SPX TECHNOLOGIES, INC.
(All currency and share amounts are in millions)
The following should be read in conjunction with our consolidated financial
statements and the related notes thereto. Unless otherwise indicated, amounts
provided in Item 7 pertain to continuing operations only.
Impact of the COVID-19 Pandemic
As further discussed below, the COVID-19 pandemic had a modest adverse impact on
our consolidated results of operations during 2020. This impact is primarily
evident in the decline in revenues at certain of our businesses due to a
reduction in customer demand and order delays. These adverse impacts could
continue during 2021. Although certain of our businesses have been, and could
be, impacted more than others in our portfolio, we believe that our diverse set
of businesses, along with our strong balance sheet and available liquidity,
position us well to manage the potential adverse impacts of the COVID-19
pandemic. For example, the products we manufacture and services we provide fall
under the definition of "critical" or "essential" under various federal
guidelines and state/local governmental orders that otherwise restrict business
activities. These include products and services that enable the operation and
maintenance of communication networks, the electrical grid, water and wastewater
systems, and other key elements of infrastructure. Our manufacturing facilities
have not experienced material interruptions in operations. If incidents of the
COVID-19 pandemic increase, we may temporarily close facilities, if necessary,
to address employee safety matters. In terms of liquidity, we generated $131.1
of cash flows from operating activities associated with continuing operations
during 2020 and have experienced no consequential delays in collecting
outstanding amounts due from our customers. In addition, as of December 31,
2020 , we had over $350.0 of availability from cash on-hand and aggregate
borrowing capacity under our senior credit facilities and trade receivable
financing arrangement. Lastly, scheduled repayments over the next twelve months
for our long-term debt arrangements totaled only $7.2 as of December 31, 2020 .
We also have taken actions to manage near-term costs and cash flows, including
reducing discretionary expenses, and implemented actions to address potential
material sourcing challenges. We will continue to assess the actual and expected
impacts of the COVID-19 pandemic and the need for further actions.
See Notes 2 and 10 to our consolidated financial statements and "Risk Factors"
for additional considerations regarding the current and potential impacts of the
COVID-19 pandemic.
Executive Overview
Revenues for 2020 totaled $1,559.5 , compared to $1,520.9 in 2019 (and $1,512.6
in 2018). The increase in revenues in 2020, compared to 2019, was due primarily
to (i) the impact of the acquisitions of SGS and Patterson-Kelley during 2019
and ULC and Sensors & Software during 2020 and (ii) adjustments which resulted
in reductions to the cumulative revenue associated with variable consideration
on the large power projects in South Africa of $23.5 during 2019, partially
offset by a decline in organic revenue in 2020. The decline in organic revenue
was due primarily to lower sales of HVAC heating products, HVAC domestic cooling
products, and communication technologies products, partially offset by higher
sales of HVAC cooling products in the international markets and power
transformers. A portion of the organic revenue decline is attributable to a
decline in customer demand and order delays caused by the COVID-19 pandemic. The
increase in revenues in 2019, compared to 2018, was due to increases in revenues
associated with the acquisitions of Schonstedt and Cues in 2018 and Sabik, SGS,
and Patterson-Kelley during 2019, partially offset by (i) a decline in organic
revenue, (ii) the adjustments of $23.5 noted above related to our large power
projects in South Africa , and (iii) a stronger U.S. dollar during 2019. The
decline in organic revenue was attributable to lower sales related to the large
power projects in South Africa , as these projects have been in the latter stages
of completion, partially offset by increases in organic revenue for all three of
our reportable segments.
For 2020, operating income totaled $132.0 , compared to $110.0 in 2019 (and
$112.5 in 2018). The increase in operating income in 2020, compared to 2019, was
due primarily to (i) the impact of the reduction in revenues during 2019 of
$23.5 noted above associated with the large power projects in South Africa and
(ii) increases in profitability at our power transformer and cooling products
businesses. These increases in operating income were partially offset by
declines in profitability associated with lower sales of heating products and
high-margin communication technologies products. The decrease in operating
income during 2019, compared to 2018, was due primarily to increased losses
associated with the large power projects in South Africa , with such losses
impacted by the reductions in revenues/profits of $23.5 noted above, partially
offset by improved operating results across all three reportable segments.
Operating cash flows from continuing operations totaled $131.1 in 2020, compared
to $154.2 in 2019 (and $111.5 in 2018). The decrease in operating cash flows
from continuing operations, compared to 2019, was due primarily to a decline in
cash flows at certain of our project-related businesses during 2020, as cash
receipts for these project-related businesses are often subject to contractual
milestones that can impact the timing of cash flows from period-to-period. The
increase in operating cash flows from continuing operations in 2019, compared to
2018, was due primarily to higher cash flows at certain of our project-related
businesses due to the timing of contractual milestone payments and a decline
cash outflows related to the large power
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projects in South Africa , as these projects have been in the latter stages of
completion. These improvements in operating cash flows were offset partially by
a decline in net income tax refunds (net tax payments of $7.0 in 2019 versus net
tax refunds of $44.3 in 2018).
Additional details on certain matters noted above as well as significant items
impacting the financial results for 2020, 2019, and 2018 are as follows:
2020:
•In February 2020 , and as a result of the December 2019 amendment that extended
the maturity date of our senior credit facilities to December 17, 2024 , we
entered into additional interest rate swap agreements. These additional swaps:
•Have a notional amount of $248.4 ;
•Cover the period March 2021 to November 2024 ; and
•Effectively convert borrowings under our senior credit facilities to a fixed
rate of 1.061%, plus an applicable margin, during the period noted above.
•On September 2, 2020 , we completed the acquisition of ULC.
•The purchase price for ULC was $89.2 , net of cash acquired of $4.0 .
•The seller is eligible for additional cash consideration of $45.0 .
?Payments of the contingent consideration are scheduled to be made in 2021 and
2022 upon successful achievement of certain operational and financial
milestones.
?The estimated fair value of such contingent consideration is $24.3 , which is
reflected as a liability in our consolidated balance sheet at December 31, 2020 .
•ULC's revenues for the twelve months prior to the date of acquisition were
approximately $40.0 .
•The post-acquisition operating results of ULC are reflected within our
Detection and Measurement reportable segment.
•In September 2020 , Mitsubishi Heavy Industries Power-ZAF (f.k.a.
Mitsubishi-Hitachi Power Systems Africa (PTY) LTD) ("MHI"), one of the prime
contractors on the large power projects in South Africa , made a demand and
received payment of South African Rand 239.6 (or $14.3 at the time of payment)
on certain bonds that were issued by a bank in favor of MHI.
•As required under the terms of the bonds and our senior credit agreement, we
funded the South African Rand 239.6 .
•In its demand, MHI purported that DBT failed to carry out certain contractual
obligations.
•DBT denies liability and, thus, intends to seek, and believes it is fully
entitled to, reimbursement of the South African Rand 239.6 that has been paid.
•As such, we have reflected the South African Rand 239.6 (or $16.3 at December
31, 2020 ) as a non-current asset within our consolidated balance sheet as of
December 31, 2020 .
•See Note 15 to our consolidated financial statements for additional details.
•On November 11, 2020 , we completed the acquisition of Sensors & Software.
•The purchase price for Sensors & Software was $15.2 , net of cash acquired of
$0.3 .
•The seller is eligible for additional cash consideration of up to $3.9 .
?Payment of the contingent consideration is scheduled to be made in 2021 upon
successful achievement of a financial milestone during the twelve months
following the date of acquisition.
?The estimated fair value of such contingent consideration is $0.7 , which is
reflected as a liability in our consolidated balance sheet at December 31, 2020 .
•Sensors & Software's revenues for the twelve months prior to the date of
acquisition were approximately $7.0 .
•The post-acquisition operating results of Sensors & Software are reflected
within our Detection and Measurement reportable segment.
•In the fourth quarter of 2020, we completed the wind-down of Heat Transfer.
•The wind-down was initiated in 2018 after an unsuccessful attempt to sell the
business.
•The wind-down is part of a strategic shift away from the power generation
markets.
•As part of this strategic shift, we sold our dry cooling and Balcke Dürr
businesses.
•As a result of completing the wind-down plan, we are now reporting Heat
Transfer as a discontinued operation for all periods presented.
•Asbestos Product Liability Matters:
•During 2020, we recorded charges of $21.3 related to asbestos product liability
matters.
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•Of such charges, $19.2 were reflected in "Income from continuing operations
before income taxes" and the remainder in "Gain (loss) on disposition of
discontinued operations, net of tax."
•Payments for asbestos product liability matters, net of insurance recoveries,
totaled $19.3 in 2020.
•Actuarial Losses on Pension and Postretirement Plans:
•We recorded net actuarial losses of $6.8 in the fourth quarter of 2020 in
connection with the annual remeasurement of our pension and postretirement
plans, with such losses resulting primarily from declines in discount rates on
our unfunded pension and postretirement plans.
•See Notes 1 and 11 to our consolidated financial statements for additional
details.
•Changes in the Estimated Fair Value of an Equity Security:
•During 2020, we:
?Recorded gains of $8.6 within "Other income (expense), net" related to
increases in the estimated fair value of an equity security that we hold; and
?Received distributions of $3.5 , which are included in "Cash flows from
operating activities."
•See Note 17 to our consolidated financial statements for additional details.
2019:
•On February 1, 2019 , we completed the acquisition of Sabik.
•The purchase price for Sabik was $77.2 , net of cash acquired of $0.6 .
•Sabik's revenues for the twelve months prior to the date of acquisition were
approximately $28.0 .
•The post-acquisition operating results of Sabik are reflected within our
Detection and Measurement reportable segment.
•Adjustments to Revenues and Profits on the Large Power Projects in South
Africa :
•During the first quarter of 2019, in consideration of recent claims received
from the prime contractors on the projects, and in accordance with ASC 606, we
analyzed the risk of a significant revenue reversal associated with the amount
of variable consideration recorded for the projects. Based on such analysis, we
reduced the amount of cumulative revenue associated with the variable
consideration on the projects by $17.5 .
•On June 28, 2019 , DBT reached an agreement with Alstom/GE , one of the prime
contractors on the projects, to, among other things, settle all material
outstanding claims between the parties (other than certain pass-through claims
related to third-parties). In connection with the agreement, we reduced the
revenues associated with the projects by $6.0 during the second quarter of 2019.
•See Notes 5 and 15 to our consolidated financial statements for additional
details.
•On July 3, 2019 , we completed the acquisition of SGS.
•The purchase price for SGS was $11.5 , including contingent consideration of
$1.5 that was paid during 2020.
•SGS's revenues for the twelve months prior to the date of acquisition were
approximately $12.0 .
•The post-acquisition operating results of SGS are reflected within our HVAC
reportable segment.
•On November 12, 2019 , we completed the acquisition of Patterson-Kelley.
•The purchase price for Patterson-Kelley was $59.9 .
•Patterson-Kelley's revenues for the twelve months prior to the date of
acquisition were approximately $35.0 .
