SPX Technologies, Inc 10-Q for FY2021 Q1
SPX Technologies, Inc. (SPXC)
10-Q
2021-05-07
For: 2021-04-03
View Original
Added on
April 10, 2026
About this 10-Q
SPX Technologies, Inc filed this 10-Q on May 7, 2021, covering the quarter ended April 3, 2021 (FY2021 Q1).
Headline figures
Quarter ended April 3, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $398.5M
- up 8.5% from $367.4M a year earlier
- Net income
- $26.8M
- up 18.1% from net income of $22.7M a year earlier
- Diluted EPS
- $0.58
- up 16.0% from $0.50 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended April 3, 2021
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 1-6948
(Exact Name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(980 ) 474-3700
(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 | ||||||
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. ☒ Yes ☐ 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). ☒ Yes ☐ 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.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
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 ☒ No.
Common shares outstanding April 30, 2021, 45,253,465
SPX CORPORATION AND SUBSIDIARIES
FORM 10-Q INDEX
PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; in millions, except per share amounts)
| Three months ended | |||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||
| Revenues | $ | $ | |||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Intangible amortization | |||||||||||||||||||||||
| Special charges, net | |||||||||||||||||||||||
| Other operating income | ( | ||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Income from continuing operations before income taxes | |||||||||||||||||||||||
| Income tax provision | ( | ( | |||||||||||||||||||||
| Income from continuing operations | |||||||||||||||||||||||
| Income from discontinued operations, net of tax | |||||||||||||||||||||||
| Loss on disposition of discontinued operations, net of tax | ( | ||||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax | ( | ||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Basic income per share of common stock: | |||||||||||||||||||||||
| Income from continuing operations | $ | $ | |||||||||||||||||||||
| Income (loss) from discontinued operations | ( | ||||||||||||||||||||||
| Net income per share | $ | $ | |||||||||||||||||||||
| Weighted-average number of common shares outstanding — basic | |||||||||||||||||||||||
| Diluted income per share of common stock: | |||||||||||||||||||||||
| Income from continuing operations | $ | $ | |||||||||||||||||||||
| Income (loss) from discontinued operations | ( | ||||||||||||||||||||||
| Net income per share | $ | $ | |||||||||||||||||||||
| Weighted-average number of common shares outstanding — diluted | |||||||||||||||||||||||
| Comprehensive income | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these statements.
3
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share data)
| April 3, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Contract assets | |||||||||||
| Inventories, net | |||||||||||
Other current assets (includes income taxes receivable of $ | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment: | |||||||||||
| Land | |||||||||||
| Buildings and leasehold improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Other assets | |||||||||||
| Deferred income taxes | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Contract liabilities | |||||||||||
| Accrued expenses | |||||||||||
| Income taxes payable | |||||||||||
| Short-term debt | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred and other income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
Commitments and contingent liabilities (Note 15) | |||||||||||
| Equity: | |||||||||||
Common stock ( | |||||||||||
| Paid-in capital | |||||||||||
| Retained deficit | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
Common stock in treasury ( | ( | ( | |||||||||
| Total equity | |||||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these statements.
4
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in millions)
| Three months ended April 3, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In Capital | Retained Deficit | Accum. Other Comprehensive Income | Common Stock In Treasury | SPX Corporation Shareholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
Other comprehensive income, net | — | — | — | — | |||||||||||||||||||||||||||||||
Incentive plan activity | — | — | — | — | |||||||||||||||||||||||||||||||
Long-term incentive compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Restricted stock unit vesting | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at April 3, 2021 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Three months ended March 28, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In Capital | Retained Deficit | Accum. Other Comprehensive Income | Common Stock In Treasury | SPX Corporation Shareholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Incentive plan activity | — | — | — | — | |||||||||||||||||||||||||||||||
| Long-term incentive compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Restricted stock unit vesting | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at March 28, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
5
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
| Three months ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Cash flows from (used in) operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Less: Income (loss) from discontinued operations, net of tax | ( | ||||||||||
| Income from continuing operations | |||||||||||
| Adjustments to reconcile income from continuing operations to net cash from (used in) operating activities: | |||||||||||
| Special charges, net | |||||||||||
| Gain on change in fair value of equity security | ( | ||||||||||
| Deferred and other income taxes | |||||||||||
| Depreciation and amortization | |||||||||||
| Pension and other employee benefits | |||||||||||
| Long-term incentive compensation | |||||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | |||||||||||
| Accounts receivable and other assets | |||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable, accrued expenses and other | ( | ( | |||||||||
| Cash spending on restructuring actions | ( | ( | |||||||||
| Net cash from continuing operations | |||||||||||
| Net cash used in discontinued operations | ( | ( | |||||||||
| Net cash from (used in) operating activities | ( | ||||||||||
| Cash flows from (used in) investing activities: | |||||||||||
| Proceeds from company-owned life insurance policies, net | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net cash from (used in) continuing operations | ( | ||||||||||
| Net cash from discontinued operations | |||||||||||
| Net cash from (used in) investing activities | ( | ||||||||||
| Cash flows from (used in) financing activities: | |||||||||||
| Borrowings under senior credit facilities | |||||||||||
| Repayments under senior credit facilities | ( | ( | |||||||||
| Borrowings under trade receivables financing arrangement | |||||||||||
| Repayments under trade receivables financing arrangement | ( | ( | |||||||||
| Net borrowings (repayments) under other financing arrangements | ( | ||||||||||
| Payment of contingent consideration | ( | ||||||||||
| Minimum withholdings paid on behalf of employees for net share settlements, net of proceeds from the exercise of employee stock options | ( | ( | |||||||||
| Net cash from (used in) continuing operations | ( | ||||||||||
| Net cash from discontinued operations | |||||||||||
| Net cash from (used in) financing activities | ( | ||||||||||
| Change in cash and equivalents due to changes in foreign currency exchange rates | ( | ||||||||||
| Net change in cash and equivalents | |||||||||||
| Consolidated cash and equivalents, beginning of period | |||||||||||
| Consolidated cash and equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these statements.
6
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions, except per share data)
(1) BASIS OF PRESENTATION
Unless otherwise indicated, “we,” “us” and “our” mean SPX Corporation and its consolidated subsidiaries (“SPX”).
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 (“Heat Transfer“) business, 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 $89.2 , net of cash acquired of $4.0 . Under the terms of the purchase and sales agreement, the seller is eligible for additional cash consideration of up to $45.0 , with payments scheduled to be made in 2021 and 2022 upon successful achievement of certain operational and financial performance milestones. The estimated fair value of such contingent consideration is $24.3
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 $15.2 , net of cash acquired of $0.3 . Under the terms of the purchase and sales agreement, the seller is eligible for additional cash consideration of up to $4.0 , 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 $0.7
The assets acquired and liabilities assumed in the ULC and Sensors & Software 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.
