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EX-31.2 - EX-31.2 - SPX CORPa14-19676_1ex31d2.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 27, 2014

 

o                   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

 

SPX CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

38-1016240

(State or Other Jurisdiction of Incorporation or
Organization)

 

(I.R.S. Employer Identification No.)

 

13320 Ballantyne Corporate Place, Charlotte, North Carolina 28277

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code (704) 752-4400

 

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

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.  x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes x No

 

Common shares outstanding October 24, 2014 41,072,263

 

 

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

1,158.1

 

$

1,145.8

 

$

3,407.2

 

$

3,398.2

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products sold

 

816.0

 

809.0

 

2,426.3

 

2,438.2

 

Selling, general and administrative

 

226.9

 

224.8

 

734.7

 

710.6

 

Intangible amortization

 

7.6

 

8.2

 

24.2

 

24.4

 

Impairment of intangible assets

 

 

 

 

2.0

 

Special charges, net

 

4.1

 

6.9

 

18.3

 

25.1

 

Operating income

 

103.5

 

96.9

 

203.7

 

197.9

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

1.1

 

(4.1

)

490.5

 

(4.2

)

Interest expense

 

(16.6

)

(27.1

)

(52.2

)

(83.4

)

Interest income

 

2.5

 

2.6

 

7.0

 

6.2

 

Loss on early extinguishment of debt

 

 

 

(32.5

)

 

Equity earnings in joint ventures

 

0.3

 

11.4

 

0.8

 

30.6

 

Income from continuing operations before income taxes

 

90.8

 

79.7

 

617.3

 

147.1

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

(26.0

)

(16.6

)

(202.6

)

(30.2

)

Income from continuing operations

 

64.8

 

63.1

 

414.7

 

116.9

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

1.9

 

5.2

 

4.9

 

11.1

 

Gain (loss) on disposition of discontinued operations, net of tax

 

(2.9

)

0.2

 

12.0

 

(2.3

)

Income (loss) from discontinued operations, net of tax

 

(1.0

)

5.4

 

16.9

 

8.8

 

 

 

 

 

 

 

 

 

 

 

Net income

 

63.8

 

68.5

 

431.6

 

125.7

 

Net income (loss) attributable to noncontrolling interests

 

0.3

 

(0.8

)

(1.3

)

2.5

 

Net income attributable to SPX Corporation common shareholders

 

$

63.5

 

$

69.3

 

$

432.9

 

$

123.2

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to SPX Corporation common shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

64.5

 

$

63.9

 

$

416.0

 

$

114.6

 

Income (loss) from discontinued operations, net of tax

 

(1.0

)

5.4

 

16.9

 

8.6

 

Net income

 

$

63.5

 

$

69.3

 

$

432.9

 

$

123.2

 

 

 

 

 

 

 

 

 

 

 

Basic income per share of common stock:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to SPX Corporation common shareholders

 

$

1.54

 

$

1.43

 

$

9.67

 

$

2.51

 

Income (loss) from discontinued operations attributable to SPX Corporation common shareholders

 

(0.02

)

0.12

 

0.39

 

0.19

 

Net income per share attributable to SPX Corporation common shareholders

 

$

1.52

 

$

1.55

 

$

10.06

 

$

2.70

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding — basic

 

41.796

 

44.709

 

43.024

 

45.592

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share of common stock:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to SPX Corporation common shareholders

 

$

1.52

 

$

1.42

 

$

9.50

 

$

2.48

 

Income (loss) from discontinued operations attributable to SPX Corporation common shareholders

 

(0.02

)

0.12

 

0.39

 

0.19

 

Net income per share attributable to SPX Corporation common shareholders

 

$

1.50

 

$

1.54

 

$

9.89

 

$

2.67

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding — diluted

 

42.364

 

45.037

 

43.772

 

46.140

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(52.1

)

$

140.6

 

$

313.5

 

$

120.7

 

 

The accompanying notes are an integral part of these statements.

 

2



 

SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share data)

 

 

 

September 27,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

501.9

 

$

691.8

 

Accounts receivable, net

 

1,152.0

 

1,206.7

 

Inventories, net

 

563.6

 

502.2

 

Other current assets

 

103.0

 

104.3

 

Deferred income taxes

 

121.9

 

119.6

 

Assets of discontinued operations

 

50.0

 

148.3

 

Total current assets

 

2,492.4

 

2,772.9

 

Property, plant and equipment:

 

 

 

 

 

Land

 

53.8

 

45.4

 

Buildings and leasehold improvements

 

377.2

 

384.4

 

Machinery and equipment

 

821.5

 

789.7

 

 

 

1,252.5

 

1,219.5

 

Accumulated depreciation

 

(581.1

)

(527.2

)

Property, plant and equipment, net

 

671.4

 

692.3

 

Goodwill

 

1,471.0

 

1,517.0

 

Intangibles, net

 

880.9

 

924.7

 

Other assets

 

820.1

 

949.3

 

TOTAL ASSETS

 

$

6,335.8

 

$

6,856.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

488.4

 

$

494.6

 

Accrued expenses

 

898.2

 

989.2

 

Income taxes payable

 

83.2

 

73.1

 

Short-term debt

 

264.2

 

26.9

 

Current maturities of long-term debt

 

16.5

 

558.7

 

Liabilities of discontinued operations

 

6.8

 

31.9

 

Total current liabilities

 

1,757.3

 

2,174.4

 

 

 

 

 

 

 

Long-term debt

 

1,173.0

 

1,090.0

 

Deferred and other income taxes

 

370.9

 

427.2

 

Other long-term liabilities

 

979.4

 

992.6

 

Total long-term liabilities

 

2,523.3

 

2,509.8

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

SPX Corporation shareholders’ equity:

 

 

 

 

 

Common stock (100,018,256 and 41,632,293 issued and outstanding at September 27, 2014, respectively, 99,801,498 and 45,281,329 issued and outstanding at December 31, 2013, respectively)

 

1,007.8

 

1,004.5

 

Paid-in capital

 

1,596.0

 

1,571.5

 

Retained earnings

 

2,687.7

 

2,303.1

 

Accumulated other comprehensive income

 

169.0

 

287.5

 

Common stock in treasury (58,385,963 and 54,520,169 shares at September 27, 2014 and December 31, 2013, respectively)

 

(3,417.2

)

(3,008.6

)

Total SPX Corporation shareholders’ equity

 

2,043.3

 

2,158.0

 

Noncontrolling interests

 

11.9

 

14.0

 

Total equity

 

2,055.2

 

2,172.0

 

TOTAL LIABILITIES AND EQUITY

 

$

6,335.8

 

$

6,856.2

 

 

The accompanying notes are an integral part of these statements.

