NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions, except per share data)
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(1)
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BASIS OF PRESENTATION
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Unless otherwise indicated, “we,” “us” and “our” mean SPX Corporation and its consolidated subsidiaries (“SPX”).
We prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally required by accounting principles generally accepted in the United States (“GAAP”) can be condensed or omitted. The financial statements represent our accounts after the elimination of intercompany transactions and, in our opinion, include the adjustments (consisting only of normal and recurring items) necessary for their fair presentation.
We account for investments in unconsolidated companies where we exercise significant influence but do not have control using the equity method. In determining whether we are the primary beneficiary of a variable interest entity (“VIE”), we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties to determine which party has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and which party has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We have an interest in a VIE, in which we are not the primary beneficiary, as a result of the sale of Balcke Dürr. See below and in Note 15 for further discussion of the sale of Balcke Dürr. All other VIEs are considered immaterial, individually and in aggregate, to our condensed consolidated financial statements.
Sale of Dry Cooling Business
On March 30, 2016, we completed the sale of our dry cooling business, a business previously within our Engineered Solutions reportable segment, to Paharpur Cooling Towers Limited (“Paharpur”) for cash proceeds of
$45.9
(net of cash transferred with the business of
$3.0
), resulting in a gain during the quarter ended April 2, 2016 of
$17.9
. The gain includes a reclassification from “Equity” of other comprehensive income totaling
$40.4
related to foreign currency translation.
During the second quarter of 2016, we reduced the gain by
$1.2
in connection with adjustments to certain liabilities retained from the sale. During the third quarter of 2016, we increased the gain by
$1.7
in connection with the settlement of the final working capital associated with the business.
In connection with the sale, we provided customary indemnifications to Paharpur. Accordingly, it is possible that the sales price and resulting gain for this divestiture may be materially adjusted in subsequent periods.
Sale of Balcke Dürr Business
On December 30, 2016, we completed the sale of Balcke Dürr to a subsidiary of mutares AG (the “Buyer”) for cash proceeds of less than
$0.1
. In addition, we left
$21.1
of cash in Balcke Dürr at the time of the sale and provided the Buyer with a non-interest bearing loan of
$9.1
, payable in installments due at the end of 2018 and 2019. The results of Balcke Dürr are presented as a discontinued operation within the accompanying condensed consolidated financial statements. In connection with the sale, we recorded a net loss of
$78.6
in the fourth quarter of 2016 to “Gain (loss) on disposition of discontinued operations, net of tax.” During the first quarter of 2017, we reduced the net loss associated with the sale of Balcke Dürr by
$7.2
. The reduction was comprised of an additional income tax benefit recorded for the sale of
$8.4
, partially offset by adjustments to liabilities retained in connection with the sale of
$1.2
. During the second quarter of 2017, we increased the net loss associated with the sale of Balcke Dürr by
$0.4
, with the increase resulting from adjustments to liabilities retained in connection with the sale.
The purchase agreement provided that existing parent company guarantees of approximately
€79.0
and bank and surety bonds of approximately
€79.0
would remain in place through each instrument’s expiration date, with such expiration dates ranging from 2017 to 2022. Balcke Dürr and the Buyer have provided us a full indemnity in the event that any of these guarantees or bonds are called. Also, Balcke Dürr has provided cash collateral of
€4.0
and mutares AG has provided a guarantee of
€5.0
as a security for the above indemnifications. 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. See Note 15 for further details regarding these estimated fair values.
The final sales price for Balcke Dürr is subject to adjustment based on cash and working capital existing at the closing date and is subject to agreement with the Buyer. Final agreement of the cash and working capital amounts with the Buyer has yet to occur. Accordingly, it is possible that the sales price and resulting loss for this divestiture may be materially adjusted in subsequent periods.
Other
Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016. Interim results are not necessarily indicative of full year results. We have reclassified certain prior year amounts, including the results of discontinued operations, to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only. See Note 3 for information on discontinued operations.
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 2017 are April 1, July 1 and September 30, compared to the respective April 2, July 2 and October 1, 2016 dates. We had two fewer days in the first quarter of 2017 and will have one more day in the fourth quarter of 2017 than in the respective 2016 periods. We do not believe the two fewer days during the first quarter of 2017 had a material impact on our consolidated operating results for the first half of 2017, when compared to the consolidated operating results for the first half of 2016.
(2)
NEW ACCOUNTING PRONOUNCEMENTS
The following is a summary of new accounting pronouncements that apply or may apply to our business.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standard contains a five-step approach that entities will apply to determine the measurement of revenue and timing of when it is recognized, including (i) identifying the contract(s) with a customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to separate performance obligations, and (v) recognizing revenue when (or as) each performance obligation is satisfied. The new standard requires a number of disclosures intended to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue, and the related cash flows. The disclosures include qualitative and quantitative information about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and we currently plan to adopt the standard using the modified retrospective transition method. The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We are continuing to assess the potential effect that the standard is expected to have on our consolidated financial statements. We believe the more significant effects on our existing accounting policies will be associated with our power transformer business. Under the new standard, revenue for our power transformers will be recognized over time, which is a change from our current accounting policy of recognizing revenue for power transformers at a point in time.
In February 2016, the FASB issued an amendment to existing guidance that requires lessees to recognize assets and liabilities for the rights and obligations created by long-term leases. In addition, this amendment requires new qualitative and quantitative disclosures about leasing arrangements. This standard is effective for annual periods beginning on or after December 15, 2018 for public business entities, and interim periods within those fiscal years. Early adoption is permitted, and adoption must be applied on a modified retrospective basis. We are currently evaluating the effect this new standard will have on our condensed consolidated financial statements.
In March 2016, the FASB issued an amendment to existing guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. We adopted this guidance on January 1, 2017, and, thus, excess income tax benefits recognized on stock-based compensation awards are now being reflected, on a prospective basis, in our condensed consolidated statement of operations as a component of the provision for income taxes (versus the previous requirement to reflect such amounts within “equity”). In accordance with this prospective adoption, we recognized income tax benefits of
$0.2
and
$1.2
in our condensed consolidated statements of operations for the three and six months ended July 1, 2017, respectively. In addition, we prospectively adopted the amendment to present excess income tax benefits on share-based compensation awards as an operating activity within our condensed consolidated statement of cash flows (versus the previous requirement to reflect such amounts as a financing activity), which resulted in the classification of
$1.2
of such income tax benefits within operating activities of the condensed consolidated statement of cash flows for the six months ended July 1, 2017. Cash paid on employees’ behalf related to shares withheld for income taxes payable continues to be classified
as a financing activity. Lastly, we elected to continue estimating stock-based compensation award forfeitures in determining the amount of compensation expense to be recognized in each period.
In August 2016, the FASB issued an amendment to existing guidance to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. This amendment provides clarification on eight specific cash flow presentation issues. The issues include, but are not limited to, debt prepayment or extinguishment costs, settlement of zero-coupon debt, proceeds from the settlement of insurance claims, and cash receipts from payments on beneficial interests in securitization transactions. This amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the effect this amendment will have on our condensed consolidated financial statements.
In January 2017, the FASB issued an amendment to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires that an entity recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This amendment is effective for annual reporting periods beginning after December 31, 2019, including interim periods within those annual reporting periods. Early adoption is permitted. The impact of this amendment on our consolidated financial statements will depend on the results of future goodwill impairment tests.