7
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 a diminishing impact in the second half of 2020 and into the first quarter of 2021. Despite the adverse impacts, there are 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 April 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
Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform to the current year presentation, with the amounts related to the inclusion of Heat Transfer within discontinued operations.
(2) NEW 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 $0.5 .
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-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.
8
(3) ACQUISITIONS AND DISCONTINUED OPERATIONS
As indicated in Note 1, on September 2, 2020 and November 11, 2020, we completed the acquisitions of ULC and Sensors & Software, respectively. The pro forma effects of these acquisitions are not material to the condensed consolidated results of operations for the three months ended March 28, 2020.
Wind-Down of the Heat Transfer Business
As discussed in Note 1, we completed the wind-down of our Heat Transfer business in the fourth quarter of 2020. As a result of completing the wind-down plan, we are now reporting Heat Transfer as a discontinued operation for all prior periods presented.
Major line items constituting pre-tax income and after-tax income of Heat Transfer for the period ended March 28, 2020 is shown below:
| Three months ended | |||||||||||
| March 28, 2020 | |||||||||||
| Revenues | $ | ||||||||||
| Cost of product sold | |||||||||||
| Income before income tax | |||||||||||
| Income tax provision | |||||||||||
| Income from discontinued operations, net of tax | $ | ||||||||||
(4) REVENUES FROM CONTRACTS
Disaggregated Revenues
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 months ended April 3, 2021 and March 28, 2020:
| Three months ended April 3, 2021 | ||||||||||||||||||||||||||||||||
| Reportable Segments and Other | HVAC | Detection and Measurement | Engineered Solutions | Other | Total | |||||||||||||||||||||||||||
| Major product lines | ||||||||||||||||||||||||||||||||
| Cooling | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Boilers, comfort heating, and ventilation | ||||||||||||||||||||||||||||||||
| Underground locators, inspection and rehabilitation equipment, and robotic systems | ||||||||||||||||||||||||||||||||
| Signal monitoring, obstruction lighting, and bus fare collection systems | ||||||||||||||||||||||||||||||||
| Power transformers | ||||||||||||||||||||||||||||||||
| Process cooling equipment and services | ||||||||||||||||||||||||||||||||
| South African projects | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Revenues recognized at a point in time | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Revenues recognized over time | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
9
| Three months ended March 28, 2020 | ||||||||||||||||||||||||||||||||
| Reportable Segments and Other | HVAC | Detection and Measurement | Engineered Solutions | Other | Total | |||||||||||||||||||||||||||
| Major product lines | ||||||||||||||||||||||||||||||||
| Cooling | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Boilers, comfort heating, and ventilation | ||||||||||||||||||||||||||||||||
| Underground locators and inspection and rehabilitation equipment | ||||||||||||||||||||||||||||||||
| Signal monitoring, obstruction lighting, and bus fare collection systems | ||||||||||||||||||||||||||||||||
| Power transformers | ||||||||||||||||||||||||||||||||
| Process cooling equipment and services | ||||||||||||||||||||||||||||||||
| South African projects | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Revenues recognized at a point in time | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Revenues recognized over time | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Contract Balances
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. Our contract balances consisted of the following as of April 3, 2021 and December 31, 2020:
| Contract Balances | April 3, 2021 | December 31, 2020 | Change | ||||||||||||||
Contract Accounts Receivable(1) | $ | $ | $ | ( | |||||||||||||
| Contract Assets | ( | ||||||||||||||||
| Contract Liabilities - current | ( | ( | ( | ||||||||||||||
Contract Liabilities - non-current(2) | ( | ( | |||||||||||||||
| Net contract balance | $ | $ | $ | ( | |||||||||||||
___________________________
(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 $42.4 decrease in our net contract balance from December 31, 2020 to April 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 months ended April 3, 2021, we recognized revenues of $46.3 related to our contract liabilities at December 31, 2020.
Performance Obligations
As of April 3, 2021, the aggregate amount allocated to remaining performance obligations was $100.7 . We expect to recognize revenue on approximately 54 % and 72 % of remaining performance obligations over the next 12 and 24 months, respectively, with the remaining recognized thereafter.
10
(5) LEASES
(6) INFORMATION ON REPORTABLE SEGMENTS AND “OTHER” OPERATING SEGMENT
We are a global supplier of highly specialized, engineered solutions with operations in over 15 countries and sales in over 100 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 three reportable segments: HVAC, Detection and Measurement and Engineered Solutions. 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 cooling products for the HVAC and industrial 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.
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.
Engineered Solutions Reportable Segment
Our Engineered Solutions reportable segment engineers, designs, manufactures, installs and services transformers for the power transmission and distribution market and process cooling equipment for the industrial and power generation markets. The primary distribution channels for the segment’s products are direct to customers and third-party representatives. The segment has a strong presence in North America.
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.
11
Financial data for our reportable segments and our other operating segment for the three months ended April 3, 2021 and March 28, 2020 are presented below:
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| HVAC reportable segment | $ | $ | |||||||||||||||||||||||||||||||||
| Detection and Measurement reportable segment | |||||||||||||||||||||||||||||||||||
| Engineered Solutions reportable segment | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Consolidated revenues | $ | $ | |||||||||||||||||||||||||||||||||
| Income (loss): | |||||||||||||||||||||||||||||||||||
| HVAC reportable segment | $ | $ | |||||||||||||||||||||||||||||||||
| Detection and Measurement reportable segment | |||||||||||||||||||||||||||||||||||
| Engineered Solutions reportable segment | |||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| Total income for segments | |||||||||||||||||||||||||||||||||||
| Corporate expense | ( | ( | |||||||||||||||||||||||||||||||||
| Long-term incentive compensation expense | ( | ( | |||||||||||||||||||||||||||||||||
| Special charges, net | ( | ( | |||||||||||||||||||||||||||||||||
Other operating income(1) | |||||||||||||||||||||||||||||||||||
| Consolidated operating income | $ | $ | |||||||||||||||||||||||||||||||||
___________________________________________________________________
(7) SPECIAL CHARGES, NET
Special charges, net, for the three months ended April 3, 2021 and March 28, 2020 are described in more detail below:
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||||||||||||||
| HVAC reportable segment | $ | $ | |||||||||||||||||||||||||||||||||
| Detection and Measurement reportable segment | |||||||||||||||||||||||||||||||||||
| Engineered Solutions reportable segment | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||||||||
HVAC — Charges for the three months ended March 28, 2020 related primarily to severance costs associated with a restructuring action at the segment's Cooling Americas business.