 

3



 

SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)

 

 

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

Cash flows used in operating activities:

 

 

 

 

 

Net income

 

$

431.6

 

$

125.7

 

Less: Income from discontinued operations, net of tax

 

16.9

 

8.8

 

Income from continuing operations

 

414.7

 

116.9

 

Adjustments to reconcile income from continuing operations to net cash used in operating activities:

 

 

 

 

 

Special charges, net

 

18.3

 

25.1

 

Impairment of intangible assets

 

 

2.0

 

Gain on asset sales

 

(491.1

)

 

Loss on early extinguishment of debt

 

32.5

 

 

Deferred and other income taxes

 

(44.3

)

102.3

 

Depreciation and amortization

 

81.9

 

84.5

 

Pension and other employee benefits

 

39.0

 

0.9

 

Stock-based compensation

 

33.9

 

29.3

 

Other, net

 

0.7

 

4.2

 

Changes in operating assets and liabilities, net of effects from divestitures:

 

 

 

 

 

Accounts receivable and other assets

 

19.6

 

78.1

 

Inventories

 

(72.8

)

(58.5

)

Accounts payable, accrued expenses and other

 

(77.2

)

(263.8

)

Discretionary pension contribution

 

 

(250.0

)

Cash spending on restructuring actions

 

(21.4

)

(21.1

)

Net cash used in continuing operations

 

(66.2

)

(150.1

)

Net cash from (used in) discontinued operations

 

3.2

 

(7.4

)

Net cash used in operating activities

 

(63.0

)

(157.5

)

Cash flows from (used in) investing activities:

 

 

 

 

 

Proceeds from asset sales and other, net

 

581.4

 

9.8

 

Increase in restricted cash

 

(0.6

)

(0.1

)

Capital expenditures

 

(41.4

)

(42.5

)

Net cash from (used in) continuing operations

 

539.4

 

(32.8

)

Net cash from discontinued operations

 

107.5

 

1.5

 

Net cash from (used in) investing activities

 

646.9

 

(31.3

)

Cash flows used in financing activities:

 

 

 

 

 

Repurchase of senior notes (includes premiums paid of $30.6)

 

(530.6

)

 

Borrowings under senior credit facilities

 

467.0

 

287.0

 

Repayments under senior credit facilities

 

(207.0

)

(287.0

)

Borrowings under trade receivables agreement

 

80.0

 

35.0

 

Repayments under trade receivables agreement

 

(11.0

)

(35.0

)

Net repayments under other financing arrangements

 

(55.0

)

(9.7

)

Purchases of common stock

 

(414.3

)

(249.0

)

Minimum withholdings paid on behalf of employees for net share settlements, net of proceeds from the exercise of employee stock options and other

 

(12.9

)

(16.5

)

Financing fees paid

 

(0.4

)

 

Change in noncontrolling interest in subsidiary

 

(0.8

)

1.9

 

Dividends paid

 

(44.7

)

(23.5

)

Net cash used in continuing operations

 

(729.7

)

(296.8

)

Net cash from discontinued operations

 

 

 

Net cash used in financing activities

 

(729.7

)

(296.8

)

Change in cash and equivalents due to changes in foreign currency exchange rates

 

(44.1

)

(7.8

)

Net change in cash and equivalents

 

(189.9

)

(493.4

)

Consolidated cash and equivalents, beginning of period

 

691.8

 

984.1

 

Consolidated cash and equivalents, end of period

 

$

501.9

 

$

490.7

 

 

The accompanying notes are an integral part of these statements.

 

4



 

SPX CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; in millions, except per share data)

 

(1)                                 BASIS OF PRESENTATION

 

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.

 

In the fourth quarter of 2013, we elected to change our accounting methods for recognizing changes in fair value of plan assets and actuarial gains and losses associated with all our pension and postretirement plans. Under our new accounting methods, we recognize changes in fair value of plan assets and actuarial gains and losses during the fourth quarter of each year, unless earlier remeasurement is required, as a component of net periodic benefit expense.  In connection with these accounting changes, we have revised previously reported amounts to conform to the current methods of accounting. Refer to the consolidated financial statements contained in our 2013 Annual Report on Form 10-K for additional information regarding these changes in accounting methods.

 

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 interests in VIEs, primarily joint ventures, in which we are the primary beneficiary and others in which we are not. Our VIEs are considered immaterial, individually and in aggregate, to our condensed consolidated financial statements.

 

On January 7, 2014, we completed the sale of our 44.5% interest in the EGS Electrical Group, LLC and Subsidiaries (“EGS”) joint venture to Emerson Electric Co. for cash proceeds of $574.1. As a result of the sale, we recorded a gain of $491.2 to “Other income (expense), net” during the first quarter of 2014. Prior to the sale, we accounted for our investment in EGS on a three-month lag. As a result of the sale, we recorded no equity earnings related to this investment during the three and nine months ended September 27, 2014, while equity earnings related to this investment totaled $11.4 and $30.5 during the three and nine months ended September 28, 2013, respectively. Summarized financial results for EGS for the three and nine months ended June 30, 2013 were as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

June 30, 2013

 

June 30, 2013

 

Revenues

 

$

129.1

 

$

380.2

 

Gross profit

 

57.0

 

164.7

 

Income from continuing operations

 

25.7

 

68.5

 

Net income

 

25.7

 

68.5

 

 

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 2013 Annual Report on Form 10-K. Interim results are not necessarily indicative of full year results. We have reclassified certain prior year amounts to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. 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 2014 were March 29, June 28 and September 27, compared to the respective March 30, June 29 and September 28, 2013 dates. We had one less day in the first quarter of 2014 and will have one more day in the fourth quarter of 2014 than in the respective 2013 periods.

