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EXCEL - IDEA: XBRL DOCUMENT - SPX CORPFinancial_Report.xls
EX-32.1 - EX-32.1 - SPX CORPa15-6682_1ex32d1.htm
EX-10.2 - EX-10.2 - SPX CORPa15-6682_1ex10d2.htm
EX-10.1 - EX-10.1 - SPX CORPa15-6682_1ex10d1.htm
EX-31.2 - EX-31.2 - SPX CORPa15-6682_1ex31d2.htm
EX-31.1 - EX-31.1 - SPX CORPa15-6682_1ex31d1.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 March 28, 2015

 

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 April 24, 2015 41,025,390

 

 

 



 

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

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Revenues

 

$

946.9

 

$

1,077.1

 

Costs and expenses:

 

 

 

 

 

Cost of products sold

 

685.0

 

775.6

 

Selling, general and administrative

 

233.2

 

267.5

 

Intangible amortization

 

7.3

 

8.3

 

Special charges, net

 

6.6

 

10.0

 

Operating income

 

14.8

 

15.7

 

Other income, net

 

0.8

 

490.6

 

Interest expense

 

(16.8

)

(19.3

)

Interest income

 

1.1

 

2.2

 

Loss on early extinguishment of debt

 

 

(32.5

)

Income (loss) from continuing operations before income taxes

 

(0.1

)

456.7

 

Income tax provision

 

(9.5

)

(160.0

)

Income (loss) from continuing operations

 

(9.6

)

296.7

 

Income from discontinued operations, net of tax

 

 

0.1

 

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

 

(0.4

)

21.0

 

Income (loss) from discontinued operations, net of tax

 

(0.4

)

21.1

 

Net income (loss)

 

(10.0

)

317.8

 

Less: Net loss attributable to noncontrolling interests

 

(2.9

)

(0.4

)

Net income (loss) attributable to SPX Corporation common shareholders

 

$

(7.1

)

$

318.2

 

Amounts attributable to SPX Corporation common shareholders:

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

(6.7

)

$

297.1

 

Income (loss) from discontinued operations, net of tax

 

(0.4

)

21.1

 

Net income (loss)

 

$

(7.1

)

$

318.2

 

Basic income (loss) per share of common stock:

 

 

 

 

 

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

 

$

(0.17

)

$

6.72

 

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

 

(0.01

)

0.47

 

Net income (loss) per share attributable to SPX Corporation common shareholders

 

$

(0.18

)

$

7.19

 

Weighted-average number of common shares outstanding — basic

 

40.503

 

44.236

 

Diluted income (loss) per share of common stock:

 

 

 

 

 

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

 

$

(0.17

)

$

6.59

 

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

 

(0.01

)

0.47

 

Net income (loss) per share attributable to SPX Corporation common shareholders

 

$

(0.18

)

$

7.06

 

Weighted-average number of common shares outstanding — diluted

 

40.503

 

45.082

 

Comprehensive income (loss)

 

$

(140.5

)

$

323.7

 

 

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)

 

 

 

March 28,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

363.1

 

$

427.6

 

Accounts receivable, net

 

1,026.2

 

1,067.4

 

Inventories, net

 

525.4

 

497.8

 

Other current assets

 

150.5

 

98.5

 

Deferred income taxes

 

128.0

 

123.8

 

Total current assets

 

2,193.2

 

2,215.1

 

Property, plant and equipment:

 

 

 

 

 

Land

 

54.8

 

56.4

 

Buildings and leasehold improvements

 

352.6

 

361.8

 

Machinery and equipment

 

824.3

 

825.9

 

 

 

1,231.7

 

1,244.1

 

Accumulated depreciation

 

(574.0

)

(573.2

)

Property, plant and equipment, net

 

657.7

 

670.9

 

Goodwill

 

1,401.0

 

1,455.4

 

Intangibles, net

 

791.0

 

831.0

 

Other assets

 

736.9

 

729.8

 

TOTAL ASSETS

 

$

5,779.8

 

$

5,902.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

432.8

 

$

462.0

 

Accrued expenses

 

846.1

 

892.3

 

Income taxes payable

 

42.9

 

43.7

 

Short-term debt

 

298.5

 

181.1

 

Current maturities of long-term debt

 

37.7

 

30.8

 

Total current liabilities

 

1,658.0

 

1,609.9

 

 

 

 

 

 

 

Long-term debt

 

1,149.9

 

1,157.8

 

Deferred and other income taxes

 

283.1

 

294.9

 

Other long-term liabilities

 

1,001.1

 

1,018.5

 

Total long-term liabilities

 

2,434.1

 

2,471.2

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

SPX Corporation shareholders’ equity:

 

 

 

 

 

Common stock (100,135,319 and 41,011,085 issued and outstanding at March 28, 2015, respectively, and 100,063,887 and 40,858,006 issued and outstanding at December 31, 2014, respectively)

 

1,009.2

 

1,008.2

 

Paid-in capital

 

1,618.4

 

1,600.8

 

Retained earnings

 

2,615.3

 

2,637.8

 

Accumulated other comprehensive income (loss)

 

(68.0

)

62.6

 

Common stock in treasury (59,124,234 and 59,205,881 shares at March 28, 2015 and December 31, 2014, respectively)

 

(3,487.1

)

(3,491.5

)

Total SPX Corporation shareholders’ equity

 

1,687.8

 

1,817.9

 

Noncontrolling interests

 

(0.1

)

3.2

 

Total equity

 

1,687.7

 

1,821.1

 

TOTAL LIABILITIES AND EQUITY

 

$

5,779.8

 

$

5,902.2

 

 

The accompanying notes are an integral part of these statements.

 

3



 

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

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Cash flows used in operating activities:

 

 

 

 

 

Net income (loss)

 

$

(10.0

)

$

317.8

 

Less: Income (loss) from discontinued operations, net of tax

 

(0.4

)

21.1

 

Income (loss) from continuing operations

 

(9.6

)

296.7

 

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

 

 

 

 

 

Special charges, net

 

6.6

 

10.0

 

Gain on asset sales

 

 

(491.5

)

Loss on early extinguishment of debt

 

 

32.5

 

Deferred and other income taxes

 

(0.3

)

(58.3

)

Depreciation and amortization

 

25.0

 

27.6

 

Pension and other employee benefits

 

6.7

 

24.8

 

Stock-based compensation

 

23.6

 

24.7

 

Other, net

 

1.9

 

0.2

 

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

 

 

 

 

 

Accounts receivable and other assets

 

(52.4

)

(22.4

)

Inventories

 

(44.4

)

(50.4

)

Accounts payable, accrued expenses and other

 

(61.5

)

156.8

 

Cash spending on restructuring actions

 

(3.9

)

(9.3

)

Net cash used in continuing operations

 

(108.3

)

(58.6

)

Net cash used in discontinued operations

 

(0.5

)

(2.0

)