In March 2017, the FASB issued an amendment to revise the presentation of net periodic pension and postretirement benefit cost. The amendment requires the service cost component to be presented separately from the other components of net periodic pension and postretirement benefit cost. Service cost will be presented with other employee compensation costs within operations. The other components of net periodic pension and postretirement benefit cost, such as interest cost, expected return on plan assets, amortization of prior service cost/credits, and gains or losses, are required to be separately presented outside of operations. This amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The amendment to the presentation in the income statement of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost shall be applied retrospectively. Early adoption is permitted. We will adopt the standard effective January 1, 2018. The adoption is not expected to have a material impact on our condensed consolidated financial statements. See Note 9 for details of our pension and postretirement expense.
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(3)
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DISCONTINUED OPERATIONS
|
As indicated in Note 1, the results of Balcke Dürr are presented as a discontinued operation within the accompanying condensed consolidated financial statements for the three and six months ended
July 2, 2016
. Major classes of line items constituting pre-tax loss and after-tax loss of Balcke Dürr for the three and six months ended
July 2, 2016
are shown below:
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|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 2,
2016
|
|
July 2,
2016
|
Revenues
|
$
|
41.5
|
|
|
$
|
70.2
|
|
Costs and expenses:
|
|
|
|
|
|
Cost of products sold
|
37.8
|
|
|
66.6
|
|
Selling, general and administrative
|
8.2
|
|
|
16.1
|
|
Special charges (credits), net
|
(0.4
|
)
|
|
(0.6
|
)
|
Other expense, net
|
(0.2
|
)
|
|
(0.2
|
)
|
Loss before taxes
|
(4.3
|
)
|
|
(12.1
|
)
|
Income tax benefit
|
1.2
|
|
|
3.5
|
|
Loss from discontinued operations, net of tax
|
$
|
(3.1
|
)
|
|
$
|
(8.6
|
)
|
The following table presents selected financial information for Balcke Dürr that is included within discontinued operations in the condensed consolidated statement of cash flows for the six months ended
July 2, 2016
:
|
|
|
|
|
Non-cash items included in loss from discontinued operations:
|
|
Depreciation and amortization
|
$
|
1.0
|
|
Capital expenditures
|
0.6
|
|
During the first quarter of 2017, we reduced the net loss associated with the sale of Balcke Dürr by
$7.2
. The reduction was comprised of an additional income tax benefit recorded for the sale of
$8.4
, partially offset by adjustments to liabilities retained in connection with the sale of
$1.2
. During the second quarter of 2017, we increased the net loss associated with the sale of Balcke Dürr by
$0.4
, with the increase resulting from adjustments to liabilities retained in connection with the sale. In addition to the adjustment for the net loss related to the Balcke Dürr sale, we recognized net losses of
$0.3
and
$0.4
during the three and six
months ended
July 1, 2017
, and
$0.4
and
$1.5
during the three and six months ended
July 2, 2016
, respectively, resulting from revisions to liabilities retained from businesses discontinued prior to 2016.
For the
three and six
months ended
July 1, 2017
and
July 2, 2016
, the table below presents a reconciliation of discontinued operations activity to the related amounts in the condensed consolidated statements of operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Balcke Dürr
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
$
|
(0.5
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
(12.1
|
)
|
Income tax benefit
|
0.1
|
|
|
1.2
|
|
|
9.4
|
|
|
3.5
|
|
Income (loss) from discontinued operations, net
|
(0.4
|
)
|
|
(3.1
|
)
|
|
6.8
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.9
|
)
|
|
(1.8
|
)
|
Income tax benefit
|
0.1
|
|
|
0.2
|
|
|
0.5
|
|
|
0.3
|
|
Loss from discontinued operations, net
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
(0.9
|
)
|
|
(4.9
|
)
|
|
(3.5
|
)
|
|
(13.9
|
)
|
Income tax benefit
|
0.2
|
|
|
1.4
|
|
|
9.9
|
|
|
3.8
|
|
Income (loss) from discontinued operations, net
|
$
|
(0.7
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
6.4
|
|
|
$
|
(10.1
|
)
|
(4)
INFORMATION ON REPORTABLE SEGMENTS
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.
We have aggregated our 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 segments, we apply the threshold criteria of the Segment Reporting Topic of the Codification. Operating income or loss for each of our segments is determined before considering impairment and special charges, pension and postretirement expense/income, long-term incentive compensation 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, 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 Pacific.
Detection and Measurement Reportable Segment
Our Detection and Measurement reportable segment engineers, designs, manufactures and installs underground pipe and cable locators and inspection equipment, bus fare collection systems, communication technologies, and specialty 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, and Asia Pacific.
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 and stationary heat exchangers 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 and South Africa.
Corporate Expense
Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters.
Financial data for our reportable segments for the
three and six
months ended
July 1, 2017
and
July 2, 2016
are presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Revenues:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
HVAC segment
|
$
|
120.3
|
|
|
$
|
121.9
|
|
|
$
|
230.4
|
|
|
$
|
233.5
|
|
Detection and Measurement segment
|
64.5
|
|
|
60.1
|
|
|
118.1
|
|
|
115.5
|
|
Engineered Solutions segment
(2)
|
164.9
|
|
|
189.4
|
|
|
341.8
|
|
|
383.0
|
|
Consolidated revenues
|
$
|
349.7
|
|
|
$
|
371.4
|
|
|
$
|
690.3
|
|
|
$
|
732.0
|
|
|
|
|
|
|
|
|
|
Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
HVAC segment
|
$
|
15.4
|
|
|
$
|
17.1
|
|
|
$
|
31.9
|
|
|
$
|
33.0
|
|
Detection and Measurement segment
|
17.3
|
|
|
12.1
|
|
|
28.5
|
|
|
23.1
|
|
Engineered Solutions segment
(2)
|
(12.0
|
)
|
|
3.0
|
|
|
(5.4
|
)
|
|
5.9
|
|
Total income for segments
|
20.7
|
|
|
32.2
|
|
|
55.0
|
|
|
62.0
|
|
|
|
|
|
|
|
|
|
Corporate expense
|
(11.3
|
)
|
|
(8.6
|
)
|
|
(22.7
|
)
|
|
(20.0
|
)
|
Long-term incentive compensation expense
|
(3.6
|
)
|
|
(3.4
|
)
|
|
(6.8
|
)
|
|
(6.1
|
)
|
Pension and postretirement expense
|
(1.2
|
)
|
|
(2.8
|
)
|
|
(2.6
|
)
|
|
(3.8
|
)
|
Special charges, net
|
(0.5
|
)
|
|
(2.4
|
)
|
|
(1.0
|
)
|
|
(2.9
|
)
|
Impairment of intangible assets
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.0
|
)
|
Gain (loss) on sale of dry cooling business
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
16.7
|
|
Consolidated operating income
|
$
|
4.1
|
|
|
$
|
13.8
|
|
|
$
|
21.9
|
|
|
$
|
41.9
|
|
___________________________
|
|
(1)
|
Under the percentage-of-completion method, we recognized revenues of
$65.8
and
$80.1
in the three months ended
July 1, 2017
and
July 2, 2016
, respectively. For the
six
months ended
July 1, 2017
and
July 2, 2016
, revenues under the percentage-of-completion method were
$144.6
and
$184.4
, respectively. Costs and estimated earnings in excess of billings on uncompleted contracts accounted for under the percentage-of-completion method were
$31.3
and
$33.9
as of
July 1, 2017
and
December 31, 2016
, respectively, and are reported as a component of ‘‘Accounts receivable, net’’ in the condensed consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted contracts accounted for under the percentage-of-completion method were
$42.0
and
$53.3
as of
July 1, 2017
and
December 31, 2016
, respectively, and are reported as a component of ‘‘Accrued expenses’’ in the condensed consolidated balance sheets.
|
|
|
(2)
|
As further discussed in Note 13, during the second quarter of 2017, we made revisions to our expected revenues and profits on our large power projects in South Africa. As a result of these revisions, we reduced revenue and segment income by
$13.5
and
$22.9
, respectively, for the three and six months ended
July 1, 2017
.
|
Special charges, net, for the
three and six
months ended
July 1, 2017
and
July 2, 2016
are described in more detail below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
HVAC segment
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
Detection and Measurement segment
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.2
|
|
Engineered Solutions segment
|
0.2
|
|
|
2.4
|
|
|
0.2
|
|
|
2.7
|
|
Corporate
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Total
|
$
|
0.5
|
|
|
$
|
2.4
|
|
|
$
|
1.0
|
|
|
$
|
2.9
|
|
HVAC Segment
— Charges for the
three and six
months ended
July 1, 2017
related primarily to severance costs associated with a restructuring action at the segment’s Cooling Americas business.