Detection and Measurement — Charges for the three months ended April 3, 2021 related primarily to severance costs associated with a restructuring action at the segment's pipeline inspection and rehabilitation business.
Other — Charges for the three months ended April 3, 2021 and March 28, 2020 related primarily to severance costs incurred in connection with the wind-down activities at DBT, our South African subsidiary.
No significant future charges are expected to be incurred under actions approved as of April 3, 2021.
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The following is an analysis of our restructuring liabilities for the three months ended April 3, 2021 and March 28, 2020:
| Three months ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Balance at beginning of year | $ | $ | |||||||||
| Special charges | |||||||||||
| Utilization — cash | ( | ( | |||||||||
| Currency translation adjustment and other | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
(8) INVENTORIES, NET
Inventories at April 3, 2021 and December 31, 2020 comprised the following:
| April 3, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials and purchased parts | |||||||||||
| Total FIFO cost | |||||||||||
| Excess of FIFO cost over LIFO inventory value | ( | ( | |||||||||
| Total inventories, net | $ | $ | |||||||||
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(9) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the three months ended April 3, 2021 were as follows:
| December 31, 2020 | Goodwill Resulting from Business Combinations (1) | Impairments | Foreign Currency Translation | April 3, 2021 | |||||||||||||||||||||||||||||||||||||
| HVAC reportable segment | |||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Accumulated impairments | ( | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||
| Goodwill | ( | ||||||||||||||||||||||||||||||||||||||||
| Detection and Measurement reportable segment | |||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | ( | ||||||||||||||||||||||||||||||||||||||||
| Accumulated impairments | ( | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||
| Goodwill | ( | ||||||||||||||||||||||||||||||||||||||||
| Engineered Solutions reportable segment | |||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | ( | ||||||||||||||||||||||||||||||||||||||||
| Accumulated impairments | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | |||||||||||||||||||||||||||||||||||||||||
| Accumulated impairments | — | — | |||||||||||||||||||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||||||||
| Gross goodwill | ( | ||||||||||||||||||||||||||||||||||||||||
| Accumulated impairments | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Goodwill | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
___________________________
(1)Reflects a net increase in ULC's goodwill during 2021 of $0.8 resulting from revisions to the valuation of certain assets and liabilities and an increase in Sensors & Software's goodwill of $2.0 resulting from revisions to the valuation of certain income tax accounts. As indicated in Note 1, the acquired assets, including goodwill, and liabilities assumed in the ULC and Sensors & Software acquisitions have been recorded at estimates of fair value and are subject to change upon completion of acquisition accounting.
Other Intangibles, Net
Identifiable intangible assets at April 3, 2021 and December 31, 2020 comprised the following:
| April 3, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||||
| Intangible assets with determinable lives: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Technology | ( | ( | |||||||||||||||||||||||||||||||||
| Patents | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||||||||
| Trademarks with indefinite lives | — | — | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
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At April 3, 2021, the net carrying value of intangible assets with determinable lives consisted of $23.8 in the HVAC reportable segment and $113.1 in the Detection and Measurement reportable segment. At April 3, 2021, trademarks with indefinite lives consisted of $96.4 in the HVAC reportable segment, $57.9 in the Detection and Measurement reportable segment, and $9.1 in the Engineered Solutions reportable segment.
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”) and Patterson-Kelley, LLC (“Patterson-Kelley”), exceeded the carrying value of their respective net assets by over 75 %. The estimated fair values of Cues and Patterson-Kelley exceeded the carrying value of their respective net assets by approximately 12 % and 3 %, 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 $47.9 , $14.2 and $38.4 , respectively, as of April 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.
As indicated in Note 1, the COVID-19 pandemic could have an adverse impact on our future operating results. As of April 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) WARRANTY
The following is an analysis of our product warranty accrual for the periods presented:
| Three months ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Balance at beginning of year | $ | $ | |||||||||
| Acquisitions | |||||||||||
| Provisions | |||||||||||
| Usage | ( | ( | |||||||||
| Currency translation adjustment | ( | ||||||||||
| Balance at end of period | |||||||||||
| Less: Current portion of warranty | |||||||||||
| Non-current portion of warranty | $ | $ | |||||||||
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(11) EMPLOYEE BENEFIT PLANS
Net periodic benefit (income) expense for our pension and postretirement plans include the following components:
Domestic Pension Plans
| Three months ended | |||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||
| Service cost | $ | $ | |||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Net periodic pension benefit (income) expense | $ | ( | $ | ||||||||||||||||||||
Foreign Pension Plans
| Three months ended | |||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||
| Service cost | $ | $ | |||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Net periodic pension benefit income | $ | ( | $ | ( | |||||||||||||||||||
Postretirement Plans
| Three months ended | |||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||
| Service cost | $ | $ | |||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization of unrecognized prior service credits | ( | ( | |||||||||||||||||||||
| Net periodic postretirement benefit income | $ | ( | $ | ( | |||||||||||||||||||
(12) INDEBTEDNESS
The following summarizes our debt activity (both current and non-current) for the three months ended April 3, 2021:
| December 31, 2020 | Borrowings | Repayments | Other(5) | April 3, 2021 | |||||||||||||||||||||||||
Revolving loans (1) | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
Term loan(2) | ( | ||||||||||||||||||||||||||||
Trade receivables financing arrangement(3) | ( | ||||||||||||||||||||||||||||
Other indebtedness(4) | ( | ||||||||||||||||||||||||||||
| Total debt | $ | $ | ( | $ | |||||||||||||||||||||||||
| Less: short-term debt | |||||||||||||||||||||||||||||
| Less: current maturities of long-term debt | |||||||||||||||||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||||||||||||||
___________________________
(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.
(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 $1.3 and $1.4 at April 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 April 3, 2021, we had $16.0 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $34.0 . 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 $2.1 and $1.7 and finance lease obligations of $2.8 and $2.6 at April 3, 2021 and December 31, 2020, respectively. The purchase card program allows for payment beyond the normal payment
16
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.
At April 3, 2021, we had $334.1 of available borrowing capacity under our revolving credit facilities after giving effect to borrowings under the domestic revolving loan facility of $103.7 and $12.2 reserved for domestic letters of credit. In addition, at April 3, 2021, we had $34.4 of available issuance capacity under our foreign credit instrument facilities after giving effect to $65.6 reserved for outstanding letters of credit.
The weighted-average interest rate of outstanding borrowings under our senior credit agreement was approximately 1.5 % at April 3, 2021.
At April 3, 2021, we were in compliance with all covenants of our senior credit agreement.
(13) DERIVATIVE 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 2.535 %, 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 $248.4 , cover the period from March 2021 to November 2024, and effectively convert borrowings under our senior credit facilities to a fixed rate of 1.061 %, plus the applicable margin.