Net cash used in operating activities

 

(108.8

)

(60.6

)

Cash flows from (used in) investing activities:

 

 

 

 

 

Proceeds from asset sales and other

 

 

575.7

 

Increase in restricted cash

 

(0.1

)

(0.1

)

Capital expenditures

 

(14.4

)

(11.3

)

Net cash from (used in) continuing operations

 

(14.5

)

564.3

 

Net cash from discontinued operations

 

 

38.3

 

Net cash from (used in) investing activities

 

(14.5

)

602.6

 

Cash flows from (used in) financing activities:

 

 

 

 

 

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

 

 

(530.6

)

Borrowings under senior credit facilities

 

196.0

 

 

Repayments under senior credit facilities

 

(119.0

)

 

Borrowings under trade receivables agreement

 

70.0

 

 

Repayments under trade receivables agreement

 

(25.0

)

 

Net repayments under other financing arrangements

 

(4.3

)

(53.9

)

Purchases of common stock

 

 

(134.3

)

Minimum withholdings paid on behalf of employees for net share settlements, net

 

(5.2

)

(11.5

)

Financing fees paid

 

 

(0.4

)

Dividends paid

 

(15.6

)

(11.7

)

Net cash from (used in) continuing operations

 

96.9

 

(742.4

)

Net cash used in discontinued operations

 

 

 

Net cash from (used in) financing activities

 

96.9

 

(742.4

)

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

 

(38.1

)

(5.4

)

Net change in cash and equivalents

 

(64.5

)

(205.8

)

Consolidated cash and equivalents, beginning of period

 

427.6

 

691.8

 

Consolidated cash and equivalents, end of period

 

$

363.1

 

$

486.0

 

 

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.

 

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 October 29, 2014, we announced that our Board of Directors had unanimously approved a plan for a tax-free spin-off of our Flow Technology reportable segment and our Hydraulic Technologies business, a business currently reported within Industrial Products and Services and Other. The spin-off would create a new stand-alone, publicly-traded company focused on providing highly engineered technologies and services to customers in the global food and beverage, power and energy, and industrial markets. We continue to expect that the transaction will be completed during the third quarter of 2015.

 

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, net” during the first quarter of 2014.

 

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 2014 Annual Report on Form 10-K. 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 2015 are March 28, June 27 and September 26, compared to the respective March 29, June 28 and September 27, 2014 dates. We had one less day in the first quarter of 2015 and will have one more day in the fourth quarter of 2015 than in the respective 2014 periods.

 

(2)                                 NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

In April 2014, the Financial Accounting Standards Board (“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

 

5



 

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.  We adopted this guidance on January 1, 2015, with no impact on our condensed consolidated financial statements as there were no disposal activities in the first quarter of 2015.

 

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 original standard was effective for interim and annual reporting periods beginning after December 15, 2016; however, in April 2015, the FASB proposed a one-year deferral of this standard, with a new effective date for interim and annual reporting periods beginning after December 15, 2017.  We are currently evaluating the effect that this new standard will have on our condensed consolidated financial statements.

 

(3)                                 DISCONTINUED OPERATIONS

 

As indicated in Note 2, there were no disposal activities in the first quarter of 2015. Prior to January 1, 2015, we reported businesses or asset groups as discontinued operations when, among other things, we terminated the operations of the business or asset group, committed to a plan to divest the business or asset group or actively began marketing the business or asset group, and the sale of the business or asset group was deemed probable within the next twelve months.

 

During the first quarter of 2014, we sold our Thermal Products Solutions (“TPS”) business for cash consideration of $38.5 and a promissory note of $4.0, resulting in a gain, net of tax, during the quarter of $21.5. The promissory note was paid in full during the fourth quarter of 2014.

 

In addition to the TPS business, we recognized net losses of $0.4 and $0.5 during the three months ended March 28, 2015 and March 29, 2014, respectively, resulting from adjustments to gains/losses on dispositions of businesses discontinued prior to 2014.

 

For the first three months of 2015 and 2014, income (loss) from discontinued operations and the related income taxes are shown below:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Income (loss) from discontinued operations

 

$

(0.4

)

$

33.9

 

Income tax provision

 

 

(12.8

)

Income (loss) from discontinued operations, net

 

$

(0.4

)

$

21.1

 

 

For the first three months of 2015 and 2014, results of operations from our businesses reported as discontinued operations were as follows:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Revenues

 

$

 

$

26.0

 

Pre-tax income

 

 

 

 

6



 

(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 solutions play a role in helping to meet rising global demand for processed foods and beverages and power and energy, 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 Financial Accounting Standards Board Codification (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.

 

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 personal comfort heating 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, tower and obstruction lights and monitoring equipment, communications and signal monitoring systems, fare collection systems, and portable cable and pipe locators.

 

Corporate Expense

 

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

 

7



 

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

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Revenues: (1)

 

 

 

 

 

Flow Technology reportable segment

 

$

530.8

 

$

616.7

 

Thermal Equipment and Services reportable segment (2)

 

247.2

 

279.6

 

Industrial Products and Services and Other

 

168.9

 

180.8

 

Total revenues

 

$

946.9

 

$

1,077.1

 

Income (loss):

 

 

 

 

 

Flow Technology reportable segment

 

$

59.3

 

$

66.2

 

Thermal Equipment and Services reportable segment (2)

 

(2.8

)

9.2

 

Industrial Products and Services and Other

 

19.0

 

23.3

 

Total income for reportable and other operating segments

 

75.5

 

98.7

 

Corporate expense

 

(29.2

)

(28.5

)

Pension and postretirement expense

 

(1.3

)

(19.8

)

Stock-based compensation expense

 

(23.6

)

(24.7

)

Special charges, net

 

(6.6

)

(10.0

)

Consolidated operating income

 

$

14.8

 

$

15.7

 

 


(1)                                 Under the percentage-of-completion method, we recognized revenues of $239.4 and $274.2 in the three months ended March 28, 2015 and March 29, 2014, respectively. Costs and estimated earnings in excess of billings on contracts accounted for under the percentage of completion method were $241.5 and $237.1 as of March 28, 2015 and December 31, 2014, 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 $180.7 and $178.9 as of March 28, 2015 and December 31, 2014, respectively, and are reported as a component of ‘‘Accrued expenses’’ in the condensed consolidated balance sheets.

 

(2)                                 For the three months ended March 28, 2015, revenue and income related to the segment’s large power projects in South Africa declined approximately $15.0 and $8.0, respectively, when compared to the respective period in 2014.