 

5



 

(2)                                 NEW ACCOUNTING PRONOUNCEMENTS

 

The following is a summary of new accounting pronouncements that apply or may apply to our business.

 

In March 2013, the Financial Accounting Standards Board (“FASB”) issued an amendment to guidance to resolve the diversity in practice relating to a parent entity’s accounting for the cumulative translation adjustment (“CTA”) upon derecognition of foreign subsidiaries or groups of assets. The amendment requires that any CTA related to the parent entity’s investment in a foreign entity be released into earnings when a sale or transfer of the foreign subsidiary or group of assets results in the complete or substantially complete liquidation of the foreign entity. This amendment is effective for interim and annual reporting periods beginning after December 15, 2013, and shall be applied prospectively. We adopted this guidance on January 1, 2014, with no material impact on our condensed consolidated financial statements.

 

In July 2013, the FASB issued an amendment to guidance to resolve the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward (collectively, a “carryforward”) exists. An unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for the carryforward, except to the extent (i) the carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose.  In these cases, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment applies to all entities that have unrecognized tax benefits when a carryforward exists at the reporting date. This amendment is effective for interim and annual reporting periods beginning after December 15, 2013 and must be applied prospectively to all unrecognized tax benefits that exist at the effective date, with retrospective application permitted. We adopted this guidance on January 1, 2014, with no material impact on our condensed consolidated financial statements.

 

In April 2014, the FASB issued an amendment to guidance to change the criteria for determining which disposals of components of an entity can be presented as discontinued operations and to modify related disclosure requirements. Under the amended guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amendment states that a “strategic shift” could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity.  The standard no longer precludes presentation as a discontinued operation if there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or there is significant continuing involvement with a component after its disposal.  This amendment is effective for interim and annual reporting periods beginning after December 15, 2014 and shall be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The impact of the adoption of this amendment on our consolidated financial statements will be based on our future disposal activity.

 

In May 2014, the 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 new standard is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.

 

6



 

(3)                                 DISCONTINUED OPERATIONS

 

As part of our operating strategy, we regularly review and negotiate potential divestitures, some of which are or may be material.

 

We report businesses or asset groups as discontinued operations when, among other things, we terminate the operations of the business or asset group, commit to a plan to divest the business or asset group or we actively begin marketing the business or asset group, and the sale of the business or asset group is deemed probable within the next twelve months.

 

The following businesses, which have been sold or for which operations have been terminated, met these requirements and therefore have been reported as discontinued operations for all periods presented:

 

Business

 

Quarter
Discontinued

 

Quarter of Sale
or Termination
of Operations

 

Fenn LLC (“Fenn”)

 

Q3 2013

 

Q3 2014

 

SPX Precision Components (“Precision Components”)

 

Q3 2013

 

Q2 2014

 

Thermal Product Solutions (“TPS”)

 

Q3 2013

 

Q1 2014

 

Broadcast Antenna System business (“Dielectric”)

 

Q2 2013

 

Q2 2013

 

Crystal Growing business (“Kayex”)

 

Q1 2013

 

Q1 2013

 

 

Fenn — Sold for cash consideration of $3.5 during the third quarter of 2014, resulting in a loss, net of taxes, of $0.4.

 

Precision Components — Sold for cash consideration of $63.0 during the second quarter of 2014, resulting in a loss, net of taxes, of $7.3. During the third quarter of 2014, we reduced the net loss by $0.4, primarily as a result of revisions to certain liabilities related to the sale, and paid $0.4 associated with the working capital settlement.

 

TPS — Sold for cash consideration of $38.5 and a promissory note of $4.0 during the first quarter of 2014, resulting in a gain, net of taxes, of $21.5. During the third quarter of 2014, the amount due under the promissory note was collected in full, and we reduced the net gain on the sale of the business by $0.3 related to revisions of certain retained liabilities associated with the sale.

 

Dielectric — We sold assets of the business during the second quarter of 2013 for cash consideration of $4.7, resulting in a gain of less than $0.1.

 

KayexWe closed the business during the first quarter of 2013. In connection with the closure, we recorded a loss, net of taxes, of $2.1 during the first quarter of 2013, with such loss related primarily to severance costs and asset impairment charges. During the third quarter of 2013, we recorded a gain, net of taxes, of $3.6 associated primarily with the sale of a perpetual license related to certain of the business’s intangible assets. Proceeds from the sale of the perpetual license totaled $6.9.

 

In addition to the businesses discussed above, we recognized net losses of $2.6 and $1.9 during the three and nine months ended September 27, 2014, respectively, and net losses of $3.4 and $3.8 during the three and nine months ended September 28, 2013, respectively, resulting from adjustments to gains/losses on dispositions of previously discontinued businesses. Refer to the consolidated financial statements contained in our 2013 Annual Report on Form 10-K for the disclosure of all businesses discontinued during 2011, 2012 and 2013.

 

The final sales price for certain of the divested businesses is subject to adjustment based on working capital existing at the respective closing dates. The working capital figures are subject to agreement with the buyers or, if we cannot come to agreement with the buyers, an arbitration or other dispute-resolution process. Final agreement of the working capital figures with the buyers for certain of these transactions has yet to occur. In addition, changes in estimates associated with liabilities retained in connection with a business divestiture (e.g., income taxes) may occur. It is possible that the sales price and resulting gains/losses on these and other previous divestitures may be materially adjusted in subsequent periods.