We have designated and are accounting for our interest rate swap agreements as cash flow hedges. As of April 3, 2021 and December 31, 2020, the unrealized loss, net of tax, recorded in AOCI was $2.5 and $5.9 , respectively. In addition, as of April 3, 2021, the fair value of our interest rate swap agreements totaled $3.4 , with $2.2 recorded as a current liability and the remainder in long-term liabilities, and $7.8 at December 31, 2020 (with $1.4 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.
Currency Forward Contracts
We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the South African Rand, British Pound Sterling, and Euro.
We had FX forward contracts with an aggregate notional amount of $12.4 and $6.3 outstanding as of April 3, 2021 and December 31, 2020, respectively, with all of the $12.4 scheduled to mature within one year.
Commodity Contracts
From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At April 3, 2021 and December 31, 2020, the outstanding notional amount of commodity contracts were 3.1 and 3.2 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 AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. As of April 3, 2021 and December 31, 2020, the fair value of these contracts were current assets of $1.5 and $2.4 , respectively. The unrealized gains, net of taxes, recorded in AOCI were $1.1 1.5 as of April 3, 2021 and
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(14) EQUITY AND LONG-TERM INCENTIVE COMPENSATION
Income Per Share
The following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income per share:
| Three months ended | |||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||
| Weighted-average number of common shares used in basic income per share | |||||||||||||||||||||||
| Dilutive securities — Employee stock options and restricted stock units | |||||||||||||||||||||||
| Weighted-average number of common shares and dilutive securities used in diluted income per share | |||||||||||||||||||||||
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 0.234 and 0.627 , respectively, for the three months ended April 3, 2021, and 0.280 and 0.756 , respectively, for the three months ended March 28, 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 three-year performance period, with performance based on the total return of our stock over the three-year performance period against a peer group within the S&P 600 Capital Goods Index. Stock options and RSU’s vest ratably over the three-year period subsequent to the date of grant.
Non-employee directors receive annual long-term incentive awards at the time of our annual meeting of stockholders, with the 2021 meeting scheduled for May 11, 2021.
Compensation expense within income from continuing operations related to long-term incentive awards totaled $3.0 and $3.5 for the three months ended April 3, 2021 and March 28, 2020, respectively. The related tax benefit was $0.5 and $0.9 for the three months ended April 3, 2021 and March 28, 2020.
PSU’s and RSU’s
We use the Monte Carlo simulation model valuation technique to determine the fair value of our restricted stock units that contain a market condition (i.e., the PSU’s). The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each PSU.
The following table summarizes the PSU and RSU activity from December 31, 2020 through April 3, 2021:
| Unvested PSU's and RSU's | Weighted-Average Grant-Date Fair Value Per Share | ||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at April 3, 2021 | $ | ||||||||||
As of April 3, 2021, there was $19.7 of unrecognized compensation cost related to PSU’s and RSU’s. We expect this cost to be recognized over a weighted-average period of 2.4 years.
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Stock Options
On March 1, 2021, we granted 0.105 stock options, all of which were outstanding (but not exercisable) as of April 3, 2021. The exercise price per share of these options is $58.34 and the maximum contractual term of these options is 10 years.
The fair value per share of the stock options granted on March 1, 2021 was $23.49 . The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
| Annual expected stock price volatility | % | ||||
| Annual expected dividend yield | % | ||||
| Risk-free interest rate | % | ||||
| Expected life of stock option (in years) | |||||
Annual expected stock price volatility is based on a weighted average of SPX’s stock volatility since the spin-off of SPX FLOW, Inc. on September 26, 2015, and an average of the most recent six-year historical volatility of a peer company group. There is no annual expected dividend yield as we discontinued dividend payments in 2015 and do not expect to pay dividends for the foreseeable future. The average risk-free interest rate is based on the five-year and seven-year treasury constant maturity rates. The expected option life is based on a three-year pro-rata vesting schedule and represents the period of time that awards are expected to be outstanding.
As of April 3, 2021, there was $3.4 of unrecognized compensation cost related to stock options. We expect this cost to be recognized over a weighted-average period of 2.6 years.
Accumulated Other Comprehensive Income
The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended April 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 | $ | $ | ( | $ | $ | ||||||||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Current-period other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance at end of period | $ | $ | ( | $ | $ | ||||||||||||||||||
__________________________
(1)Net of tax benefit of $0.4 and $1.4 as of April 3, 2021 and December 31, 2020, respectively.
(2)Net of tax provision of $4.6 and $4.9 as of April 3, 2021 and December 31, 2020, respectively. The balances as of April 3, 2021 and December 31, 2020 include unamortized prior service credits.
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The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended March 28, 2020 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 | $ | $ | ( | $ | $ | ||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Current-period other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | $ | ( | $ | $ | ||||||||||||||||||
__________________________
(1)Net of tax benefit of $2.7 and $0.5 as of March 28, 2020 and December 31, 2019, respectively.
The following summarizes amounts reclassified from each component of accumulated comprehensive income for the three months ended April 3, 2021 and March 28, 2020:
| Amount Reclassified from AOCI | |||||||||||||||||
| Three months ended | |||||||||||||||||
| April 3, 2021 | March 28, 2020 | Affected Line Item in the Condensed Consolidated Statements of Operations | |||||||||||||||
| (Gains) losses on qualifying cash flow hedges: | |||||||||||||||||
| Commodity contracts | $ | ( | $ | Cost of products sold | |||||||||||||
| Swaps | Interest expense | ||||||||||||||||
| Pre-tax | ( | ||||||||||||||||
| Income taxes | ( | ||||||||||||||||
| $ | ( | $ | |||||||||||||||
| Gains on pension and postretirement items: | |||||||||||||||||
| Amortization of unrecognized prior service credits - Pre-tax | $ | ( | $ | ( | Other income, net | ||||||||||||
| Income taxes | |||||||||||||||||
| $ | ( | $ | ( | ||||||||||||||
(15) CONTINGENT 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 $563.3 and $575.7 at April 3, 2021 and December 31, 2020, respectively. Of these amounts, $487.6 and $499.8 are included in “Other long-term liabilities” within our condensed consolidated balance sheets at April 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
20
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 fifty 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. Our recorded assets and liabilities related to asbestos-related claims were as follows at April 3, 2021 and December 31, 2020:
| April 3, 2021 | December 31, 2020 | ||||||||||
Insurance recovery assets (1) | $ | $ | |||||||||
Liabilities for claims (2) | |||||||||||
__________________________
(1)Of these amounts, $438.4 and $446.4 are included in "Other assets" at April 3, 2021 and December 31, 2020, respectively, while the remainder is included in “Other current assets.”