 

(5)                                 SPECIAL CHARGES, NET

 

Special charges, net, for the three months ended March 28, 2015 and March 29, 2014 are described in more detail below:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Flow Technology reportable segment

 

$

3.8

 

$

8.9

 

Thermal Equipment and Services reportable segment

 

2.3

 

0.1

 

Industrial Products and Services and Other

 

0.5

 

0.4

 

Corporate

 

 

0.6

 

Total

 

$

6.6

 

$

10.0

 

 

Flow Technology reportable segment — Charges for the three months ended March 28, 2015 related primarily to severance and other costs associated with restructuring initiatives at various locations in Europe and South America. These actions were taken primarily to (i) reduce the cost base of various businesses within the segment and (ii) continue the reorganization of the Johnson Pump management structure in Europe. Charges for the three months ended March 29, 2014 related primarily to severance and other costs associated with restructuring initiatives to (i) reduce the cost base of Clyde Union as we continued to integrate the business into the segment and (ii) to further align the segment’s operational structure to its key end markets.

 

8



 

Thermal Equipment and Services reportable segment — Charges for the three months ended March 28, 2015 related primarily to severance and other costs associated with (i) facility consolidation efforts in Asia Pacific and (ii) the continuation of restructuring actions at our Balcke Duerr and dry cooling businesses in order to reduce the cost base of the businesses primarily in response to reduced demand for nuclear power products and services in Europe. Charges for the three months ended March 29, 2014 related primarily to costs associated with finalizing 2013 restructuring initiatives in Germany.

 

Industrial Products and Services and Other — Charges for the three months ended March 28, 2015 and March 29, 2014 related primarily to severance and other costs associated with restructuring initiatives at our tower and obstruction lights and monitoring equipment business. These actions were taken to reduce the cost base of the business in response to reduced demand within the markets served by the business.

 

Corporate — Charges for the three months ended March 29, 2014 related primarily to costs associated with efforts to better align our corporate overhead structure with the new operational alignment we implemented in the second half in 2013.

 

Expected charges still to be incurred under actions approved as of March 28, 2015 were approximately $3.0.

 

The following is an analysis of our restructuring liabilities for the three months ended March 28, 2015 and March 29, 2014:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Balance at beginning of period

 

$

14.3

 

$

19.0

 

Special charges (1)

 

6.2

 

10.0

 

Utilization — cash (2)

 

(3.9

)

(9.7

)

Currency translation adjustment and other

 

(0.7

)

0.4

 

Balance at end of period

 

$

15.9

 

$

19.7

 

 


(1)                                 The three months ended March 28, 2015 included $0.4 of non-cash charges that did not impact the restructuring liability.

 

(2)                                 The three months ended March 29, 2014 included $0.4 of cash utilization to settle retained liabilities of discontinued operations.

 

(6)                                 INVENTORIES, NET

 

Inventories at March 28, 2015 and December 31, 2014 comprised the following:

 

 

 

March 28,

 

December 31,

 

 

 

2015

 

2014

 

Finished goods

 

$

148.4

 

$

138.2

 

Work in process

 

178.5

 

158.6

 

Raw materials and purchased parts

 

217.9

 

220.5

 

Total FIFO cost

 

544.8

 

517.3

 

Excess of FIFO cost over LIFO inventory value

 

(19.4

)

(19.5

)

Total inventories

 

$

525.4

 

$

497.8

 

 

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 21% and 18% of total inventory at March 28, 2015 and December 31, 2014, respectively. Other inventories are valued using the first-in, first-out (“FIFO”) method.

 

9



 

(7)                                 GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill, by reportable segment and other operating segments for the three months ended March 28, 2015, were as follows:

 

 

 

 

 

Goodwill

 

 

 

Foreign

 

 

 

 

 

 

 

Resulting from

 

 

 

Currency

 

 

 

 

 

December 31,

 

Business

 

 

 

Translation

 

March 28,

 

 

 

2014

 

Combinations

 

Impairments

 

and Other

 

2015

 

Flow Technology reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

1,036.5

 

$

 

$

 

$

(47.0

)

$

989.5

 

Accumulated impairments

 

 

 

 

 

 

Goodwill

 

1,036.5

 

 

 

(47.0

)

989.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Thermal Equipment and Services reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

553.3

 

 

 

(16.4

)

536.9

 

Accumulated impairments

 

(391.4

)

 

 

9.5

 

(381.9

)

Goodwill

 

161.9

 

 

 

(6.9

)

155.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Products and Services and Other

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

396.1

 

 

 

(1.5

)

394.6

 

Accumulated impairments

 

(139.1

)

 

 

1.0

 

(138.1

)

Goodwill

 

257.0

 

 

 

(0.5

)

256.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

1,985.9

 

 

 

(64.9

)

1,921.0

 

Accumulated impairments

 

(530.5

)

 

 

10.5

 

(520.0

)

Goodwill

 

$

1,455.4

 

$

 

$

 

$

(54.4

)

$

1,401.0

 

 

Other Intangibles, Net

 

Identifiable intangible assets were as follows:

 

 

 

March 28, 2015

 

December 31, 2014

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Intangible assets with determinable lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

371.8

 

$

(91.9

)

$

279.9

 

$

388.6

 

$

(91.7

)

$

296.9

 

Technology

 

172.8

 

(58.6

)

114.2

 

183.8

 

(59.8

)

124.0

 

Patents

 

11.3

 

(8.8

)

2.5

 

11.3

 

(8.8

)

2.5

 

Other

 

27.9

 

(18.3

)

9.6

 

28.7

 

(18.3

)

10.4

 

 

 

583.8

 

(177.6

)

406.2

 

612.4

 

(178.6

)

433.8

 

Trademarks with indefinite lives

 

384.8

 

 

384.8

 

397.2

 

 

397.2

 

Total

 

$

968.6

 

$

(177.6

)

$

791.0

 

$

1,009.6

 

$

(178.6

)

$

831.0

 

 

At March 28, 2015, the net carrying value of intangible assets with determinable lives consisted of $359.5 in the Flow Technology reportable segment, $40.4 in the Thermal Equipment and Services reportable segment, and $6.3 in Industrial Products and Services and Other. Trademarks with indefinite lives consisted of $247.9 in the Flow Technology reportable segment, $116.2 in the

 

10



 

Thermal Equipment and Services reportable segment, and $20.7 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 quarter of 2015 or 2014. Changes in the gross carrying value of trademarks and other identifiable intangible assets related primarily to foreign currency translation.

 

(8)                                 WARRANTY

 

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

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Balance at beginning of year

 

$

56.0

 

$

55.1

 

Provisions

 

5.4

 

6.0

 

Usage

 

(8.4

)

(7.5

)

Currency translation adjustment

 

(1.2

)

 

Balance at end of period

 

51.8

 

53.6

 

Less: Current portion of warranty

 

34.4

 

41.7

 

Non-current portion of warranty

 

$

17.4

 

$

11.9

 

 

(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 “U.S. Plan”) a voluntary lump-sum payment option in lieu of a future pension benefit under the U.S. Plan. Approximately 38%, or $165.2, of the projected benefit obligation of the U.S. 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 U.S. 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.

