UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2020
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission file number: 1-6948
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (980 ) 474-3700
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to used the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 27, 2020 was $1,689,537,294 . The determination of affiliate status for purposes of the foregoing calculation is not necessarily a conclusive determination for other purposes.
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The number of shares outstanding of the registrant’s common stock as of February 19, 2021 was 45,075,565 .
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SPX CORPORATION AND SUBSIDIARIES
FORM 10-K TABLE OF CONTENTS
P A R T I
ITEM 1. Business
(All currency and share amounts are in millions)
Forward-Looking Information
Some of the statements in this document and any documents incorporated by reference, including any statements as to operational and financial projections, constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our businesses’ or our industries’ actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements may address our plans, our strategies, our prospects, changes and trends in our business and the markets in which we operate under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) or in other sections of this document. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential” or “continue” or the negative of those terms or other comparable terminology. Particular risks facing us include economic, business and other risks stemming from our internal operations, legal and regulatory risks, costs of raw materials, pricing pressures, information technology and cybersecurity risks, integration of acquisitions, and changes in the economy, as well as the impacts of the coronavirus disease (the “COVID-19 pandemic”) and governmental responses to stem further outbreaks of the COVID-19 pandemic, which is further discussed below and in other sections of this document. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors, and forward-looking statements should not be relied upon as a prediction of actual results. In addition, management’s estimates of future operating results are based on our current complement of businesses, which is subject to change as management selects strategic markets.
All the forward-looking statements are qualified in their entirety by reference to the risks and uncertainties discussed in this filing, including under the heading “Risk Factors,” and any subsequent filing with the U.S. Securities and Exchange Commission (“SEC”), as well as in any documents incorporated by reference that describe risks and factors that could cause results to differ materially from those projected in these forward-looking statements. We caution you that these discussions of risks and uncertainties may not be exhaustive. We operate in a continually changing business environment and frequently enter into new businesses and product lines. We cannot predict all potentially relevant risks and uncertainties, and we cannot assess the impact, if any, of these factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, you should not rely on forward-looking statements as a prediction of actual results. We disclaim any responsibility to update or publicly revise any forward-looking statements to reflect events or circumstances that arise after the date of this document.
Business
SPX Corporation (“SPX”, “our” or “we”) was founded in Muskegon, Michigan in 1912 as the Piston Ring Company and adopted our current name in 1988. Since 1968, we have been incorporated under the laws of Delaware, and we have been listed on the New York Stock Exchange since 1972.
On September 26, 2015, we completed the spin-off to our stockholders (the “Spin-Off”) of all the outstanding shares of SPX FLOW, Inc. (“SPX FLOW”), a wholly-owned subsidiary of SPX prior to the Spin-Off, which at the time of the Spin-Off held the businesses comprising our Flow Technology reportable segment, our Hydraulic Technologies business, and certain of our corporate subsidiaries.
Prior to the Spin-Off, our businesses serving the power generation markets had a major impact on the consolidated financial results of SPX. In the recent years leading up to the Spin-Off, these businesses experienced significant declines in revenues and profitability associated with weak demand and increased competition within the global power generation markets. Based on a review of our post-spin portfolio and the belief that a recovery within the power generation markets was unlikely in the foreseeable future, we decided that our strategic focus would be on our (i) scalable growth businesses that serve the heating, ventilation and cooling (“HVAC”) and detection and measurement markets and (ii) power transformer and process cooling systems businesses. As a result, we have significantly reduced our exposure to the power generation markets as indicated by the dispositions of our dry cooling and Balcke Dürr businesses during 2016. Additionally, during 2018, we initiated a plan to wind-down the SPX Heat Transfer (“Heat Transfer”) business, with the wind-down completed during the fourth quarter of 2020. As a result of completing such wind-down activities, we are now reporting the Heat Transfer business as a discontinued operation for all periods presented. Lastly, our South African subsidiary, DBT Technologies (PTY) LTD’s (“DBT”) contractual scope on the large power projects in South Africa is substantially complete, with its remaining responsibilities under the projects related
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primarily to resolution of various claims between itself and one of the prime contractors on the projects. See MD&A and Notes 1 and 4 to our consolidated financial statements for further discussion of these actions.
On March 1, 2018 and June 7, 2018, we completed the acquisitions of Schonstedt Instrument Company (“Schonstedt”) and Cues, Inc. (“Cues”), respectively. Schonstedt is a manufacturer and distributor of magnetic locator products used for locating underground utilities and buried objects, while Cues is a manufacturer of pipeline inspection and rehabilitation equipment. The post-acquisition operating results of Schonstedt and Cues are reflected within our Detection and Measurement reportable segment.
On February 1, 2019, we completed the acquisition of Sabik Marine (“Sabik”), primarily a manufacturer of obstruction lighting products. The post-acquisition operating results of Sabik Marine are reflected within our Detection and Measurement reportable segment.
On July 3, 2019 and November 12, 2019, we completed the acquisitions of SGS Refrigeration Inc. (“SGS”) and Patterson-Kelley, LLC (“Patterson-Kelley”), respectively. SGS is a manufacturer of industrial refrigeration products, while Patterson-Kelley is a manufacturer and distributor of commercial boilers and water heaters. The post-acquisition operating results of SGS and Patterson-Kelley are reflected within our HVAC reportable segment.
On September 2, 2020 and November 11, 2020, we completed the acquisitions of ULC Robotics (“ULC”) and Sensors & Software, Inc. (“Sensors & Software”), respectively. ULC is leading developer of robotic systems, mechanical learning applications, and inspection technology for the energy, utility, and industrial markets, while Sensors & Software is a manufacturer and distributor of ground penetrating radar products used for locating underground utilities, detecting unexploded ordinances, and geotechnical and geological investigations. The post-acquisition operating results of ULC and Sensors & Software are reflected within our Detection and Measurement reportable segment.
Unless otherwise indicated, amounts provided in Part I pertain to continuing operations only (see Notes 1 and 4 to our consolidated financial statements for information on discontinued operations).
We are a diversified, global supplier of infrastructure equipment serving the HVAC, detection and measurement, power transmission and generation, and industrial markets. With operations in over 15 countries and approximately 4,500 employees, we offer a wide array of highly engineered infrastructure products with strong brands.
HVAC solutions offered by our businesses include package cooling towers, residential and commercial boilers, comfort heating, and ventilation products. Our market leading brands, coupled with our commitment to continuous innovation and focus on our customers’ needs, enables our HVAC cooling and heating businesses to serve an expanding number of industrial, commercial and residential customers. Growth for our HVAC businesses will be driven by innovation, increased scalability, and our ability to meet the needs of broader markets.
Our detection and measurement product lines encompass underground pipe and cable locators, inspection and rehabilitation equipment, robotic systems, bus fare collection systems, communication technologies, and obstruction lighting. Our detection and measurement solutions enable utilities, telecommunication providers and regulators, and municipalities and transit authorities to build, monitor and maintain vital infrastructure. Our technology and decades of experience have afforded us a strong position in specific detection and measurement markets. We intend to expand our portfolio of specialized products through new, innovative hardware and software solutions in an attempt to (i) further capitalize on the detection and measurement markets we currently serve and (ii) expand the number of markets that we serve.
Within our engineered solutions platform, we are a leading manufacturer of medium and large power transformers, as well as process cooling equipment. These solutions play a critical role in electricity transmission and generation. Specifically, our power transformers play an integral role in the North American power grid, while our process cooling equipment assists our customers in meeting their power generation and industrial needs. The businesses within the platform are committed to driving value through continued focus on operational and engineering efficiencies.