Detection and Measurement Segment
— Charges for the six months ended July 1, 2017 related to severance costs associated with a restructuring action at the segment’s communication technologies business during the first quarter of 2017. Charges for the
six
months ended
July 2, 2016
related to severance costs associated with a restructuring action at the segment’s bus fare collection systems business.
Engineered Solutions Segment
— Charges for the
three and six
months ended
July 1, 2017
related primarily to severance costs associated with a restructuring action at the segment’s process cooling business. Charges for the
three and six
months ended
July 2, 2016
related to a restructuring actions at the segment’s SPX Heat Transfer (“Heat Transfer”) business. The costs incurred for the Heat Transfer business restructuring action included asset impairment charges of
$2.6
associated with the discontinuance of a product line and severance costs.
Corporate
— Charges for the six months ended
July 1, 2017
related to severance costs incurred in connection with the sale of Balcke Dürr.
Expected charges still to be incurred under actions approved as of
July 1, 2017
are approximately
$0.1
.
The following is an analysis of our restructuring liabilities for the
six
months ended
July 1, 2017
and
July 2, 2016
:
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Balance at beginning of year
|
$
|
0.9
|
|
|
$
|
1.6
|
|
Special charges
(1)
|
1.0
|
|
|
0.3
|
|
Utilization — cash
|
(1.0
|
)
|
|
(1.2
|
)
|
Currency translation adjustment and other
|
—
|
|
|
(0.1
|
)
|
Balance at end of period
|
$
|
0.9
|
|
|
$
|
0.6
|
|
___________________________
|
|
(1)
|
The
six
months ended
July 1, 2017
and
July 2, 2016
included
$0.0
and
$2.6
of non-cash charges, respectively, that did not impact the restructuring liability.
|
Inventories at
July 1, 2017
and
December 31, 2016
comprised the following:
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Finished goods
|
$
|
49.7
|
|
|
$
|
43.0
|
|
Work in process
|
59.8
|
|
|
50.0
|
|
Raw materials and purchased parts
|
70.9
|
|
|
64.9
|
|
Total FIFO cost
|
180.4
|
|
|
157.9
|
|
Excess of FIFO cost over LIFO inventory value
|
(12.1
|
)
|
|
(12.2
|
)
|
Total inventories, net
|
$
|
168.3
|
|
|
$
|
145.7
|
|
Inventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated net realizable values. Certain domestic inventories are valued using the last-in, first-out (“LIFO”) method. These inventories were approximately
55%
and
51%
of total inventory at
July 1, 2017
and
December 31, 2016
, respectively. Other inventories are valued using the first-in, first-out (“FIFO”) method.
|
|
(7)
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Goodwill
The changes in the carrying amount of goodwill, by reportable segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Impairments
|
|
Foreign
Currency
Translation
and Other
|
|
July 1,
2017
|
HVAC segment
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
$
|
258.5
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
261.8
|
|
Accumulated impairments
|
(144.2
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(144.5
|
)
|
Goodwill
|
114.3
|
|
|
—
|
|
|
3.0
|
|
|
117.3
|
|
|
|
|
|
|
|
|
|
Detection and Measurement segment
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
214.4
|
|
|
—
|
|
|
1.4
|
|
|
215.8
|
|
Accumulated impairments
|
(134.2
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
(135.3
|
)
|
Goodwill
|
80.2
|
|
|
—
|
|
|
0.3
|
|
|
80.5
|
|
|
|
|
|
|
|
|
|
Engineered Solutions segment
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
351.4
|
|
|
—
|
|
|
4.6
|
|
|
356.0
|
|
Accumulated impairments
|
(205.5
|
)
|
|
—
|
|
|
(4.2
|
)
|
|
(209.7
|
)
|
Goodwill
|
145.9
|
|
|
—
|
|
|
0.4
|
|
|
146.3
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
824.3
|
|
|
—
|
|
|
9.3
|
|
|
833.6
|
|
Accumulated impairments
|
(483.9
|
)
|
|
—
|
|
|
(5.6
|
)
|
|
(489.5
|
)
|
Goodwill
|
$
|
340.4
|
|
|
$
|
—
|
|
|
$
|
3.7
|
|
|
$
|
344.1
|
|
Other Intangibles, Net
Identifiable intangible assets at
July 1, 2017
and
December 31, 2016
comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
1.4
|
|
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
Technology
|
2.1
|
|
|
(0.4
|
)
|
|
1.7
|
|
|
2.1
|
|
|
(0.4
|
)
|
|
1.7
|
|
Patents
|
4.5
|
|
|
(4.5
|
)
|
|
—
|
|
|
4.5
|
|
|
(4.5
|
)
|
|
—
|
|
Other
|
12.7
|
|
|
(7.7
|
)
|
|
5.0
|
|
|
12.7
|
|
|
(7.4
|
)
|
|
5.3
|
|
|
20.7
|
|
|
(14.0
|
)
|
|
6.7
|
|
|
20.7
|
|
|
(13.7
|
)
|
|
7.0
|
|
Trademarks with indefinite lives
|
111.7
|
|
|
—
|
|
|
111.7
|
|
|
110.9
|
|
|
—
|
|
|
110.9
|
|
Total
(1)
|
$
|
132.4
|
|
|
$
|
(14.0
|
)
|
|
$
|
118.4
|
|
|
$
|
131.6
|
|
|
$
|
(13.7
|
)
|
|
$
|
117.9
|
|
___________________________
|
|
(1)
|
Changes in the gross carrying values of “Other Intangibles, Net” during the
six
months ended
July 1, 2017
related to foreign currency translation.
|
At
July 1, 2017
, the net carrying value of intangible assets with determinable lives consisted of
$4.0
in the HVAC segment and
$2.7
in the Engineered Solutions segment. At
July 1, 2017
, trademarks with indefinite lives consisted of
$89.3
in the HVAC segment,
$10.0
in the Detection and Measurement segment and
$12.4
in the Engineered Solutions 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.
We perform our annual trademarks impairment testing during the fourth quarter, or on a more frequent basis if there are indications of potential impairment. The fair values of our trademarks are determined by applying estimated royalty rates to projected revenues, with the resulting cash flows discounted at a rate of return that reflects current market conditions (fair value based on unobservable inputs - Level 3, as defined in Note 15). The primary basis for these projected revenues is the annual operating plan for each of the related businesses, which is prepared in the fourth quarter of each year.
In the first quarter of 2016, we recorded an impairment charge of
$4.0
related to trademarks of our Heat Transfer business.
No
impairment charges were recorded in the first half of 2017.