 

During the fourth quarter of 2014, we executed an agreement to transfer obligations for monthly pension payments to retirees under the SPX U.K. Pension Plan (the ‘‘U.K. Plan’’) to Just Retirement Limited (‘‘Just Retirement’’). Under the agreement, Just Retirement irrevocably assumed the obligation to make future pension payments to the approximately 900 retirees of the U.K. Plan beginning in the first quarter of 2015. The U.K. Plan paid Just Retirement 79.2 British Pounds (‘‘GBP’’) ($123.3 equivalent) in the fourth quarter of 2014 to assume obligations totaling approximately GBP 68.0 ($105.8 equivalent). The partial annuitization of the U.K. Plan resulted in a settlement loss of $15.0, which was included in net periodic pension benefit expense during the fourth quarter of 2014.

 

11



 

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

 

Domestic Pension Plans

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Service cost

 

$

0.9

 

$

1.8

 

Interest cost

 

4.3

 

6.7

 

Expected return on plan assets

 

(4.9

)

(5.5

)

Settlement charges, net(1)

 

 

0.5

 

Recognized net actuarial loss(2)

 

 

14.8

 

Total net periodic pension benefit expense

 

$

0.3

 

$

18.3

 

 


(1)                                 Consisted of 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 $4.1 increase to the estimated settlement gain that was recorded during the fourth quarter of 2013 in connection with the transfer of the pension obligation for the retirees of the U.S. Plan to Massachusetts Mutual Life Insurance Company.

 

(2)                                 Represented the actuarial loss resulting from the remeasurement of the assets and obligations of the U.S. Plan during the first quarter of 2014, which was required in connection with the lump-sum payment action noted above.

 

Foreign Pension Plans

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Service cost

 

$

0.4

 

$

0.7

 

Interest cost

 

2.0

 

3.5

 

Expected return on plan assets

 

(2.4

)

(4.3

)

Total net periodic pension benefit income

 

 

(0.1

)

Less: Net periodic pension benefit income of discontinued operations

 

(0.1

)

(0.2

)

Net periodic pension benefit expense of continuing operations

 

$

0.1

 

$

0.1

 

 

Postretirement Plans

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Service cost

 

$

 

$

0.1

 

Interest cost

 

1.1

 

1.3

 

Amortization of unrecognized prior service credits

 

(0.2

)

 

Net periodic postretirement benefit expense

 

$

0.9

 

$

1.4

 

 

Employer Contributions

 

During the first quarter of 2015, we made contributions to our domestic and foreign pension plans of approximately $0.8, of which $0.4 related to discontinued operations.

 

12



 

(10)                          INDEBTEDNESS

 

The following summarizes our debt activity (both current and non-current) for the three months ended March 28, 2015:

 

 

 

December 31,

 

 

 

 

 

 

 

March 28,

 

 

 

2014

 

Borrowings

 

Repayments

 

Other (4)

 

2015

 

Domestic revolving loan facility

 

$

133.0

 

196.0

 

(119.0

)

 

$

210.0

 

Term loan (1)

 

575.0

 

 

 

 

575.0

 

6.875% senior notes, due in August 2017

 

600.0

 

 

 

 

600.0

 

Trade receivables financing arrangement (2)

 

10.0

 

70.0

 

(25.0

)

 

55.0

 

Other indebtedness (3)

 

51.7

 

0.2

 

(4.5

)

(1.3

)

46.1

 

Total debt

 

1,369.7

 

$

266.2

 

$

(148.5

)

$

(1.3

)

1,486.1

 

Less: short-term debt

 

181.1

 

 

 

 

 

 

 

298.5

 

Less: current maturities of long-term debt

 

30.8

 

 

 

 

 

 

 

37.7

 

Total long-term debt

 

$

1,157.8

 

 

 

 

 

 

 

$

1,149.9

 

 


(1)                                 The term loan 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)                                 Under this arrangement, we can borrow, on a continuous basis, up to $80.0, as available. At March 28, 2015, we had $19.4 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $55.0.

 

(3)                                 Primarily included balances under a purchase card program of $28.4 and $32.1 and capital lease obligations of $12.6 and $13.6 at March 28, 2015 and December 31, 2014, 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 included debt assumed and foreign currency translation on any debt instruments denominated in currencies other than the U.S. dollar.

 

Senior Credit Facilities

 

A detailed description of our senior credit facilities is included in our 2014 Annual Report on Form 10-K.

 

At March 28, 2015, we had $53.8 and $673.8, 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 $6.8 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 1.7% at March 28, 2015.

 

At March 28, 2015, 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 2014 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 GBP.

 

13



 

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, 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 $247.0 and $298.0 outstanding as of March 28, 2015 and December 31, 2014, respectively, with notional amounts of $231.1, $14.5 and $1.4 scheduled to mature within one, two and three years, respectively. We also had FX embedded derivatives with an aggregate notional amount of $180.7 and $246.0 at March 28, 2015 and December 31, 2014, respectively, with notional amounts of $146.9, $28.2 and $5.6 scheduled to mature within one, two and three years, respectively. The unrealized gains (losses), net of taxes, recorded in AOCI related to FX forward contracts were $0.3 and $(0.3) as of March 28, 2015 and December 31, 2014, respectively.

 

Commodity Contracts

 

From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At March 28, 2015 and December 31, 2014, the outstanding notional amount of commodity contracts was 4.3 and 4.2 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 March 28, 2015 and December 31, 2014, the fair value of these contracts was $0.7 (current liability) and $1.4 (current liability), respectively. The unrealized loss, net of taxes, recorded in AOCI was $0.9 and $1.0 as of March 28, 2015 and December 31, 2014, respectively. We anticipate reclassifying the unrealized loss as of March 28, 2015 to income over the next 12 months.

 

The following summarizes the gross and net fair values of our FX forward and commodity contracts by counterparty at March 28, 2015 and December 31, 2014, respectively:

 

 

 

March 28, 2015

 

December 31, 2014

 

 

 

Gross Assets

 

Gross Liabilities

 

Net Assets /
Liabilities

 

Gross Assets

 

Gross Liabilities

 

Net Assets /
Liabilities

 

FX Forward Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

$

0.3

 

$

(0.1

)

$

0.2

 

$

 

$

(0.1

)

$

(0.1

)

Counterparty B

 

1.1

 

(3.9

)

(2.8

)

0.3

 

(3.5

)

(3.2

)

Aggregate of other counterparties

 

0.6

 

(1.5

)

(0.9

)

0.5

 

(1.8

)

(1.3

)

Totals (1)

 

$

2.0

 

$

(5.5

)

$

(3.5

)

$

0.8

 

$

(5.4

)

$

(4.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A(2)

 

$

 

$

(0.7

)

$

(0.7

)

$

 

$

(1.4

)

$

(1.4

)

 


(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 were as follows:

 

14



 

 

 

March 28,

 

December 31,

 

 

 

2015

 

2014

 

Designated as hedging instruments:

 

 

 

 

 

Accrued expenses

 

$

(0.8

)

$

(0.1

)

Other long-term liabilities

 

(0.2

)

(0.1

)

 

 

(1.0

)

(0.2

)

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

Other current assets

 

0.1

 

 

Accrued expenses

 

(2.6

)

(4.4

)

 

 

(2.5

)

(4.4

)

Net fair value of FX forward contracts

 

$

(3.5

)

$

(4.6

)

 

(2)                                 Related contracts are designated as hedging instruments. Net amounts at March 28, 2015 and December 31, 2014 were recorded in ‘‘Accrued expenses.’’