Reportable Segments and Other Operating Segment
Our DBT operating segment is reported within an “Other” category outside of our reportable segments. Our other operating segments are aggregated into the following three reportable segments: HVAC, Detection and Measurement, and Engineered Solutions. The factors considered in determining our aggregated segments are the economic similarity of the businesses, the nature of products sold or services provided, production processes, types of customers, distribution methods, and regulatory environment. In determining our reportable segments, we apply the threshold criteria of the Segment Reporting Topic of the Financial Accounting Standards Board Codification (“Codification”). Operating income or loss for each of our operating segments is determined before considering impairment and special charges, long-term incentive compensation,
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certain other operating expenses and other indirect corporate expenses. This is consistent with the way our Chief Operating Decision Maker evaluates the results of each segment.
HVAC Reportable Segment
Our HVAC reportable segment had revenues of $590.7, $593.2 and $582.1 in 2020, 2019 and 2018, respectively, and 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. The segment engineers, designs, manufactures, installs and services cooling products for the HVAC and industrial markets, as well as heating and ventilation products for the residential and commercial markets. The primary distribution channels for the segment’s products are direct to customers, independent manufacturing representatives, third-party distributors, and retailers. The segment serves a customer base in North America, Europe, and Asia. Core brands for our cooling products include Marley and Recold, while our heating and ventilation products are sold under the Berko, Qmark, Fahrenheat, Leading Edge, and Patterson-Kelley brands, and our Marley-Wylain subsidiary sells its products under the Weil-McLain and Williamson-Thermoflo brands.
Detection and Measurement Reportable Segment
Our Detection and Measurement reportable segment had revenues of $387.3, $384.9 and $320.9 in 2020, 2019 and 2018, respectively, and backlog of $89.3 and $76.4 as of December 31, 2020 and 2019, respectively. Approximately 81% of the segment’s backlog as of December 31, 2020 is expected to be recognized as revenue during 2021. The segment engineers, designs, manufactures, services, and installs underground pipe and cable locators, inspection and rehabilitation equipment, robotic systems, bus fare collection systems, communication technologies, and obstruction lighting. The primary distribution channels for the segment’s products are direct to customers and third-party distributors. The segment serves a global customer base, with a strong presence in North America, Europe, Africa and Asia Pacific. Core brands for our underground pipe and cable locators and inspection and rehabilitation equipment are Radiodetection, Pearpoint, Schonstedt, Dielectric, Warren G-V, Cues, ULC Robotics, and Sensors & Software. Our bus fare collection systems, communication technologies, and obstruction lighting are sold under the Genfare, TCI, Flash Technology and Sabik Marine brand names, respectively.
Engineered Solutions Reportable Segment
Our Engineered Solutions reportable segment had revenues of $577.5, $548.9 and $537.0 in 2020, 2019 and 2018, respectively, and backlog of $353.4 and $373.4 as of December 31, 2020 and 2019, respectively. Approximately 88% of the segment’s backlog as of December 31, 2020 is expected to be recognized as revenue during 2021. The segment engineers, designs, manufactures, installs and services transformers for the power transmission and distribution market, as well as process cooling equipment for the industrial and power generation markets. The primary distribution channels for the segment’s products are direct to customers and third-party representatives. The segment has a strong presence in North America.
We sell transformers under the Waukesha brand name. Typical customers for this product line are publicly and privately held utilities. Our process cooling products are sold under the brand names of SPX Cooling and Marley.
Other
Our DBT operating segment had revenues of $4.0, $(6.1) and $72.6 in 2020, 2019 and 2018, respectively, and backlog of $3.7 and $7.4 as of December 31, 2020 and 2019, respectively. DBT engineers, designs, manufactures, installs, and services equipment for the industrial and power generation markets, with its efforts focused primarily on two large power projects in South Africa that are in the final stages of completion (see Note 15 to our consolidated financial statements for additional details).
Acquisitions
We regularly review and negotiate potential acquisitions in the ordinary course of business, some of which are or may be material.
As previously indicated, we acquired ULC and Sensors & Software in 2020, Sabik, SGS, and Patterson-Kelley in 2019, and Schonstedt and Cues in 2018.
Divestitures
We regularly review and negotiate potential divestitures in the ordinary course of business, some of which are or may be material. There were no divestitures of businesses in 2020, 2019 or 2018. As previously indicated, we completed the wind-down of our Heat Transfer business in the fourth quarter of 2020 and, as such, the business is now being reported as a discontinued operation for all periods presented.
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International Operations
We are a multinational corporation with operations in over 15 countries. Sales outside the United States were $196.4, $144.8 and $221.0 in 2020, 2019 and 2018, respectively.
See Note 7 to our consolidated financial statements for more information on our international operations.
Research and Development
We are actively engaged in research and development programs designed to improve existing products and manufacturing methods and develop new products to better serve our current and future customers. These efforts encompass certain of our products with divisional engineering teams coordinating their resources. We place particular emphasis on the development of new products that are compatible with, and build upon, our manufacturing and marketing capabilities.
Patents/Trademarks
We own 197 domestic and 214 foreign patents (comprising 186 patent “families”), including 23 patents that were issued in 2020, covering a variety of our products and manufacturing methods. We also own a number of registered trademarks. Although in the aggregate our patents and trademarks are of considerable importance in the operation of our business, we do not consider any single patent or trademark to be of such importance that its absence would adversely affect our ability to conduct business as presently constituted. We are both a licensor and licensee of patents. For more information, please refer to “Risk Factors.”
Outsourcing and Raw Materials
We manufacture many of the components used in our products; however, our strategy includes outsourcing certain components and sub-assemblies to other companies where strategically and economically beneficial. In instances where we depend on third-party suppliers for outsourced products or components, we are subject to the risk of customer dissatisfaction with the quality or performance of the products we sell due to supplier failure. In addition, business difficulties experienced by a third-party supplier can lead to the interruption of our ability to obtain the outsourced product or component and ultimately to our inability to supply products to our customers. We believe that we generally will be able to continue to obtain adequate supplies of key products, components or appropriate substitutes at reasonable costs.
We are subject to increases in the prices of many of our key raw materials, including petroleum-based products, steel and copper. In recent years, we have generally been able to offset increases in raw material costs. Occasionally, we are subject to long-term supplier contracts, which may increase our exposure to pricing fluctuations. We use forward contracts to manage our exposure on forecasted purchases of commodity raw materials (“commodity contracts”). See Note 14 to our consolidated financial statements for further information on commodity contracts.
Due to our diverse products and services, as well as the wide geographic dispersion of our production facilities, we use numerous sources for the raw materials needed in our operations. We are not significantly dependent on any one or a limited number of suppliers, and we have been able to obtain suitable quantities of raw materials at competitive prices.
Competition
Our competitive position cannot be determined accurately in the aggregate or by reportable or operating segment since we and our competitors do not offer all the same product lines or serve all the same markets. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors as they apply to the various products and services offered. See “Reportable Segments and Other Operating Segment” above for a discussion of our competitors.
Environmental Matters
See “MD&A — Critical Accounting Estimates — Contingent Liabilities,” “Risk Factors” and Note 15 to our consolidated financial statements for information regarding environmental matters.
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Human Capital Resources
At December 31, 2020, we had approximately 4,500 employees, with approximately 3,900 employed in the United States. We also leverage temporary workers to provide flexibility for our business and manufacturing needs. Eight domestic collective bargaining agreements cover approximately 1,100 of our employees. In addition, we have various collective labor arrangements covering certain of our non-U.S. employee groups. While we generally have experienced satisfactory labor relations, we are subject to potential union campaigns, work stoppages, union negotiations and other potential labor disputes.
We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. As such, we strive to provide an environment where employees are developed and provided challenging career growth opportunities, and know their inputs and contributions are appreciated. We offer a “Total Rewards” program that provides comprehensive compensation and benefits packages that are competitive with the market and choices designed to reward employees and assist them in managing their well-being. Together, these opportunities present significant growth potential for employees, both financially and professionally.
As part of our focus on building and sustaining a highly capable, engaged and motivated workforce that has the ability to deliver on the current and future requirements of the company, we continue to advance our talent management framework, known as RiSE, which helps us Reach, Identify, Strengthen, and Engage our workforce. Recent areas of focus include: the graduation of a new cohort from our executive leadership development program, the introduction of a new course supporting our frontline leaders’ development, and the expansion of our talent review and succession planning programs. We also were able to successfully pivot many of our education and training programs to an online format in response to the COVID-19 pandemic. We anticipate that we will incorporate the online approach into our training offerings going forward, as this format allows expanded participation and permits broader, time-flexible development.