•The post-acquisition operating results of Patterson-Kelley are reflected within
our HVAC reportable segment.
•On December 17, 2019 , we amended our senior credit agreement.
•In connection with the amendment, we recorded a charge of $0.6 associated with
the write-off of a portion of deferred financing costs associated with the
senior credit agreement.
•See Note 13 to our consolidated financial statements for additional details.
•Asbestos Product Liability Matters:
•During 2019, we recorded charges of $10.1 related to asbestos product liability
matters.
•Of such charges, $6.3 were reflected in "Income from continuing operations
before income taxes" and the remainder in "Gain (loss) on disposition of
discontinued operations, net of tax."
•Payments for asbestos product liability matters, net of insurance recoveries,
totaled $13.1 in 2019.
•Actuarial Losses on Pension and Postretirement Plans:
•We recorded net actuarial losses of $10.0 in the fourth quarter of 2019 in
connection with the annual remeasurement of our pension and postretirement
plans.
•See Notes 1 and 11 to our consolidated financial statements for additional
details, with such losses resulting primarily from declines in discount rates on
our unfunded pension and postretirement plans.
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•Changes in the Estimated Fair Value of an Equity Security:
•During 2019, we:
?Recorded gains of $7.9 within "Other income (expense), net" related to
increases in the estimated fair value of an equity security that we hold; and
?Received distributions of $2.6 , which are included in "Cash flows from
operating activities."
•See Note 17 to our consolidated financial statements for additions details.
2018:
•OnMarch 1, 2018 , we completed the acquisition of Schonstedt. •The purchase price for Schonstedt was$16.4 , net of cash acquired of$0.3 . •Schonstedt's revenues for the twelve months prior to the date of acquisition were approximately$9.0 . •The post-acquisition operating results of Schonstedt are reflected within our Detection and Measurement reportable segment. •OnJune 7, 2018 , we completed the acquisition of Cues. •The purchase price for Cues was$164.4 , net of cash acquired of$20.6 . •Cues' revenues for the twelve months prior to the date of acquisition were approximately$84.0 . •The post-acquisition operating results of Cues are reflected within our Detection and Measurement reportable segment. •See Notes 1 and 4 to our consolidated financial statements for additional details. •Asbestos Product Liability Matters: •During 2018, we recorded charges of$4.8 related to asbestos product liability matters. •Of such charges,$4.4 were reflected in "Income from continuing operations before income taxes" and the remainder in "Gain (loss) on disposition of discontinued operations, net of tax." •Payments for asbestos product liability matters, net of insurance recoveries, totaled$9.7 in 2018. •Actuarial Losses on Pension and Postretirement Plans: •We recorded net actuarial losses of$6.6 in the fourth quarter of 2018 in connection with the annual remeasurement of our pension and postretirement plans, with such losses resulting primarily from negative returns on assets of our foreign pension plans. •See Notes 1 and 11 to our consolidated financial statements for additional details. Results of Continuing Operations Cyclicality of End Markets, Seasonality and Competition-The financial results of our businesses closely follow changes in the industries in which they operate and end markets in which they serve. In addition, certain of our businesses have seasonal fluctuations. For example, our heating products businesses tend to be stronger in the third and fourth quarters, as customer buying habits are driven largely by seasonal weather patterns. In aggregate, our businesses generally tend to be stronger in the second half of the year. Although our businesses operate in highly competitive markets, our competitive position cannot be determined accurately in the aggregate or by segment since none of our competitors offer all the same product lines or serve all the same markets as we do. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors. Non-GAAP Measures - Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations, acquisitions/divestitures, and the impact of the reduction to revenues on the large power projects inSouth Africa during 2019 and 2018 of$23.5 and$2.7 , respectively. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as, when read in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool they can use to evaluate our management of assets held from period to period. In addition, organic revenue growth (decline) is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted inthe United States ("GAAP"), should not be 24 -------------------------------------------------------------------------------- considered a substitute for net revenue growth (decline) as determined in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. The following table provides selected financial information for the years endedDecember 31, 2020 , 2019, and 2018, including the reconciliation of organic revenue decline to net revenue increase: Year ended December 31, 2020 vs 2019 vs 2020 2019 2018 2019% 2018% Revenues$ 1,559.5 $ 1,520.9 $ 1,512.6 2.5 % 0.5 % Gross profit 478.9 442.7 410.0 8.2 8.0 % of revenues 30.7 % 29.1 % 27.1 % Selling, general and administrative expense 320.0 317.6 289.1 0.8 9.9 % of revenues 20.5 % 20.9 % 19.1 % Intangible amortization 14.0 8.9 4.1 57.3 117.1 Impairment of intangible assets 0.7 - - * * Special charges, net 3.2 4.4 3.7 (27.3) 18.9 Other operating expenses, net 9.0 1.8 0.6 * * Other income (expense), net 2.7 (5.2) (7.6) (151.9) (31.6) Interest expense, net (18.2) (19.2) (20.0) (5.2) (4.0) Loss on amendment/refinancing of senior credit agreement - (0.6) (0.4) (100.0) 50.0 Income from continuing operations before income taxes 116.5 85.0 84.5 37.1 0.6 Income tax provision (15.8) (13.9) (2.6) * * Income from continuing operations 100.7 71.1 81.9 41.6 (13.2) Components of consolidated revenue increase: Organic (3.1) (2.0) Foreign currency 0.2 (0.9) South Africa revenue adjustments 1.6 (1.4) Acquisitions 3.8 4.8 Net revenue increase 2.5 0.5
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* Not meaningful for comparison purposes.
Revenues - For 2020, the increase in revenues, compared to 2019, was due primarily to (i) the impact of the acquisitions of SGS and Patterson-Kelley during 2019 and ULC and Sensors & Software during 2020 and (ii) adjustments which resulted in reductions to the cumulative revenue associated with variable consideration on the large power projects inSouth Africa of$23.5 during 2019, partially offset by a decline in organic revenue in 2020. The decline in organic revenue was due primarily to lower sales of HVAC heating products, HVAC domestic cooling products, and communication technologies products, partially offset by higher sales of HVAC cooling products in the international markets and power transformers. A portion of the organic revenue decline is attributable to a decline in customer demand and order delays caused by the COVID-19 pandemic. See "Results of Reportable Segments and Other Operating Segment" for additional details. For 2019, the increase in revenues, compared to 2018, was due primarily to increases in revenues associated with the acquisitions of Schonstedt and Cues in 2018 and Sabik, SGS, and Patterson-Kelley in 2019, partially offset by (i) a decline in organic revenue, (ii) adjustments during the first and second quarters of 2019 to revenues on the large power projects inSouth Africa of$17.5 and$6.0 , respectively, and (iii) a strongerU.S. dollar during 2019. The decline in organic revenue was attributable to lower sales related to the large power projects inSouth Africa , as these projects have been in the latter stages of completion, partially offset by increases in organic revenue for all three of our reportable segments. See "Results of Reportable Segments and Other Operating Segment" for additional details. Gross Profit - For 2020, the increase in gross profit and gross profit as a percentage of revenues, compared to 2019, was due primarily to (i) the impact of the reduction in revenues during 2019 of$23.5 noted above associated with the large power projects inSouth Africa and (ii) increases in profitability at our power transformer and cooling products businesses. These increases in gross profit and gross profit as a percentage of revenues were offset partially by declines in gross profit within our Detection and Measurement reportable segment resulting from lower sales of high-margin communication technologies products. 25 -------------------------------------------------------------------------------- For 2019, the increase in gross profit and gross profit as a percentage of revenues, compared to 2018, was due primarily to (i) a more profitable revenue mix and (ii) operational improvements within the cooling businesses of our HVAC reportable segment and power transformer business of our Engineered Solutions reportable segment during 2019. The more profitable revenue mix resulted from increases in revenues associated with acquired businesses that generally have higher gross margins (i.e., Cues and Sabik) and a decrease in revenue at DBT, a business that historically generates lower gross margins. In addition, for 2019, gross profit and gross profit as a percentage of revenues were impacted negatively by the aggregate reduction in revenues noted above of$23.5 associated with the large power projects inSouth Africa . Selling, General and Administrative ("SG&A") Expense - For 2020, the increase in SG&A expense, compared to 2019, was due primarily to SG&A associated with ULC since its date of acquisition in 2020 and the impact of a full year's SG&A associated with the 2019 acquisitions of Sabik, SGS, and Patterson-Kelley. These increases in SG&A were partially offset by lower incentive compensation and lower travel expense during 2020, with the lower travel expense due to the impact of the COVID-19 pandemic. For 2019, the increase in SG&A, compared to 2018, was due primarily to SG&A associated with Sabik, SGS, and Patterson-Kelley since their respective dates of acquisition in 2019 and the impact of a full year's SG&A associated with the 2018 acquisitions of Schonstedt and Cues. Intangible Amortization - For 2020, the increase in intangible amortization, compared to 2019, was due primarily to the amortization expense associated with ULC since its date of acquisition in 2020 and the impact of a full year's amortization expense on the 2019 acquisitions of Sabik, SGS, and Patterson-Kelley. For 2019, the increase in intangible amortization, compared to 2018, was due primarily to the amortization expense associated with Sabik, SGS, and Patterson-Kelley since their respective dates of acquisition in 2019 and the impact of a full year's amortization expense on the 2018 acquisitions of Schonstedt and Cues. Impairment of Intangible Assets - In connection with the annual impairment testing of our trademarks during the fourth quarter of 2020, we recorded impairment charges related to certain of these trademarks. Special Charges, Net - Special charges, net, related primarily to restructuring initiatives to consolidate manufacturing, distribution, sales and administrative facilities, reduce workforce, and rationalize certain product lines. See Note 8 to our consolidated financial statements for the details of actions taken in 2020, 2019, and 2018. The components of special charges, net, are as follows: Year ended December 31, 2020 2019 2018 Employee termination costs$ 1.8 $ 3.1 $ 3.7 Facility consolidation costs - 0.5 - Other cash costs, net 1.0 - - Non-cash asset write-downs 0.4 0.8 - Total$ 3.2 $ 4.4 $ 3.7 Other Operating Expenses, Net - During 2020, we recorded charges of$9.4 for asbestos product liability matters related to products that we no longer manufacture, net of a gain of$0.4 related to revisions to estimates of certain liabilities retained in connection with the 2016 sale of the dry cooling business. The charges for the asbestos product liability matters were due to a change in assumptions for estimating the related liabilities as a result of recent claim trends. For 2019 and 2018, we recorded charges associated with revisions to estimates of certain liabilities retained in connection with the 2016 sale of the dry cooling business. Other Income (Expense), Net - Other income, net, for 2020 was composed primarily of a gain of$8.6 related to changes in the estimated fair value of an equity security we hold and income derived from company-owned life insurance policies of$5.0 , partially offset by charges of$7.6 associated with asbestos product liability matters and pension and postretirement expense of$3.0 . Other expense, net, for 2019 was composed primarily of pension and postretirement expense of$9.9 , charges of$4.5 associated with asbestos product liability matters, and foreign currency transaction losses of$1.5 , partially offset by a gain of 26 --------------------------------------------------------------------------------
Other expense, net, for 2018 was composed primarily of pension and postretirement expense of$3.9 , charges of$5.0 associated with legacy environmental matters, and charges of$2.0 associated with asbestos product liability matters, partially offset by income of$1.5 related to the reduction of the parent company guarantees and bank surety bonds liability and the amortization of related indemnification assets that were outstanding in connection with the Balcke Dürr sale, income from company-owned life insurance policies of$0.9 , and equity earnings in joint ventures of$0.6 . Interest Expense, Net - Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during 2020, compared to 2019, was the result of lower average interest rates during 2020, partially offset by the impact of higher average debt balances during 2020.