 

7



 

For the three and nine months ended September 27, 2014 and September 28, 2013, income from discontinued operations and the related income taxes are shown below:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Income from discontinued operations

 

$

3.3

 

$

9.0

 

$

36.9

 

$

13.3

 

Income tax provision

 

(4.3

)

(3.6

)

(20.0

)

(4.5

)

Income (loss) from discontinued operations, net

 

$

(1.0

)

$

5.4

 

$

16.9

 

$

8.8

 

 

For the three and nine months ended September 27, 2014 and September 28, 2013, results of operations for discontinued operations were as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

13.4

 

$

50.7

 

$

63.1

 

$

154.2

 

Pre-tax income

 

3.4

 

8.6

 

8.0

 

15.9

 

 

The major classes of assets and liabilities, excluding intercompany balances, of the businesses reported as discontinued operations included in the accompanying condensed consolidated balance sheets are as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Accounts receivable, net

 

$

6.6

 

$

22.8

 

Inventories, net

 

3.6

 

37.6

 

Other current assets

 

0.1

 

1.2

 

Property, plant and equipment, net

 

4.0

 

16.3

 

Goodwill and intangibles, net

 

35.7

 

70.4

 

Assets of discontinued operations

 

$

50.0

 

148.3

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

4.4

 

$

13.3

 

Accrued expenses

 

2.4

 

18.6

 

Liabilities of discontinued operations

 

$

6.8

 

$

31.9

 

 

(4)                                 INFORMATION ON REPORTABLE SEGMENTS AND OTHER OPERATING SEGMENTS

 

We are a global supplier of highly specialized, engineered solutions with operations in over 35 countries and sales in over 150 countries around the world.  Many of our products and innovative solutions play a role in helping to meet rising global demand for power and energy and processed foods and beverages, particularly in emerging markets.  Our key products include processing systems and equipment for the food and beverage industry, reciprocating pumps used in oil and gas processing, power transformers used by utility companies, and cooling systems for power plants.

 

We aggregate certain of our operating segments into our two reportable segments, Flow Technology and Thermal Equipment and Services, while our remaining operating segments, which do not meet the quantitative threshold criteria of the Segment Reporting Topic of the Codification, have been combined within our “All Other” category, which we refer to as Industrial Products and Services and Other. The operating segments in this “All Other” category generally serve industrial end-markets. Industrial Products and Services and Other is not considered a reportable segment.

 

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 and distribution methods. In determining our segments, we apply the threshold criteria of the Segment Reporting Topic of the Codification to operating income or loss of each segment before considering impairment and special charges, pension and postretirement expense/income, stock-based compensation and other indirect corporate expenses. This is consistent with the way our chief operating decision maker evaluates the results of each segment.

 

8



 

Flow Technology Reportable Segment

 

Our Flow Technology reportable segment engineers, designs, manufactures and markets products and solutions used to process, blend, filter, dry, meter and transport fluids with a focus on original equipment installation, including turnkey systems, skidded systems and components, as well as comprehensive aftermarket components and support services. Primary component offerings include engineered pumps, valves, mixers, plate heat exchangers, and dehydration and filtration technologies. The segment primarily serves customers in food and beverage, power and energy and industrial end markets. The segment continues to focus on innovation and new product development, optimizing its global footprint while taking advantage of cross-product integration opportunities and increasing its competitive position in global end markets. Flow Technology’s solutions focus on key business drivers, such as product flexibility, process optimization, sustainability and safety.

 

Thermal Equipment and Services Reportable Segment

 

Our Thermal Equipment and Services reportable segment engineers, designs, manufactures, installs and services thermal heat transfer products. Primary offerings include dry, evaporative and hybrid cooling systems, rotating and stationary heat exchangers and pollution control systems for the power generation, HVAC and industrial markets, as well as boilers and heating and ventilation products for the residential and commercial markets.

 

Industrial Products and Services and Other

 

Industrial Products and Services and Other comprises operating segments that design, manufacture and market power transformers, industrial tools and hydraulic units, communications and signal monitoring systems, fare collection systems, and portable cable and pipe locators.

 

9



 

Corporate Expense

 

Corporate expense generally relates to the cost of our Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai, China.

 

Financial data for our reportable segments and other operating segments were as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues: (1)

 

 

 

 

 

 

 

 

 

Flow Technology reportable segment

 

$

638.5

 

$

651.6

 

$

1,916.6

 

$

1,918.0

 

Thermal Equipment and Services reportable segment

 

338.8

 

324.1

 

945.7

 

979.5

 

Industrial Products and Services and Other

 

180.8

 

170.1

 

544.9

 

500.7

 

Total revenues

 

$

1,158.1

 

$

1,145.8

 

$

3,407.2

 

$

3,398.2

 

 

 

 

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

Flow Technology reportable segment

 

$

97.5

 

$

83.1

 

$

252.0

 

$

205.1

 

Thermal Equipment and Services reportable segment

 

23.2

 

21.7

 

41.9

 

49.6

 

Industrial Products and Services and Other

 

19.0

 

24.7

 

66.6

 

69.1

 

Total income for reportable and other operating segments

 

139.7

 

129.5

 

360.5

 

323.8

 

 

 

 

 

 

 

 

 

 

 

Corporate expense

 

(24.7

)

(26.2

)

(79.0

)

(82.2

)

Pension and postretirement (expense) income

 

(2.8

)

4.2

 

(25.6

)

12.7

 

Stock-based compensation expense

 

(4.6

)

(3.7

)

(33.9

)

(29.3

)

Impairment of intangible assets

 

 

 

 

(2.0

)

Special charges, net

 

(4.1

)

(6.9

)

(18.3

)

(25.1

)

 

 

 

 

 

 

 

 

 

 

Consolidated operating income

 

$

103.5

 

$

96.9

 

$

203.7

 

$

197.9

 

 


(1)                                Under the percentage of completion method, we recognized revenues of $310.7 and $317.2 in the three months ended September 27, 2014 and September 28, 2013, respectively. For the nine months ended September 27, 2014 and September 28, 2013, revenues under the percentage of completion method were $880.7 and $1,012.9, respectively. Costs and estimated earnings in excess of billings on uncompleted contracts accounted for under the percentage of completion method were $288.4 and $285.3 as of September 27, 2014 and December 31, 2013, 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 $184.9 and $218.4 as of September 27, 2014 and December 31, 2013, respectively, and are reported as a component of ‘‘Accrued expenses’’ in the condensed consolidated balance sheets.