During 2020, there was significant focus on enhancing our Diversity & Inclusion programs, aimed at ensuring we provide an inclusive environment where everyone feels valued and respected. We targeted engagement, as well as education and training efforts, which focused on creating awareness and expanding understanding and changing behaviors. We also formed a Diversity & Inclusion Council, which is comprised of several senior leaders from across the enterprise and is led by our CEO. In addition, we developed networking and action groups, comprised of dozens of “Ambassadors” from across the company. These groups have been asked to participate in the development and implementation of strategy and programming to ensure that the actions we take drive meaningful and impactful results for our employees. We believe that through education and training we can unlock greater potential and opportunities and benefit from diverse backgrounds and points of view. Valuing diversity and inclusion is, and will be, an on-going part of the culture we are continuously working to strengthen.
Other Matters
No customer or group of customers that, to our knowledge, are under common control accounted for more than 10% of our consolidated revenues for any period presented.
Our businesses maintain sufficient levels of working capital to support customer requirements, particularly inventory. We believe our businesses’ sales and payment terms are generally similar to those of our competitors.
Many of our businesses closely follow changes in the industries and end markets they serve. In addition, certain businesses have seasonal fluctuations. Historically, our businesses generally tend to be stronger in the second half of the year.
Our website address is www.spx.com. Information on our website is not incorporated by reference herein. We file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and certain amendments to these reports. Copies of these reports are available free of charge on our website as soon as reasonably practicable after we file the reports with the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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ITEM 1A. Risk Factors
(All currency and share amounts are in millions)
You should consider the risks described below and elsewhere in our documents filed with the SEC before investing in any of our securities. We may amend, supplement or add to the risk factors described below from time to time in future reports filed with the SEC.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has had, and could continue to have, an adverse impact on our business.
During March 2020, our business began to experience the adverse impacts of the COVID-19 pandemic, including a modest impact on our consolidated financial results for year ended December 31, 2020. In response, we have taken a number steps to protect our employees, customers, and business, including:
•The implementation of a COVID-19 task force, which, among other things, is monitoring the impacts of the COVID-19 pandemic on a regular basis;
•The adoption of practices that promote social distancing and prevent the spread of the COVID-19 pandemic (e.g., visitor access restrictions at our facilities, the use of masks and, in most cases, temperature checks at our facilities, remote work arrangements where feasible, staggered work shifts, travel restrictions, etc.);
•Enhanced workplace hygiene and sanitary processes at our facilities; and
•Modified/enhanced employee benefits to better support employee needs in the current environment.
The COVID-19 pandemic could continue to have an adverse impact on our business and consolidated financial results during 2021 and we are unable to determine the extent, duration, or nature at this time. The intensity, duration and governmental response to the pandemic, as well as the pace of vaccination efforts, are all highly uncertain and could contribute to the ultimate impact on our business. Specifically, the COVID-19 pandemic could impact:
•Our customers’ ability to access credit and to pay amounts due to us;
•Our distributors’ ability to perform;
•Our suppliers’ ability to perform and the availability of materials and subcontractors’ services; and
•Our ability to:
◦Access credit;
◦Meet contractual deadlines with customers, which could result in delays in payments from customers and customers possibly seeking delay damages;
◦Complete acquisitions due to potential adverse impacts on targeted businesses or product lines; and
◦Meet the financial covenants under our senior credit and other debt agreements.
The impact of the COVID-19 pandemic could also result in:
•A prolonged reduction in the demand for certain of our products;
•A prolonged shut-down of one or more of our facilities either due to exposure to the COVID-19 pandemic or to further restrictive government orders;
•Disruptions in our supply chain or increased costs for certain components or commodities;
•Asset impairment charges;
•A loss of productivity, greater cybersecurity risk and other fraud risks, and difficulties in maintaining internal controls over financial reporting due to the impact of employees working remotely;
•An adverse impact to the funded status of our defined benefit pension plans, which could result in (i) a material charge during the fourth quarter of 2021 and (ii) on a longer-term, additional funding requirements for the plans;
•The diversion of management’s attention from core business operations; and
•Restructuring charges if we decide to reduce headcount as a result of a decline in customer demand.
Any of the above risks could have a material adverse impact on our business and consolidated financial results.
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Risks Related to Contingent Liabilities
We are subject to various claims, disputes, enforcement actions, litigation, arbitration and other legal proceedings related to two large power projects in South Africa that could ultimately be resolved against us.
Since 2008, DBT has been executing contracts on two large power projects in South Africa (Kusile and Medupi). Over such time, the business environment surrounding these projects has been difficult, as DBT, along with many other contractors on the projects, have experienced delays, cost over-runs, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors, various subcontractors (including DBT and its subcontractors), and various suppliers. DBT is currently involved in a number of claims relating to these challenges and may be subject to other claims, which could be significant. We cannot give assurance that these claims and the costs to assert our claims and defend claims against us will not have a material adverse effect on our financial position, results of operations, or cash flows. See “MD&A - Critical Accounting Estimates - Contingent Liabilities” and Note 15 to our consolidated financial statements for further discussion.
We are subject to potential liability relating to claims, complaints and proceedings, including those relating to asbestos, environmental, product liability and other matters.
We are subject to various laws, ordinances, regulations and other requirements of government authorities in the United States and other nations. Additionally, changes in laws, ordinances, regulations, or other governmental policies may significantly increase our expenses and 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 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). Periodically, claims, complaints and proceedings arising other than in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (e.g. patent infringement), including claims with respect to businesses that we have acquired for matters arising before the relevant date of the acquisition. From time to time, we face actions by governmental authorities, both in and outside the United States. 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. Our insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against potential loss exposures.
The liabilities we record for asbestos product liability matters are based on a number of assumptions, including historical claims and payment experience and actuarial estimates of the future period during which additional claims are reasonably foreseeable. While we base our assumptions on facts currently known to us, they entail inherently subjective judgments and uncertainties. As a result, our current assumptions for estimating these liabilities may not prove accurate, and we may be required to adjust these liabilities in the future, including as a result of our change in relevant assumptions, which could result in material charges to earnings. In addition, a significant increase in claims, costs, and/or issues with existing insurance coverage could have a material adverse impact on our financial position, results of operations and cash flows.
We face environmental exposures including, for example, those relating to discharges from and materials handled as part of our operations, the remediation of soil and groundwater contaminated by petroleum products or hazardous substances or wastes, and the health and safety of our employees. We may be liable for the costs of investigation, removal, or remediation of hazardous substances or petroleum products on, under, or in our current or formerly owned or leased properties, or from third-party disposal facilities that we may have used, without regard to whether we knew of, or caused, the presence of the contaminants. The presence of, or failure to properly remediate, these substances may have adverse effects, including, for example, substantial investigative or remedial obligations and limitations on the ability to sell or rent affected property or to borrow funds using affected property as collateral. New or existing environmental matters or changes in environmental laws or policies could lead to material costs for environmental compliance or cleanup. In addition, environmentally related product regulations are growing globally in number and complexity and could contribute to increased costs with respect to disclosure requirements, product sales and distribution related costs, and post-sale recycling and disposal costs. There can be no assurance that these liabilities and costs will not have a material adverse effect on our financial position, results of operations, or cash flows.
We devote significant time and expense to defend against the various claims, complaints, and proceedings brought against us. In addition, from time to time, we bring actions to enforce our rights against customers, suppliers, insurers, and other third
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parties. We cannot assure you that the expenses or distractions from operating our businesses arising from these defenses and actions will not increase materially.
We cannot assure you that our accruals and right to indemnity and insurance will be sufficient, that recoveries from insurance or indemnification claims will be available or that any of our current or future claims or other matters will not have a material adverse effect on our financial position, results of operations, or cash flows.