 

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 March 28, 2015 and December 31, 2014:

 

 

 

March 28,

 

December 31,

 

Balance Sheet Classification

 

2015

 

2014

 

Other current assets

 

$

7.5

 

$

5.1

 

Other assets

 

3.0

 

1.2

 

Accrued expenses

 

(4.4

)

(4.7

)

Other long-term liabilities

 

(0.7

)

(0.9

)

 

 

$

5.4

 

$

0.7

 

 

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 months ended March 28, 2015 and March 29, 2014:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

FX forward contracts

 

$

0.5

 

$

0.3

 

Commodity contracts

 

(0.4

)

(1.3

)

 

 

$

0.1

 

$

(1.0

)

 

The following summarizes the pre-tax loss related to commodity contracts designated as cash flow hedging relationships reclassified from AOCI to income through ‘‘Cost of products sold’’ for the three months ended March 28, 2015 and March 29, 2014:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

Commodity contracts

 

$

(0.5

)

$

(0.1

)

 

In addition, losses of $0.2 were recognized in ‘‘Other income, net’’ during the three months ended March 28, 2015 relating to derivative ineffectiveness and amounts excluded from effectiveness testing.

 

15



 

The following summarizes the loss recognized in ‘‘Other income, net’’ for the three months ended March 28, 2015 and March 29, 2014 related to derivative financial instruments not designated as cash flow hedging relationships:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

FX forward contracts

 

$

(12.2

)

$

0.4

 

FX embedded derivatives

 

6.6

 

(2.2

)

 

 

$

(5.6

)

$

(1.8

)

 

(12)                          SHAREHOLDERS’ EQUITY AND STOCK-BASED 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

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

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

 

40.503

 

44.236

 

Dilutive securities — Restricted stock shares and restricted stock units

 

 

0.846

 

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

 

40.503

 

45.082

 

 

Given the loss from continuing operations for the three months ended March 28, 2015, an aggregate of 1.162 unvested restricted stock shares, restricted stock units, and stock options outstanding were excluded from the computation of diluted loss per share for the period. All unvested restricted stock shares and restricted stock units were included in the computation of diluted income per share for the three months ended March 29, 2014 because required market thresholds for vesting were met. There were no stock options outstanding during the three months ended March 29, 2014.

 

Stock-based Compensation

 

Stock-based compensation awards may be granted to certain eligible employees or non-employee directors under the 2002 Stock Compensation Plan, as amended, or to non-employee directors under the 2006 Non-Employee Directors’ Stock Incentive Plan. A detailed description of the awards granted under these plans is included in our 2014 Annual Report on Form 10-K.

 

The recognition of compensation expense for share-based awards, including stock options, is based on their grant-date fair values.  The fair value of each award is amortized over the lesser of the award’s requisite or derived service period, which is generally up to three years. Compensation expense within income from continuing operations related to restricted stock shares, restricted stock units, and stock options totaled $23.6 and $24.7 for the three months ended March 28, 2015 and March 29, 2014, respectively, with a related tax benefit of $8.8 and $8.9 for the three-month periods, respectively.

 

Restricted Stock Share and Restricted Stock Unit Awards

 

We use the Monte Carlo simulation model valuation technique to determine fair value of our restricted stock shares and restricted stock units that contain a “market condition.” The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each restricted stock share and restricted stock unit award. Awards granted during the three months ended March 28, 2015 did not contain a market condition.

 

16



 

The following table summarizes the restricted stock share and restricted stock unit activity from December 31, 2014 through March 28, 2015:

 

 

 

 

 

Weighted-Average

 

 

 

Unvested Restricted Stock Shares

 

Grant-Date Fair

 

 

 

and Restricted Stock Units

 

Value Per Share

 

Outstanding at December 31, 2014

 

1.168

 

$

69.22

 

Granted

 

0.375

 

85.81

 

Vested

 

(0.191

)

80.46

 

Forfeited

 

(0.175

)

47.67

 

Outstanding at March 28, 2015

 

1.177

 

75.77

 

 

As of March 28, 2015, there was $36.3 of unrecognized compensation cost related to restricted stock share and restricted stock unit compensation arrangements. We expect this cost to be recognized over a weighted-average period of 2.1 years.

 

Stock Options

 

On January 2, 2015, we granted 0.323 stock options, all of which were outstanding (but not exercisable) as of March 28, 2015. The weighted-average exercise price per share of these options was $85.87 and the maximum contractual term of these options is ten years. There were no stock options outstanding during the three months ended March 29, 2014.

 

The weighted-average grant-date fair value per share of the stock options granted on January 2, 2015 was $27.06. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

Annual expected stock price volatility

 

36.53

%

Annual expected dividend yield

 

1.75

%

Risk-free interest rate

 

1.97

%

Expected life of stock option (in years)

 

6.0

 

 

Annual expected stock price volatility is based on the six-year historical volatility. The annual expected dividend yield is based on annual expected dividend payments and the stock price on the date of grant. The average risk-free interest rate is based on the seven-year treasury constant maturity rate. The expected option life is based on a three-year pro-rata vesting schedule and represents the period of time that awards are expected to be outstanding.

 

As of March 28, 2015, there was $2.2 of unrecognized compensation cost related to stock options. We expect this cost to be recognized over a weighted-average period of 2.8 years.

 

17



 

Accumulated Other Comprehensive Income (Loss)

 

The changes in the components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 28, 2015 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 year

 

$

59.0

 

$

(1.3

)

$

4.9

 

$

62.6

 

Other comprehensive income (loss) before reclassifications

 

(131.1

)

0.1

 

 

(131.0

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.6

 

(0.2

)

0.4

 

Current-period other comprehensive income (loss)

 

(131.1

)

0.7

 

(0.2

)

(130.6

)

Balance at end of period

 

$

(72.1

)

$

(0.6

)

$

4.7

 

$

(68.0

)

 


(1)                                 Net of tax benefit of $0.5 and $1.1 as of March 28, 2015 and December 31, 2014, respectively.

 

(2)                                 Net of tax provision of $3.0 as of March 28, 2015 and December 31, 2014, respectively. The balances as of March 28, 2015 and December 31, 2014 include net unamortized prior service credits.