(2)Of these amounts, $471.5 and $479.9 are included in “Other long-term liabilities" at April 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).
The following table presents information regarding activity for the asbestos-related claims for the three months ended April 3, 2021 and March 28, 2020:
| Three months ended April 3, | Three months ended March 28, | ||||||||||
| 2021 | 2020 | ||||||||||
| Pending claims, beginning of period | |||||||||||
| Claims filed | |||||||||||
| Claims resolved | ( | ( | |||||||||
| Pending claims, end of period | |||||||||||
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 periods ended April 3, 2021 and March 28, 2020, our payments for asbestos-related claims, net of respective insurance recoveries of $8.0 and $7.8 , were $3.8 and $4.2 , 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 ended April 3, 2021 and March 28, 2020, there were no changes in estimates associated with our assets and liabilities related to our asbestos product liability matters.
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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 1,100.0 (or $74.6 ). As we prepare these claims for dispute resolution processes, the amounts, along with the characterization, of the claims could change. Of these claims, South African Rand 533.9 (or $36.2 ) 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.
On February 22, 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 Kusile project. In connection with the ruling, MHI paid DBT South African Rand 126.6 (or $8.6 at the time of the 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 three months ended April 3, 2021.
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. The panel ruled that MHI is obligated to pay DBT South African Rand 75.8 , plus interest from June 2020 (or $5.1 , plus interest). This ruling is subject to MHI’s rights to seek further arbitration in the matter. No amount has been reflected in our condensed consolidated financial statements for this matter.
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. We believe the notification is unsubstantiated and the vast majority of the claimed damages are prohibited under the relevant contracts. Therefore, we believe any loss for the majority of these claimed damages is remote. For the remainder of the claims, which largely appear to be direct in nature (approximately South African Rand 948.0 or $64.3 ), 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. 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. 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 407.2 (or $27.6 ) 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
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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 176.2 (or $11.9 ). 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.
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 9 of the units; (ii) ordered MHI to return $2.3 of bonds (which have been subsequently returned by MHI); (iii) ruled that DBT is entitled to the return of an additional $4.6 of bonds upon the completion of certain administrative milestones; and (iv) ordered MHI to pay South African Rand 18.4 (or $1.1 at the time of the ruling) in incentive payments for work performed by DBT (which MHI has subsequently paid), and 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.
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 239.6 (or $14.3 at the time of payment), on certain of these bonds, which we funded as required under the terms of the bonds and our senior credit agreement. In its demand, MHI purported that DBT failed to carry out its obligations to rectify certain alleged product defects identified in its February 2019 interim claims notice (see above). DBT denies liability for such alleged product defects and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of the South African Rand 239.6 (or $16.2 ) that has been paid. However, given the extent and complexities of the claims between DBT and MHI, reimbursement of the South African Rand 239.6 (or $16.2 ) is unlikely to occur over the next twelve months. As such, we have reflected the South African Rand 239.6 16.2
After the cancellation of a bond issued in favor of MHI totaling $22.2 in April 2021, the remaining amount of outstanding bonds that have been issued to MHI include $16.1 of performance and retention money guarantees, which could be exercised by MHI for alleged defects or other alleged breaches of DBT's obligations. In the event that MHI were to receive payment on a portion, or all, of the remaining bonds, we would be required to reimburse the respective issuing bank.
In addition to these bonds, 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 $6.7 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 three months ended April 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.
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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 April 3, 2021, we had liabilities for site investigation and/or remediation at 25 sites (25 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 April 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 11 sites at which the liability has not been settled, of which 9 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.
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.
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(16) INCOME AND OTHER TAXES
Uncertain Tax Benefits
As of April 3, 2021, we had gross unrecognized tax benefits of $13.6 (net unrecognized tax benefits of $11.0 ). Of these net unrecognized tax benefits, $7.0 would impact our effective tax rate from continuing operations if recognized.
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of April 3, 2021, gross accrued interest totaled $3.7 (net accrued interest of $2.9 ). As of April 3, 2021, we had no 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 $5.0 . The previously unrecognized tax benefits relate to a variety of tax matters including transfer pricing and various state matters.
Other Tax Matters
For the three months ended April 3, 2021, we recorded an income tax provision of $7.0 on $34.6 of pre-tax income from continuing operations, resulting in an effective rate of 20.2 %. This compares to an income tax provision for the three months ended March 28, 2020 of $6.0 on $28.3 of pre-tax income from continuing operations, resulting in an effective rate of 21.2 %. The most significant item impacting the income tax provisions for the first quarters of 2021 and 2020 was $0.9 and $1.2 , respectively, of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the periods.
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”) currently is performing an audit of our 2013, 2014, 2015, 2016 and 2017 federal income tax returns. With regard to all open tax years, we believe any contingencies are adequately provided for.
State income tax returns generally are subject to examination for a period of three to five years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We 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.
(17) FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.
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•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 79.0 and Euro 79.0 , 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 4.0 and the parent company of the buyer provided a guarantee of Euro 5.0 as a security for the above indemnifications (Euro 0.0 and Euro 1.0 , respectively, at April 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. During the three months ended April 3, 2021, all remaining bonds were returned. Summarized below are changes in the liability and asset during the three months ended April 3, 2021 and March 28, 2020.
| Three months ended | ||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | |||||||||||||||||||||||||
Guarantees and Bonds Liability (1) | Indemnification Assets (1) | Guarantees and Bonds Liability (1) | Indemnification Assets (1) | |||||||||||||||||||||||
Balance at beginning of year | $ | $ | $ | $ | ||||||||||||||||||||||
Reduction/Amortization for the period (2) | ( | ( | ( | |||||||||||||||||||||||
| Impact of changes in foreign currency rates | ( | |||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||||||||||||
___________________________
(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).
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 $45.0 and $4.0 , respectively, with payment of such contingent consideration dependent upon the achievement of certain milestones. The estimated fair value of such contingent consideration is $24.3 0.7
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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 April 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 months ended April 3, 2021, we recorded a gain of $5.2 to “Other income, net” to reflect an increase in the estimated fair value of the equity security. During the three months ended March 28, 2020, there was no change in the estimated fair value of the equity security. As of April 3, 2021 and December 31, 2020, the equity security had an estimated fair value of $32.2 and $27.0 , respectively.