The decrease in interest expense, net, during 2019, compared to 2018, was the result of lower average debt balances during 2019.
Loss on Amendment/Refinancing of Senior Credit Agreement - During the fourth quarter of 2019, we amended our senior credit agreement. In connection with the amendment, we recorded a charge of$0.6 , which consisted of the write-off of a portion of the unamortized deferred financing costs related to our senior credit facilities. During the fourth quarter of 2018, we elected to reduce the issuance capacity of our foreign credit facilities under our senior credit agreement by$50.0 . In connection with such reduction, we recorded a charge of$0.4 associated with the write-off of the unamortized deferred financing costs related to the$50.0 of previously available issuance capacity. Income Taxes - During 2020, we recorded an income tax provision of$15.8 on$116.5 of pre-tax income from continuing operations, resulting in an effective tax rate of 13.6%. The most significant items impacting the effective tax rate for 2020 were (i)$4.2 of tax benefits related to various audit settlements, statute expirations, and other adjustments to liabilities for uncertain tax positions and (ii)$2.9 of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the year. During 2019, we recorded an income tax provision of$13.9 on$85.0 of pre-tax income from continuing operations, resulting in an effective tax rate of 16.4%. The most significant items impacting the effective tax rate for 2019 were (i)$1.9 of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the year, (ii) a$1.9 tax benefit associated with an adjustment to the taxation of foreign earnings, (iii)$1.3 of tax benefits related to ourU.S. tax credits and incentives, and (iv)$1.2 of tax benefits related to various audit settlements, statute expirations, and other adjustments to liabilities for uncertain tax positions, partially offset by$3.8 of tax expense related to various valuation allowance adjustments, primarily due to foreign losses generated during the year for which no foreign tax benefit was recognized as future realization of any such tax benefit is considered unlikely. During 2018, we recorded an income tax provision of$2.6 on$84.5 of pre-tax income from continuing operations, resulting in an effective tax rate of 3.1%%. The most significant items impacting the effective tax rate for 2018 were (i) the utilization of$33.0 of prior years' losses generated in foreign jurisdictions in which no benefit was previously recognized, (ii)$7.0 of tax benefits related to various audit settlements, statute expirations, and other adjustments to liabilities for uncertain tax positions, and (iii)$2.2 of excess tax benefits resulting from stock-based compensation awards that vested during the year. 27
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Results of Discontinued Operations
Wind-Down of the Heat Transfer Business
Following the Spin-Off, we initiated a strategic shift away from the power
generation markets. As part of this strategic shift, we sold the dry cooling and
Balcke Dürr businesses in 2016 and commenced efforts to sell the Heat Transfer
business. After an unsuccessful attempt to sell the Heat Transfer business, we
implemented a wind-down plan for the business in 2018. In connection with the
wind-down of Heat Transfer, we recorded charges of $3.5 in 2018,
with $0.9 related to the write-down of inventory, $0.6 related to the impairment
of machinery and equipment, and $2.0 to severance costs. In addition, we sold
certain intangible assets of the business in 2018 for net cash proceeds of $4.8 ,
which resulted in a gain of less than $0.1 . During 2019, we completed the sale
of Heat Transfer's manufacturing facility for cash proceeds of $5.5 , which
resulted in a gain of $0.3 . During the fourth quarter of 2020, we completed the
wind-down plan, which included providing all products and services on the
business's remaining contracts with customers. As a result, we are now reporting
Heat Transfer as a discontinued operation for all periods presented.
Sale of Balcke Dürr Business
During 2018, we reached a settlement with the buyer of Balcke Dürr on the amount
of cash and working capital at the closing date, as well as on various other
matters, for a net payment from the buyer in the amount of Euro 3.0 (or $3.6 ).
The settlement resulted in a gain, net of tax, of $3.8 , which was recorded to
"Gain (loss) on disposition of discontinued operations, net of tax."
Other Discontinued Operations Activity
In addition to Heat Transfer and Balcke Dürr, we recognized net losses of $3.7 ,
$4.4 and $0.8 during 2020, 2019 and 2018, respectively, resulting from
adjustments to gains/losses on dispositions of other businesses discontinued
prior to 2018.
Changes in estimates associated with liabilities retained in connection with a
business divestiture (e.g., income taxes) may occur. As a result, it is possible
that the resulting gains/losses on these and other previous divestitures may be
materially adjusted in subsequent periods.
For the years ended December 31, 2020 , 2019 and 2018, results of operations from
our businesses reported as discontinued operations were as follows:
Year ended December 31,
2020 2019 2018
Balcke Dürr
Income from discontinued operations $ - $ - $ 6.3
Income tax provision - - (2.5)
Income from discontinued operations, net - - 3.8
Heat Transfer
Income (loss) from discontinued operations 0.3 (1.8) (4.9)
Income tax (provision) benefit (0.1)
0.4 1.2
Income (loss) from discontinued operations, net 0.2
(1.4) (3.7)
All other
Loss from discontinued operations (4.8)
(4.0) (1.2)
Income tax (provision) benefit 1.1
(0.4) 0.4
Loss from discontinued operations, net (3.7)
(4.4) (0.8)
Total
Income (loss) from discontinued operations (4.5)
(5.8) 0.2
Income tax (provision) benefit 1.0
- (0.9)
Loss from discontinued operations, net$ (3.5) $ (5.8) $ (0.7) 28
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Results of Reportable Segments and Other Operating Segment
The following information should be read in conjunction with our consolidated
financial statements and related notes. These results exclude the operating
results of discontinued operations for all periods presented. See Note 7 to our
consolidated financial statements for a description of each of our reportable
segments and our other operating segment.
Non-GAAP Measures - Throughout the following discussion of reportable and other
operating segments, we use "organic revenue" growth (decline) to facilitate
explanation of the operating performance of our segments. Organic revenue growth
(decline) is a non-GAAP financial measure, and is not a substitute for net
revenue growth (decline). Refer to the explanation of this measure and purpose
of use by management under "Results of Continuing Operations - Non-GAAP
Measures."
HVAC Reportable Segment
Year Ended December 31, 2020 vs. 2019 vs.
2020 2019 2018 2019% 2018%
Revenues $ 590.7 $ 593.2 $ 582.1 (0.4) 1.9
Income 93.4 95.4 90.0 (2.1) 6.0
% of revenues 15.8 % 16.1 % 15.5 %
Components of revenue increase
(decline):
Organic (6.9) 0.5
Foreign currency - (0.4)
Acquisitions 6.5 1.8
Net revenue increase (decline) (0.4) 1.9
Revenues - For 2020, the decrease in revenues, compared to 2019, was due to a
decline in organic revenue, partially offset by the impact of the SGS and
Patterson-Kelley acquisitions in 2019. The decline in organic revenue was due to
a decrease in sales of heating products and domestic cooling products. The
decline in the sales of heating products was due primarily to (i) warmer than
normal weather during the first quarter of 2020 and (ii) the negative impact of
the COVID-19 pandemic on customer demand. The demand for domestic cooling
products was also negatively impacted by the COVID-19 pandemic. These declines
in organic revenue were offset partially by higher sales of cooling products in
the international markets, with such sales favorably impacted by a number of
large orders that were secured prior to the COVID-19 pandemic.
For 2019, the increase in revenues, compared to 2018, was due to the impact of
the SGS and Patterson-Kelley acquisitions and, to a lesser extent, an increase
in organic revenue, partially offset by the impact of a stronger U.S. dollar in
2019. The increase in organic revenue was due primarily to higher sales of
boiler products, associated primarily with price increases, as well as cooling
products in the Americas , partially offset by lower sales of cooling products in
the Asia Pacific region.
Income - For 2020, the decrease in income and margin, compared to 2019, was due
primarily to the decline in sales of heating products noted above. This decrease
in income and margin was partially offset by the impact of (i) improved
operational execution and a favorable sales mix within the segment's domestic
cooling products business and (ii) higher sales of cooling products in the
international markets.
For 2019, the increase in income and margin, compared to 2018, was due primarily
to a more profitable sales mix and operational improvements within the segment's
cooling products businesses.
Backlog - The segment had backlog of $82.8 and $77.8 as of December 31, 2020 and
2019, respectively. Approximately 97% of the segment's backlog as of
December 31, 2020 is expected to be recognized as revenue during 2021.
29
--------------------------------------------------------------------------------Detection and Measurement Reportable Segment
Year Ended December 31, 2020 vs. 2019 vs.
2020 2019 2018 2019% 2018%
Revenues $ 387.3 $ 384.9 $ 320.9 0.6 19.9
Income 69.1 81.7 72.4 (15.4) 12.8
% of revenues 17.8 % 21.2 % 22.6 %
Components of revenue increase:
Organic (4.4) 1.4
Foreign currency 0.1 (0.7)
Acquisitions 4.9 19.2
Net revenue increase 0.6 19.9
Revenues - For 2020, the increase in revenues, compared to 2019, was due
primarily to the impact of the ULC acquisition and, to a lesser extent, the
Sensors & Software acquisition, partially offset by a decline in organic
revenue. The decline in organic revenue was primarily the result of lower sales
of communication technologies products, with a portion of the decline due to
order delays caused by the COVID-19 pandemic.
For 2019, the increase in revenues, compared to 2018, was due to (i) the impact
of the Schonstedt and Cues acquisitions in 2018 and the Sabik acquisition in
2019 and, to a lesser extent, (ii) an increase in organic revenue. The increase
in organic revenue was due primarily to additional sales by the segment's
communication technologies businesses, partially offset by a decline in sales by
the segment's bus fare collection systems business.
Income - For 2020, the decrease in income and margin, compared to 2019, was due primarily to the decline in sales of high-margin communication technologies products noted above.
For 2019, the increase in income, compared to 2018, was due to the impact of the acquisitions noted above and the incremental profits resulting from additional revenues within the segment's communication technologies businesses. The decrease in margin, compared to 2018, was due primarily to the incremental amortization expense associated with the intangible assets acquired in the Cues and Sabik transactions. Backlog - The segment had backlog of$89.3 (including$10.6 related to ULC and Sensors & Software) and$76.4 as ofDecember 31, 2020 and 2019, respectively. Approximately 81% of the segment's backlog as ofDecember 31, 2020 is expected to be recognized as revenue during 2021. Engineered Solutions Reportable Segment Year Ended December 31, 2020 vs. 2019 vs. 2020 2019 2018 2019% 2018% Revenues$ 577.5 $ 548.9 $ 537.0 5.2 2.2 Income 60.5 43.0 35.0 40.7 22.9 % of revenues 10.5 % 7.8 % 6.5 % Components of revenue increase: Organic 5.3 2.2 Foreign currency (0.1) - Net revenue increase 5.2 2.2
Revenues - For 2020, the increase in revenues, compared to 2019, was due primarily to an increase in organic revenue within the segment's power transformer business associated with (i) a more favorable sales mix and (ii) improved pricing discipline.
