $0.6.
Other income, net, for the six months ended July 3, 2021 was composed primarily of a gains of $7.4 related to changes in the estimated fair value of an equity security we hold, pension and postretirement income of $3.2, income derived from company-owned life insurance policies of $2.7, and income of $1.7 related to a reduction of the parent company guarantees and bank surety bonds liability that were outstanding in connection with the 2016 sale of Balcke Dürr, partially offset by foreign currency transaction losses.
Other income, net, for the six months ended June 27, 2020 was composed primarily of a gain of $5.3 related to a change in the estimated
fair value of an equity security that we hold and pension and postretirement income of $2.0.
Interest Expense, net — Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during the three and six months ended July 3, 2021, compared to the respective periods in 2020, was the result of a lower average effective interest rate during 2021.
Income Tax Provision — For the three months ended July 3, 2021, we recorded an income tax provision of $2.0 on $16.7 of pre-tax income from continuing operations, resulting in an effective rate of 12.0%. This compares to an
income tax provision for the three months ended June 27, 2020 of $3.0 on $18.2 of pre-tax income from continuing operations, resulting in an effective rate of 16.5%. The most significant item impacting the income tax provision for the second quarter of 2021 was a benefit of $2.2 related to revisions to liabilities for uncertain tax positions and interest associated with various refund claims. The most significant items impacting the income tax provision for the second quarter of 2020 were (i) $0.5 of tax benefits associated with statute expirations in certain jurisdictions and (ii) $0.3 of excess tax benefits resulting from stock option awards that were exercised during the period.
For the six months ended July 3, 2021, we recorded an income tax provision of $6.1
on $39.8 of pre-tax income from continuing operations, resulting in an effective rate of 15.3%. This compares to an income tax provision for the six months ended June 27, 2020 of $5.3 on $30.0 of pre-tax income from continuing operations, resulting in an effective rate of 17.7%. The most significant items impacting the income tax provision for the first half of 2021 were (i) a benefit of $2.2 noted above recorded during the second quarter of 2021 and (ii) $1.0 of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the period. The most significant items impacting the income tax provision for the first half of 2020 were (i) $1.5 of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the period and (ii) the $0.5 of tax benefits associated with the statute expirations noted above.
RESULTS
OF REPORTABLE SEGMENTS AND OTHER OPERATING SEGMENT
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 and other operating segment.
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.”
Revenues
— For the three and six months ended July 3, 2021, the increase in revenues, compared to the respective periods in 2020, was due primarily to an increase in organic revenue for the segment’s heating products, partially offset by a reduction of revenue during the second quarter of 2021 related to the settlement of a legacy dry cooling contract. Sales of heating products during the first half of 2020 were impacted negatively by (i) a warmer than normal winter and (ii) the COVID-19 pandemic.
Income — For the three and six months ended July 3, 2021, the increase in income and margin, compared to the respective periods in 2020, was due primarily to the increase
in revenues noted above.
Backlog — The segment had backlog of $190.7 and $193.2 as of July 3, 2021 and June 27, 2020, respectively.
Revenues — For the three and six months ended July 3, 2021, the increase in revenues, compared to the respective periods in 2020, was due primarily to the impact of the acquisitions of Sealite, ULC, and Sensors & Software and, to a lesser extent, the impact of changes in foreign currency exchange
rates and an increase in organic revenue. The increase in organic revenue was primarily the result of higher sales of location and inspection equipment, partially offset by lower sales of bus fare collection systems during the three and six months ended July 3, 2021. During the first half of 2020, sales of location and inspection equipment were impacted negatively by the COVID-19 pandemic, while the decline in sales of bus fare collection systems was due primarily to the timing of large projects, as the extent of such projects can fluctuate from period to period.
Income — For the three and six months ended July 3, 2021, the decrease in income and margin, compared to the respective periods in 2020, was due primarily to increased amortization expense associated with
the acquisitions of Sealite, ULC, and Sensors & Software and the impact of the decline in sales of bus fare collection systems, partially offset by the impact of the organic revenue growth associated with location and inspection equipment.
Backlog — The segment had backlog of $141.9 and $68.7 as of July 3, 2021 and June 27, 2020, respectively. Aggregate backlog related to ULC, Sensors and Software and Sealite totaled $39.0 as of July 3, 2021.
Revenues — For the three and six months ended July 3, 2021, the decrease in revenues, compared to the respective periods in 2020, was due to a
decline in organic revenue resulting from lower sales related to the large power projects in South Africa, as these projects are in the latter stages of completion.
Loss — For the three and six months ended July 3, 2021, the loss decreased, compared to the respective periods in 2020, as a result of the wind-down activities noted above for the large power projects in South Africa. The losses for all periods presented relate primarily to legal costs associated with the claims matters for the large power projects in South Africa.
Backlog — The operating segment had a backlog of $3.1 and $4.0
as of July 3, 2021 and June 27, 2020, respectively.
Corporate Expense — Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters. The increase in corporate expense during the three and six months ended July
3, 2021, compared to the respective periods in 2020, was due primarily to increased investments in continuous improvement and other strategic initiatives and an increase in incentive compensation expense.