See “MD&A - Critical Accounting Estimates - Contingent Liabilities” and Note 15 to our consolidated financial statements for further discussion.
Risks Related to our Markets and Customers
Many of the markets in which we operate are cyclical or are subject to industry events, and our results have been and could be affected as a result.
Many of the markets in which we operate are subject to general economic cycles or industry events. In addition, certain of our businesses are subject to market-specific cycles.
Furthermore, contract timing on projects, including those relating to power transmission and distribution systems, communication technologies, fare collection systems, and process cooling systems and towers may cause significant fluctuations in revenues and profits from period to period.
The businesses of many of our customers are to varying degrees cyclical and have experienced, and may continue to experience, periodic downturns. Cyclical changes and specific industry events could also affect sales of products in our other businesses. Downturns in the business cycles of our different operations may occur at the same time, which could exacerbate any adverse effects on our business. In addition, certain of our businesses have seasonal and weather-related fluctuations. Historically, many of our key businesses generally have tended to have stronger performance in the second half of the year. See “MD&A - Results of Continuing Operations and Results of Reportable Segments and Other Operating Segment.”
Our business depends on capital investment and maintenance expenditures by our customers.
Demand for most of our products and services depends on the level of new capital investment and planned maintenance expenditures by our customers. The level of capital expenditures by our customers fluctuates based on planned expansions, new builds and repairs, commodity prices, general economic conditions, availability of credit, and expectations of future market behavior. Any of these factors, whether individually or in the aggregate, could have a material adverse effect on our customers and, in turn, our business, financial condition, results of operations and cash flows.
Our customers have been and could be impacted by commodity availability and prices.
A number of factors outside our control, including fluctuating commodity prices, impact the demand for our products. Increased commodity prices, including as a result of new or increased tariffs or the impact of new trade laws, may increase our customers’ cost of doing business, thus causing them to delay or cancel large capital projects.
On the other hand, declining commodity prices may cause our customers to delay or cancel projects relating to the production of such commodities. Reduced demand for our products and services could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our absorption of fixed manufacturing costs. Reduced demand may also erode average selling prices in the relevant market.
We operate in highly competitive markets. Our failure to compete effectively could harm our business.
We sell our products in highly competitive markets, which could result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products. We compete on a number of fronts, including on the basis of service, product performance, technical innovation and price. We have a number of competitors with substantial technological and financial resources, brand recognition and established relationships with global service providers. Some of our competitors have lower cost structures, support from local governments, or both. In addition, new competitors may enter the markets in which we participate. Competitors may be able to offer lower prices, additional products or services or a more attractive mix of products or services, or services or other incentives that we cannot or will not match. These competitors may be in a stronger position to respond quickly to new or emerging technologies and may be able to undertake more extensive marketing campaigns and make more attractive offers to potential customers, employees and strategic partners. In addition, competitive environments in slow-growth markets, to which some of our businesses have exposure, have been inherently more influenced by pricing and domestic and global economic conditions. To remain competitive, we need to invest in manufacturing,
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marketing, customer service and support, and our distribution networks. No assurances can be made that we will have sufficient resources to continue to make the investment required to maintain or increase our market share or that our investments will be successful. If we do not compete successfully, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Risks Related to our Suppliers and Vendors
The price and availability of raw materials and components has and may adversely affect our business.
We are exposed to a variety of risks relating to the price and availability of raw materials and components. In recent years, we have faced volatility in the prices of many key raw materials (e.g., copper, steel and oil) and key components (e.g. circuit boards), including price increases in response to trade laws and tariffs. Increases in the prices of raw materials and components, including as a result of new or increased tariffs or the impact of new trade laws, or shortages or allocations of materials and components may have a material adverse effect on our financial position, results of operations or cash flows, as there may be delays in our ability, or we may not be able, to pass cost increases on to our customers, or our sales may be reduced. We are subject to, or may enter into, long-term supplier contracts that may increase our exposure to pricing fluctuations.
The fact that we outsource various elements of the products and services we sell subjects us to the business risks of our suppliers and subcontractors, which could have a material adverse impact on our operations.
In areas where we depend on third-party suppliers and subcontractors for outsourced products, components or services, we are subject to the risk of customer dissatisfaction with the quality or performance of the products or services we sell due to supplier or subcontractor failure. In addition, business difficulties experienced by a third-party supplier or subcontractor can lead to the interruption of our ability to obtain outsourced products or services and ultimately our inability to supply products or services to our customers. Third-party supplier and subcontractor business interruptions can include, but are not limited to, work stoppages, union negotiations and other labor disputes. Current economic conditions could also impact the ability of suppliers and subcontractors to access credit and, thus, impair their ability to provide us quality products or services in a timely manner, or at all.
Risks Related to Information, Technology and Cybersecurity
If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.
We are increasingly dependent on cloud-based and other information technology (“IT”) networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information. We depend on such IT infrastructure for electronic communications among our locations around the world and between our personnel and suppliers and customers. In addition, we rely on these IT systems to record, process, summarize, transmit, and store electronic information, and to manage or support a variety of business processes and activities, including, among other things, our accounting and financial reporting processes; our manufacturing and supply chain processes; our sales and marketing efforts; and the data related to our research and development efforts. The failure of our IT systems or those of our business partners or third-party service providers to perform properly, or difficulties encountered in the development of new systems or the upgrade of existing systems, could disrupt our business and harm our reputation, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business, reputation, financial condition, and operating results to suffer. Upon expiration or termination of any of our agreements with third-party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.
IT security threats are increasing in frequency and sophistication and we have detected numerous attempts to compromise the security of our IT systems. Cyber-attacks may be random, coordinated, or targeted, including sophisticated computer crime threats. These threats pose a risk to the security of our systems and networks, and those of our business partners and third-party service providers, and to the confidentiality, availability, and integrity of our data. Despite our implementation of security measures, cybersecurity threats, such as malicious software, phishing attacks, computer viruses, and attempts to gain unauthorized access, cannot be completely mitigated. Our business, reputation, operating results, and financial condition could be materially adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shutdown; our confidential, proprietary information is stolen or disclosed; the performance or security of our cloud-based product offerings is impacted; our intranet and internet sites are compromised; data is manipulated or destroyed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we must dedicate
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significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.
In addition, newer generations of certain of our products include IT systems, including systems that are cloud-based and/or interconnect through the internet. These systems are subject to the same cybersecurity threats described above and the failure of these systems, including by cyber-attack, could disrupt our customers’ business, leading to potential exposure for us.
Our technology is important to our success, and failure to develop new products or make the appropriate investment in technology advancements may result in the loss of any sustainable competitive advantage in products, services and processes.
We believe the development of our intellectual property rights is critical to the success of our business. In order to maintain our market positions and margins, we need to regularly develop and introduce high-quality, technologically advanced and cost-effective products on a timely basis, in many cases in multiple jurisdictions around the world. Information technology systems, platforms and products are critical to our operating environment, product offerings and competitive position. Certain digitalization initiatives important to our long-term success may require capital investment, have significant risks associated with their execution, and could take several years to implement. If we do not accurately predict, prepare and respond to new technology innovations, market developments and changing customer needs, our revenues, profitability and long-term competitiveness could be materially adversely affected.
Failure to protect or unauthorized use of our intellectual property may harm our business.
Despite our efforts to protect our proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use our products or technology. The steps we have taken may not prevent unauthorized use of our technology or knowledge, particularly in foreign countries where the laws may not protect our proprietary rights to the same extent as in the United States. Costs incurred to defend our rights may be material.
Risks Related to Our Manufacturing and Operations
Cost overruns, inflation, delays and other risks could significantly impact our results, particularly with respect to fixed-price contracts.
A portion of our revenues and earnings is generated through fixed-price contracts, particularly within our Engineered Solutions reportable segment. We recognize revenues for certain of these contracts over-time whereby revenues and expenses, and thereby profit, in a given period are determined based on our estimates as to the project status and the costs remaining to complete a particular project.