 

(5)                                 SPECIAL CHARGES, NET

 

Special charges, net, for the three and nine months ended September 27, 2014 and September 28, 2013 are described in

more detail below:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Flow Technology reportable segment

 

$

2.8

 

$

6.4

 

$

12.9

 

$

11.4

 

Thermal Equipment and Services reportable segment

 

1.5

 

0.4

 

3.0

 

12.0

 

Industrial Products and Services and Other

 

 

0.1

 

1.7

 

1.2

 

Corporate

 

(0.2

)

 

0.7

 

0.5

 

Total

 

$

4.1

 

$

6.9

 

$

18.3

 

$

25.1

 

 

10



 

Flow Technology Reportable Segment — Charges for the three and nine months ended September 27, 2014 related primarily to severance and other costs associated with restructuring initiatives at various locations in Europe and the U.S. These actions were taken primarily to reduce the cost base of Clyde Union, as we continue to integrate the business into our Flow Technology reportable segment, and to reorganize the food and beverage commercial organization in Europe. Charges for the three and nine months ended September 28, 2013 related primarily to severance costs associated with (i) restructuring initiatives at Clyde Union locations in the U.K. and the U.S. and (ii) the operational realignment of the segment’s reporting structure.

 

Thermal Equipment and Services Reportable Segment — Charges for the three and nine months ended September 27, 2014 related primarily to severance and other costs associated with (i) the restructuring of a regional sales organization within the boiler products business, (ii) the closure of a facility in China and (iii) various restructuring initiatives in Germany. Charges for the three and nine months ended September 28, 2013 related primarily to severance and other costs associated with restructuring actions at our Balcke Duerr business in Germany.

 

Industrial Products and Services and Other — Charges for the nine months ended September 27, 2014 and the three and nine months ended September 28, 2013 related primarily to costs associated with restructuring initiatives at various locations in the U.S.

 

Corporate — The credit for the three months ended September 27, 2014 and charges for the nine months ended September 27, 2014 related primarily to costs (or reversals of previously accrued costs) associated with our efforts to better align our corporate overhead structure with the new operational alignment we implemented in the second half of 2013. Charges for the nine months ended September 28, 2013 related to costs associated with the early termination of two building leases and an asset impairment charge of $0.3.

 

Expected charges still to be incurred under actions approved as of September 27, 2014 are approximately $1.0.

 

The following is an analysis of our restructuring liabilities for the nine months ended September 27, 2014 and September 28, 2013:

 

 

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

Balance at beginning of period

 

$

19.0

 

$

16.4

 

Special charges (1)

 

17.6

 

27.5

 

Utilization — cash (2)

 

(22.0

)

(23.8

)

Currency translation adjustment and other

 

0.1

 

0.5

 

Balance at end of period

 

$

14.7

 

$

20.6

 

 


(1)                   The nine months ended September 27, 2014 and September 28, 2013 included $0.0 and $4.4, respectively, of charges that related to discontinued operations for which we have retained the related liabilities, and excluded $0.7 and $2.0, respectively, of non-cash charges that did not impact the restructuring liabilities.

 

(2)                   The nine months ended September 27, 2014 and September 28, 2013 included $0.6 and $2.7, respectively, of cash utilized to settle retained liabilities of discontinued operations.

 

11



 

(6)                                 INVENTORIES, NET

 

Inventories, net, were as follows:

 

 

 

September 27,
2014

 

December 31,
2013

 

 

 

 

 

 

 

Finished goods

 

$

152.5

 

$

147.5

 

Work in process

 

187.9

 

165.0

 

Raw materials and purchased parts

 

243.6

 

210.6

 

Total FIFO cost

 

584.0

 

523.1

 

Excess of FIFO cost over LIFO inventory value

 

(20.4

)

(20.9

)

Total inventories, net

 

$

563.6

 

$

502.2

 

 

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 20% and 19% of total inventory at September 27, 2014 and December 31, 2013, 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 and other operating segments, were as follows:

 

 

 

 

 

Goodwill

 

 

 

Foreign

 

 

 

 

 

 

 

Resulting from

 

 

 

Currency

 

 

 

 

 

December 31,

 

Business

 

 

 

Translation

 

September 27,

 

 

 

2013

 

Combinations

 

Impairments

 

and Other

 

2014

 

Flow Technology reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

1,120.2

 

$

 

$

 

$

(41.0

)

$

1,079.2

 

Accumulated impairments

 

 

 

 

 

 

Goodwill

 

1,120.2

 

 

 

(41.0

)

1,079.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Thermal Equipment and Services reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

570.0

 

 

 

(12.1

)

557.9

 

Accumulated impairments

 

(399.5

)

 

 

7.0

 

(392.5

)

Goodwill

 

170.5

 

 

 

(5.1

)

165.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Products and Services and Other

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

366.8

 

 

 

0.1

 

366.9

 

Accumulated impairments

 

(140.5

)

 

 

 

(140.5

)

Goodwill

 

226.3

 

 

 

0.1

 

226.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

2,057.0

 

 

 

(53.0

)

2,004.0

 

Accumulated impairments

 

(540.0

)

 

 

7.0

 

(533.0

)

Goodwill

 

$

1,517.0

 

$

 

$

 

$

(46.0

)

$

1,471.0

 

 

12



 

Other Intangibles

 

Identifiable intangible assets comprised the following:

 

 

 

September 27, 2014

 

December 31, 2013

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Intangible assets with determinable lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent

 

$

11.5

 

$

(8.7

)

$

2.8

 

$

11.5

 

$

(8.3

)

$

3.2

 

Technology

 

189.8

 

(58.8

)

131.0

 

196.3

 

(52.4

)

143.9

 

Customer relationships

 

401.4

 

(89.3

)

312.1

 

412.0

 

(78.6

)

333.4

 

Other

 

29.5

 

(18.6

)

10.9

 

31.0

 

(18.6

)

12.4

 

 

 

632.2

 

(175.4

)

456.8

 

650.8

 

(157.9

)

492.9

 

Trademarks with indefinite lives

 

424.1

 

 

424.1

 

431.8

 

 

431.8

 

Total

 

$

1,056.3

 

$

(175.4

)

$

880.9

 

$

1,082.6

 

$

(157.9

)

$

924.7

 

 

At September 27, 2014, the net carrying value of intangible assets with determinable lives consisted of $406.2 in the Flow Technology reportable segment, $43.3 in the Thermal Equipment and Services reportable segment and $7.3 in Industrial Products and Services and Other. At September 27, 2014, trademarks with indefinite lives consisted of $280.2 in the Flow Technology reportable segment, $125.7 in the Thermal Equipment and Services reportable segment and $18.2 in Industrial Products and Services and Other.