 

The changes in the components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 29, 2014 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Losses on
Qualifying Cash
Flow Hedges (1)

 

Net Unrealized
Losses on
Available-for-
Sale Securities

 

Pension and
Postretirement 
Liability
Adjustment (2)

 

Total

 

Balance at beginning of year

 

$

296.8

 

$

(0.8

)

$

(3.7

)

$

(4.8

)

$

287.5

 

Other comprehensive income (loss) before reclassifications

 

(2.0

)

(0.8

)

3.8

 

0.2

 

1.2

 

Amounts reclassified from accumulated other comprehensive income

 

 

0.1

 

(0.3

)

5.0

 

4.8

 

Current-period other comprehensive income (loss)

 

(2.0

)

(0.7

)

3.5

 

5.2

 

6.0

 

Balance at end of period

 

$

294.8

 

$

(1.5

)

$

(0.2

)

$

0.4

 

$

293.5

 

 


(1)                                 Net of tax benefit of $1.2 and $1.0 as of March 29, 2014 and December 31, 2013, respectively.

 

(2)                                 Net of tax (provision) benefit of $(0.1) and $2.2 as of March 29, 2014 and December 31, 2013, respectively. The balance as of December 31, 2013 primarily included $(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.

 

18



 

The following summarizes amounts reclassified from each component of accumulated comprehensive income (loss) for the three months ended March 28, 2015 and March 29, 2014:

 

 

 

Amount Reclassified from AOCI

 

 

 

 

 

Three months ended

 

Affected Line Items in the Condensed

 

 

 

March 28, 2015

 

March 29, 2014

 

Consolidated Statements of Operations

 

Losses on qualifying cash flow hedges:

 

 

 

 

 

 

 

Pre-tax loss on commodity contracts

 

$

0.7

 

$

0.1

 

Cost of products sold

 

Income taxes

 

(0.1

)

 

 

 

 

 

$

0.6

 

$

0.1

 

 

 

 

 

 

 

 

 

 

 

Gain on available-for-sale securities

 

$

 

$

0.3

 

Other income, net

 

 

 

 

 

 

 

 

 

Pension and postretirement items:

 

 

 

 

 

 

 

Recognition of our share of the pension liability adjustment for EGS

 

$

 

$

7.4

 

Other income, net

 

Amortization of unrecognized prior service credits

 

(0.2

)

 

Selling, general and administrative

 

Pre-tax

 

(0.2

)

7.4

 

 

 

Income taxes

 

 

(2.4

)

 

 

 

 

$

(0.2

)

$

5.0

 

 

 

 

Common Stock in Treasury

 

On December 18, 2013, we entered into a written trading plan under Rule 10b5-1 to facilitate the repurchase of up to $500.0 of shares of our common stock on or before December 31, 2014, in accordance with a share repurchase program authorized by our Board of Directors. We repurchased 0.115 shares of our common stock for $11.2 under this trading plan during December 2013. During the first quarter of 2014, we repurchased 1.316 shares of our common stock for $134.3 under this trading plan. During the remainder of 2014, we repurchased 3.536 shares of our common stock for $354.5, which completed the repurchases authorized under this trading plan.  There were no common stock repurchases during the first quarter of 2015.

 

During the three months ended March 28, 2015 and March 29, 2014, “Common stock in treasury” was decreased by the settlement of restricted stock units issued from treasury stock of $5.6 and $12.0, respectively, and increased by $1.2 and $7.9, respectively, for common stock that was surrendered by recipients of restricted stock as a means of funding the related minimum income tax withholding requirements.

 

Dividends

 

The dividends declared during the first quarters of 2015 and 2014 totaled $15.4 and $16.3, respectively. We paid first quarter dividends on April 1, 2015 and April 2, 2014.

 

19



 

Changes in Equity

 

A summary of the changes in equity for the three months ended March 28, 2015 and March 29, 2014 is provided below:

 

 

 

March 28, 2015

 

March 29, 2014

 

 

 

SPX

 

 

 

 

 

SPX

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

Shareholders’

 

Noncontrolling

 

Total

 

Shareholders’

 

Noncontrolling

 

Total

 

 

 

Equity

 

Interests

 

Equity

 

Equity

 

Interests

 

Equity

 

Equity, beginning of year

 

$

1,817.9

 

$

3.2

 

$

1,821.1

 

$

2,158.0

 

$

14.0

 

$

2,172.0

 

Net income (loss)

 

(7.1

)

(2.9

)

(10.0

)

318.2

 

(0.4

)

317.8

 

Net unrealized gains (losses) on qualifying cash flow hedges, net of tax (provision) benefit of $(0.6) and $0.2 for the three months ended March 28, 2015 and March 29, 2014, respectively

 

0.7

 

 

0.7

 

(0.7

)

 

(0.7

)

Net unrealized gains on available-for-sale securities

 

 

 

 

3.5

 

 

3.5

 

Pension liability adjustment, net of tax provision of $2.3 for the three months ended March 29, 2014

 

(0.2

)

 

(0.2

)

5.2

 

 

5.2

 

Foreign currency translation adjustments

 

(131.1

)

0.1

 

(131.0

)

(2.0

)

(0.1

)

(2.1

)

Total comprehensive income (loss), net

 

(137.7

)

(2.8

)

(140.5

)

324.2

 

(0.5

)

323.7

 

Dividends declared

 

(15.4

)

 

(15.4

)

(16.3

)

 

(16.3

)

Incentive plan activity

 

4.9

 

 

4.9

 

4.8

 

 

4.8

 

Stock-based compensation expense

 

23.6

 

 

23.6

 

24.7

 

 

24.7

 

Restricted stock and restricted stock unit vesting, net of tax withholdings, and related tax benefit of $0.4 and $8.8 for the three months ended March 28, 2015 and March 29, 2014, respectively

 

(5.5

)

 

(5.5

)

(11.5

)

 

(11.5

)

Common stock repurchases

 

 

 

 

(134.3

)

 

(134.3

)

Dividends attributable to noncontrolling interests

 

 

(0.5

)

(0.5

)

 

 

 

Equity, end of period

 

$

1,687.8

 

$

(0.1

)

$

1,687.7

 

$

2,349.6

 

$

13.5

 

$

2,363.1

 

 

(13)                          CONTINGENT LIABILITIES AND OTHER MATTERS

 

General

 

Numerous claims, complaints and proceedings arising in the ordinary course of business, including those relating to litigation matters (e.g., class actions, derivative lawsuits and contracts, intellectual property and competitive claims), environmental matters, and risk management matters (e.g., product and general liability, automobile, and workers’ compensation claims), have been filed or are pending against us and certain of our subsidiaries. Additionally, we may become subject to significant claims of which we are currently unaware, or the claims of which we are aware may result in us incurring a significantly greater liability than we anticipate. This may also be true in connection with past or future acquisitions. While we 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 portion of these claims, this insurance may be insufficient or unavailable (e.g., because 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. We believe, however, that our accruals related to these items are sufficient and that these items and our rights to available insurance and indemnity will be resolved without material effect, individually or in the aggregate, on our financial position, results of operations and cash flows. These accruals, which are determined in accordance with the Contingencies Topic of the Codification, totaled $619.1 (including $576.9 for risk management matters) and $619.6 (including $575.4 for risk management matters) at March 28, 2015 and December 31, 2014, respectively. Of these amounts, $565.7 and $571.5 are included in “Other long-term liabilities” within our condensed consolidated balance sheets at March 28, 2015 and December 31, 2014, respectively, with the remainder included in “Accrued expenses.” It is reasonably possible that our ultimate liability for these items could exceed the amount of the recorded accruals; however, we believe the estimated amount of any potential additional liability would not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows.