Indebtedness and Other — The estimated fair value of our debt instruments as of April 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) SUBSEQUENT EVENT
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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 quarter of 2020 and into the second quarter of 2020, with a diminishing impact during the second half of 2020. Any impacts of the pandemic on the first quarter of 2021 operating results were relatively minimal. However, we could experience an increase in adverse impacts during the remainder of 2021 if incidents of COVID-19 increase from current levels. Although certain of our businesses have been, and could be, impacted more than others in our portfolio, we believe that our diverse set of businesses, along with our strong balance sheet and available liquidity, position us well to manage the potential adverse impacts of the COVID-19 pandemic. For example, the products we manufacture and services we provide fall under the definition of “critical” or “essential” under various federal guidelines and state/local governmental orders that otherwise restrict business activities. These include products and services that enable the operation and maintenance of communication networks, the electrical grid, water and wastewater systems, and other key elements of infrastructure. Our manufacturing facilities have not experienced material interruptions in operations. If incidents of the COVID-19 pandemic increase, we may temporarily close facilities, if necessary, to address employee safety matters. In terms of liquidity, we generated $63.7 of cash flows from operating activities associated with continuing operations during the three months ended April 3, 2021 and have experienced no consequential delays in collecting outstanding amounts due from our customers. In addition, as of April 3, 2021, we had over $450.0 of availability from cash on-hand and aggregate borrowing capacity under our senior credit facilities and trade receivable financing arrangement. Lastly, scheduled repayments over the next twelve months for our long-term debt arrangements totaled $8.9 as of April 3, 2021. We also have taken actions to manage near-term costs and cash flows and implemented actions to address potential material sourcing challenges. 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.
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OVERVIEW OF OPERATING RESULTS
Revenues for the three months ended April 3, 2021 totaled $398.5, compared to $367.4 during the comparable period in 2020. The increase in revenues during the three months ended April 3, 2021, compared to the respective period in 2020, was due primarily to an increase in organic revenue and, to a lesser extent, the impact of the ULC Robotics (“ULC”) and Sensors & Software, Inc. (“Sensors & Software”) acquisitions. The increase in organic revenue was due primarily to higher sales of HVAC products and location and inspection equipment, partially offset by a decline in sales of process cooling products within our Engineered Solutions reportable segment. Sales of HVAC cooling products in the first quarter of 2020, particularly in the Asia Pacific region, were negatively impacted by the COVID-19 pandemic. In addition, during the first quarter of 2021, sales of HVAC heating products were favorably impacted by higher winter heating demand. Lastly, sales of process cooling products declined during the first quarter of 2021, compared to the first quarter of 2020, as the business generated a significant amount of revenues from a number of large projects during the first quarter of 2020.
During the three months ended April 3, 2021, we generated operating income of $31.7, compared to $32.3 for the comparable period in 2020. Operating income during the three months ended April 3, 2021, compared to the respective period in 2020, was favorably impacted by increases in profitability within our HVAC and Detection and Measurement reportable segments, offset by a decline in profitability within our Engineered Solutions reportable segment and additional corporate expense associated with additional investments in connection with continuous improvement and other strategic initiatives.
Cash flows from operating activities associated with continuing operations totaled $63.7 for the three months ended April 3, 2021, compared to $2.5 during the three months ended March 28, 2020. The increase in cash flows from operating activities was due primarily to (i) increases in cash flows at certain of our project-related businesses during the first quarter of 2021, as cash receipts for these project-related businesses are often subject to contract milestones that can impact the timing of cash flows from period-to-period, and (ii) cash receipts during the quarter of $15.3 related to claims matters in South Africa.
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 three months ended April 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 and acquisitions/divestitures. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as, when read 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 months ended April 3, 2021 and March 28, 2020, respectively, including the reconciliation of organic revenue increase to the net revenue increase:
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | % Change | |||||||||||||||||||||||||||||||||
| Revenues | $ | 398.5 | $ | 367.4 | 8.5 | ||||||||||||||||||||||||||||||
| Gross profit | 125.2 | 113.7 | 10.1 | ||||||||||||||||||||||||||||||||
| % of revenues | 31.4 | % | 30.9 | % | |||||||||||||||||||||||||||||||
| Selling, general and administrative expense | 88.8 | 78.9 | 12.5 | ||||||||||||||||||||||||||||||||
| % of revenues | 22.3 | % | 21.5 | % | |||||||||||||||||||||||||||||||
| Intangible amortization | 4.0 | 2.6 | 53.8 | ||||||||||||||||||||||||||||||||
| Special charges, net | 0.7 | 0.3 | * | ||||||||||||||||||||||||||||||||
| Other operating income | — | (0.4) | * | ||||||||||||||||||||||||||||||||
| Other income, net | 7.0 | 0.7 | * | ||||||||||||||||||||||||||||||||
| Interest expense, net | (4.1) | (4.7) | (12.8) | ||||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 34.6 | 28.3 | 22.3 | ||||||||||||||||||||||||||||||||
| Income tax provision | (7.0) | (6.0) | 16.7 | ||||||||||||||||||||||||||||||||
| Income from continuing operations | 27.6 | 22.3 | 23.8 | ||||||||||||||||||||||||||||||||
| Components of revenue increase: | |||||||||||||||||||||||||||||||||||
| Organic | 4.6 | ||||||||||||||||||||||||||||||||||
| Foreign currency | 0.7 | ||||||||||||||||||||||||||||||||||
| Acquisitions | 3.2 | ||||||||||||||||||||||||||||||||||
| Net revenue increase | 8.5 | ||||||||||||||||||||||||||||||||||
_________________________________
* Not meaningful for comparison purposes.
Revenues — For the three months ended April 3, 2021, the increase in revenues, compared to the respective period in 2020, was primarily due to an increase in organic revenue and, to a lesser extent, the impact of the ULC and Sensors & Software acquisitions. The increase in organic revenue was due primarily to higher sales of HVAC products and location and inspection equipment, partially offset by a decline in sales of process cooling products within our Engineered Solutions reportable segment. Sales of HVAC cooling products in the first quarter of 2020, particularly in the Asia Pacific region, were negatively impacted by the COVID-19 pandemic. In addition, during the first quarter of 2021, sales of HVAC heating products were favorably impacted by higher winter heating demand. Lastly, sales of process cooling products declined during the first quarter of 2021, compared to the first quarter of 2020, as the business generated a significant amount of revenues from a number of large projects during the first quarter of 2020.
See “Results of Reportable Segments and Other Operating Segment” for additional details.
Gross Profit — For the three months ended April 3, 2021, the increase in gross profit and gross profit as a percentage of revenues, compared to the respective period 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 months ended April 3, 2021, the increase in SG&A expense, compared to the respective period in 2020, was due 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.
Intangible Amortization — For the three months ended April 3, 2021, the increase in intangible amortization, compared to the respective period in 2020, was due to the impact of the acquisitions noted above, including $1.6 of intangible amortization during the three months ended April 3, 2021 related to ULC and Sensors & Software.