 

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 indications 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.

 

No impairment charges were recorded in the first nine months of 2014. In the first quarter of 2013, we recorded an impairment charge of $2.0 related to the trademarks of Clyde Union. Other changes in the gross carrying value of trademarks and other identifiable intangible assets relate primarily to foreign currency translation.

 

(8)                                 WARRANTY

 

The following is an analysis of our product warranty accrual for the periods presented:

 

 

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

Balance at beginning of period

 

$

54.8

 

$

59.7

 

Provisions

 

20.9

 

15.1

 

Usage

 

(23.5

)

(22.4

)

Balance at end of period

 

52.2

 

52.4

 

Less: Current portion of warranty

 

40.0

 

42.6

 

Non-current portion of warranty

 

$

12.2

 

$

9.8

 

 

13



 

(9)                                 EMPLOYEE BENEFIT PLANS

 

During a designated election period in the first quarter of 2014, we offered approximately 7,100 eligible former employees under the SPX U.S. Pension Plan (the “Plan”) a voluntary lump-sum payment option in lieu of a future pension benefit under the Plan. Approximately 38%, or $165.2, of the projected benefit obligation of the Plan was settled as a result of lump-sum payments made to those who accepted the offer. These payments were made during March 2014 and resulted in a settlement charge of $4.6 being reflected in net periodic pension benefit expense for the first quarter of 2014. In addition, in connection with this lump-sum payment action, we remeasured the assets and liabilities of the Plan as of March 29, 2014, which resulted in a charge to net periodic pension benefit expense of $14.8 for the three months then ended.

 

Net periodic benefit expense (income) for our pension and postretirement plans included the following components:

 

Domestic Pension Plans

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

1.8

 

$

1.9

 

$

5.4

 

$

5.6

 

Interest cost

 

4.5

 

12.0

 

15.7

 

36.0

 

Expected return on plan assets

 

(4.7

)

(18.8

)

(14.9

)

(56.3

)

Settlement charges (credits), net (1)

 

(0.1

)

 

0.4

 

 

Recognized net actuarial loss (2)

 

 

 

14.8

 

 

Total net periodic pension benefit expense (income)

 

$

1.5

 

$

(4.9

)

$

21.4

 

$

(14.7

)

 


(1)                                 For the nine months ended September 27, 2014, includes the settlement charge of $4.6 associated with the lump-sum payment action that took place during the first quarter of 2014 (see above), net of a $4.2 reduction to the estimated settlement charge that was recorded during the fourth quarter of 2013 in connection with the transfer of the pension obligation for the retirees of the Plan to Massachusetts Mutual Life Insurance Company.

 

(2)                                 For the nine months ended September 27, 2014, includes the actuarial loss resulting from the remeasurement of the assets and obligations of the Plan in the first quarter of 2014, which was required in connection with the lump-sum payment action noted above.

 

Foreign Pension Plans

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

0.7

 

$

0.6

 

$

2.1

 

$

2.0

 

Interest cost

 

3.5

 

3.4

 

10.5

 

10.0

 

Expected return on plan assets

 

(4.3

)

(4.4

)

(12.8

)

(13.1

)

Total net periodic pension benefit income

 

(0.1

)

(0.4

)

(0.2

)

(1.1

)

Less: Net periodic pension benefit income of discontinued operations

 

(0.1

)

(0.2

)

(0.3

)

(0.2

)

Net periodic pension benefit expense (income) of continuing operations

 

$

 

$

(0.2

)

$

0.1

 

$

(0.9

)

 

14



 

Postretirement Plans

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

0.1

 

$

0.1

 

$

0.4

 

$

0.3

 

Interest cost

 

1.3

 

1.2

 

3.9

 

3.6

 

Amortization of unrecognized prior service credits

 

(0.1

)

(0.4

)

(0.2

)

(1.0

)

Net periodic postretirement benefit expense

 

$

1.3

 

$

0.9

 

$

4.1

 

$

2.9

 

 

Employer Contributions

 

During the first nine months of 2014, we made contributions to our domestic and foreign pension plans of approximately $9.7, of which $2.0 related to businesses that have been disposed of and had been classified as discontinued operations.

 

(10)                          INDEBTEDNESS

 

The following summarizes our debt activity (both current and non-current) for the nine months ended September 27,

2014:

 

 

 

December 31,
2013

 

Borrowings

 

Repayments

 

Other (5)

 

September 27,
2014

 

Domestic revolving loan facility

 

$

 

$

367.0

 

$

(207.0

)

$

 

$

160.0

 

Term loan (1) 

 

475.0

 

100.0

 

 

 

575.0

 

6.875% senior notes, due in August 2017

 

600.0

 

 

 

 

600.0

 

7.625% senior notes (2)

 

500.0

 

 

(500.0

)

 

 

Trade receivables financing arrangement (3)

 

 

80.0

 

(11.0

)

 

69.0

 

Other indebtedness (4)

 

100.6

 

9.2

 

(64.2

)

4.1

 

49.7

 

Total debt

 

1,675.6

 

$

556.2

 

$

(782.2

)

$

4.1

 

1,453.7

 

Less: short-term debt

 

26.9

 

 

 

 

 

 

 

264.2

 

Less: current maturities of long-term debt

 

558.7

 

 

 

 

 

 

 

16.5

 

Total long-term debt

 

$

1,090.0

 

 

 

 

 

 

 

$

1,173.0

 

 


(1)                                 The term loan of $575.0 (which includes $100.0 drawn under the facility in the second quarter of 2014) is repayable in quarterly installments of 5.0% annually, beginning with our second fiscal quarter of 2015, with the remaining balance repayable in full on December 23, 2018.