Estimates of total revenues and cost at completion are subject to many variables, including the length of time to complete a contract. In addition, contract delays may negatively impact these estimates and our revenues and earnings results for affected periods.
To the extent that we underestimate the remaining cost to complete a project, we may overstate the revenues and profit in a particular period. Further, certain of these contracts provide for penalties or liquidated damages for failure to timely perform our obligations under the contract, or require that we, at our expense, correct and remedy certain defects to the satisfaction of the other party. Because some of our contracts are at a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on our projects.
Our current and planned products may contain defects or errors that are detected only after delivery to customers. If that occurs, our reputation may be harmed and we may face additional costs.
We cannot assure you that our product development, manufacturing and integration testing will be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us with regard to our products. As a result, we may have, and from time to time have had, to replace certain components and/or provide remediation in response to the discovery of defects in products that are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers or our customers’ end users and other losses to us or to any of our customers or end users, and could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues, profitability and cash flows.
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Risks Related to Macro-Economic, Domestic and World Political Events
Governmental laws and regulations could negatively affect our business.
Changes in laws and regulations to which we are or may become subject could have a significant negative impact on our business. In addition, we could face material costs and risks if it is determined that we have failed to comply with relevant laws and regulations. We are subject to U.S. Customs and Export Regulations, including U.S. International Traffic and Arms Regulations and similar laws, which collectively control import, export and sale of technologies by companies and various other aspects of the operation of our business; the Foreign Corrupt Practices Act and similar anti-bribery laws, which prohibit companies from making improper payments to government officials for the purposes of obtaining or retaining business; the California Transparency in Supply Chain Act and similar laws and regulations, which relate to human trafficking and anti-slavery and impose new compliance requirements on our businesses and their suppliers; and the California Consumer Privacy Act of 2018 and the European General Data Protection Regulation, which establish data management requirements for the protection of personal information of individuals. While our policies and procedures mandate compliance with such laws and regulations, there can be no assurance that our employees and agents will always act in strict compliance. Failure to comply with such laws and regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product or other of our activities, which could have a material adverse impact on our results of operations and financial condition.
Several of our businesses are reliant on or may be directly impacted by government regulations. Changes to these regulations may have a significant negative impact on these businesses. For example, (i) a reduction of Federal Aviation Administration regulations mandating lighting of towers and buildings at height; (ii) increases in Department of Energy regulations on energy efficiency requirements for heating, and (iii) a reduction in regulations requiring 811 calls to be made before the commencement of a digging project, could have a significant negative impact on these businesses. While we monitor these regulations and our businesses plan for potential changes, there can be no assurance that we will be able to adapt in each circumstance. Failure to adapt if regulations change could have a material adverse impact on our results of operations and financial condition.
Difficulties presented by domestic economic, political, legal, accounting and business factors could negatively affect our business.
In 2020, approximately 87% of our revenues were generated inside the United States. Our reliance on U.S. revenues and U.S. manufacturing bases exposes us to a number of risks, including:
•Government embargoes or foreign trade restrictions such as antidumping duties, as well as the imposition of trade sanctions by the United States against a class of products imported from or sold and exported to, or the loss of “normal trade relations” status with, countries in which we conduct business, could significantly increase our cost of products imported into or exported from the United States or reduce our sales and harm our business and the relaxation of embargoes and foreign trade restrictions, including antidumping duties on transformers, by the United States could adversely affect the market for our products in the United States;
•Customs and tariffs may make it difficult or impossible for us to move our products or assets across borders in a cost-effective manner and may increase the cost of our raw materials, including raw materials sourced domestically;
•Transportation and shipping expenses add cost to our products;
•Complications related to shipping, including delays due to weather, labor action, or customs, may impact our profit margins or lead to lost business;
•Environmental and other laws and regulations could increase our costs or limit our ability to run our business; and
•Our ability to obtain supplies from foreign vendors and ship products internationally may be impaired during times of crisis or otherwise.
Any of the above factors or other factors affecting the movement of people and products into and from various countries to North America could have a significant negative effect on our operations. In addition, our concentration on U.S. business may make it difficult to enter new markets, making it more difficult for our businesses to grow.
Worldwide economic conditions could negatively impact our businesses.
Many of our customers historically have tended to delay capital projects, including expensive maintenance and upgrades, during economic downturns. Poor macroeconomic conditions could negatively impact our businesses by adversely affecting, among other things, our:
•Revenues;
•Margins;
•Profits;
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•Cash flows;
•Customers’ orders, including order cancellation activity or delays on existing orders;
•Customers’ ability to access credit;
•Customers’ ability to pay amounts due to us; and
•Suppliers’ and distributors’ ability to perform and the availability and costs of materials and subcontracted services.
Downturns in global economies could negatively impact our performance or any expectations in reporting performance.
Our non-U.S. revenues and operations expose us to numerous risks that may negatively impact our business.
To the extent we generate revenues outside of the United States, non-U.S. revenues and non-U.S. manufacturing bases exposes us to a number of risks, including:
•Significant competition could come from local or long-term participants in non-U.S. markets who may have significantly greater market knowledge and substantially greater resources than we do;
•Local customers may have a preference for locally-produced products;
•Credit risk or financial condition of local customers and distributors could affect our ability to market our products or collect receivables;
•Regulatory or political systems or barriers may make it difficult or impossible to enter or remain in new markets. In addition, these barriers may impact our existing businesses, including making it more difficult for them to grow;
•Local political, economic and social conditions, including the possibility of hyperinflationary conditions, political instability, nationalization of private enterprises, or unexpected changes relating to currency could adversely impact our revenues and operations;
•The United Kingdom’s exit from the European Union (commonly referred to as “Brexit”) has contributed to, and may continue to contribute to, economic, currency, market and regulatory uncertainty in the United Kingdom and European Union and could adversely affect economic, currency, market, regulatory, or political conditions both in those regions and worldwide;
•Customs, tariffs and trade restrictions may make it difficult or impossible for us to move our products or assets across borders in a cost-effective manner;
•Transportation and shipping expenses add cost to our products;
•Complications related to shipping, including delays due to weather, labor action, or customs, may impact our profit margins or lead to lost business;
•Local, regional or worldwide hostilities could impact our operations;
•Distance and language and cultural differences may make it more difficult to manage our business and employees and to effectively market our products and services; and
•Public health crises, including the outbreak of a pandemic or contagious disease.
Any of the above factors or other factors affecting social and economic activity in the United Kingdom, China, and South Africa or affecting the movement of people and products into and from these countries to our major markets, could have a significant negative effect on our operations.
Risks Related to Acquisitions and Dispositions
Acquisitions involve a number of risks and present financial, managerial and operational challenges.
Our acquisitions involve a number of risks and present financial, managerial and operational challenges, including:
•Adverse effects on our reported operating results due to charges to earnings, including potential impairment charges associated with goodwill and other intangibles;
•Diversion of management attention from core business operations;
•Integration of technology, operations, personnel and financial and other systems;
•Increased expenses;
•Increased foreign operations, often with unique issues relating to corporate culture, compliance with legal and regulatory requirements and other challenges;
•Assumption of known and unknown liabilities and exposure to litigation;
•Increased levels of debt or dilution to existing stockholders;
•Potential disputes with the sellers of acquired businesses; and
•Potential cybersecurity risks, as acquired systems may not possess the appropriate security measures.
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We conduct operational, financial, tax, systems, and legal due diligence on all acquisitions; however, we cannot assure that all potential risks or liabilities are adequately discovered, disclosed, or understood in each instance.
In addition, internal controls over financial reporting of acquired companies may not be compliant with required standards. Issues may exist that could rise to the level of significant deficiencies or, in some cases, material weaknesses, particularly with respect to foreign companies or non-public U.S. companies.
Our integration activities may place substantial demands on our management, operational resources and financial and internal control systems. Customer dissatisfaction or performance problems with an acquired business, technology, service or product could also have a material adverse effect on our reputation and business.