Special Charges, net — Special charges, net, related primarily to restructuring initiatives to reduce workforce. See Note 7 to our condensed consolidated financial statements for the details of actions taken in the first three months of 2021 and 2020.
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Other Operating Income — Other operating income for the three months ended March 28, 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 April 3, 2021 was composed primarily of a gain of $5.2 related to changes in the estimated fair value of an equity security we hold, 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, and pension and postretirement income of $1.6, partially offset by currency transaction losses of $0.9.
Other income, net, for the three months ended March 28, 2020 was composed primarily of pension and post retirement income of $1.0.
Interest Expense, net — Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during the three months ended April 3, 2021, compared to the respective period in 2020, was the result of lower average interest rates and debt balances during the 2021 period.
Income Tax Provision — For the three months ended April 3, 2021, we recorded an income tax provision of $7.0 on $34.6 of pre-tax income from continuing operations, resulting in an effective rate of 20.2%. This compares to an income tax provision for the three months ended March 28, 2020 of $6.0 on $28.3 of pre-tax income from continuing operations, resulting in an effective tax rate of 21.2%. The most significant item impacting the income tax provisions for the first quarters of 2021 and 2020 was $0.9 and $1.2, respectively, of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the periods.
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 each of our reportable segments.
Non-GAAP Measures — Throughout the following discussion of segment results, we use “organic revenue” growth (decline) to facilitate explanation of the operating performance of our segments. Organic revenue growth (decline) is a non-GAAP financial measure and is not a substitute for revenue growth (decline). Refer to the explanation of this measure and purpose of use by management under “Results of Continuing Operations—Non-GAAP Measures.”
HVAC Reportable Segment
| Three months ended | ||||||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | % Change | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 146.5 | $ | 118.5 | 23.6 | |||||||||||||||||||||||||||||||||
| Income | 24.2 | 15.0 | 61.3 | |||||||||||||||||||||||||||||||||||
| % of revenues | 16.5 | % | 12.7 | % | ||||||||||||||||||||||||||||||||||
| Components of revenue increase: | ||||||||||||||||||||||||||||||||||||||
| Organic | 22.9 | |||||||||||||||||||||||||||||||||||||
| Foreign currency | 0.7 | |||||||||||||||||||||||||||||||||||||
| Net revenue increase | 23.6 | |||||||||||||||||||||||||||||||||||||
Revenues — For the three months ended April 3, 2021, the increase in revenues, compared to the respective period in 2020, was due primarily to an increase in organic revenue for both the segment's cooling and heating product lines. Sales of cooling products in the first quarter of 2020, particularly in the Asia Pacific region, were negatively impacted by the COVID-19 pandemic. In addition, during the first quarter of 2021, sales of heating products were favorably impacted by higher winter heating demand.
Income — For the three months ended April 3, 2021, the increase in income and margin, compared to the respective period in 2020, was due primarily to the increase in revenues noted above.
Backlog — The segment had backlog of $95.2 and $88.9 as of April 3, 2021 and March 28, 2020, respectively.
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Detection and Measurement Reportable Segment
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | % Change | |||||||||||||||||||||||||||||||||
| Revenues | $ | 111.6 | $ | 91.9 | 21.4 | ||||||||||||||||||||||||||||||
| Income | 20.0 | 18.2 | 9.9 | ||||||||||||||||||||||||||||||||
| % of revenues | 17.9 | % | 19.8 | % | |||||||||||||||||||||||||||||||
| Components of revenue increase: | |||||||||||||||||||||||||||||||||||
| Organic | 6.7 | ||||||||||||||||||||||||||||||||||
| Foreign currency | 1.8 | ||||||||||||||||||||||||||||||||||
| Acquisitions | 12.9 | ||||||||||||||||||||||||||||||||||
| Net revenue increase | 21.4 | ||||||||||||||||||||||||||||||||||
Revenues — For the three months ended April 3, 2021, the increase in revenues, compared to the respective period in 2020, was due primarily to the impact of the acquisitions of ULC and Sensors & Software and, to a lesser extent, an increase in organic revenue. The increase in organic revenue for the three months ended April 3, 2021 was primarily the result of higher sales of location and inspection equipment.
Income — For the three months ended April 3, 2021, the increase in income, compared to the respective period in 2020, was due to the impact of the revenue increase noted above, with the decline in margin resulting primarily from the incremental amortization expense associated with the acquisitions of ULC and Sensors & Software.
Backlog — The segment had backlog of $109.0 and $75.9 as of April 3, 2021 and March 28, 2020, respectively. Aggregate backlog related to ULC and Sensors and Software totaled $8.5 as of April 3, 2021.
Engineered Solutions Reportable Segment
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | % Change | |||||||||||||||||||||||||||||||||
| Revenues | $ | 139.7 | $ | 154.9 | (9.8) | ||||||||||||||||||||||||||||||
| Income | 10.0 | 17.9 | (44.1) | ||||||||||||||||||||||||||||||||
| % of revenues | 7.2 | % | 11.6 | % | |||||||||||||||||||||||||||||||
| Components of revenue decrease: | |||||||||||||||||||||||||||||||||||
| Organic | (9.8) | ||||||||||||||||||||||||||||||||||
| Foreign currency | — | ||||||||||||||||||||||||||||||||||
| Net revenue decrease | (9.8) | ||||||||||||||||||||||||||||||||||
Revenues — For the three months ended April 3, 2021, the decrease in revenues, compared to the respective period in 2020, was due to a decrease in organic revenue, associated with lower sales of process cooling products, as the business generated a significant amount of revenue from a number of large projects during the first quarter of 2020.
Income — For the three months ended April 3, 2021, the decrease in income and margin, compared to the respective period in 2020, was due primarily to the decrease in revenues noted above and less favorable throughput and sales mix related to the segment's power transformer business.
Backlog — The segment had backlog of $380.4 and $363.2 as of April 3, 2021 and March 28, 2020, respectively. Portions of the segment’s backlog are long-term in nature, with the related revenues expected to be recorded through 2021 and into 2022.
Other
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||||||||||||||
| Revenues | $ | 0.7 | $ | 2.1 | |||||||||||||||||||||||||||||||
| Loss | (4.6) | (4.3) | |||||||||||||||||||||||||||||||||
| % of revenues | * | * | |||||||||||||||||||||||||||||||||
_________________________________
* Not meaningful for comparison purposes.
32
Revenues — For the three months ended April 3, 2021, the decrease in revenues, compared to the respective period 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 months ended April 3, 2021, the loss increased, compared to the respective period in 2020, as a result of higher professional fees during the 2021 period.
Backlog — The operating segment had a backlog of $3.1 and $4.3 as of April 3, 2021 and March 28, 2020, respectively.