For 2019, the increase in revenues, compared to 2018, was due to an organic revenue increase within the segment's power transformer business, partially offset by a decrease in organic revenue for the segment's process cooling business. Revenue for the segment's process cooling business continued to be impacted by a shift in its sales model, as the business is focused more on high-margin components and services and less on lower-margin large projects.
Income - For 2020, the increase in income and margin, compared to 2019, was due
primarily to the increase in revenues noted above resulting from the favorable
sales mix and improved pricing discipline at the segment's power transformer
business.
30
--------------------------------------------------------------------------------For 2019, the increase in income and margin, compared to 2018, was due primarily to the increase in revenue noted above.
Backlog - The segment had backlog of
Other
Year Ended December 31, 2020 vs. 2019 vs.
2020 2019 2018 2019% 2018%
Revenues $ 4.0 $ (6.1) $ 72.6 * *
Loss (19.3) (43.6) (16.0) * *
% of revenues * * *
* *
___________________________________________________________________
* Not meaningful for comparison purposes.
Revenues - For 2020, the increase in revenues, compared to 2019, was due to adjustments which resulted in reductions to the cumulative revenue associated with variable consideration on the large power projects inSouth Africa of$23.5 during 2019. The year-over-year impact of these adjustments was offset partially by a decline in organic revenue resulting from lower sales on the large power projects inSouth Africa , as these projects have been in the latter stages of completion. For 2019, the decrease in revenues, compared to 2018, was due primarily to a decline in organic revenue. The decline in organic revenue was the result of lower sales related to the large power projects inSouth Africa , as these projects have been in the latter stages of completion. In addition, revenues in 2019 were impacted negatively by an adjustment during the first quarter of 2019 to the amount of cumulative revenue associated with the variable consideration on the large power projects inSouth Africa of$17.5 and an adjustment during the second quarter of 2019 of$6.0 to revenues on the large power projects inSouth Africa associated with a settlement with Alstom/GE .
Loss - For 2020, the loss decreased, compared to 2019, as operating results for
2019 included the aggregate reduction in revenues/profit noted above of
For 2019, the increase in the loss, compared to 2018, was due primarily to the aggregate adjustments noted above to the large power projects inSouth Africa . Backlog - The DBT operating segment had aggregate backlog of$3.7 and$7.4 as ofDecember 31, 2020 and 2019, respectively. Corporate Expense and Other Expense Year Ended December 31, 2020 vs. 2019 vs. 2020 2019 2018 2019% 2018% Total consolidated revenues$ 1,559.5 $ 1,520.9 $ 1,512.6 2.5 0.5 Corporate expense 44.8 46.7 49.1 (4.1) (4.9) % of revenues 2.9 % 3.1 % 3.2 % Long-term incentive compensation expense 14.0 13.6 15.5 2.9 (12.3) Corporate Expense - Corporate expense generally relates to the cost of ourCharlotte, NC corporate headquarters. The decrease in corporate expense during 2020, compared to 2019, was due primarily to lower incentive compensation and travel expense during 2020, with the decline in travel expense resulting from the impact of the COVID-19 pandemic. The decrease in corporate expense in 2019, compared to 2018, was due primarily to a decline in acquisition-related costs and other professional fees, partially offset by higher incentive compensation expense. Long-Term Incentive Compensation Expense - The increase in long-term incentive compensation in 2020, compared to 2019, was due primarily to the accelerated expense in 2020 on certain awards. The decrease in long-term incentive compensation in 2019, compared to 2018, was due primarily to certain one-time awards, which were issued in 2015 and became fully vested in the second half of 2018. 31 --------------------------------------------------------------------------------
See Note 16 to our consolidated financial statements for further details on our long-term incentive compensation plans.
Liquidity and Financial Condition
Listed below are the cash flows from (used in) operating, investing and
financing activities, and discontinued operations, as well as the net change in
cash and equivalents for the years ended
Year Ended December 31,
2020 2019 2018
Continuing operations:
Cash flows from operating activities $ 131.1 $ 154.2 $ 111.5
Cash flows used in investing activities (126.1) (159.2) (189.0)
Cash flows from (used in) financing activities 15.9 (11.1) 16.8
Cash flows from (used in) discontinued operations (4.8) (0.1) 7.5
Change in cash and equivalents due to changes in foreign currency exchange rates
(2.5) 2.1 (2.3)
Net change in cash and equivalents $ 13.6 $ (14.1) $ (55.5)
2020 Compared to 2019
Operating Activities - The decrease in cash flows from operating activities,
compared to 2019, was due primarily to a decline in cash flows at certain of our
project-related businesses during 2020, as cash receipts for these
project-related business are often subject to contractual milestones that can
impact the timing of cash flows from period-to-period.
Investing Activities - Cash flows used in investing activities for 2020 were
comprised primarily of cash utilized in the acquisitions of ULC and Sensors &
Software of $104.4 and capital expenditures of $21.5 . Cash flows used in
investing activities in 2019 were comprised primarily of cash utilized in the
acquisitions of Sabik, SGS, and Patterson-Kelley of $147.1 and capital
expenditures of $17.8 , partially offset by proceeds from company-owned life
insurance policies of $5.9 .
Financing Activities - Cash flows from financing activities during 2020 were
comprised primarily of net borrowings on our various debt instruments of $15.6 .
Cash flows used in financing activities during 2019 were comprised primarily of
a payment of $15.6 to settle a put option held by a minority shareholder of DBT
(see Note 15 to our consolidated financial statements for additional details),
partially offset by net borrowings on various debt instruments of $10.0 .
Discontinued Operations - Cash flows used in discontinued operations for 2020
related primarily to disbursements for liabilities retained in connection with
dispositions, net of cash flows from operations generated by Heat Transfer. Cash
flows used in discontinued operations for 2019 related primarily to
disbursements for liabilities retained in connection with dispositions and net
cash flows used in operations by Heat Transfer, partially offset by proceeds of
$5.5 received in connection with the sale of Heat Transfer's manufacturing
facility.
Change in Cash and Equivalents Due to Changes in Foreign Currency Exchange Rates
- Changes in foreign currency exchange rates did not have a significant impact
on our cash and equivalents during 2020 and 2019.
2019 Compared to 2018
Operating Activities - The increase in cash flows from operating activities,
compared to 2018, was due primarily to higher cash flows at certain of our
project-related businesses due to the timing of contractual milestone payments
and a decline in cash outflows related to our large power projects in South
Africa , as these projects have been in the latter stages of completion. These
improvements in operating cash flows were offset partially by a decline in net
income tax refunds (net tax payments of $7.0 in 2019 versus net tax refunds of
$44.3 in 2018).
Investing Activities - Cash flows used in investing activities for 2019 were
comprised primarily of cash utilized in the acquisitions of Sabik, SGS, and
Patterson-Kelley of $147.1 and capital expenditures of $17.8 , partially offset
by proceeds from company-owned life insurance policies of $5.9 . Cash flows used
in investing activities for 2018 were comprised primarily of cash utilized in
the acquisitions of Schonstedt and Cues of $180.8 and capital expenditures of
$12.4 , partially offset by cash proceeds of $4.6 received in connection with the
subsequent sale of marketable securities acquired in connection with the Cues
transaction.
32
--------------------------------------------------------------------------------
Financing Activities - Cash flows used in financing activities during 2019 were
comprised primarily of a payment of $15.6 to settle a put option held by the
minority shareholder of DBT (see Note 15 to our consolidated financial
statements for additional details), partially offset by net borrowings on our
various debt instruments of $10.0 . Cash flows from financing activities in 2018
related primarily to net borrowings in connection with the Cues acquisition.
Discontinued Operations - Cash flows used in discontinued operations for 2019
related primarily to disbursements for liabilities retained in connection with
dispositions and net cash flows used in operations by Heat Transfer, partially
offset by proceeds of $5.5 received in connection with the sale of Heat
Transfer's manufacturing facility. Cash flows from discontinued operations for
2018 related primarily to proceeds of $3.6 received in connection with a
settlement reached with the buyer of Balcke Dürr, proceeds of $4.8 received in
connection with the sale of certain intangible assets of our Heat Transfer
business, and net cash flows from operations generated by Heat Transfer,
partially offset by disbursements for liabilities retained in connection with
dispositions.
Change in Cash and Equivalents Due to Changes in Foreign Currency Exchange Rates
- Changes in foreign currency exchange rates did not have a significant impact
on our cash and equivalents during 2019 and 2018.