Our failure to successfully complete acquisitions could negatively affect us.
We may not be able to consummate desired acquisitions, which could materially impact our growth rate, results of operations, future cash flows and stock price. Our ability to achieve our goals depends upon, among other things, our ability to identify and successfully acquire companies, businesses and product lines, to effectively integrate them and to achieve cost savings. We may also be unable to raise additional funds necessary to consummate these acquisitions. In addition, decreases in our stock price may adversely affect our ability to consummate acquisitions. Competition for acquisitions in our business areas may be significant and result in higher prices for businesses, including businesses that we may target, which may also affect our acquisition rate or benefits achieved from our acquisitions.
We may not achieve the expected cost savings and other benefits of our acquisitions.
We strive for and expect to achieve cost savings in connection with our acquisitions, including: (i) manufacturing process and supply chain rationalization, (ii) streamlining redundant administrative overhead and support activities, (iii) restructuring and repositioning sales and marketing organizations to eliminate redundancies, and (iv) achieving anticipated revenue synergies. Cost savings expectations are estimates that are inherently difficult to predict and are necessarily speculative in nature, and we cannot assure you that we will achieve expected, or any, cost savings in connection with an acquisition. In addition, we cannot assure you that unforeseen factors will not offset the estimated cost savings or other benefits from our acquisitions. As a result, anticipated benefits could be delayed, differ significantly from our estimates and the other information contained in this report, or not be realized.
Dispositions or liabilities retained in connection with dispositions could negatively affect us.
Our dispositions involve a number of risks and present financial, managerial and operational challenges, including diversion of management attention from running our core businesses, increased expense associated with the dispositions, potential disputes with the customers or suppliers of the disposed businesses, potential disputes with the acquirers of the disposed businesses and a potential dilutive effect on our earnings per share. In addition, we have agreed to retain certain liabilities in connection with the disposition of certain businesses, including the Balcke Dürr business. These liabilities may be significant and could negatively impact our business.
If dispositions are not completed in a timely manner, there may be a negative effect on our cash flows and/or our ability to execute our strategy. In addition, we may not realize some or all of the anticipated benefits of our dispositions. See “Business,” “MD&A - Results of Discontinued Operations,” and Notes 4 and 17 to our consolidated financial statements for the status of our divestitures, including liabilities retained in connection with such dispositions.
Risks Related to Human Capital Resources
The loss of key personnel and an inability to attract and retain qualified employees could have a material adverse effect on our operations.
We are dependent on the continued services of our leadership team. The loss of these personnel without adequate replacement could have a material adverse effect on our operations. Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience in many locations in order to operate our business successfully. From time to time, there may be a shortage of qualified managers or skilled labor, which may make it more difficult and expensive for us to attract and retain qualified employees. If we were unable to attract and retain sufficient numbers of qualified individuals or our costs to do so were to increase significantly, our operations could be materially adversely affected.
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We are subject to work stoppages, union negotiations, labor disputes and other matters associated with our labor force, which may adversely impact our operations and cause us to incur incremental costs.
At December 31, 2020, we had eight domestic collective bargaining agreements covering approximately 1,100 of our over 4,500 employees. Three of these collective bargaining agreements expire in 2021 and are scheduled for negotiation and renewal. We also have various collective labor arrangements covering certain non-U.S. employee groups. We are subject to potential union campaigns, work stoppages, union negotiations and other potential labor disputes. Further, we may be subject to work stoppages, which are beyond our control, at our suppliers or customers.
Risks Related to Financial Matters
Our indebtedness may affect our business and may restrict our operating flexibility.
At December 31, 2020, we had $412.4 in total indebtedness. On that same date, we had $302.9 of available borrowing capacity under our revolving credit facilities, after giving effect to $17.3 reserved for outstanding letters of credit and $129.8 of borrowings under the revolving credit agreement, and $11.5 of available borrowing capacity under our trade receivables financing arrangement. In addition, at December 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. At December 31, 2020, our cash and equivalents balance was $68.3. See MD&A and Note 13 to our consolidated financial statements for further discussion. We may incur additional indebtedness in the future, including indebtedness incurred to finance, or assumed in connection with, acquisitions. We may renegotiate or refinance our senior credit facilities or other debt facilities, or enter into additional agreements that have different or more stringent terms. The level of our indebtedness could:
•Impact our ability to obtain new, or refinance existing, indebtedness, on favorable terms or at all;
•Limit our ability to obtain, or obtain on favorable terms, additional debt financing for working capital, capital expenditures or acquisitions;
•Limit our flexibility in reacting to competitive and other changes in the industry and economic conditions;
•Limit our ability to pay dividends on our common stock in the future;
•Coupled with a substantial decrease in net operating cash flows due to economic developments or adverse developments in our business, make it difficult to meet debt service requirements; and
•Expose us to interest rate fluctuations to the extent existing borrowings are, and any new borrowings may be, at variable rates of interest, which could result in higher interest expense and interest payments in the event of increases in interest rates.
Our ability to make scheduled payments of principal or pay interest on, or to refinance, our indebtedness and to satisfy our other debt obligations will depend upon our future operating performance, which may be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. In addition, we cannot assure you that future borrowings or equity financing will be available for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, whether in the ordinary course of business or upon an acceleration of such indebtedness, we may pursue one or more alternative strategies, such as restructuring or refinancing our indebtedness, selling assets, reducing or delaying capital expenditures, revising implementation of or delaying strategic plans or seeking additional equity capital. Any of these actions could have a material adverse effect on our business, financial condition, results of operations and stock price. In addition, we cannot assure that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements, or that these actions would be permitted under the terms of our various debt agreements.
Numerous banks in many countries are syndicate members in our credit facility. Failure of one or more of our larger lenders, or several of our smaller lenders, could significantly reduce availability of our credit, which could harm our liquidity.
We may not be able to finance future needs or adapt our business plan to react to changes in economic or business conditions because of restrictions placed on us by our senior credit facilities and any existing or future instruments governing our other indebtedness.
Our senior credit facilities and agreements governing our other indebtedness contain, or future or revised instruments may contain, various restrictions and covenants that limit our ability to make distributions or other payments to our investors and creditors unless certain financial tests or other criteria are satisfied. We also must comply with certain specified financial ratios and tests. Our subsidiaries may also be subject to restrictions on their ability to make distributions to us. In addition, our senior credit facilities and agreements governing our other indebtedness contain or may contain additional affirmative and negative covenants. Material existing restrictions are described more fully in the MD&A and Note 13 to our consolidated financial statements. Each of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities, such as acquisitions.
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If we do not comply with the covenants and restrictions contained in our senior credit facilities and agreements governing our other indebtedness, we could default under those agreements, and the debt, together with accrued interest, could be declared due and payable. If we default under our senior credit facilities, the lenders could cause all our outstanding debt obligations under our senior credit facilities to become due and payable or require us to repay the indebtedness under these facilities. If our debt is accelerated, we may not be able to repay or refinance our debt. In addition, any default under our senior credit facilities or agreements governing our other indebtedness could lead to an acceleration of debt under other debt instruments that contain cross-acceleration or cross-default provisions. If the indebtedness under our senior credit facilities is accelerated, we may not have sufficient assets to repay amounts due under our senior credit facilities or other debt securities then outstanding. Our ability to comply with these provisions of our senior credit facilities and agreements governing our other indebtedness will be affected by changes in the economic or business conditions or other events beyond our control. Complying with our covenants may also cause us to take actions that are not favorable to us and may make it more difficult for us to successfully execute our business strategy and compete, including against companies that are not subject to such restrictions.
Currency conversion risk could have a material impact on our reported results of business operations.
Our operating results are presented in U.S. dollars for reporting purposes. The strengthening or weakening of the U.S. dollar against other currencies in which we conduct business could result in unfavorable translation effects as the results of transactions in foreign countries are translated into U.S. dollars.
