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 , 2021
| 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 July 3, 2021 was $2,744,821,519 . 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 18, 2022 was 45,491,812 .
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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 and uncertainties facing us include economic, business and other risks stemming from our internal operations, legal and regulatory risks, and uncertainties with respect to costs and availability of raw materials, availability of labor, pricing pressures, pension funding requirements, integration of acquisitions, and changes in the economy, as well as the impacts of the coronavirus disease (the “COVID-19 pandemic”), which is further discussed 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, uncertainties, and other 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 these new risk factors, and we cannot assess the impact, if any, of these new risk 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, except to the extent we are legally required, 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 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 coming out of the Spin-Off 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 reporting the Heat Transfer business as a discontinued operation for all periods presented. Lastly, with its substantial completion of the remaining
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scope on the large power projects in South Africa, our South African subsidiary, DBT Technologies (PTY) LTD’s (“DBT”), completed wind-down activities during the fourth quarter of 2021. As a result of completing wind-down activities, we are now reporting the DBT business as a discontinued operation for all periods presented. See MD&A and Notes 1 and 4 to our consolidated financial statements for further discussion of these actions.
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.
On April 19, 2021 and August 2, 2021, we completed the acquisitions of Sealite Pty Ltd and affiliated entities, including Sealite USA, LLC (doing business as Avlite Systems) and Star2M Pty Ltd (collectively, "Sealite"), and Enterprise Control Systems Ltd ("ECS"), respectively. Sealite is a leader in the design and manufacture of marine and aviation Aids to Navigation products, while ECS is a manufacturer and designer of highly-engineered tactical datalinks and radio frequency (“RF”) countermeasures, including counter-drone and counter-IED RF jammers. The post-acquisition operating results of Sealite and ECS are reflected within our Detection and Measurement reportable segment.
On October 1, 2021 we completed the sale of SPX Transformer Solutions, Inc. (“Transformer Solutions”) pursuant to the terms of the Stock Purchase Agreement dated June 8, 2021 with GE-Prolec Transformers, Inc. (the “Purchaser”) and Prolec GE Internacional, S. de R.L. de C.V. We are reporting Transformer Solutions as a discontinued operation for all periods presented. See Notes 1 and 4 to our consolidated financial statements for further details. In connection with the disposition of Transformer Solutions and its classification as a discontinued operation, we have eliminated the Engineered Solutions reportable segment and have reflected the remaining operations of the former Engineered Solutions reportable segment within the HVAC reportable segment for all periods presented.
On December 15, 2021, we completed the acquisition of Cincinnati Fan & Ventilator Co., Inc. (“Cincinnati Fan”), a leader in engineered air movement solutions, including blowers and critical exhaust systems. The post-acquisition operating results of Cincinnati Fan are reflected within our HVAC 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 and detection and measurement markets. With operations in 15 countries and approximately 3,100 employees, we offer a wide array of highly engineered infrastructure products with strong brands.
HVAC solutions offered by our businesses include package and process cooling equipment, engineered air quality solutions, 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.
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Reportable Segments
Our operating segments are aggregated into the following two reportable segments: HVAC and Detection and Measurement. 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 for our reportable segments is determined before considering impairment and special charges, long-term incentive compensation, certain other operating income/expense 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 $752.1, $740.8 and $738.7 in 2021, 2020 and 2019, respectively, and backlog of $226.9 and $150.1 as of December 31, 2021 and 2020, respectively. Approximately 97% of the segment’s backlog as of December 31, 2021 is expected to be recognized as revenue during 2022. The segment engineers, designs, manufactures, installs and services cooling products and engineered air quality solutions 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, Recold, SGS and Cincinnati Fan, while our heating and ventilation products are sold under the Berko, Qmark, Fahrenheat, Leading Edge, and Patterson-Kelley brands, and our WM Technologies 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 $467.4, $387.3 and $384.9 in 2021, 2020 and 2019, respectively, and backlog of $153.6 and $89.3 as of December 31, 2021 and 2020, respectively. Approximately 71% of the segment’s backlog as of December 31, 2021 is expected to be recognized as revenue during 2022. 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, Riser Bond, 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, Sabik Marine, Sealite, Avlite and ECS brand names, respectively.
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 Sealite, ECS, and Cincinnati Fan in 2021, ULC and Sensors & Software in 2020, and Sabik, SGS, and Patterson-Kelley in 2019.