CORPORATE AND OTHER EXPENSES
| Three months ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | % Change | |||||||||||||||||||||||||||||||||
| Total consolidated revenues | $ | 398.5 | $ | 367.4 | 8.5 | ||||||||||||||||||||||||||||||
| Corporate expense | 14.2 | 11.1 | 27.9 | ||||||||||||||||||||||||||||||||
| % of revenues | 3.6 | % | 3.0 | % | |||||||||||||||||||||||||||||||
| Long-term incentive compensation expense | 3.0 | 3.5 | (14.3) | ||||||||||||||||||||||||||||||||
Corporate Expense — Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters. The increase in corporate expense during the three months ended April 3, 2021 compared to the respective period in 2020, was due primarily to increased investments in continuous improvement and other strategic initiatives.
Long-Term Incentive Compensation Expense — Long-term incentive compensation expense represents our consolidated expense, which we do not allocate for segment reporting purposes. The decrease in long-term incentive compensation during the three months ended April 3, 2021, compared to the respective period in 2020, was due to (i) revisions to/finalization of the liability associated with the 2018 long-term cash awards and (ii) the impact of awards that were forfeited in connection with the departure of certain employees. 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 three months ended April 3, 2021 and March 28, 2020.
| Three months ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Continuing operations: | |||||||||||
| Cash flows from operating activities | $ | 63.7 | $ | 2.5 | |||||||
| Cash flows from (used in) investing activities | 0.9 | (2.5) | |||||||||
| Cash flows from (used in) financing activities | (25.6) | 113.0 | |||||||||
| Cash flows used in discontinued operations | (3.5) | (2.9) | |||||||||
| Change in cash and equivalents due to changes in foreign currency exchange rates | 3.1 | (1.7) | |||||||||
| Net change in cash and equivalents | $ | 38.6 | $ | 108.4 | |||||||
Operating Activities — The increase in cash flows from operating activities during the three months ended April 3, 2021, compared to the respective period in 2020, was due primarily to (i) increases in cash flows at certain of our project-related businesses during the first quarter of 2021, as cash receipts for these businesses are often subject to contract milestones that can impact the timing of cash flows from period-to-period, and (ii) cash receipts during the quarter of $15.3 related to claims matters in South Africa.
Investing Activities — Cash flows from investing activities for the three months ended April 3, 2021 were comprised of proceeds from company-owned life insurance policies of $3.5, partially offset by capital expenditures of $2.6.
Cash flows used in investing activities for the three months ended March 28, 2020 were comprised of capital expenditures of $3.6, partially offset by proceeds from company-owned life insurance policies of $1.1.
Financing Activities — Cash flows used in financing activities for the three months ended April 3, 2021 were comprised of net repayments under our various debt instruments of $21.4 and 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 three months ended March 28, 2020 were comprised of net borrowings under our various debt instruments of $117.3, partially offset by (i) minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $2.8 and (ii) $1.5 related to contingent consideration paid in connection with the SGS acquisition.
Discontinued Operations — Cash flows used in discontinued operations for the three months ended April 3, 2021 and March 28, 2020 related primarily to disbursements for 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 three 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 three months ended April 3, 2021.
| December 31, 2020 | Borrowings | Repayments | Other(5) | April 3, 2021 | |||||||||||||||||||||||||
Revolving loans (1) | $ | 129.8 | $ | 54.0 | $ | (80.1) | $ | — | $ | 103.7 | |||||||||||||||||||
Term loan(2) | 248.6 | — | (1.5) | 0.1 | 247.2 | ||||||||||||||||||||||||
Trade receivables financing arrangement(3) | 28.0 | 54.0 | (48.0) | — | 34.0 | ||||||||||||||||||||||||
Other indebtedness(4) | 6.0 | 0.4 | (0.2) | 0.4 | 6.6 | ||||||||||||||||||||||||
| Total debt | 412.4 | $ | 108.4 | $ | (129.8) | $ | 0.5 | 391.5 | |||||||||||||||||||||
| Less: short-term debt | 101.2 | 100.0 | |||||||||||||||||||||||||||
| Less: current maturities of long-term debt | 7.2 | 8.9 | |||||||||||||||||||||||||||
| Total long-term debt | $ | 304.0 | $ | 282.6 | |||||||||||||||||||||||||
___________________________
(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.
(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 $1.3 and $1.4 at April 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 April 3, 2021, we had $16.0 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $34.0. 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 $2.1 and $1.7 and finance lease obligations of $2.8 and $2.6 at April 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 April 3, 2021, we were in compliance with all covenants of our senior credit agreement.
Availability — At April 3, 2021, we had $334.1 of available borrowing capacity under our revolving credit facilities after giving effect to borrowings under the domestic revolving loan facility of $103.7 and $12.2 reserved for domestic letters of credit. In addition, at April 3, 2021, we had $34.4 of available issuance capacity under our foreign credit instrument facilities after giving effect to $65.6 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.
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
35
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 $13.9 as of April 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.
36
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 April 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 April 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 April 3, 2021 were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
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, specifically Note 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
None.
ITEM 6. Exhibits
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101.1 | SPX Corporation financial information from its Form 10-Q for the quarterly period ended April 3, 2021, formatted in Inline XBRL, including: (i) Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended April 3, 2021 and March 28, 2020; (ii) Condensed Consolidated Balance Sheets at April 3, 2021 and December 31, 2020; (iii) Condensed Consolidated Statements of Equity for the three months ended April 3, 2021 and March 28, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2021 and March 28, 2020; and (v) Notes to Condensed Consolidated Financial Statements. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibit 101.1) | ||||
38
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.
| SPX CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date: May 6, 2021 | By | /s/ Eugene J. Lowe, III | |||||||||
| President and Chief Executive Officer | |||||||||||
| Date: May 6, 2021 | By | /s/ James E. Harris | |||||||||
| Vice President, Chief Financial Officer and Treasurer | |||||||||||
39
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eugene J. Lowe, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPX Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 6, 2021 | /s/ EUGENE J. LOWE, III | ||||
Eugene J. Lowe, III President and Chief Executive Officer | |||||
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James E. Harris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPX Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 6, 2021 | /s/ JAMES E. HARRIS | ||||
| James E. Harris Vice President, Chief Financial Officer and Treasurer | |||||
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SPX Corporation on Form 10-Q for the period ended April 3, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPX Corporation.
Date: May 6, 2021
/s/ EUGENE J. LOWE, III | /s/ JAMES E. HARRIS | |||||||
Eugene J. Lowe, III President and Chief Executive Officer | James E. Harris Vice President, Chief Financial Officer and Treasurer | |||||||
A signed original of this written statement required by Section 906 has been provided to SPX Corporation and will be retained by SPX Corporation and furnished to the Securities and Exchange Commission or its staff upon request.