Increased strength of the U.S. dollar will increase the effective price of our products sold in U.S. dollars into other countries, including countries utilizing the Euro, which may have a material adverse effect on sales or require us to lower our prices, and also decrease our reported revenues or margins related to sales conducted in foreign currencies to the extent we are unable or determine not to increase local currency prices. Likewise, the increased strength of the U.S. dollar could allow competitors with foreign-based manufacturing costs to sell their products in the U.S. at lower prices. Alternatively, decreased strength of the U.S. dollar could have a material adverse effect on the cost of materials and products purchased overseas.
Similarly, increased or decreased strength of the currencies of non-U.S. countries in which we manufacture will have a comparable effect against the currencies of other jurisdictions in which we sell. For example, our Radiodetection business manufactures a number of detection instruments in the United Kingdom and sells to customers in other countries, therefore increased strength of the British pound sterling will increase the effective price of these products sold in British pound sterling into other countries; and decreased strength of British pound sterling could have a material adverse effect on the cost of materials and products purchased outside of the United Kingdom.
Credit and counterparty risks could harm our business.
The financial condition of our customers and distributors could affect our ability to market our products or collect receivables. In addition, financial difficulties faced by our customers may lead to cancellations or delays of orders.
Our customers may suffer financial difficulties that make them unable to pay for a project when completed, or they may decide not or be unable to pay us, either as a matter of corporate decision-making or in response to changes in local laws and regulations. We cannot assure you that expenses or losses for uncollectible amounts will not have a material adverse effect on our earnings and cash flows.
Changes in tax laws and regulations or other factors could cause our income tax obligations to increase, potentially reducing our net income and adversely affecting our cash flows.
We are subject to taxation in various jurisdictions around the world. In preparing our financial statements, we provide for income taxes based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions. Our income tax obligations, however, may be higher due to numerous factors, including changes in tax laws or regulations and the outcome of audits and examinations of our tax returns.
Officials in some of the jurisdictions in which we do business have proposed, or announced that they are reviewing, tax changes that could potentially increase taxes, and other revenue-raising laws and regulations, including those that may be enacted as a result of various OECD projects. Changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application, could have a material impact on our financial position, results of operations, and cash flows.
As indicated in Note 12 to our consolidated financial statements, certain of our income tax returns are currently under audit. In connection with these and any future audits, there is a risk that we could be challenged by tax authorities on certain of the tax positions we have taken, or will take, on our tax returns. Although we believe that current tax laws and regulations support our positions, there can be no assurance that tax authorities will agree with our positions. In the event tax authorities
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were to challenge one or more of our tax positions, an unfavorable outcome could have a material adverse impact on our financial position, results of operations, and cash flows.
If the fair value of any of our reporting units is insufficient to recover the carrying value of the goodwill and other intangibles of the respective reporting unit, a material non-cash charge to earnings could result.
At December 31, 2020, we had goodwill and other intangible assets, net, of $804.9. We conduct annual impairment testing to determine if we will be able to recover all or a portion of the carrying value of goodwill and indefinite-lived intangibles. In addition, we review goodwill and indefinite-lived intangible assets for impairment more frequently if impairment indicators arise. If the fair value is insufficient to recover the carrying value of our goodwill and indefinite-lived intangibles, we may be required to record a material non-cash charge to earnings.
The fair values of our reporting units generally are based on discounted cash flow projections that are believed to be reasonable under current and forecasted circumstances, the results of which form the basis for making judgments about carrying values of the reported net assets of our reporting units. Other considerations are also incorporated, including comparable price multiples. Many of our businesses closely follow changes in the industries and end markets that they serve. Accordingly, we consider estimates and judgments that affect the future cash flow projections, including principal methods of competition such as volume, price, service, product performance and technical innovations and estimates associated with cost reduction initiatives, capacity utilization, and assumptions for inflation and foreign currency changes. We monitor impairment indicators across all of our businesses. Significant changes in market conditions and estimates or judgments used to determine expected future cash flows that indicate a reduction in carrying value may give, and have given, rise to impairments in the period that the change becomes known.
Cost reduction actions may affect our business.
Cost reduction actions often result in charges against earnings. These charges can vary significantly from period to period and, as a result, we may experience fluctuations in our reported net income and earnings per share due to the timing of cost reduction actions.
Changes in key estimates and assumptions related to our defined benefit pension and postretirement plans, such as discount rates, assumed long-term return on assets, assumed long-term trends of future cost, and accounting and legislative changes, as well as actual investment returns on our pension plan assets and other actuarial factors, could affect our results of operations and cash flows.
We have defined benefit pension and postretirement plans, including both qualified and non-qualified plans, which cover a portion of our salaried and hourly employees and retirees, including a portion of our employees and retirees in foreign countries. As of December 31, 2020, our net liability to these plans was $139.3. The determination of funding requirements and pension expense or income associated with these plans involves significant judgment, particularly with respect to discount rates, long-term trends of future costs and other actuarial assumptions. If our assumptions change significantly due to changes in economic, legislative and/or demographic experience or circumstances, our pension and other benefit plans’ expense, funded status and our required cash contributions to such plans could be negatively impacted. In addition, returns on plan assets could have a material impact on our pension plans’ expense, funded status and our required contributions to the plans. Changes in regulations or law could also significantly impact our obligations. For example, see “MD&A - Critical Accounting Estimates” for the impact that changes in certain assumptions used in the calculation of our costs and obligations associated with these plans could have on our results of operations and financial position.
Risks Related to Ownership of Our Common Stock
Provisions in our corporate documents and Delaware law may delay or prevent a change in control of our company, and accordingly, we may not consummate a transaction that our stockholders consider favorable.
Provisions of our Certificate of Incorporation and By-laws may inhibit changes in control of our company not approved by our Board. These provisions include, for example: a staggered board of directors; a prohibition on stockholder action by written consent; a requirement that special stockholder meetings be called only by our Chairman, President or Board; advance notice requirements for stockholder proposals and nominations; limitations on stockholders’ ability to amend, alter or repeal the By-laws; enhanced voting requirements for certain business combinations involving substantial stockholders; the authority of our Board to issue, without stockholder approval, preferred stock with terms determined in its discretion; and limitations on stockholders’ ability to remove directors. In addition, we are afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. In general, Section 203 prohibits us from engaging in a “business combination” with an “interested stockholder” (each as defined in Section 203) for at least three years after the time the person
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became an interested stockholder unless certain conditions are met. These protective provisions could result in our not consummating a transaction that our stockholders consider favorable or discourage entities from attempting to acquire us, potentially at a significant premium to our then-existing stock price.
Increases in the number of shares of our outstanding common stock could adversely affect our common stock price or dilute our earnings per share.
Sales of a substantial number of shares of common stock into the public market, or the perception that these sales could occur, could have a material adverse effect on our stock price. As of December 31, 2020, we had the ability to issue up to an additional 4.407 shares as restricted stock shares, restricted stock units, performance stock units, or stock options under our 2019 Stock Compensation Plan, and 0.027 under our 2006 Non-Employee Directors’ Stock Incentive Plan. We also may issue a significant number of additional shares, in connection with acquisitions, through a registration statement, or otherwise. Additional shares issued would have a dilutive effect on our earnings per share.
The Spin-Off of SPX FLOW could result in substantial tax liability to us and our stockholders.
In connection with the Spin-Off of SPX FLOW, we received opinions of tax counsel satisfactory to us as to the tax-free treatment of the Spin-Off and certain related transactions. However, if the factual assumptions or representations upon which the opinions are based are inaccurate or incomplete in any material respect, we will not be able to rely on the opinions. Furthermore, the opinions are not binding on the Internal Revenue Service (“IRS”) or the courts. Accordingly, the IRS may challenge the conclusions set forth in the opinions and any such challenge could prevail. If, notwithstanding the opinions, the Spin-Off or a related transaction is determined to be taxable, we could be subject to a substantial tax liability. In addition, if the Spin-Off is determined to be taxable, each holder of our common stock who received shares of SPX FLOW would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the shares received.