The following is an analysis of our product warranty accrual for the periods presented:
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Balance at beginning of year
|
$
|
35.8
|
|
|
$
|
36.3
|
|
Provisions
|
5.2
|
|
|
6.6
|
|
Usage
|
(8.1
|
)
|
|
(8.2
|
)
|
Currency translation adjustment
|
0.2
|
|
|
(0.3
|
)
|
Balance at end of period
|
33.1
|
|
|
34.4
|
|
Less: Current portion of warranty
|
12.7
|
|
|
15.8
|
|
Non-current portion of warranty
|
$
|
20.4
|
|
|
$
|
18.6
|
|
|
|
(9)
|
EMPLOYEE BENEFIT PLANS
|
In connection with the spin-off of SPX Flow, Inc. (“SPX Flow”) on September 26, 2015, participants in the SPX U.S. Pension Plan (the “U.S. Plan”) that were transferred to SPX FLOW became eligible to elect a lump-sum payment option in lieu of a future pension benefit under the U.S. Plan. During the second quarter of 2016, approximately
9%
, or
$25.2
, of the projected benefit obligation of the U.S. Plan was settled as a result of lump-sum payments. In connection with these lump-sum payments, we remeasured the assets and liabilities of the U.S. Plan as of May 31, 2016, which resulted in a charge to net periodic pension benefit expense of
$1.0
during the quarter.
During the second quarter of 2016, we made lump-sum payments to certain participants of the Supplemental Individual Account Retirement Plan (“SIARP”), settling approximately
22%
, or
$2.7
, of the SIARP’s projected benefit obligation. In connection with these lump-sum payments, we remeasured the liabilities of the SIARP as of June 30, 2016, which resulted in a charge to net periodic pension benefit expense of
$0.8
during the quarter.
Net periodic benefit expense (income) for our pension and postretirement plans included the following components:
Domestic Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Service cost
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
3.3
|
|
|
3.5
|
|
|
6.6
|
|
|
7.1
|
|
Expected return on plan assets
|
(2.5
|
)
|
|
(3.2
|
)
|
|
(5.0
|
)
|
|
(6.4
|
)
|
Recognized net actuarial loss
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
Total net periodic pension benefit expense
|
$
|
0.9
|
|
|
$
|
2.2
|
|
|
$
|
1.8
|
|
|
$
|
2.7
|
|
Foreign Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
1.2
|
|
|
1.5
|
|
|
2.4
|
|
|
2.9
|
|
Expected return on plan assets
|
(1.6
|
)
|
|
(1.8
|
)
|
|
(3.1
|
)
|
|
(3.5
|
)
|
Net periodic pension benefit income
|
$
|
(0.4
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(0.6
|
)
|
Postretirement Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
0.9
|
|
|
1.1
|
|
|
1.9
|
|
|
2.1
|
|
Amortization of unrecognized prior service credits
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Net periodic postretirement benefit expense
|
$
|
0.7
|
|
|
$
|
0.9
|
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
The following summarizes our debt activity (both current and non-current) for the
six
months ended
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Borrowings
|
|
Repayments
|
|
Other
(4)
|
|
July 1,
2017
|
Revolving loans
|
$
|
—
|
|
|
$
|
16.0
|
|
|
$
|
(16.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loan
(1)
|
339.6
|
|
|
—
|
|
|
(8.7
|
)
|
|
0.2
|
|
|
331.1
|
|
Trade receivables financing arrangement
(2)
|
—
|
|
|
40.0
|
|
|
(19.0
|
)
|
|
—
|
|
|
21.0
|
|
Other indebtedness
(3)
|
16.6
|
|
|
21.4
|
|
|
(24.1
|
)
|
|
1.4
|
|
|
15.3
|
|
Total debt
|
356.2
|
|
|
$
|
77.4
|
|
|
$
|
(67.8
|
)
|
|
$
|
1.6
|
|
|
367.4
|
|
Less: short-term debt
|
14.8
|
|
|
|
|
|
|
|
|
33.9
|
|
Less: current maturities of long-term debt
|
17.9
|
|
|
|
|
|
|
|
|
18.1
|
|
Total long-term debt
|
$
|
323.5
|
|
|
|
|
|
|
|
|
$
|
315.4
|
|
___________________________
|
|
(1)
|
The term loan is repayable in quarterly installments of
1.25%
of the original loan balance of
$350.0
. The remaining balance is repayable in full on September 24, 2020. Balances are net of unamortized debt issuance costs of
$1.4
and
$1.6
at
July 1, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Under this arrangement, we can borrow, on a continuous basis, up to
$50.0
, as available. At
July 1, 2017
, we had
$22.9
of available borrowing capacity under this facility.
|
|
|
(3)
|
Primarily includes balances under a purchase card program of
$3.0
and
$3.9
, capital lease obligations of
$2.4
and
$1.7
, and borrowings under lines of credit in South Africa and China totaling $
9.2
and $
10.2
at
July 1, 2017
and
December 31, 2016
, 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.
|
|
|
(4)
|
“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
On March 20, 2017, we entered into an amendment to our senior credit facilities. Among other things, the amendment extended the period during which we may reinvest the net proceeds from the disposition of our dry cooling business. A detailed description of our senior credit facilities is included in our 2016 Annual Report on Form 10-K.
At
July 1, 2017
, we had
$36.1
and
$195.2
of outstanding letters of credit issued under our revolving credit and our foreign credit instrument facilities of our senior credit agreement, respectively.
The weighted-average interest rate of outstanding borrowings under our senior credit agreement was approximately
3.0%
at
July 1, 2017
.
At
July 1, 2017
, we were in compliance with all covenants of our senior credit agreement.
|
|
(11)
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
Interest Rate Swaps
During the second quarter of 2016, we entered into interest rate swap agreements (“Swaps”) to hedge the interest rate risk on our variable rate term loan. These Swaps, which we designate and account for as cash flow hedges, have effective dates beginning in January 2017 and maturities through September 2020 and effectively convert
50%
of the borrowing under the variable rate term loan to a fixed rate of
1.2895%
plus the applicable margin. These are amortizing Swaps; therefore, the outstanding notional value is scheduled to decline commensurate with the scheduled maturities of the term loan. As of
July 1, 2017
, the aggregate notional amounts of the Swaps was
$166.9
and the unrealized gain, net of tax, recorded in accumulated other comprehensive income (“AOCI”) was
$0.9
. In addition, we have recorded a long-term asset of
$1.9
to recognize the fair value of these Swaps. These changes in fair value are reclassified into earnings as a component of interest expense, when the forecasted transaction impacts earnings.
Currency Forward Contracts and Currency Forward Embedded Derivatives
From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries (“FX forward contracts”). In addition, some of our contracts contain currency forward embedded derivatives (“FX embedded derivatives”), because the currency of exchange is not “clearly and closely” related to the functional currency of either party to the transaction. Certain of our FX forward contracts are designated as cash flow hedges. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (“AOCI”). These changes in fair value are reclassified into earnings as a component of revenues or cost of products sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction is no longer probable, the cumulative change in the derivatives’ fair value is recorded as a component of “Other income (expense), net” in the period in which the transaction is no longer considered probable of occurring. To the extent a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period in which it occurs.
We had FX forward contracts with an aggregate notional amount of
$5.3
and
$8.8
outstanding as of
July 1, 2017
and
December 31, 2016
, respectively, with all of the
$5.3
scheduled to mature within one year. We also had FX embedded derivatives with an aggregate notional amount of
$0.4
and
$0.9
at
July 1, 2017
and
December 31, 2016
, respectively, with all of the
$0.4
scheduled to mature within one year. There were no unrealized gains or losses recorded in AOCI related to FX forward contracts as of
July 1, 2017
and
December 31, 2016
.