Borrowings
The following summarizes our debt activity (both current and non-current) for
the year ended December 31, 2020 :
December 31, December 31,
2019 Borrowings Repayments Other (5) 2020
Revolving loans (1) $ 140.0 $ 197.6 $ (207.8) $ - $ 129.8
Term loan (2) 248.2 - - 0.4 248.6
Trade receivables financing arrangement
(3) - 134.4 (106.4) - 28.0
Other indebtedness (4) 5.3 - (2.2) 2.9 6.0
Total debt 393.5 $ 332.0 $ (316.4) $ 3.3 412.4
Less: short-term debt 142.6 101.2
Less: current maturities of long-term
debt 1.0 7.2
Total long-term debt $ 249.9 $ 304.0 _____________________________________________________________
(1)While not due for repayment untilDecember 2024 under the terms of our senior credit agreement, we have classified within current liabilities the portion of the outstanding balance that we believe will be repaid over the next year, with such amount based on an estimate of cash that is expected to be generated over such period. (2)The term loan is repayable in quarterly installments beginning in the first quarter of 2021, with the quarterly installments equal to 0.625% of the initial term loan balance of$250.0 during 2021, 1.25% in each of the four quarters of 2022 and 2023, and 1.25% during the first three quarters of 2024. The remaining balance is payable in full onDecember 17, 2024 . Balances are net of unamortized debt issuance costs of$1.4 and$1.8 atDecember 31, 2020 andDecember 31, 2019 , respectively. (3)Under this arrangement, we can borrow, on a continuous basis, up to$50.0 , as available. AtDecember 31, 2020 , we had$11.5 of available borrowing capacity under this facility. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses. (4)Primarily includes balances under a purchase card program of$1.7 and$2.6 and finance lease obligations of$2.6 and$2.7 atDecember 31, 2020 and 2019, respectively. The purchase card program allows for payment beyond the normal payment terms for goods and services acquired under the program. As this arrangement extends the payment of these purchases beyond their normal payment terms through third-party lending institutions, we have classified these amounts as short-term debt. (5)"Other" primarily includes debt assumed, foreign currency translation on any debt instruments denominated in currencies other than theU.S. dollar, and the impact of amortization of debt issuance costs associated with the term loan. Maturities of long-term debt payable during each of the five years subsequent toDecember 31, 2020 are$7.2 ,$13.3 ,$13.0 ,$279.0 , and$0.1 , respectively. 33 -------------------------------------------------------------------------------- Senior Credit Facilities OnDecember 17, 2019 , we amended our senior credit agreement (the "Credit Agreement") to, among other things, extend the term of each facility under the Credit Agreement (with the aggregate of each facility comprising the "Senior Credit Facilities") and provide for committed senior secured financing with an aggregate amount of$800.0 , consisting of the following (each with a final maturity ofDecember 17, 2024 ):
•A new term loan facility in the aggregate principal amount of
•A domestic revolving credit facility, available for loans and letters of
credit, in an aggregate principal amount of
•A global revolving credit facility, available for loans in USD, Euros, British Pounds Sterling, and other currencies, in the aggregate principal amount up to the equivalent of$150.0 ; •A participating foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate principal amount up to the equivalent of$55.0 ; and •A bilateral foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate principal amount up to the equivalent of$45.0 . The Credit Agreement also: •Requires that we maintain the Consolidated Leverage Ratio (defined in the Credit Agreement) as of the last day of each fiscal quarter to not more than 3.75 to 1.00 (or up to 4.25 to 1.00 for the four fiscal quarters after certain permitted acquisitions);
•Requires that we maintain a Consolidated Interest Coverage Ratio as of the last day of each fiscal quarter to not less than 3.00 to 1.00; and
•Establishes per annum fees charged and applies interest rate margins to
Eurodollar and alternate base rate loans, in each case based on the Consolidated
Leverage Ratio, as follows:
Domestic Global Foreign Foreign
Consolidated Revolving Revolving Letter of Credit Credit LIBOR
Leverage Commitment Commitment Credit Commitment Instrument Rate ABR
Ratio Fee Fee Fee Fee Fee Loans Loans
Greater than or equal to
3.50 to 1.0 0.350 % 0.350 % 2.000 % 0.350 % 1.250 % 2.000 % 1.000 %
Between 2.50 to 1.0 and
3.50 to 1.0 0.300 % 0.300 % 1.750 % 0.300 % 1.000 % 1.750 % 0.750 %
Between 1.75 to 1.0 and
2.50 to 1.0 0.275 % 0.275 % 1.500 % 0.275 % 0.875 % 1.500 % 0.500 %
Less than 1.75 to 1.0 0.250 % 0.250 % 1.375 % 0.250 % 0.800 % 1.375 % 0.375 %
The interest rates applicable to loans under the Credit Agreement are, at our
option, equal to either (i) an alternate base rate (the highest of (a) the
federal funds effective rate plus 0.5%, (b) the prime rate of Bank of America,
N.A ., and (c) the one-month LIBOR rate plus 1.0%) or (ii) a reserve-adjusted
LIBOR rate for dollars (Eurodollars) plus, in each case, an applicable margin
percentage as previously discussed, which varies based on our Consolidated
Leverage Ratio (defined in the Credit Agreement generally as the ratio of
consolidated total debt (excluding the face amount of undrawn letters of credit,
bank undertakings and analogous instruments and net of cash and cash
equivalents) at the date of determination to consolidated adjusted EBITDA for
the four fiscal quarters ended most recently before such date). We may elect
interest periods of one, two, three or six months (and, if consented to by all
relevant lenders, twelve months) for Eurodollar borrowings.
The weighted-average interest rate of outstanding borrowings under our Senior
Credit Facilities was approximately 1.6% at December 31, 2020 .
The fees and bilateral foreign credit commitments are as specified above for
foreign credit commitments unless otherwise agreed with the bilateral foreign
issuing lender. We also pay fronting fees on the outstanding amounts of letters
of credit and foreign credit instruments (in the participation facility) at the
rates of 0.125% per annum and 0.25% per annum, respectively.
SPX is the borrower under each of the above facilities, and certain of our
foreign subsidiaries are (and we may designate other foreign subsidiaries to be)
borrowers under the global revolving credit facility and the foreign credit
instrument facilities.
34
--------------------------------------------------------------------------------
All borrowings and other extensions of credit under the Credit Agreement are
subject to the satisfaction of customary conditions, including absence of
defaults and accuracy in material respects of representations and warranties.
The letters of credit under the domestic revolving credit facility are stand-by
letters of credit requested by SPX on behalf of any of our subsidiaries or
certain joint ventures. The foreign credit instrument facility is used to issue
foreign credit instruments, including bank undertakings to support our foreign
operations.
The Credit Agreement requires mandatory prepayments in amounts equal to the net
proceeds from the sale or other disposition of, including from any casualty to,
or governmental taking of, property in excess of specified values (other than in
the ordinary course of business and subject to other exceptions) by SPX or our
subsidiaries. Mandatory prepayments will be applied to repay, first, amounts
outstanding under any term loans and, then, amounts (or cash collateralize
letters of credit) outstanding under the global revolving credit facility and
the domestic revolving credit facility (without reducing the commitments
thereunder). No prepayment is required generally to the extent the net proceeds
are reinvested (or committed to be reinvested) in permitted acquisitions,
permitted investments or assets to be used in our business within 360 days (and
if committed to be reinvested, actually reinvested within 360 days after the end
of such 360-day period) of the receipt of such proceeds.
We may voluntarily prepay loans under the Credit Agreement, in whole or in part,
without premium or penalty. Any voluntary prepayment of loans will be subject to
reimbursement of the lenders' breakage costs in the case of a prepayment of
Eurodollar rate borrowings other than on the last day of the relevant interest
period. Indebtedness under the Credit Agreement is guaranteed by:
•Each existing and subsequently acquired or organized domestic material subsidiary with specified exceptions; and
•SPX with respect to the obligations of our foreign borrower subsidiaries under the global revolving credit facility, the participation foreign credit instrument facility and the bilateral foreign credit instrument facility. Indebtedness under the Credit Agreement is secured by a first priority pledge and security interest in 100% of the capital stock of our domestic subsidiaries (with certain exceptions) held by SPX or our domestic subsidiary guarantors and 65% of the capital stock of our material first-tier foreign subsidiaries (with certain exceptions). If SPX obtains a corporate credit rating from Moody's and S&P and such corporate credit rating is less than "Ba2" (or not rated) by Moody's and less than "BB" (or not rated) by S&P, then SPX and our domestic subsidiary guarantors are required to grant security interests, mortgages and other liens on substantially all of their assets. If SPX's corporate credit rating is "Baa3" or better by Moody's or "BBB-" or better by S&P and no defaults then exist, all collateral security is to be released and the indebtedness under the Credit Agreement would be unsecured. The Credit Agreement also contains covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees, or advances, make restricted junior payments, including dividends, redemptions of capital stock, and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions, or engage in certain transactions with affiliates, and otherwise restrict certain corporate activities. The Credit Agreement contains customary representations, warranties, affirmative covenants and events of default. We are permitted under the Credit Agreement to repurchase our capital stock and pay cash dividends in an unlimited amount if our Consolidated Leverage Ratio is (after giving pro forma effect to such payments) less than 2.75 to 1.00. If our Consolidated Leverage Ratio is (after giving pro forma effect to such payments) greater than or equal to 2.75 to 1.00, the aggregate amount of such repurchases and dividend declarations cannot exceed (A)$100.0 in any fiscal year plus (B) an additional amount for all such repurchases and dividend declarations made afterSeptember 1, 2015 equal to the sum of (i)$100.0 plus (ii) a positive amount equal to 50% of cumulative Consolidated Net Income (as defined in the Credit Agreement generally as consolidated net income subject to certain adjustments solely for the purposes of determining this basket) during the period fromSeptember 1, 2015 to the end of the most recent fiscal quarter preceding the date of such repurchase or dividend declaration for which financial statements have been (or were required to be) delivered (or, in case such Consolidated Net Income is a deficit, minus 100% of such deficit) plus (iii) certain other amounts, less our previous usage of such additional amount for certain other investments and restricted junior payments. AtDecember 31, 2020 , we had$302.9 of available borrowing capacity under our revolving credit facilities after giving effect to borrowings under the domestic revolving loan facility of$129.8 and$17.3 reserved for outstanding letters of credit. In addition, atDecember 31, 2020 , we had$11.0 of available issuance capacity under our foreign credit instrument facilities after giving effect to$89.0 reserved for outstanding letters of credit. 35 -------------------------------------------------------------------------------- AtDecember 31, 2020 , we were in compliance with all covenants of our Credit Agreement. Other Borrowings and Financing Activities Certain of our businesses purchase goods and services under a purchase card program allowing for payment beyond their normal payment terms. As ofDecember 31, 2020 and 2019, the participating businesses had$1.7 and$2.6 , respectively, outstanding under this arrangement. We are party to a trade receivables financing agreement, whereby we can borrow, on a continuous basis, up to$50.0 . Availability of funds may fluctuate over time given changes in eligible receivable balances, but will not exceed the$50.0 program limit. The facility contains representations, warranties, covenants and indemnities customary for facilities of this type. The facility does not contain any covenants that we view as materially constraining to the activities of our business. In addition, we maintain line of credit facilities inChina andSouth Africa available to fund operations in these regions, when necessary. AtDecember 31, 2020 , the aggregate amount of borrowing capacity under these facilities was$20.0 , while there were no borrowings outstanding. Financial Instruments We measure our financial assets and liabilities on a recurring basis, and nonfinancial assets and liabilities on a non-recurring basis, at 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. We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or significant unobservable inputs (Level 3). Our derivative financial assets and liabilities include interest rate swap agreements, FX forward contracts, and forward contracts that manage the exposure on forecasted purchases of commodity raw materials ("commodity contracts") that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk, and our counterparties' credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments active. As ofDecember 31, 2020 , there was 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 was no significant impact to the fair value of our derivative assets based on our evaluation of our counterparties' credit risk. We primarily use the income approach, which uses valuation techniques to convert future amounts to a single present amount. Assets and liabilities measured at fair value on a recurring basis are further discussed below. 36