The Spin-Off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.
The Spin-Off is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (1) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return, and (2) the entity (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer, (b) has unreasonably small capital with which to carry on its business, or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including, without limitation, a trustee or debtor-in-possession in a bankruptcy by us or SPX FLOW or any of our respective subsidiaries) may bring a lawsuit alleging that the Spin-Off or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including, without limitation, voiding the distribution and returning SPX FLOW’s assets or SPX FLOW’s shares and subject us to liability.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, an entity would be considered insolvent if (1) the present fair salable value of its assets is less than the amount of its liabilities (including contingent liabilities); (2) the present fair salable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (3) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (4) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that we, SPX FLOW or any of our respective subsidiaries were solvent at the time of or after giving effect to the Spin-Off.
The distribution of SPX FLOW common stock is also subject to review under state corporate distribution statutes. Under the General Corporation Law of the State of Delaware (the “DGCL”), a corporation may only pay dividends to its stockholders either (1) out of its surplus (net assets) or (2) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Although we believe that we and SPX FLOW were each solvent at the time of the Spin-Off (including immediately after the distribution of shares of SPX FLOW common stock), that we are able to repay our debts as they mature and have sufficient capital to carry on our businesses, and that the distribution was made entirely out of surplus in accordance with Section 170 of the DGCL, we cannot assure you that a court would reach the same conclusions in determining whether SPX FLOW or we were insolvent at the time of, or after giving effect to, the Spin-Off, or whether lawful funds were available for the separation and the distribution to our stockholders.
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ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The following is a summary of our principal properties as of December 31, 2020:
| No. of | Approximate Square Footage | ||||||||||||||||||||||
| Location | Facilities | Owned | Leased | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| HVAC reportable segment | 6 U.S. states and 2 foreign countries | 12 | 0.6 | 1.4 | |||||||||||||||||||
Detection and Measurement reportable segment | 7 U.S. states and 3 foreign countries | 14 | 0.3 | 0.2 | |||||||||||||||||||
| Engineered Solutions reportable segment | 7 U.S. states and 0 foreign country | 11 | 1.8 | 0.2 | |||||||||||||||||||
| Other (including corporate) | 1 U.S. state and 1 foreign country | 3 | 0.4 | 0.1 | |||||||||||||||||||
| Total | 40 | 3.1 | 1.9 | ||||||||||||||||||||
In addition to manufacturing plants, we own and lease various sales, service and other locations throughout the world. We consider these properties, as well as the related machinery and equipment, to be well maintained and suitable and adequate for their intended purposes.
ITEM 3. Legal Proceedings
See “Risk Factors,” “MD&A — Critical Accounting Estimates — Contingent Liabilities,” and Note 15 to our consolidated financial statements for a discussion of legal proceedings.
We are also subject to legal proceedings and claims that arise in the normal course of business. We believe these matters are either without merit or of a kind that should not have a material effect individually or in the aggregate on our financial position, results of operations or cash flows; however, we cannot assure you that these proceedings or claims will not have a material effect on our financial position, results of operations or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
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P A R T I I
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “SPXC.”
We discontinued dividend payments in September 2015 in connection with the Spin-off and, thus, there have been no dividends declared since such time.
There were no repurchases of common stock during the three months ended December 31, 2020. The number of shareholders of record of our common stock as of February 19, 2021 was 2,499.
Company Performance
This graph shows a five-year comparison of cumulative total returns for SPX, the S&P 500 Index, the S&P 1500 Industrials Index, and the S&P 600 Index. The graph assumes an initial investment of $100 on December 31, 2015 and the reinvestment of dividends.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
| SPX Corporation | $ | 100.00 | $ | 254.23 | $ | 336.44 | $ | 300.21 | $ | 545.34 | $ | 584.57 | ||||||||
| S&P 500 | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | ||||||||||||||
| S&P 1500 Industrials | 100.00 | 120.41 | 145.77 | 126.27 | 163.90 | 183.06 | ||||||||||||||
| S&P 600 | 100.00 | 124.75 | 139.38 | 125.79 | 152.02 | 166.57 | ||||||||||||||
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ITEM 6. Selected Financial Data
Not applicable. The Company has elected early compliance with the changes to Items 301 and 302 of Regulation S-K effected by Securities and Exchange Commission Release No. 33-10890, Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information (effective February 10, 2021).
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ITEM 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(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:
•On March 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.
•On June 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 in South 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 in the United States (“GAAP”), should not be
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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 ended December 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 | |||||||||||||||||||||||||||
___________________________________________________________________
* 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 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. 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 in South Africa of $17.5 and $6.0, respectively, 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. 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 in South 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.
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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 in South 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
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$7.9 related to changes in the estimated fair value of an equity security that we hold and income derived from company-owned life insurance policies of $4.0.
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 our U.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.
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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) | |||||||||||
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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% | 2019 vs. 2018% | |||||||||||||||||||||||||||
| 2020 | 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.
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Detection and Measurement Reportable Segment
| Year Ended December 31, | 2020 vs. 2019% | 2019 vs. 2018% | |||||||||||||||||||||||||||
| 2020 | 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 of December 31, 2020 and 2019, respectively. Approximately 81% of the segment’s backlog as of December 31, 2020 is expected to be recognized as revenue during 2021.
Engineered Solutions Reportable Segment
| Year Ended December 31, | 2020 vs. 2019% | 2019 vs. 2018% | |||||||||||||||||||||||||||
| 2020 | 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.
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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 $353.4 and $373.4 as of December 31, 2020 and 2019, respectively. Approximately 88% of the segment’s backlog as of December 31, 2020 is expected to be recognized as revenue during 2021.
Other
| Year Ended December 31, | 2020 vs. 2019% | 2019 vs. 2018% | |||||||||||||||||||||||||||
| 2020 | 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 in South 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 in South 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 in South 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 in South Africa of $17.5 and an adjustment during the second quarter of 2019 of $6.0 to revenues on the large power projects in South 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 $23.5.
For 2019, the increase in the loss, compared to 2018, was due primarily to the aggregate adjustments noted above to the large power projects in South Africa.
Backlog — The DBT operating segment had aggregate backlog of $3.7 and $7.4 as of December 31, 2020 and 2019, respectively.
Corporate Expense and Other Expense
| Year Ended December 31, | 2020 vs. 2019% | 2019 vs. 2018% | |||||||||||||||||||||||||||
| 2020 | 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 our Charlotte, 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.
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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 December 31, 2020, 2019 and 2018.
| 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.
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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, 2019 | Borrowings | Repayments | Other (5) | December 31, 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 until December 2024 under the terms of our senior credit agreement, we have classified within current liabilities the portion of the outstanding balance that we believe will be repaid over the next year, with such amount based on an estimate of cash that is expected to be generated over such period.
(2)The term loan is repayable in quarterly installments beginning in the first quarter of 2021, with the quarterly installments equal to 0.625% of the initial term loan balance of $250.0 during 2021, 1.25% in each of the four quarters of 2022 and 2023, and 1.25% during the first three quarters of 2024. The remaining balance is payable in full on December 17, 2024. Balances are net of unamortized debt issuance costs of $1.4 and $1.8 at December 31, 2020 and December 31, 2019, respectively.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. At December 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 at December 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 the U.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 to December 31, 2020 are $7.2, $13.3, $13.0, $279.0, and $0.1, respectively.
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Senior Credit Facilities
On December 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 of December 17, 2024):
•A new term loan facility in the aggregate principal amount of $250.0;
•A domestic revolving credit facility, available for loans and letters of credit, in an aggregate principal amount of $300.0;
•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:
| Consolidated Leverage Ratio | Domestic Revolving Commitment Fee | Global Revolving Commitment Fee | Letter of Credit Fee | Foreign Credit Commitment Fee | Foreign Credit Instrument Fee | LIBOR Rate Loans | ABR 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 | |||||||||||||||||||||||||||||||||||