The fair value of our FX forward contracts and FX embedded derivative instruments were not material in relation to our condensed consolidated balance sheets as of
July 1, 2017
and
December 31, 2016
.
Commodity Contracts
From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At
July 1, 2017
and
December 31, 2016
, the outstanding notional amount of commodity contracts was
4.3
and
4.1
pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these 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
July 1, 2017
and
December 31, 2016
, the fair value of these contracts was
$0.5
(current asset) and
$1.1
(current asset), respectively. The unrealized gains, net of tax, recorded in AOCI were
$0.4
and
$0.8
as of
July 1, 2017
and
December 31, 2016
, respectively. We anticipate reclassifying the unrealized gains as of
July 1, 2017
to income over the next
12 months
.
|
|
(12)
|
SHAREHOLDERS’ EQUITY AND LONG-TERM INCENTIVE COMPENSATION
|
Income (Loss) Per Share
The following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Weighted-average number of common shares used in basic income per share
|
42.388
|
|
|
41.594
|
|
|
42.249
|
|
|
41.443
|
|
Dilutive securities — Employee stock options, restricted stock shares and restricted stock units
|
—
|
|
|
—
|
|
|
1.373
|
|
|
0.311
|
|
Weighted-average number of common shares and dilutive securities used in diluted income per share
|
42.388
|
|
|
41.594
|
|
|
43.622
|
|
|
41.754
|
|
The weighted-average number of restricted stock shares/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 was
0.476
and
1.037
, respectively, for the three months ended
July 1, 2017
, and
0.435
and
1.010
, respectively, for the six months ended
July 1, 2017
. In addition, for the three months ended
July 1, 2017
,
0.804
and
0.597
of restricted stock shares/units and stock options, respectively, were excluded from the related computation of diluted income per share due to the net loss from continuing operations attributable to SPX common shareholders during the period.
The weighted-average number of restricted stock shares/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 was
1.365
and
1.417
, respectively, for the three months ended
July 2, 2016
and
1.254
and
1.251
, respectively, for the six months ended
July 2, 2016
. In addition, for the three months ended July 2, 2016,
0.359
and
0.001
of restricted stock shares/units and stock options, respectively, were excluded from the related computation of diluted income per share due to the net loss from continuing operations attributable to SPX common shareholders during the period.
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 2017 is included in our 2016 Annual Report on Form 10-K.
Awards granted on March 1, 2017 to executive officers and other members of senior management were comprised of performance stock units (“PSU’s”), stock options, time-based restricted stock units (“RSU’s”), and long-term cash awards, while other eligible employees were granted RSU’s and long-term cash awards. 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 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. Long-term cash awards are eligible to vest at the end of a
three
-year performance measurement period, with performance based on our achieving a target segment income amount over the
three
-year measurement period.
Effective May 8, 2017, we granted
0.024
RSU’s to our Non-employee directors, which vest in their entirety immediately prior to the annual meeting of stockholders in May 2018.
Compensation expense within income from continuing operations related to long-term incentive awards totaled
$3.6
and
$3.4
for the three months ended
July 1, 2017
and
July 2, 2016
, respectively, and
$6.8
and
$6.1
for the six months ended
July 1, 2017
and
July 2, 2016
, respectively. The related tax benefit was
$1.4
and
$1.3
for the three months ended
July 1, 2017
and
July 2, 2016
, respectively, and
$2.6
and
$2.3
for the six months ended
July 1, 2017
and
July 2, 2016
, respectively.
Accumulated Other Comprehensive Income (Loss)
The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended
July 1, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized Gains
on Qualifying Cash
Flow Hedges
(1)
|
|
Pension and
Postretirement
Liability Adjustment
(2)
|
|
Total
|
Balance at beginning of period
|
$
|
228.2
|
|
|
$
|
2.2
|
|
|
$
|
3.7
|
|
|
$
|
234.1
|
|
Other comprehensive income (loss) before reclassifications
|
1.1
|
|
|
(0.6
|
)
|
|
—
|
|
|
0.5
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(0.4
|
)
|
Current-period other comprehensive income (loss)
|
1.1
|
|
|
(0.9
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
Balance at end of period
|
$
|
229.3
|
|
|
$
|
1.3
|
|
|
$
|
3.6
|
|
|
$
|
234.2
|
|
__________________________
|
|
(1)
|
Net of tax provision of
$0.8
and
$1.3
as of
July 1, 2017
and
April 1, 2017
, respectively.
|
|
|
(2)
|
Net of tax provision of
$2.6
and
$2.7
as of
July 1, 2017
and
April 1, 2017
, respectively. The balances as of
July 1, 2017
and
April 1, 2017
represent net unamortized prior service credits.
|
The changes in the components of accumulated other comprehensive income, net of tax, for the six months ended
July 1, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized Gains
on Qualifying Cash
Flow Hedges
(1)
|
|
Pension and
Postretirement
Liability Adjustment
(2)
|
|
Total
|
Balance at beginning of period
|
$
|
229.7
|
|
|
$
|
1.5
|
|
|
$
|
3.9
|
|
|
$
|
235.1
|
|
Other comprehensive income (loss) before reclassifications
|
(0.4
|
)
|
|
0.5
|
|
|
—
|
|
|
0.1
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(0.7
|
)
|
|
(0.3
|
)
|
|
(1.0
|
)
|
Current-period other comprehensive loss
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.9
|
)
|
Balance at end of period
|
$
|
229.3
|
|
|
$
|
1.3
|
|
|
$
|
3.6
|
|
|
$
|
234.2
|
|
_________________________
|
|
(1)
|
Net of tax provision of
$0.8
and
$0.9
as of
July 1, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Net of tax provision of
$2.6
and
$2.7
as of
July 1, 2017
and
December 31, 2016
. The balances as of
July 1, 2017
and
December 31, 2016
represent net unamortized prior service credits.
|
The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended
July 2, 2016
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
|
$
|
241.9
|
|
|
$
|
(0.6
|
)
|
|
$
|
4.3
|
|
|
$
|
245.6
|
|
Other comprehensive loss before reclassifications
|
(2.3
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
(3.8
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
0.5
|
|
|
(0.1
|
)
|
|
0.4
|
|
Current-period other comprehensive loss
|
(2.3
|
)
|
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(3.4
|
)
|
Balance at end of period
|
$
|
239.6
|
|
|
$
|
(1.6
|
)
|
|
$
|
4.2
|
|
|
$
|
242.2
|
|
___________________________
|
|
(1)
|
Net of tax benefit of
$1.0
and
$0.4
as of
July 2, 2016
and
April 2, 2016
, respectively.
|
|
|
(2)
|
Net of tax provision of
$3.0
and
$3.1
as of
July 2, 2016
and
April 2, 2016
, respectively. The balances as of
July 2, 2016
and
April 2, 2016
include net unamortized prior service credits.
|
The changes in the components of accumulated other comprehensive income, net of tax, for the six months ended
July 2, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Net Unrealized Losses
on Qualifying Cash Flow Hedges
(2)
|
|
Pension and
Postretirement
Liability Adjustment
(3)
|
|
Total
|
Balance at beginning of period
|
$
|
280.6
|
|
|
$
|
(1.8
|
)
|
|
$
|
4.5
|
|
|
$
|
283.3
|
|
Other comprehensive loss before reclassifications
|
(0.6
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
(2.3
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
(40.4
|
)
|
|
1.9
|
|
|
(0.3
|
)
|
|
(38.8
|
)
|
Current-period other comprehensive income (loss)
|
(41.0
|
)
|
|
0.2
|
|
|
(0.3
|
)
|
|
(41.1
|
)
|
Balance at end of period
|
$
|
239.6
|
|
|
$
|
(1.6
|
)
|
|
$
|
4.2
|
|
|
$
|
242.2
|
|
__________________________
|
|
(1)
|
In connection with the sale of our dry cooling business, we reclassified
$40.4
of other comprehensive income related to foreign currency translation to “Gain (loss) on sale of dry cooling business.”