-------------------------------------------------------------------------------- Interest Rate Swaps InMarch 2018 , we entered into interest rate swap agreements ("Initial Swaps") that had an initial notional amount of$260.0 and maturities throughMarch 2021 and effectively convert a portion of the borrowings under our senior credit facilities to a fixed rate of 2.535%, plus the applicable margin. As ofDecember 31, 2020 , the aggregate notional amount of the Initial Swaps was$234.0 . InFebruary 2020 , and as a result of aDecember 2019 amendment that extended the maturity date of our senior credit facilities toDecember 17, 2024 , we entered into additional interest swap agreements ("Additional Swaps"). The Additional Swaps have a notional amount of$248.4 , cover the period fromMarch 2021 toNovember 2024 , and will effectively convert borrowings under our senior credit facilities to a fixed rate of 1.061%, plus the applicable margin. We have designated and are accounting for our interest rate swap agreements as cash flow hedges. As ofDecember 31, 2020 and 2019, the unrealized loss, net of tax, recorded in accumulated other comprehensive income ("AOCI") was$5.9 and$1.9 as ofDecember 31, 2020 and 2019, respectively. In addition, as ofDecember 31, 2020 , the fair value of our interest rate swap agreements totaled$7.8 , with$1.4 recorded as a current liability and the remainder in long-term liabilities, and$2.5 atDecember 31, 2019 (all of which is recorded in long-term liabilities). Changes in fair value of our interest rate swap agreements are reclassified into earnings as a component of interest expense, when the forecasted transaction impacts earnings. Currency Forward Contracts We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the South African Rand, British Pound Sterling, and Euro. From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries ("FX forward contracts"). None of our FX forward contracts are designated as cash flow hedges. We had FX forward contracts with an aggregate notional amount of$6.3 and$26.0 outstanding as ofDecember 31, 2020 and 2019, respectively, with all of the$6.3 scheduled to mature in 2021. Commodity Contracts From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. The outstanding notional amounts of commodity contracts were 3.2 and 3.4 pounds of copper atDecember 31, 2020 and 2019, 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 ofDecember 31, 2020 and 2019, the fair values of these contracts were current assets of$2.4 and$0.4 , respectively. The unrealized gains, net of taxes, recorded in AOCI were$1.5 and$0.3 as ofDecember 31, 2020 and 2019, respectively. We anticipate reclassifying the unrealized gain as ofDecember 31, 2020 to income over the next 12 months. Other Fair Value Financial Assets and Liabilities The carrying amounts of cash and equivalents and receivables reported in our consolidated balance sheets approximate fair value due to the short maturity of those instruments. The fair value of our debt instruments as ofDecember 31, 2020 approximated the related carrying values due primarily to the variable market-based interest rates for such instruments. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and equivalents, trade accounts receivable, insurance recovery assets associated with asbestos product liability matters, and interest rate swap, foreign currency forward, and commodity contracts. These financial instruments, other than trade accounts receivable, are placed with high-quality financial institutions and insurance companies throughout the world. We periodically evaluate the credit standing of these financial institutions and insurance companies. We maintain cash levels in bank accounts that, at times, may exceed federally-insured limits. We have not experienced significant loss, and believe we are not exposed to significant risk of loss, in these accounts. 37 -------------------------------------------------------------------------------- We have credit loss exposure in the event of nonperformance by counterparties to the above financial instruments, but have no other off-balance-sheet credit risk of accounting loss. We anticipate, however, that counterparties will be able to fully satisfy their obligations under the contracts. We do not obtain collateral or other security to support financial instruments subject to credit risk, but we do monitor the credit standing of counterparties. Concentrations of credit risk arising from trade accounts receivable are due to selling to customers in a particular industry. Credit risks are mitigated by performing ongoing credit evaluations of our customers' financial conditions and obtaining collateral, advance payments, or other security when appropriate. No one customer, or group of customers that to our knowledge are under common control, accounted for more than 10% of our revenues for any period presented. Cash and Other Commitments Balances under our Credit Agreement are payable in full onDecember 17, 2024 . Our term loan is repayable in quarterly installments beginning in the first quarter of 2021, with the quarterly installments equal to 0.625% of the initial term loan balance of$250.0 during 2021, 1.25% in each of the four quarters of 2022 and 2023, and 1.25% during the first three quarters of 2024. The remaining balance is repayable in full onDecember 17, 2024 . We use operating leases to finance certain equipment, vehicles and properties. AtDecember 31, 2020 , we had$43.4 of future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year. Capital expenditures for 2020 totaled$21.5 , compared to$17.8 and$12.4 in 2019 and 2018, respectively. Capital expenditures in 2020 related primarily to upgrades to manufacturing facilities, including replacement of equipment, and the move of our corporate headquarters. We expect 2021 capital expenditures to approximate$20.0 to$25.0 , with a significant portion related to replacement of equipment. In 2020, we made contributions and direct benefit payments of$13.3 to our defined benefit pension and postretirement benefit plans. We expect to make$13.2 of minimum required funding contributions and direct benefit payments in 2021. Our pension plans have not experienced any liquidity difficulties or counterparty defaults due to the volatility in the credit markets. Our pension funds earned asset returns of approximately 12.0% in 2020. See Note 11 to our consolidated financial statements for further disclosure of expected future contributions and benefit payments. On a net basis, both from continuing and discontinued operations, net income tax refunds (payments) totaled ($7.6 ), ($7.0 ), and$44.3 in 2020, 2019, and 2018, respectively. In 2020, we made payments of$10.8 associated with the actual and estimated tax liability for federal, state and foreign tax obligations and received refunds of$3.2 . The amount of income taxes that we receive or pay annually is dependent on various factors, including the timing of certain deductions. Deductions and the amount of income taxes can and do vary from year to year. Our Certificate of Incorporation provides that we indemnify our officers and directors to the fullest extent permitted by theDelaware General Corporation Law for any personal liability in connection with their employment or service with us, subject to limited exceptions. While we maintain insurance for this type of liability, the liability could exceed the amount of the insurance coverage. We continually review each of our businesses in order to determine their long-term strategic fit. These reviews could result in selected acquisitions to expand an existing business or result in the disposition of an existing business. In addition, you should read "Risk Factors," "Results for Reportable Segments and Other Operating Segment" included in this MD&A, and "Business" for an understanding of the risks, uncertainties and trends facing our businesses. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , except as discussed in Notes 15 and 17 to our consolidated financial statements and in the contractual obligations table below, we did not have any material guarantees, off-balance sheet arrangements or purchase commitments other than the following: (i)$29.2 of certain standby letters of credit outstanding, all of which relate to self-insurance or environmental matters and$17.3 of which reduce the available borrowing capacity on our domestic revolving credit facility; (ii)$89.0 of letters of credit outstanding, all of which reduce the available borrowing capacity on our foreign trade facilities; and (iii)$168.8 of surety bonds. 38 -------------------------------------------------------------------------------- Contractual Obligations The following is a summary of our primary contractual obligations as ofDecember 31, 2020 : Due Within Due in Due in Due After Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt obligations$ 312.6 $ 7.2
212.4 13.2 24.1 20.9 154.2
Purchase and other contractual obligations(2) 115.0 99.3 14.8 0.9 -
Future minimum operating lease payments(3) 43.4 8.7 15.0 9.1 10.6
Interest payments 30.5 7.8 15.2 7.5 -
Total contractual cash obligations(4)(5)
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(1)Estimated minimum required pension funding and pension and postretirement benefit payments are based on actuarial estimates using current assumptions for, among other things, discount rates, expected long-term rates of return on plan assets (where applicable), and health care cost trend rates. The expected pension contributions for theU.S. plans in 2021 and thereafter reflect the minimum required contributions under the Pension Protection Act of 2006 and the Worker, Retiree, and Employer Recovery Act of 2008. These contributions do not reflect potential voluntary contributions, or additional contributions that may be required in connection with acquisitions, dispositions or related plan mergers. See Note 11 to our consolidated financial statements for additional information on expected future contributions and benefit payments. (2)Represents contractual commitments to purchase goods and services at specified dates. (3)Represents rental payments under operating leases with remaining non-cancelable terms in excess of one year. (4)Contingent obligations, such as environmental accruals and those relating to uncertain tax positions generally do not have specific payment dates and accordingly have been excluded from the above table. We believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease up to$5.0 . (5)In addition, the above table does not include potential payments under (i) our derivative financial instruments or (ii) the guarantees and bonds associated with Balcke Dürr. Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties, are listed below. This section should be read in conjunction with Notes 1 and 2 to our consolidated financial statements, which include a detailed discussion of these and other accounting policies. Contingent Liabilities Numerous claims, complaints and proceedings arising in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (collectively, "claims"). These claims relate to litigation matters (e.g., class actions, derivative lawsuits and contracts, intellectual property and competitive claims), environmental matters, product liability matters (predominately associated with alleged exposure to asbestos-containing materials), and other risk management matters (e.g., general liability, automobile, and workers' compensation claims). Additionally, we may become subject to other claims of which we are currently unaware, which may be significant, or the claims of which we are aware may result in our incurring significantly greater loss than we anticipate. While we (and our subsidiaries) maintain property, cargo, auto, product, general liability, environmental, and directors' and officers' liability insurance and have acquired rights under similar policies in connection with acquisitions that we believe cover a significant portion of these claims, this insurance may be insufficient or unavailable (e.g., in the case of insurer insolvency) to protect us against potential loss exposures. Also, while we believe we are entitled to indemnification from third parties for some of these claims, these rights may be insufficient or unavailable to protect us against potential loss exposures. Our recorded liabilities related to these matters totaled$575.7 and$592.4 atDecember 31, 2020 and 2019, respectively. Of these amounts,$499.8 and$517.6 are included in "Other long-term liabilities" within our consolidated balance sheets at 39 --------------------------------------------------------------------------------December 31, 2020 and 2019, respectively, with the remainder included in "Accrued expenses." The liabilities we record for these matters are based on a number of assumptions, including historical claims and payment experience. While we base our assumptions on facts currently known to us, they entail inherently subjective judgments and uncertainties. As a result, our current assumptions for estimating these liabilities may not prove accurate, and we may be required to adjust these liabilities in the future, which could result in charges to earnings. These variances relative to current expectations could have a material impact on our financial position and results of operations. Our asbestos-related claims are typical in certain of the industries in which we operate or pertain to legacy businesses we no longer operate. It is not unusual in these cases for fifty or more corporate entities to be named as defendants. We vigorously defend these claims, many of which are dismissed without payment, and the significant majority of costs related to these claims have historically been paid pursuant to our insurance arrangements. Our recorded assets and liabilities related to asbestos-related claims were as follows atDecember 31, 2020 and 2019: December 31, 2020 2019 Insurance recovery assets (1)$ 496.4 $ 509.6 Liabilities for claims (2) 535.2 552.2
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(1)Of these amounts$446.4 and$459.6 are included in "Other assets" atDecember 31, 2020 and 2019, respectively, while the remainder is included in "Other current assets." (2)Of these amounts$479.9 and$498.1 are included in "Other long-term liabilities" atDecember 31, 2020 and 2019, respectively, while the remainder is included in "Accrued expenses." The liabilities we record for asbestos-related claims are based on a number of assumptions. In estimating our liabilities for asbestos-related claims, we consider, among other things, the following: •The number of pending claims by disease type and jurisdiction. •Historical information by disease type and jurisdiction with regard to: •Average number of claims settled with payment (versus dismissed without payment); and •Average claim settlement amounts. •The period over which we can reasonably project asbestos-related claims (currently projecting through 2057).