 

(2)                                 During the first quarter of 2014, we completed the redemption of all our 7.625% senior notes due in December 2014 for a total redemption price of $530.6. As a result of the redemption, we recorded a charge of $32.5 to “Loss on early extinguishment of debt” during the first quarter of 2014, which related to premiums paid to redeem the senior notes of $30.6, the write-off of unamortized deferred financing fees of $1.0, and other costs associated with the extinguishment of the senior notes of $0.9.

 

(3)                                 Under this arrangement, we can borrow, on a continuous basis, up to $80.0, as available. At September 27, 2014, we had $0.9 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $69.0.

 

(4)                                 Primarily included capital lease obligations of $14.5 and $73.0 and balances under purchase card programs of $29.3 and $25.4 at September 27, 2014 and December 31, 2013, respectively. During the first quarter of 2014, we purchased our corporate headquarters facility for cash consideration of $60.8, resulting in the extinguishment of the related capital lease obligation.

 

(5)                                 “Other” primarily includes debt assumed and foreign currency translation on any debt instruments denominated in currencies other than the U.S. dollar.

 

15



 

Senior Credit Facilities

 

A detailed description of our senior credit facilities is included in our 2013 Annual Report on Form 10-K.

 

At September 27, 2014, we had $54.2 and $693.8, respectively, of outstanding letters of credit issued under our revolving credit and our foreign credit instrument facilities of our senior credit agreement. In addition, we had $5.9 of letters of credit outstanding under separate arrangements in China and India.

 

The weighted-average interest rate of outstanding borrowings under our senior credit facilities was approximately 1.6% at September 27, 2014.

 

At September 27, 2014, we were in compliance with all covenants of our senior credit facilities and our senior notes. Restrictions on our ability to repurchase shares or pay dividends are described in our 2013 Annual Report on Form 10-K.

 

(11)         DERIVATIVE FINANCIAL INSTRUMENTS

 

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 Euro, South African Rand, Chinese Yuan and Great Britain Pound.

 

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 $200.9 and $191.3 outstanding as of September 27, 2014 and December 31, 2013, respectively, with all such contracts scheduled to mature within the next 12 months. We also had FX embedded derivatives with an aggregate notional amount of $150.1 and $145.8 at September 27, 2014 and December 31, 2013, respectively. The unrealized losses, net of taxes, recorded in AOCI related to FX forward contracts were $0.8 and $1.0 as of September 27, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of September 27, 2014 to income within 12 months.

 

Commodity Contracts

 

From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At September 27, 2014 and December 31, 2013, the outstanding notional amount of commodity contracts was 6.4 and 3.4 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 September 27, 2014 and December 31, 2013, the fair value of these contracts was $0.7 (current liabilities) and $0.4 (current assets), respectively. The unrealized gain (loss), net of taxes, recorded in AOCI was $(0.4) and $0.2 as of September 27, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of September 27, 2014 to income within 12 months.

 

16



 

The following summarizes the gross and net fair values of our FX forward and commodity contracts by counterparty at September 27, 2014 and December 31, 2013, respectively:

 

 

 

September 27, 2014

 

December 31, 2013

 

 

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

FX forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

$

0.2

 

$

(0.1

)

$

0.1

 

$

0.7

 

$

(0.1

)

$

0.6

 

Counterparty B

 

0.1

 

(1.8

)

(1.7

)

0.1

 

(0.4

)

(0.3

)

Aggregate of other counterparties

 

0.1

 

(0.8

)

(0.7

)

0.3

 

 

0.3

 

Totals (1)

 

$

0.4

 

$

(2.7

)

$

(2.3

)

$

1.1

 

$

(0.5

)

$

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A (2)

 

$

 

$

(0.7

)

$

(0.7

)

$

0.4

 

$

 

$

0.4

 

 


(1)     We enter into arrangements designed to provide the right of setoff in the event of counterparty default or insolvency, and have elected to offset the fair values of our qualifying financial instruments in our condensed consolidated balance sheets. Amounts presented in our condensed consolidated balance sheets are as follows:

 

 

 

September 27,

 

December 31,

 

 

 

2014

 

2013

 

Designated as hedging instruments:

 

 

 

 

 

Other current assets

 

$

 0.1

 

$

 0.3

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

Other current assets

 

 

0.6

 

Accrued expenses

 

(2.4

)

(0.3

)

 

 

(2.4

)

0.3

 

Net fair value of FX forward contracts

 

$

(2.3

)

$

0.6

 

 

(2)     Related contracts are designated as hedging instruments. Net amounts at September 27, 2014 and December 31, 2013 are recorded in “Accrued expenses” and “Other current assets,” respectively.