Long-Term Incentive Compensation Expense — Long-term incentive compensation expense represents our consolidated expense, which we do not allocate for segment reporting purposes. For the three months ended July 3, 2021, the increase in long-term incentive compensation expense, compared to the respective period in 2020, was due to a higher amount award forfeitures during the 2020 period. The decrease in long-term incentive compensation during the six months ended July 3, 2021, compared to the respective period in 2020, was due to revisions
to/finalization of the liability associated with the 2018 long-term cash awards. See Note 14 to our condensed consolidated financial statements for additional details.
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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 six months ended July 3, 2021 and June 27, 2020.
Change in cash and equivalents due to changes in foreign currency exchange rates
4.4
(2.3)
Net
change in cash and equivalents
$
0.8
$
135.5
Operating Activities —The increase in cash flows from operating activities during the six months ended July 3, 2021, compared to the respective period in 2020, was due primarily to improved cash flows within our location and inspection and heating businesses associated with improved profitability and decreases in working capital.
Investing Activities — Cash
flows used in investing activities for the six months ended July 3, 2021 were comprised primarily of cash utilized in the acquisition of Sealite of $81.6 and capital expenditures of $4.2, partially offset by proceeds from company-owned life insurance policies of $3.9.
Cash flows used in investing activities for the six months ended June 27, 2020 were comprised of capital expenditures of $8.3, partially offset by proceeds from company-owned life insurance policies of $1.1.
Financing Activities — Cash flows from financing activities for the six months ended July 3,
2021 were comprised of net borrowings under our various debt instruments of $5.1, partially offset by minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $4.2.
Cash flows from financing activities for the six months ended June 27, 2020 were comprised of net borrowings under our various debt instruments of $123.6, partially offset by (i) minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $2.3 and (ii) $1.5 related to contingent consideration paid in connection with the SGS acquisition, which was completed in July 2019.
Discontinued Operations — Cash flows from
discontinued operations for the six months ended July 3, 2021 and June 27, 2020 related primarily to cash flows from operations generated by Transformers Solutions, partially offset by cash disbursements related to liabilities retained in connection with dispositions.
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 six months of 2021 and 2020.
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Borrowings and Availability
Borrowings
— The following summarizes our debt activity (both current and non-current) for the six months ended July 3, 2021.
(1)While
not due for repayment until December 2024 under the terms of our senior credit agreement, we have classified 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, including proceeds from the expected sale of Transformer Solutions in the fourth quarter of 2021.
(2)The term loan is repayable in quarterly installments beginning in the first quarter of 2021, with the quarterly installments equal to 0.625% of the initial term loan balance of $250.0 during 2021, 1.25% in each of the four quarters of 2022 and 2023, and 1.25% during the first three quarters of 2024. The remaining balance is payable in full on December 17, 2024. Balances are net of unamortized
debt issuance costs of $1.2 and $1.4 at July 3, 2021 and December 31, 2020, respectively.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. At July 3, 2021, we had $24.0 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $26.0. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses.
(4)Primarily includes balances under a purchase card program of $2.3 and $1.7 and finance lease obligations of $2.7 and $2.6 at July 3, 2021 and December
31, 2020, respectively. The purchase card program allows for payment beyond the normal payment 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.
(5)“Other” primarily includes debt assumed, foreign currency translation on any debt instruments denominated in currencies other than the U.S. dollar, and the impact of amortization of debt issuance costs associated with the term loan.
At July 3, 2021, we were in compliance with all covenants of our senior credit agreement.
Availability — At July 3,
2021, we had $297.8 of available borrowing capacity under our revolving credit facilities after giving effect to borrowings under the domestic revolving loan facility of $140.0 and $12.2 reserved for domestic letters of credit. During the second quarter of 2021, we reduced the available issuance capacity under our foreign credit instrument facilities from $100.0 to $55.0. At July 3, 2021, we had $28.8 of available issuance capacity under our foreign credit instrument facilities after giving effect to $26.2 reserved for outstanding letters of credit.
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, insurance recovery assets associated with asbestos product liability matters, and interest rate swap, foreign currency forwards, and commodity contracts. These financial instruments, other than trade accounts receivable, are placed with high-quality financial institutions and insurance companies throughout the world. We periodically evaluate the credit standing of these financial institutions and insurance companies.
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.
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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.
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 2020 Annual Report on Form 10-K. Our total net liabilities for unrecognized tax benefits including interest were $8.8 as of July 3, 2021. 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 $5.0.
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, product liability matters (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. 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.
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” and “Risk Factors” in our 2020 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
General — 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 2020 Annual Report on Form 10-K. We have affected no material change in either our critical accounting policies or use of estimates since the filing of our 2020 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, 2020 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 July 3,
2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 3, 2021.
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 July 3, 2021 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 2020 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
SPX
Corporation financial information from its Form 10-Q for the quarterly period ended July 3, 2021, formatted in Inline XBRL, including: (i) Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended July 3, 2021 and June 27, 2020; (ii) Condensed Consolidated Balance Sheets at July 3, 2021 and December 31, 2020; (iii) Condensed Consolidated Statements of Equity for the three and six months ended July 3, 2021 and June 27, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2021 and June
27, 2020; and (v) Notes to Condensed Consolidated Financial Statements.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibit 101.1)
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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.