|
|
|
(2)
|
Net of tax benefit of
$1.0
and
$0.8
as of
July 2, 2016
and
December 31, 2015
, respectively.
|
|
|
(3)
|
Net of tax provision of
$3.0
and
$3.1
as of
July 2, 2016
and
December 31, 2015
, respectively. The balances as of
July 2, 2016
and
December 31, 2015
include net unamortized prior service credits.
|
The following summarizes amounts reclassified from each component of accumulated comprehensive income for the three months ended
July 1, 2017
and
July 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
|
|
Three months ended
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Affected Line Item in the Condensed
Consolidated Statements of Operations
|
(Gains) losses on qualifying cash flow hedges:
|
|
|
|
|
|
|
|
FX forward contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
Revenues
|
Commodity contracts
|
(0.7
|
)
|
|
0.9
|
|
|
Cost of products sold
|
Swaps
|
0.2
|
|
|
—
|
|
|
Interest expense
|
Pre-tax
|
(0.5
|
)
|
|
0.9
|
|
|
|
Income taxes
|
0.2
|
|
|
(0.4
|
)
|
|
|
|
$
|
(0.3
|
)
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
Gains on pension and postretirement items:
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service credits
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
Selling, general and administrative
|
Pre-tax
|
(0.2
|
)
|
|
(0.2
|
)
|
|
|
Income taxes
|
0.1
|
|
|
0.1
|
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
|
The following summarizes amounts reclassified from each component of accumulated comprehensive income (loss) for the six months ended
July 1, 2017
and
July 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
|
|
Six months ended
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Affected Line Item in the Condensed
Consolidated Statements of Operations
|
(Gains) losses on qualifying cash flow hedges:
|
|
|
|
|
|
|
|
FX forward contracts
|
$
|
—
|
|
|
$
|
1.0
|
|
|
Revenues
|
Commodity contracts
|
(1.4
|
)
|
|
1.6
|
|
|
Cost of products sold
|
Swaps
|
0.3
|
|
|
—
|
|
|
Interest expense
|
Pre-tax
|
(1.1
|
)
|
|
2.6
|
|
|
|
Income taxes
|
0.4
|
|
|
(0.7
|
)
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
Gains on pension and postretirement items:
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service credits
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
|
Selling, general and administrative
|
Pre-tax
|
(0.4
|
)
|
|
(0.4
|
)
|
|
|
Income taxes
|
0.1
|
|
|
0.1
|
|
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
Gain on sale of dry cooling business:
|
|
|
|
|
|
|
Recognition of foreign currency translation adjustment
associated with the sale of our dry cooling business
|
$
|
—
|
|
|
$
|
(40.4
|
)
|
|
Gain (loss) on sale of dry cooling business
|
Common Stock in Treasury
During the
six
months ended
July 1, 2017
and
July 2, 2016
, “Common stock in treasury” was decreased by the settlement of restricted stock units issued from treasury stock of
$16.0
and
$17.7
, respectively.
Changes in Equity
A summary of the changes in equity for the three months ended
July 1, 2017
and
July 2, 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
|
SPX
Corporation
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
|
SPX
Corporation
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
Equity, beginning of period
|
$
|
211.0
|
|
|
$
|
—
|
|
|
$
|
211.0
|
|
|
$
|
322.8
|
|
|
$
|
(37.5
|
)
|
|
$
|
285.3
|
|
Net income (loss)
|
(9.0
|
)
|
|
—
|
|
|
(9.0
|
)
|
|
4.0
|
|
|
(1.0
|
)
|
|
3.0
|
|
Net unrealized losses on qualifying cash flow hedges, net of tax benefit of $0.5 and $0.6 for the three months ended July 1, 2017 and July 2, 2016, respectively
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
(1.0
|
)
|
|
—
|
|
|
(1.0
|
)
|
Pension and postretirement liability adjustment, net of tax benefit of $0.1 for the three months ended July 2, 2017 and July 2, 2016
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Foreign currency translation adjustments
|
1.1
|
|
|
—
|
|
|
1.1
|
|
|
(2.3
|
)
|
|
(0.2
|
)
|
|
(2.5
|
)
|
Total comprehensive income (loss), net
|
(8.9
|
)
|
|
—
|
|
|
(8.9
|
)
|
|
0.6
|
|
|
(1.2
|
)
|
|
(0.6
|
)
|
Incentive plan activity
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Long-term incentive compensation expense
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
3.2
|
|
|
—
|
|
|
3.2
|
|
Restricted stock and restricted stock unit vesting, net of tax withholdings, and related tax benefit of $0.0 and $0.1 for the three months ended July 1, 2017 and July 2, 2016, respectively
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Adjustment related to redeemable noncontrolling interest (see Note 13)
|
—
|
|
|
—
|
|
|
—
|
|
|
(56.0
|
)
|
|
38.7
|
|
|
(17.3
|
)
|
Equity, end of period
|
$
|
208.7
|
|
|
$
|
—
|
|
|
$
|
208.7
|
|
|
$
|
272.6
|
|
|
$
|
—
|
|
|
$
|
272.6
|
|
A summary of the changes in equity for the
six
months ended
July 1, 2017
and
July 2, 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
July 2, 2016
|
|
SPX
Corporation
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
|
SPX
Corporation
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
Equity, beginning of period
|
$
|
191.6
|
|
|
$
|
—
|
|
|
$
|
191.6
|
|
|
$
|
345.4
|
|
|
$
|
(37.1
|
)
|
|
$
|
308.3
|
|
Net income (loss)
|
8.4
|
|
|
—
|
|
|
8.4
|
|
|
17.0
|
|
|
(0.4
|
)
|
|
16.6
|
|
Net unrealized gains (losses) on qualifying cash flow hedges, net of tax benefit of $0.1 and $0.2 for the six months ended July 1, 2017 and July 2, 2016, respectively
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Pension and postretirement liability adjustment, net of tax benefit of $0.1 for the six months ended July 1, 2017 and July 2, 2016
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
Foreign currency translation adjustments
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(41.0
|
)
|
|
(1.2
|
)
|
|
(42.2
|
)
|
Total comprehensive income (loss), net
|
7.5
|
|
|
—
|
|
|
7.5
|
|
|
(24.1
|
)
|
|
(1.6
|
)
|
|
(25.7
|
)
|
Incentive plan activity
|
7.4
|
|
|
—
|
|
|
7.4
|
|
|
4.6
|
|
|
—
|
|
|
4.6
|
|
Long-term incentive compensation expense
|
5.8
|
|
|
—
|
|
|
5.8
|
|
|
5.9
|
|
|
—
|
|
|
5.9
|
|
Restricted stock and restricted stock unit vesting, net of tax withholdings, and related tax provision of $0.0 and $1.5 for the six months ended July 1, 2017 and July 2, 2016, respectively
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
(3.2
|
)
|
|
—
|
|
|
(3.2
|
)
|
Adjustment related to redeemable noncontrolling interest (see Note 13)
|
—
|
|
|
—
|
|
|
—
|
|
|
(56.0
|
)
|
|
38.7
|
|
|
(17.3
|
)
|
Equity, end of period
|
$
|
208.7
|
|
|
$
|
—
|
|
|
$
|
208.7
|
|
|
$
|
272.6
|
|
|
$
|
—
|
|
|
$
|
272.6
|
|
|
|
(13)
|
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 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
$651.4
(including
$606.1
for asbestos product liability matters) and
$653.5
(including
$605.6
for asbestos product liability matters) at
July 1, 2017
and
December 31, 2016
, respectively. Of these amounts,
$615.7
and
$621.0
are included in “Other long-term liabilities” within our condensed consolidated balance sheets at
July 1, 2017
and
December 31, 2016
, respectively, with the remainder included in “Accrued expenses.” The liabilities we record for these claims are based on a number of assumptions, including historical claims and payment experience and, with respect to asbestos claims, actuarial estimates of the future period during which additional claims are reasonably foreseeable. While we base our assumptions on facts currently known to us, they entail inherently subjective judgments and uncertainties. As a result, our current assumptions for estimating these liabilities may not prove accurate, and we may be required to adjust these liabilities in the future, which could result in charges to earnings. These variances relative to current expectations could have a material impact on our financial position and results of operations.