The following table presents information regarding activity for asbestos-related
claims for the years ended
Year ended December 31
2020 2019 2018
Pending claims, beginning of year 11,079 13,767 17,359 Claims filed 2,449 3,607 3,857 Claims resolved (3,746) (6,295) (7,449) Pending claims, end of year 9,782 11,079 13,767 The assets we record for asbestos-related claims represent amounts that we believe we are or will be entitled to recover under agreements we have with insurance companies. The amount of these assets are based on a number of assumptions, including the continued solvency of the insurers and our legal interpretation of our rights for recovery under the agreements we have with the insurers. Our current assumptions for estimating these assets may not prove accurate, and we may be required to adjust these assets in the future. These variances relative to current expectations could have a material impact on our financial position and results of operations. During the years endedDecember 31, 2020 , 2019 and 2018, our payments for asbestos-related claims, net of respective insurance recoveries of$35.4 ,$47.1 , and$45.3 , were$19.3 ,$13.1 and$9.7 , respectively. A significant increase in claims, costs and/or issues with existing insurance coverage (e.g., dispute with or insolvency of insurer(s)) could have a material adverse impact on our share of future payments related to these matters, and, as a result, have a material impact on our financial position, results of operations and cash flows. 40 -------------------------------------------------------------------------------- During the years endedDecember 31, 2020 , 2019, and 2018, we recorded charges of$21.3 ,$10.1 , and$4.8 , respectively, as a result of changes in estimates associated with the liabilities and assets related to asbestos-related claims. Of these charges,$19.2 ,$6.3 and$4.4 were reflected in "Income from continuing operations before income taxes" for the years endedDecember 31, 2020 , 2019, and 2018, respectively, and$2.1 ,$3.8 , and$0.4 , respectively, were reflected in "Gain (loss) on disposition of discontinued operations, net of tax." Large Power Projects inSouth Africa Overview - Since 2008, DBT has been executing contracts on two large power projects inSouth Africa (Kusile and Medupi). Over such time, the business environment surrounding these projects has been difficult, as DBT, along with many other contractors on the projects, have experienced delays, cost over-runs, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors, various subcontractors (including DBT and its subcontractors), and various suppliers. DBT has substantially completed its scope of work, with its remaining responsibilities related largely to resolution of various claims, primarily between itself and one of its prime contractors, Mitsubishi Heavy Industries Power-ZAF (f.k.a.Mitsubishi-Hitachi Power Systems Africa (PTY) LTD), or "MHI." The challenges related to the projects have resulted in (i) significant adjustments to our revenue and cost estimates for the projects, (ii) DBT's submission of numerous change orders to the prime contractors, (iii) various claims and disputes between DBT and other parties involved with the projects (e.g., prime contractors, subcontractors, suppliers, etc.), and (iv) the possibility that DBT may become subject to additional claims, which could be significant. It is possible that some outstanding claims may not be resolved until after the prime contractors complete their scopes of work. Our future financial position, operating results, and cash flows could be materially impacted by the resolution of current and any future claims. Claims by DBT - DBT has asserted claims against MHI of approximatelySouth African Rand 1,100.0 (or$75.0 ). As we prepare these claims for dispute resolution processes, the amounts, along with the characterization, of the claims could change. Of these claims,South African Rand 372.1 (or$25.3 ) are currently proceeding through contractual dispute resolution processes and DBT is likely to initiate additional dispute resolution processes in 2021. DBT is also pursuing several claims to force MHI to abide by its contractual obligations and provide DBT with certain benefits that MHI may have received from its customer on the projects. In addition to existing asserted claims, DBT believes it has additional claims and rights to recovery based on its performance under the contracts with, and actions taken by, MHI. DBT is continuing to evaluate the claims and the amounts owed to it under the contracts based on MHI's failure to comply with its contractual obligations. The amounts DBT may recover for current and potential future claims against MHI are not currently known given (i) the extent of current and potential future claims by MHI against DBT (see below for further discussion) and (ii) the unpredictable nature of any dispute resolution processes that may occur in connection with these current and potential future claims. No revenue has been recorded in the consolidated financial statements with respect to current or potential future claims against MHI. OnFebruary 22, 2021 , a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on two units of the Kusile project. The panel ruled that MHI is obligated to pay DBTSouth African Rand 116.4 (or$7.8 at the time of the ruling). This ruling is subject to MHI's rights to seek further arbitration in the matter. No amount has been reflected in the consolidated financial statements for this matter. Claims by MHI - OnFebruary 26, 2019 , DBT received notification of an interim claim consisting of both direct and consequential damages from MHI alleging, among other things, that DBT (i) provided defective product and (ii) failed to meet certain project milestones. We believe the notification is unsubstantiated and the vast majority of the claimed damages are prohibited under the relevant contracts. Therefore, we believe any loss for the majority of these claimed damages is remote. For the remainder of the claims, which largely appear to be direct in nature (approximatelySouth African Rand 948.0 or$64.5 ), DBT has numerous defenses and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the consolidated financial statements with respect to these claims. InSeptember 2020 , MHI made a demand on certain bonds issued in its favor by DBT, based solely on these alleged defects, but without further substantiation or other justification (see further discussion below). OnDecember 30, 2020 , MHI notified DBT of its intent to take these claims to binding arbitration. DBT intends to vigorously defend itself against these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable to estimate the potential loss or range of potential loss associated with these claims due to the (i) lack of support provided by MHI for these claims; (ii) complexity of contractual relationships between the end customer, MHI, and DBT; (iii) legal interpretation of the contract provisions and application of South African law to the contracts; and (iv) unpredictable nature of any dispute resolution processes that may occur in connection with these claims. In April andJuly 2019 , DBT received notifications of intent to claim liquidated damages totalingSouth African Rand 407.2 (or$27.7 ) from MHI alleging that DBT failed to meet certain project milestones related to the construction of the filters for both the Kusile and Medupi projects. DBT has numerous defenses against these claims and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the consolidated financial 41 --------------------------------------------------------------------------------
statements with respect to these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable to estimate the potential loss or range of potential loss.
MHI has made other claims against DBT totalingSouth African Rand 176.2 (or$12.0 ). DBT has numerous defenses against these claims and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the consolidated financial statements with respect to these claims. OnJuly 23, 2020 , a dispute adjudication panel issued a ruling in favor of DBT on certain matters related to the Kusile and Medupi projects. The panel (i) ruled that DBT had achieved takeover on 9 of the units; (ii) ordered MHI to return$2.3 of bonds (which have been subsequently returned by MHI); (iii) ruled that DBT is entitled to the return of an additional$4.0 of bonds upon the completion of certain administrative milestones; and (iv) ordered MHI to paySouth African Rand 18.4 (or$1.1 ) in incentive payments for work performed by DBT (which MHI has subsequently paid), and ruled that MHI waived its rights to assert delay damages against DBT on one of the units of the Kusile project. The ruling is subject to MHI's rights to seek further arbitration in the matter, as provided in the contracts. As such, the incentive payments noted above have not been recorded in our consolidated statement of operations for the year endedDecember 31, 2020 . Bonds Issued in Favor of MHI - We are obligated with respect to bonds issued by banks in favor of MHI. In September of 2020, MHI made a demand, and received payment ofSouth African Rand 239.6 (or$14.3 at the time of payment), on certain of these bonds, which we funded as required under the terms of the bonds and our senior credit agreement. In its demand, MHI purported that DBT failed to carry out its obligations to rectify certain alleged product defects identified in itsFebruary 2019 interim claims notice (see above). DBT denies liability for such alleged product defects and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of theSouth African Rand 239.6 (or$16.3 ) that has been paid. However, given the extent and complexities of the claims between DBT and MHI, reimbursement of theSouth African Rand 239.6 (or$16.3 ) is unlikely to occur over the next twelve months. As such, we have reflected theSouth African Rand 239.6 (or$16.3 ) as a non-current asset within our consolidated balance sheet as ofDecember 31, 2020 . The remaining amount of outstanding bonds that have been issued in favor of MHI include (i)$16.2 of performance and retention money guarantees, which could be exercised by MHI for alleged defects or other alleged breaches of DBT's obligations, and (ii) a$22.3 bond that can be exercised by MHI only in the event that (a) it receives a favorable judgment on a certain matter and (b) DBT fails to pay any money damages awarded in such judgment. In the event that MHI were to receive payment on a portion, or all, of the remaining bonds, we would be required to reimburse the respective issuing bank.