 

20



 

We had insurance recovery assets related to risk management matters of $503.7 at March 28, 2015 and December 31, 2014, included in “Other assets” within our condensed consolidated balance sheets.

 

Litigation Matters

 

The business environment surrounding our large power projects in South Africa has become increasingly difficult, and the projects have experienced significant delays. In addition, the projects involve a complex set of contractual relationships among the end customer, the prime contractors, various subcontractors (including us and our subcontractors), and various suppliers. We are currently involved in a number of claim disputes with the prime contractors (our immediate customers) and with certain of our subcontractors relating to delay, additional costs, and performance issues. We believe that, in the accompanying condensed consolidated financial statements, we have adequately provided for those claims against us where our liability is probable and reasonably estimable. Although it is reasonably possible that our liability for certain of these claims could exceed the amount of our recorded accruals, we do not believe that the estimated amount of any potential additional liability would have a material effect, individually or in the aggregate, on our condensed consolidated financial statements.

 

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.

 

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 March 28, 2015, we had liabilities for site investigation and/or remediation at 91 sites (91 sites at December 31, 2014) 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 it becomes probable and the amount of change can be reasonably estimated. We generally do not discount our environmental accruals and do not reduce them by anticipated insurance recoveries. We take into account third-party indemnification from financially viable parties in determining our accruals where there is no dispute regarding the right to indemnification.

 

In the case of contamination at offsite, third-party disposal sites, as of March 28, 2015, we have been notified that we are potentially responsible and have received other notices of potential liability pursuant to various environmental laws at 27 sites (28 sites at December 31, 2014) at which the liability has not been settled, of which 8 sites (9 sites at December 31, 2014) 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

 

21



 

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.

 

Risk Management Matters

 

We are self-insured for certain of our workers’ compensation, automobile, product and general liability, disability and health costs, and we believe that we maintain adequate accruals to cover our retained liability. Our accruals for risk management matters are determined by us, are based on claims filed and estimates of claims incurred but not yet reported, and generally are not discounted. We consider a number of factors, including third-party actuarial valuations, when making these determinations. We maintain third-party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts. This insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against loss exposure.

 

Collaborative Arrangements

 

Collaborative arrangements are defined as contractual arrangements in which the parties are (1) active participants to the arrangements and (2) exposed to significant risks and rewards that depend on the commercial success of the endeavor. Costs incurred and revenues generated from transactions with third parties are required to be reported by the collaborators on the appropriate line item in their respective statements of operations.

 

We enter into consortium arrangements for certain projects within our Thermal Equipment and Services reportable segment. Under such arrangements, each consortium member is responsible for performing certain discrete items of work within the total scope of the contracted work and the consortium expires when all contractual obligations are completed. The revenues for these discrete items of work are defined in the contract with the project owner and each consortium member bearing the profitability risk associated with its own work. Our consortium arrangements typically provide that each consortium member assumes responsibility for its share of any damages or losses associated with the project; however, the use of a consortium arrangement typically results in joint and several liability for the consortium members. If responsibility cannot be determined or a consortium member defaults, then the consortium members are responsible according to their share of the contract value. Within our condensed consolidated financial statements, we account for our share of the revenues and profits under the consortium arrangements. As of March 28, 2015, our share of the aggregate contract value on open consortium arrangements was $81.4 (of which approximately 75% had been recognized as revenue), and the aggregate contract value on open consortium arrangements was $336.2. As of December 31, 2014, our share of the aggregate contract value on open consortium arrangements was $65.2 (of which approximately 87% had been recognized as revenue), and the aggregate contract value on open consortium arrangements was $291.1. At March 28, 2015 and December 31, 2014, we recorded liabilities of $0.3 and $0.7, respectively, representing the estimated fair value of our potential obligation under the joint and several liability provisions associated with the consortium arrangements.

 

(14)                          INCOME TAXES

 

Unrecognized Tax Benefits

 

As of March 28, 2015, we had gross unrecognized tax benefits of $66.3 (net unrecognized tax benefits of $35.9), of which $35.4, if recognized, would impact our effective tax rate from continuing operations.

 

We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of March 28, 2015, gross accrued interest totaled $6.3 (net accrued interest of $5.3). As of March 28, 2015, we had no accrual for penalties included in our unrecognized tax benefits.

 

22



 

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 $10.0 to $15.0. 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 March 28, 2015, we recorded an income tax provision of $9.5 on a pre-tax loss of $0.1 from continuing operations. This compares to an income tax provision for the three months ended March 29, 2014 of $160.0 on $456.7 of pre-tax income from continuing operations, resulting in an effective tax rate of 35.0%. The most significant items impacting the income tax provision for the first quarter of 2015 were (i) $5.1 of taxes related to the planned spin-off transaction, including $4.9 of foreign income taxes related to reorganization actions undertaken to facilitate the separation, and (ii) approximately $14.0 of pre-tax losses generated during the quarter in jurisdictions for which no tax benefit was recognized, as future realization of any such tax benefit is considered unlikely. The most significant item impacting the effective tax rate for the first quarter of 2014 was the U.S. income taxes that were provided in connection with the $491.2 gain that was recorded during the quarter on the sale of our interest in EGS.

 

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 2012 and 2013 tax years and those returns are subject to examination. The IRS is currently examining the 2012 tax return year. 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 or administrative appeal. 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 Denmark for the 2006, 2007, 2009, and 2010 tax years and in South Africa for the 2005 to 2010 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 or we have not yet reached the final stages of the appeals process, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.

 

(15)                    FAIR VALUE

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is 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:

 

23



 

·                  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 basis. There were no transfers between the three levels of the fair value hierarchy for the three months ended March 28, 2015 or March 29, 2014.

 

The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.

 

Derivative Financial Instruments

 

Our financial derivative assets and liabilities include 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 March 28, 2015, there had 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.