 

The following summarizes the fair value of our FX embedded derivative instruments, which are not designated as hedging instruments, and the related balance sheet classification as of September 27, 2014 and December 31, 2013:

 

 

 

September 27,

 

December 31,

 

Balance Sheet Classification

 

2014

 

2013

 

Other current assets

 

$

1.7

 

$

0.7

 

Other assets

 

0.9

 

 

Accrued expenses

 

(5.0

)

(6.5

)

Other long-term liabilities

 

(1.2

)

(2.1

)

 

 

$

(3.6

)

$

(7.9

)

 

17



 

The following summarizes the pre-tax gain (loss) recognized in AOCI resulting from derivative financial instruments designated as cash flow hedging relationships for the three and nine months ended September 27, 2014 and September 28, 2013:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

FX forward contracts

 

$

0.1

 

$

(0.2

)

$

0.6

 

$

(4.2

)

Commodity contracts

 

(0.8

)

0.8

 

(1.5

)

(1.5

)

 

 

$

(0.7

)

$

0.6

 

$

(0.9

)

$

(5.7

)

 

The following summarizes the pre-tax loss related to derivative financial instruments designated as cash flow hedging relationships reclassified from AOCI to income through ‘‘Revenues’’ for FX forward contracts and ‘‘Cost of products sold’’ for commodity contracts for the three and nine months ended September 27, 2014 and September 28, 2013:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

FX forward contracts

 

$

 

$

(2.1

)

$

 

$

(3.0

)

Commodity contracts

 

(0.3

)

(0.6

)

(0.5

)

(0.5

)

 

 

$

(0.3

)

$

(2.7

)

$

(0.5

)

$

(3.5

)

 

During the nine months ended September 28, 2013, losses of $0.2 were recognized in ‘‘Other income (expense), net’’ relating to derivative ineffectiveness and amounts excluded from effectiveness testing.

 

The following summarizes the gain (loss) recognized in ‘‘Other income (expense), net’’ for the three and nine months ended September 27, 2014 and September 28, 2013 related to derivative financial instruments not designated as cash flow hedging relationships:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

FX forward contracts

 

$

(4.6

)

$

0.9

 

$

(2.8

)

$

(1.0

)

FX embedded derivatives

 

3.1

 

(0.8

)

1.0

 

4.9

 

 

 

$

(1.5

)

$

0.1

 

$

(1.8

)

$

3.9

 

 

(12)         EQUITY AND STOCK-BASED 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

 

Nine months ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Weighted-average number of common shares used in basic income per share

 

41.796

 

44.709

 

43.024

 

45.592

 

Dilutive securities — Employee stock options, restricted stock shares and restricted stock units

 

0.568

 

0.328

 

0.748

 

0.548

 

Weighted-average number of common shares and dilutive securities used in diluted income per share

 

42.364

 

45.037

 

43.772

 

46.140

 

 

There were no stock options outstanding during the nine months ended September 27, 2014. All stock options outstanding were included in the computation of diluted income per share during the three and nine months ended September 28, 2013.

 

18



 

For the three and nine months ended September 27, 2014, 0.173 and 0.058 of unvested restricted stock shares and restricted stock units, respectively, were not included in the computation of diluted income per share because required market thresholds for vesting (as discussed in our 2013 Annual Report on Form 10-K) were not met, compared to 0.857 and 0.758 for the three and nine months ended September 28, 2013, respectively.

 

Stock-based Compensation

 

Stock-based compensation awards may be granted to certain eligible employees or non-employee directors under the 2002 Stock Compensation Plan, or to non-employee directors under the 2006 Non-Employee Director’s Stock Incentive Plan. A detailed description of the awards granted under these plans is included in our 2013 Annual Report on Form 10-K.

 

Compensation expense within income from continuing operations related to restricted stock shares and restricted stock units totaled $4.6 and $3.7 for the three months ended September 27, 2014 and September 28, 2013, respectively, and $33.9 and $29.3 for the nine months ended September 27, 2014 and September 28, 2013, respectively. The related tax benefit was $1.8 and $1.4 for the three months ended September 27, 2014 and September 28, 2013, respectively, and $12.4 and $10.7 for the nine months ended September 27, 2014 and September 28, 2013, respectively.

 

Accumulated Other Comprehensive Income

 

The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended September 27, 2014 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Losses on
Qualifying Cash
Flow Hedges (1)

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

285.3

 

$

(0.9

)

$

0.3

 

$

284.7

 

Other comprehensive loss before reclassifications

 

(115.3

)

(0.5

)

 

(115.8

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.2

 

(0.1

)

0.1

 

Current-period other comprehensive loss

 

(115.3

)

(0.3

)

(0.1

)

(115.7

)

Balance at end of period

 

$

170.0

 

$

(1.2

)

$

0.2

 

$

169.0

 

 


(1)        Net of tax benefit of $1.0 and $0.9 as of September 27, 2014 and June 28, 2014, respectively.

 

(2)        Net of tax provision of $(0.1) as of September 27, 2014 and June 28, 2014.

 

19



 

The changes in the components of accumulated other comprehensive income, net of tax, for the nine months ended

September 27, 2014 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Losses on
Qualifying Cash
Flow Hedges (1)

 

Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

296.8

 

$

(0.8

)

$

(3.7

)

$

(4.8

)

$

287.5

 

Other comprehensive income (loss) before reclassifications

 

(126.8

)

(0.8

)

3.6

 

0.2

 

(123.8

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.4

 

0.1

 

4.8

 

5.3

 

Current-period other comprehensive income (loss)

 

(126.8

)

(0.4

)

3.7

 

5.0

 

(118.5

)

Balance at end of period

 

$

170.0

 

$

(1.2

)

$

 

$

0.2

 

$

169.0

 

 


(1)        Net of tax benefit of $1.0 as of September 27, 2014 and December 31, 2013.

 

(2)        Net of tax (provision) benefit of $(0.1) and $2.2 as of September 27, 2014 and December 31, 2013, respectively. The balance as of December 31, 2013 primarily includes $(5.0), net of tax, related to our share of the pension liability adjustment for EGS as of December 31, 2013. In connection with the sale of our interest in EGS during the first quarter of 2014, as described in Note 1, we recognized our share of the pension liability adjustment for EGS as a component of the gain on sale of our investment interest.

 

The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended September 28, 2013 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Gains (Losses)
on Qualifying
Cash Flow
Hedges (1)

 

Net Unrealized
Losses on
Available-for-
Sale Securities

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

221.5

 

$

(4.4

)

$

(3.8

)

$

(4.3

)

$

209.0

 

Other comprehensive income (loss) before reclassifications

 

70.1

 

0.5

 

(0.8

)

 

69.8

 

Amounts reclassified from accumulated other comprehensive income

 

 

1.8

 

 

(0.2

)

1.6

 

Current-period other comprehensive income (loss)

 

70.1

 

2.3