Our asbestos-related claims are typical in certain of the industries in which we operate or pertain to legacy businesses we no longer operate. It is not unusual in these cases for
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. During the three months ended
July 1, 2017
and
July 2, 2016
, our payments for asbestos-related matters, net of insurance recoveries, were
$1.2
and
$1.3
, respectively. During the six months
ended
July 1, 2017
, our insurance recoveries for asbestos-related matters, net of payments, were
$7.8
, which included cash proceeds received during the first quarter of 2017 of
$8.5
related to a settlement reached with an insurance carrier. During the six months ended
July 2, 2016
, our payments for asbestos-related matters, net of insurance recoveries, were
$3.0
. 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 such, have a material impact on our financial position, results of operations and cash flows.
We have recorded insurance recovery assets associated with the asbestos product liability matters, with such amounts totaling
$554.0
and
$564.4
at
July 1, 2017
and
December 31, 2016
, respectively, and included in “Other assets” within our condensed consolidated balance sheets. These assets represent amounts that we believe we are or will be entitled to recover under agreements we have with insurance companies. The assets we record for these insurance recoveries are based on a number of assumptions, including the continued solvency of the insurers, and are subject to a variety of uncertainties. Our current assumptions for estimating these assets may not prove accurate, and we may be required to adjust these assets in the future, which could result in additional charges to earnings. These variances relative to current expectations could have a material impact on our financial position and results of operations.
During the three and six months ended
July 1, 2017
, we recorded a charge to “Other income (expense), net” of
$3.0
associated with the settlement of a group of asbestos-related claims, while there were no such charges during the three and six months ended
July 2, 2016
.
Large Power Projects in South Africa
The business environment surrounding our large power projects in South Africa remains difficult, as we 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 us and our subcontractors), and various suppliers. We currently are involved in a number of claim disputes relating to these challenges. We are pursuing various commercial alternatives for addressing these challenges, in an attempt to mitigate our overall financial exposure.
Over the last
two
years, we have implemented various controls and initiatives that have reduced the risk associated with our large power projects in South Africa, including more recent steps to accelerate the timeline for completing certain portions of the projects. In addition, we have experienced higher than expected costs as we complete certain scopes of work. Lastly, during the second quarter of 2017, we became aware of financial challenges facing
one
of our sub-contractors, which will negatively impact the ultimate cost of the related project scope. As a result of these efforts to accelerate certain timelines, the higher than expected costs on certain scopes of work, and the aforementioned sub-contractor financial challenges, we determined during the second quarter of 2017 that additional cost would be required in order to complete certain remaining portions of the projects. As such, we revised our estimates of revenues, costs and profits associated with the projects. These revisions resulted in a charge to “Income (loss) from continuing operations before income taxes” of
$22.9
during the three and six months ended July 1, 2017, which is comprised of a reduction in revenue of
$13.5
and an increase in cost of products sold of
$9.4
.
We recognize revenue associated with unapproved change orders and claims to the extent the related costs have been incurred and the amount of expected recovery is probable and reasonably estimable. At
July 1, 2017
, the projected revenues related to our large power projects in South Africa included approximately
$27.6
related to claims and unapproved change orders. We believe these amounts are recoverable under the provisions of the related contracts and reflect our best estimate of recoverable amounts.
Although we believe that our current estimates of revenues, costs and profits relating to these projects are reasonable, it is possible that future revisions of such estimates could have a material effect on our condensed consolidated financial statements.
Noncontrolling Interest in South African Subsidiary
Our South African subsidiary, DBT Technologies (PTY) LTD (“DBT”), has a Black Economic Empowerment shareholder (the “BEE Partner”) that holds a
25.1%
noncontrolling interest in DBT. Under the terms of the shareholder agreement between the BEE Partner and SPX Technologies (PTY) LTD (“SPX Technologies”), the BEE Partner had the option to put its ownership interest in DBT to SPX Technologies, the majority shareholder of DBT, at a redemption amount determined in accordance with the terms of the shareholder agreement (the “Put Option”). The BEE Partner notified SPX Technologies of its intention to exercise the Put Option and, on July 6, 2016, an Arbitration Tribunal declared that the BEE Partner was entitled to South African Rand
287.3
in connection with the exercise of the Put Option, having not considered an amount due from the BEE Partner under a promissory note of South African Rand
30.3
held by SPX Technologies. As a result, we have reflected the net redemption amount of South African Rand
257.0
(or
$19.8
) within “Accrued expenses” on our condensed consolidated balance sheet as of
July 1, 2017
, with the related offset recorded to “Paid-in-capital” and “Accumulated other comprehensive income.” In addition, we reclassified
$38.7
from “Noncontrolling Interests” to “Paid-in capital.” Lastly, under the two-class method of calculating earnings per share, we reflected an adjustment of
$18.1
to “Net income (loss) attributable to SPX Corporation common shareholders” for
the excess redemption amount of the Put Option (i.e., the increase in the redemption amount during the second quarter of 2016 in excess of fair value) in our calculations of basic and diluted earnings per share for the
three and six
months ended
July 2, 2016
.
SPX Technologies disagrees with the arbitration determination and will continue to pursue all available legal recourse in this matter.
Patent Infringement Lawsuit
Our subsidiary, SPX Cooling Technologies, Inc. (“SPXCT”), is a defendant in a legal action brought by Baltimore Aircoil Company (“BAC”) alleging that a SPXCT product infringes United States Patent No. 7,107,782, entitled “Evaporative Heat Exchanger and Method.” BAC filed suit on July 16, 2013 in the United States District Court for the District of Maryland (the “District Court”) seeking monetary damages and injunctive relief.
On November 4, 2016, the jury for the trial in the District Court found in favor of SPXCT. The verdict by the District Court is currently under appeal by BAC. We believe that we will ultimately be successful in any future judicial processes; however, to the extent we are not successful, the outcome could have a material adverse effect on our financial position, results of operations, and cash flows.
Litigation Matters
We are subject to other legal matters that arise in the normal course of business. We believe these matters are either without merit or of a kind that should not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows; however, we cannot assure you that these proceedings or claims will not have a material effect on our financial position, results of operations or cash flows.