 

Investments in Equity Securities

 

Certain of our investments in equity securities that are not readily marketable are accounted for under the fair value option and are classified as Level 3 assets in the fair value hierarchy, with such values determined by multidimensional pricing models. These models consider market activity based on modeling of securities with similar credit quality, duration, yield and structure. A variety of inputs are used, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spread and reference data including market research publications. Market indicators, industry and economic events are also considered. We have not made any adjustments to the inputs obtained from the independent sources. At March 28, 2015 and December 31, 2014, these assets had a fair value of $10.3 and $7.4, respectively.

 

Assets and liabilities measured at fair value on a recurring basis included the following as of March 28, 2015:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Other current assets — FX embedded derivatives and FX forward contracts

 

$

 

$

7.6

 

$

 

Other assets — FX embedded derivatives and investment in equity securities

 

 

3.0

 

10.3

 

Accrued expenses — FX forward contracts, FX embedded derivatives and commodity contracts

 

 

8.5

 

 

Other long-term liabilities — FX embedded derivatives and FX forward contracts

 

 

0.9

 

 

 

24



 

Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2014:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Other current assets — FX embedded derivatives

 

$

 

$

5.1

 

$

 

Other assets — FX embedded derivatives and investment in equity securities

 

 

1.2

 

7.4

 

Accrued expenses — FX forward contracts, FX embedded derivatives and commodity contracts

 

 

10.6

 

 

Other long-term liabilities — FX embedded derivatives and FX forward contracts

 

 

1.0

 

 

 

The table below presents a reconciliation of our investment in equity securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 28, 2015 and March 29, 2014, including net unrealized gains (losses) recorded to “Other income, net.”

 

 

 

Three months ended

 

 

 

March 28, 2015

 

March 29, 2014

 

Balance at beginning of year

 

$

7.4

 

$

1.4

 

Unrealized gains recorded to earnings

 

2.9

 

1.6

 

Balance at end of period

 

$

10.3

 

$

3.0

 

 

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. As of March 28, 2015 and December 31, 2014, we did not have any significant non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.

 

Indebtedness and Other

 

The estimated fair values of other financial liabilities (excluding capital leases) not measured at fair value on a recurring basis as of March 28, 2015 and December 31, 2014 were as follows:

 

 

 

March 28, 2015

 

December 31, 2014

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Senior notes

 

$

600.0

 

$

657.0

 

$

600.0

 

$

665.3

 

Term loan

 

575.0

 

575.0

 

575.0

 

575.0

 

Other indebtedness

 

298.5

 

298.5

 

181.1

 

181.1

 

 

The following methods and assumptions were used in estimating the fair value of these financial instruments:

 

·                  The fair values of the senior notes and term loan were determined using Level 2 inputs within the fair value hierarchy and were based on quoted market prices for the same or similar instruments or on current rates offered to us for debt with similar maturities, subordination and credit default expectations.

 

·                  The fair value of our other indebtedness approximated carrying value due primarily to the short-term nature of these instruments.

 

The carrying amounts of cash and equivalents and receivables reported in our condensed consolidated balance sheets approximate fair value due to the short maturity of those instruments.

 

25



 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(in millions)

 

EXECUTIVE OVERVIEW

 

Summary of Operating Results

 

Revenues for the three months ended March 28, 2015 decreased by 12.1% when compared to the same period in 2014, with the most significant fluctuations related to a stronger U.S. dollar in the first quarter of 2015, as well as a decrease in sales associated with the power and energy business within our Flow Technology reportable segment primarily resulting from the impact of lower oil prices. Income associated with our reportable and other operating segments totaled $75.5 for the three months ended March 28, 2015, compared to $98.7 for the three months ended March 29, 2014.  The year-over-year decrease in income associated with our reportable and other operating segments was primarily attributable to the decline in revenues noted above.

 

Cash flows used in continuing operations totaled $108.3 during the first three months of 2015, compared to $58.6 during the first three months of 2014. The increase in cash flows used in continuing operations was due primarily to (i) the decline in segment profitability noted above and (ii) the timing of cash receipts on certain large projects.

 

Planned Spin-Off Transaction

 

On October 29, 2014, we announced that our Board of Directors had unanimously approved a plan for a tax-free spin-off of our Flow Technology reportable segment and our Hydraulic Technologies business, a business currently reported within Industrial Products and Services and Other. The spin-off would create a new stand-alone, publicly-traded company focused on providing highly engineered technologies and services to customers in the global food and beverage, power and energy, and industrial markets. Since the announcement, we have been focused on building out the necessary infrastructure that is required for each of these future companies, including the identification of leadership teams and development of the required corporate functional support systems.  We continue to expect that the transaction will be completed during the third quarter of 2015.

 

During the three months ended March 28, 2015, we recorded $5.0 of professional fees and other costs (included in “Selling, general and administrative” expense) related to the planned spin-off transaction. Additionally, during the first quarter of 2015, we recorded a charge of $5.1 primarily for foreign income taxes that were provided in connection with certain reorganization actions that were undertaken to facilitate the planned spin-off transaction.

 

RESULTS OF CONTINUING OPERATIONS

 

The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2014 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year. We establish actual interim closing dates using a fiscal calendar, which requires our businesses to close their books on the Saturday closest to the end of the first calendar quarter, with the second and third quarters being 91 days in length. Our fourth quarter ends on December 31. The interim closing dates for the first, second and third quarters of 2015 are March 28, June 27 and September 26, compared to the respective March 29, June 28 and September 27, 2014 dates. We had one less day in the first quarter of 2015 and will have one more day in the fourth quarter of 2015 than in the respective 2014 periods.

 

Seasonality and Competition — Many of our businesses closely follow changes in the industries and end markets they serve. In addition, certain businesses have seasonal fluctuations. Demand in the oil and gas aftermarket is typically stronger in the second half of the year. Our personal comfort heating products businesses tend to be stronger during the third and fourth quarters, as customer buying habits are driven largely by seasonal weather patterns. Demand for cooling towers, food and beverage systems and related services is highly correlated to timing on large construction contracts, which may cause significant fluctuations in our financial performance from period to period. In aggregate, our businesses generally tend to be stronger in the second half of the year.

 

26



 

Although our businesses operate in highly competitive markets, our competitive position cannot be determined accurately in the aggregate or by segment since our competitors do not offer all the same product lines or serve all the same markets. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors.

 

Non-GAAP Measures — Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations and acquisitions. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as, when read in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool they can use to evaluate our management of assets held from period to period. In addition, organic revenue growth (decline) is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted in the United States (“GAAP”), should not be considered a substitute for net revenue growth (decline) as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

 

The following table provides selected financial information for the three months ended March 28, 2015 and March 29, 2014, respectively, including the reconciliation of organic revenue decline to net revenue decline:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

 

 

 

 

2015

 

2014

 

% Change

 

Revenues

 

$

946.9

 

$

1,077.1

 

(12.1

)

Gross profit

 

261.9

 

301.5

 

(13.1

)

% of revenues

 

27.7

%

28.0

%

 

 

Selling, general and administrative expense

 

233.2

 

267.5

 </