In addition to these bonds,
Settlement with the Minority Shareholder of DBT - OnOctober 16, 2019 ,SPX Technologies (PTY) LTD , DBT's parent company, along withDBT andSPX Corporation , executed an agreement with the minority shareholder of DBT to settle a put option and other claims between the parties for a total payment ofSouth African Rand 230.0 (or$15.6 ). The difference between the settlement amount (South African Rand 230.0 ) and the amount previously recorded for the matter ofSouth African Rand 257.0 , orSouth African Rand 27.0 (or$1.8 ), along with a tax benefit of$3.8 associated with the total payment ofSouth African Rand 230.0 , has been reflected as an adjustment to "Net income attributable to SPX common shareholders" in our calculations of basic and diluted earnings per share for the year endedDecember 31, 2019 . Environmental Matters We believe that we are in substantial compliance with applicable environmental requirements. We are currently involved in various investigatory and remedial actions at our facilities and at third-party waste disposal sites. It is our policy to accrue for estimated losses from legal actions or claims when events exist that make the realization of the losses or expenses probable and they can be reasonably estimated. Our environmental accruals cover anticipated costs, including investigation, remediation, and operation and maintenance of clean-up sites. 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. We expense costs incurred to investigate and remediate environmental issues unless they extend the economic useful lives of related assets. We record liabilities when it is probable that an obligation has been incurred and the amounts can be reasonably estimated. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. It is our policy to realize a change in estimates once it becomes probable and can be reasonably estimated. In determining our accruals, we generally do not discount environmental accruals and do not reduce them by anticipated insurance, litigation and other 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. 42 -------------------------------------------------------------------------------- Self-Insured Risk Management Matters We are self-insured for certain of our workers' compensation, automobile, product and general liability, disability and health costs, and we believe that we maintain adequate accruals to cover our retained liability. Our accruals for risk management matters are determined by us, are based on claims filed and an estimate 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; however, this insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against potential loss exposures. The key assumptions considered in estimating the ultimate cost to settle reported claims and the estimated costs associated with incurred but not yet reported claims include, among other things, our historical and industry claims experience, trends in health care and administrative costs, our current and future risk management programs, and historical lag studies with regard to the timing between when a claim is incurred versus when it is reported. Revenue Recognition We recognize revenue in accordance with Accounting Standards Codification 606, which requires revenue to be recognized over-time or at a point in time. Most of our businesses recognize revenue at a point in time as satisfaction of the related performance obligations occur at the time of shipment or delivery, while certain of our businesses recognize revenue and costs for long-term contracts over-time. The revenue for these long-term contracts is recorded based on the percentage of costs incurred to date for each contract to the estimated total costs for such a contract at completion. In 2020, 2019, and 2018, we recognized$585.4 ,$522.2 and$561.7 , respectively, of revenues under such method. We record any provision for estimated losses on uncompleted long-term contracts in the period which the losses are determined. Our long-term contracts often include unapproved change orders and claims. We include in our contract estimates additional revenue for unapproved change orders or claims when we believe we have an enforceable right to the unapproved change order or claim and the amount can be reliably estimated. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs, and the objective evidence available to support the claim. These estimates are also based on historical award experience. Due to uncertainties inherent in the estimation process, it is reasonably possible that the ultimate revenues and completion costs on our long-term contracts, including those arising from contract penalty provisions and final contract settlements, will be revised during the duration of the contract. These revised revenues and costs are recognized in the period in which the revisions are determined. Our estimation process for determining revenues and costs for our long-term contracts is based upon (i) our historical experience, (ii) the professional judgment and knowledge of our engineers, project managers, and operations and financial professionals, and (iii) an assessment of the key underlying factors (see below). As our long-term contracts generally range from six to eighteen months in duration, we typically reassess the estimated revenues and costs of these contracts on a quarterly basis, but may reassess more often as situations warrant. We record changes in estimates of revenues and costs when identified using the cumulative catch-up method. We believe the underlying factors used to estimate our long-term contracts costs to complete and percentage-of-completion are sufficiently reliable to provide a reasonable estimate of revenue and profit; however, due to the length of time over which revenues are generated and costs are incurred, along with the judgment required in developing the underlying factors, the variability of revenue and cost can be significant. Factors that may affect revenue and costs relating to long-term contracts include, but are not limited to, the following: •Sales Price Incentives and Sales Price Escalation Clauses - Sales price incentives and sales price escalations that are reasonably assured and reasonably estimable are recorded over the performance period of the contract. Otherwise, these amounts are recorded when awarded. •Cost Recovery for Product Design Changes and Claims - On occasion, design specifications may change during the course of the contract. Any additional costs arising from these changes may be supported by change orders, or we may submit a claim to the customer. Change orders and claims related to design changes are accounted for as described above. •Material Availability and Costs - Our estimates of material costs generally are based on existing supplier relationships, adequate availability of materials, prevailing market prices for materials, and, in some cases, long-term 43 -------------------------------------------------------------------------------- supplier contracts. Changes in our supplier relationships, delays in obtaining materials, or changes in material prices can have a significant impact on our cost and profitability estimates. •Use of Subcontractors - Our arrangements with subcontractors are generally based on fixed prices; however, our estimates of the cost and profitability can be impacted by subcontractor delays, customer claims arising from subcontractor performance issues, or a subcontractor's inability to fulfill its obligations. •Labor Costs and Anticipated Productivity Levels - Where applicable, we include the impact of labor improvements in our estimation of costs, such as in cases where we expect a favorable learning curve over the duration of the contract. In these cases, if the improvements do not materialize, costs and profitability could be adversely impacted. Additionally, to the extent we are more or less productive than originally anticipated, estimated costs and profitability may also be impacted. •Effect of Foreign Currency Fluctuations - Fluctuations between currencies in which our long-term contracts are denominated and the currencies under which contract costs are incurred can have an impact on profitability. When the impact on profitability is potentially significant, we may enter into FX forward contracts or prepay certain vendors for raw materials to manage the potential exposure. See Note 14 to our consolidated financial statements for additional details on our FX forward contracts. In some cases, the timing of revenue recognition, particularly for revenue recognized over time, differs from when such amounts are invoiced to customers, resulting in a contract asset (revenue recognition precedes the invoicing of the related revenue amount) or a contract liability (payment from the customer precedes recognition of the related revenue amount). Contract assets are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specific units, or completion of the contract. In contracts where a portion of the price may vary, we estimate the variable consideration at the amount to which we expect to be entitled, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and, if necessary, constrain the amount of variable consideration recognized in order to mitigate this risk. See Note 1, 3, and 5 to our consolidated financial statements for further information on our revenue recognition policies. Impairment ofGoodwill and Indefinite-Lived Intangible AssetsGoodwill and indefinite-lived intangible assets are not amortized, but instead are subject to annual impairment testing. We monitor the results of each of our reporting units as a means of identifying trends and/or matters that may impact their financial results and, thus, be an indicator of a potential impairment. The trends and/or matters that we specifically monitor for each of our reporting units are as follows:
•Significant variances in financial performance (e.g., revenues, earnings and cash flows) in relation to expectations and historical performance;
•Significant changes in end markets or other economic factors;
•Significant changes or planned changes in our use of a reporting unit's assets; and
•Significant changes in customer relationships and competitive conditions.
The identification and measurement of goodwill impairment involves the
estimation of the fair value of reporting units. We perform our impairment
testing by comparing the estimated fair value of the reporting unit to the
carrying value of the reported net assets, with such testing occurring during
the fourth quarter of each year in conjunction with our annual financial
planning process (or more frequently if impairment indicators arise), based
primarily on events and circumstances existing as of the end of the third
quarter. Fair value is generally based on the income approach using a
calculation of discounted cash flows, based on the most recent financial
projections for the reporting units. The revenue growth rates included in the
financial projections are our best estimates based on current and forecasted
market conditions, and the profit margin assumptions are projected by each
reporting unit based on current cost structure and, when applicable, anticipated
net cost reductions.
The calculation of fair value for our reporting units incorporates many
assumptions including future growth rates, profit margin and discount factors.
Changes in economic and operating conditions impacting these assumptions could
result in impairment charges in future periods.
Based on our annual goodwill impairment testing during the fourth quarter of
2020, we concluded that the estimated fair value of each of our reporting units,
exclusive of Cues and Patterson-Kelley, exceeded the carrying value of their
respective net
44
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assets by over 75%. The estimated fair values of Cues and Patterson-Kelley
exceeded the carrying value of their respective net assets by approximately 12%
and 3%, while the total goodwill for Cues and Patterson-Kelley was $47.9 and
$14.2 , respectively, as of December 31, 2020 . A change in assumptions used in
testing Cues' and Patterson-Kelley's goodwill for impairment (e.g., projected
revenues and profit growth rates, discount rates, industry price multiples,
etc.) could result in Cues' and/or Patterson-Kelley's estimated fair value being
less than the respective carrying value of their net assets. If Cues and/or
Patterson-Kelley is unable to achieve the financial forecasts included in their
respective 2020 annual goodwill impairment analysis, we may be required to
record an impairment charge in a future period related to Cues' and/or
Patterson-Kelley's goodwill.
We perform our annual trademarks impairment testing during the fourth quarter,
or on a more frequent basis if there are indications of potential impairment.
The fair values of our trademarks are determined by applying estimated royalty
rates to projected revenues, with resulting cash flows discounted at a rate of
return that reflects current market conditions. The basis for these projected
revenues is the annual operating plan for each of the related businesses, which
is prepared in the fourth quarter of each year. In connection with the annual
impairment testing of our trademarks during the fourth quarter of 2020, we
recorded impairment charges related to certain of these trademarks of $0.7 .
See Note 10 to our consolidated financial statements for additional details.
Employee Benefit Plans
Defined benefit plans cover a portion of our salaried and hourly paid employees,
including certain employees in foreign countries. Additionally, domestic
postretirement plans provide health and life insurance benefits for certain
retirees and their dependents. We recognize changes in the fair value of plan
assets and actuarial gains and losses into earnings during the fourth quarter of
each year, unless earlier remeasurement is required, as a component of net
periodic benefit expense. The remaining components of pension/postretirement
expense, primarily interest costs and expected return on plan assets, are
recorded on a quarterly basis.
Our pension plans have not experienced any significant impact on liquidity or
counterparty exposure due to the volatility in the credit markets.
The costs and obligations associated with these plans are determined based on
actuarial valuations. The critical assumptions used in determining these related
expenses and obligations are discount rates and healthcare cost projections.
These critical assumptions are calculated based on company data and appropriate
market indicators, and are evaluated at least annually by us in consultation
with outside actuaries. Other assumptions involving demographic factors such as
retirement patterns and mortality, are evaluated periodically and are updated to
reflect our experience and expectations for the future. While management
believes that the assumptions used are appropriate, actual results may differ.
The discount rate enables us to state expected future cash flows at a present
value on the measurement date. This rate is the yield on high-quality fixed
income investments at the measurement date. A lower discount rate increases the
present value of benefit obligations and increases pension expense. Including
the effects of recognizing actuarial gains and losses into earnings as described
above, a 50 basis point decrease in the discount rate for our domestic plans
would have increased our 2020 pension expense by approximately $19.8 , and a 50
basis point increase in the discount rate would have decreased our 2020 pension
expense by approximately $18.0 .
The trend in healthcare costs is difficult to estimate, and it can significantly
impact our postretirement liabilities and costs. The healthcare cost trend rate
for 2021, which is the weighted-average annual projected rate of increase in the
per capita cost of covered benefits, is 6.5%. This rate is assumed to decrease
to 5.0% by 2027 and then remain at that level.
See Note 11 to our consolidated financial statements for further information on
our pension and postretirement benefit plans.
Income Taxes
We record our income taxes based on the Income Taxes Topic of the Codification,
which includes an estimate of the amount of income taxes payable or refundable
for the current year and deferred income tax liabilities and assets for the
future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns.
Deferred tax assets and liabilities reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. We periodically
assess the realizability of deferred tax assets and the adequacy of deferred tax
liabilities, including the results of local, state, federal or foreign statutory
tax audits or estimates and judgments used.
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Realization of deferred tax assets involves estimates regarding (i) the timing
and amount of the reversal of taxable temporary differences, (ii) expected
future taxable income, and (iii) the impact of tax planning strategies. We
believe that it is more likely than not that we will not realize the benefit of
certain deferred tax assets and, accordingly, have established a valuation
allowance against them. In assessing the need for a valuation allowance, we
consider all available positive and negative evidence, including past operating
results, projections of future taxable income and the feasibility of and
potential changes to ongoing tax planning strategies. The projections of future
taxable income include a number of estimates and assumptions regarding our
volume, pricing and costs. Although realization is not assured for the remaining
deferred tax assets, we believe it is more likely than not that the remaining
deferred tax assets will be realized through future taxable earnings or
alternative tax strategies. However, deferred tax assets could be reduced in the
near term if our estimates of taxable income are significantly reduced or tax
strategies are no longer viable.
The amount of income tax that we pay annually is dependent on various factors,
including the timing of certain deductions and ongoing audits by federal, state
and foreign tax authorities, which may result in proposed adjustments. We
perform reviews of our income tax positions on a quarterly basis and accrue for
potential uncertain tax positions. Accruals for these uncertain tax positions
are classified as "Income taxes payable" and "Deferred and other income taxes"
in our consolidated balance sheets based on an expectation as to the timing of
when the matter will be resolved. As events change or resolutions occur, these
accruals are adjusted, such as in the case of audit settlements with taxing
authorities. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters.
Our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities due to closure of income tax examinations, statute
expirations, new regulatory or judicial pronouncements, changes in tax laws,
changes in projected levels of taxable income, future tax planning strategies,
or other relevant events. See Note 12 to our consolidated financial statements
for additional details regarding our uncertain tax positions.
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New Accounting PronouncementsSee Note 3 to our consolidated financial statements for a discussion of recent accounting pronouncements.
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