Environmental Matters
Our operations and properties are subject to federal, state, local and foreign regulatory requirements relating to environmental protection. It is our policy to comply fully with all applicable requirements. As part of our effort to comply, we have a comprehensive environmental compliance program that includes environmental audits conducted by internal and external independent professionals, as well as regular communications with our operating units regarding environmental compliance requirements and anticipated regulations. Based on current information, we believe that our operations are in substantial compliance with applicable environmental laws and regulations, and we are not aware of any violations that could have a material effect, individually or in the aggregate, on our business, financial condition, and results of operations or cash flows. As of
July 1, 2017
, we had liabilities for site investigation and/or remediation at
28
sites (
30
sites at December 31, 2016) that we own or control. 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 operation and maintenance of clean-up sites. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. Accordingly, our estimates may change based on future developments, including new or changes in existing environmental laws or policies, differences in costs required to complete anticipated actions from estimates provided, future findings of investigation or remediation actions, or alteration to the expected remediation plans. It is our policy to revise an estimate once the revision becomes probable and the amount of change can be reasonably estimated. We generally do not discount our environmental accruals and do not reduce them by anticipated insurance recoveries. We take into account third-party indemnification from financially viable parties in determining our accruals where there is no dispute regarding the right to indemnification.
In the case of contamination at offsite, third-party disposal sites, as of
July 1, 2017
, we have been notified that we are potentially responsible and have received other notices of potential liability pursuant to various environmental laws at
22
sites at which the liability has not been settled, of which
8
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.
Uncertain Tax Benefits
As of
July 1, 2017
, we had gross unrecognized tax benefits of
$37.9
(net unrecognized tax benefits of
$25.2
). Of these net unrecognized tax benefits,
$20.3
would impact our effective tax rate from continuing operations if recognized.
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of
July 1, 2017
, gross accrued interest totaled
$4.5
(net accrued interest of
$2.9
). As of
July 1, 2017
, 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 approximately
$6.0
to
$10.0
. The previously unrecognized tax benefits relate to a variety of tax matters relating to deemed income inclusions, transfer pricing and various state matters.
Other Tax Matters
For the three months ended
July 1, 2017
, we recorded an income tax provision of
$6.0
on
$2.3
of a pre-tax loss from continuing operations, resulting in an effective tax rate of
(260.9)%
. This compares to an income tax provision for the three months ended
July 2, 2016
of
$3.8
on
$10.3
of pre-tax income from continuing operations, resulting in an effective tax rate of
36.9%
. The most significant item impacting the income tax provision for the second quarter of 2017 was
$24.6
of foreign losses generated during the period for which no tax benefit was recognized, as future realization of any such tax benefit is considered unlikely. The most significant item impacting the income tax provision for the second quarter of 2016 was
$5.0
of foreign losses generated during the period for which no tax benefit was recognized, as future realization of any such tax benefit is considered unlikely.
For the six months ended
July 1, 2017
, we recorded an income tax provision of
$9.2
on
$11.2
of pre-tax income from continuing operations, resulting in an effective tax rate of
82.1%
. This compares to an income tax provision for the six months ended
July 2, 2016
of
$9.6
on
$36.3
of pre-tax income from continuing operations, resulting in an effective tax rate of
26.4%
. The most significant items impacting the income tax provision for the first six months of 2017 were (i)
$29.6
of foreign losses generated during the period for which no benefit was recognized, as future realization of any such tax benefit is considered unlikely, and (ii)
$1.2
of excess tax benefits resulting from stock-based compensation awards which vested in the period. The most significant items impacting the income tax provision for the first six months of 2016 were (i)
$0.3
of income taxes that were provided in connection with the
$16.7
gain that was recorded on the sale of the dry cooling business and (ii)
$9.7
of foreign losses generated during the period for which no tax benefit was recognized, as future realization of any such tax benefit is considered unlikely
.
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.
We have filed our federal income tax returns for the 2013, 2014 and 2015 tax years and those returns are subject to examination. 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 are 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 adverse effect 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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
|
|
•
|
Level 1 — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
|
|
|
•
|
Level 3 — Significant inputs to the valuation model are unobservable.
|
There were no changes during the periods presented to the valuation techniques we use to measure asset and liability fair values on a recurring or nonrecurring basis.
Valuation Methodologies Used to Measure Fair Value on a Non-Recurring Basis
Parent Guarantees and Bonds Associated with Balcke Dürr
—
As indicated in Note 1, in connection with the sale of Balcke Dürr, parent company guarantees of approximately
€79.0
and bank and surety bonds of approximately
€79.0
existing at the time of the sale will remain in place through each instrument’s expiration date, with such expiration dates ranging from 2017 to 2022. These guarantees and bonds provide 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 relate to lease obligations and foreign tax matters in existence at the time of sale. Balcke Dürr and the Buyer have provided us a full indemnity in the event that any of these guarantees or bonds are called. Also, Balcke Dürr has provided cash collateral of
€4.0
and mutares AG has provided a guarantee of
€5.0
as a security for the above indemnifications. Summarized below are the liability (related to the parent company guarantees
and bank and surety bonds) and asset (related to the cash collateral and guarantee provided by mutares AG) recorded at the time of sale, along with the change in the liability and the asset during the six months ended
July 1, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended July 1, 2017
|
|
|
Guarantees and Bonds Liability
|
|
Indemnification Assets
|
Balance as of December 31, 2016
(1) (2)
|
|
$
|
9.9
|
|
|
$
|
4.8
|
|
Reduction/Amortization for the period
(3)
|
|
(1.1
|
)
|
|
(1.3
|
)
|
Impact of changes in foreign currency rates
|
|
0.9
|
|
|
0.5
|
|
Balance as of July 1, 2017
(2)
|
|
$
|
9.7
|
|
|
$
|
4.0
|
|
___________________________
|
|
(1)
|
In connection with the sale, we estimated the fair value of the existing parent company guarantees and bank and surety bonds considering the probability of default by Balcke Dürr and an estimate of the amount we would be obligated to pay in the event of a default. Additionally, we estimated the fair value of the cash collateral provided by Balcke Dürr and guarantee provided by mutares AG based on the terms and conditions and relative risk associated with each of these securities (unobservable inputs - Level 3).
|
|
|
(2)
|
Balance associated with the guarantees and bonds is reflected within “Other long-term liabilities,” while the balance associated with the indemnification assets is reflected within “Other assets.”
|
|
|
(3)
|
We reduce the liability generally at the earlier of the completion of the related underlying project milestones or the expiration of the guarantees or bonds. We amortize the asset based on the expiration terms of each of the securities. We record the reduction of the liability and the amortization of the asset to “Other income (expense), net.”
|
As of
July 1, 2017
, the outstanding parent company guarantees and bank and surety bonds totaled
€79.0
and
€64.5
, respectively. In addition, the cash collateral of
€4.0
and the guarantee provided by mutares AG of
€5.0
continue to serve as security for the indemnifications noted above.
Goodwill, Indefinite-Lived Intangible and Other Long-Lived Assets
—
Certain of our non-financial assets are subject to impairment analysis, including long-lived assets, indefinite-lived intangible assets and goodwill. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the instrument be recorded at its fair value.
Valuation 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, FX embedded derivatives and commodity contracts, valued using valuation models based on observable market inputs such as forward rates, interest rates, our own credit risk and the credit risk of our counterparties, which comprise investment-grade financial institutions. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. We have not made any adjustments to the inputs obtained from the independent sources. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments active. We primarily use the income approach, which uses valuation techniques to convert future amounts to a single present amount.
As of
July 1, 2017
, 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.
Indebtedness and Other
— The estimated fair value of our debt instruments as of
July 1, 2017
and December 31, 2016 approximated the related carrying values due primarily to the variable market-based interest rates for such instruments. See Note 10 for further details.