Divestitures
We regularly review and negotiate potential divestitures in the ordinary course of business, some of which are or may be material. As previously indicated, the divestiture of Transformer Solutions was completed in 2021. There were no divestitures of businesses in 2020 or 2019. As previously indicated, we completed the wind-down of our DBT and Heat Transfer businesses in the fourth quarters of 2021 and 2020, respectively.
International Operations
We are a multinational corporation with operations in over 15 countries. Sales outside the United States were $228.0, $192.4 and $150.9 in 2021, 2020 and 2019, respectively.
See Note 7 to our consolidated financial statements for more information on our international operations.
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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 163 domestic and 265 foreign patents (comprising 154 patent “families”), including 34 patents that were issued in 2021, 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. For information regarding COVID-19 impacts, please refer to "MD&A - COVID-19 Pandemic, Supply Chain Disruptions, and Other Economic Factors."
We are subject to increases in the prices of many of our key raw materials, including petroleum-based products and steel. 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.
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. For information regarding COVID-19 impacts, please refer to "MD&A - COVID-19 Pandemic, Supply Chain Disruptions, and Other Economic Factors."
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” above for a discussion of our competitors.
Environmental Matters
See “MD&A — Critical Accounting Estimates — Contingent Liabilities,” “Risk Factors - Risks Related to Contingent Liabilities” and Note 15 to our consolidated financial statements for information regarding environmental matters.
Human Capital Resources
At December 31, 2021, we had approximately 3,100 employees, with approximately 2,400 employed in the United States. We also leverage temporary workers to provide flexibility for our business and manufacturing needs. Six domestic collective bargaining agreements cover approximately 300 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
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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. In 2021, we also focused significant time on re-working many of our policies and programs to provide increased flexibility and work-life balance to our team members. Together, these opportunities present significant growth potential for our employees from a financial, professional, and personal standpoint.
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 enhancement of our Front-line Leadership Program, introduction of a new on-demand learning platform and the on-going expansion of our talent review and succession planning programs. We also were able to successfully move even more of our education and training programs to an online format to allow for expanded participation and broader, time-flexible development.
During 2021, we continued our focus on enhancing our Diversity, Equity & Inclusion programs, aimed at ensuring we provide an inclusive environment where everyone feels valued and respected. We launched our formal Diversity & Inclusion Statement and published an enterprise charter to align the organization on our commitments. Our Executive Leadership Team and Diversity & Inclusion Council, both comprised of senior leaders from across the enterprise and led by our CEO, facilitated listening sessions with employees from across the globe to learn what was important to them and how we could create an even better work environment. In response to the feedback received, multiple initiatives were undertaken to increase communications, build the capabilities of our leaders (we trained over 500 employees on how to Create an Inclusive Environment) and on furthering the dialogue across the enterprise. A Day of Understanding was held in each business to communicate, engage and educate our global teams. Our networking and action groups, comprised of dozens of “Ambassadors” from across the company, were active participants in the development and implementation of our strategies and programming to ensure that the actions we take drive meaningful and impactful results for our employees. We believe that through these efforts we can unlock greater potential, provide new opportunities for our employees, 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.
The COVID-19 pandemic had an adverse impact on our consolidated results of operations in the first half of 2020, with diminishing impacts during the second half of 2020 and during 2021. The COVID-19 pandemic could have an adverse impact on our business and consolidated financial results during 2022 and we are unable to determine the extent, duration, or nature at this time. The intensity, duration and governmental responses to the pandemic, as well as the pace of vaccination efforts and the emergence of new variants of the virus that cause COVID-19, are all highly uncertain and could contribute to the ultimate impact on our business. Specifically, the COVID-19 pandemic could impact:
•Our suppliers’ ability to perform and the availability of materials and subcontractors’ services;
•Our customers’ ability to access credit and to pay amounts due to us;
•Our distributors’ ability to perform; 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 has resulted, and could continue to result, in:
•Disruptions in our supply chain or increased costs for certain components or commodities;
•Labor shortages and difficulties filling the positions within our organization;
•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;
•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 2022 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.
Risks Related to Contingent Liabilities
Our South African subsidiary is 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 it.
Since 2008, DBT had been executing on two large power projects in South Africa (Kusile and Medupi), on which it has now substantially completed its scope of work. Over such time, the business environment surrounding these projects was difficult, as DBT, along with many other contractors on the projects, experienced delays, cost over-runs, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors, various
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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. SPX has provided parent company guarantees to certain counterparties in connection with these projects. We cannot give assurance that these claims and the costs to assert DBT's claims and defend claims against DBT 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 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.
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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 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.”
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, 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.
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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., steel and oil) and key components (e.g. circuit boards), including price increases in response to trade laws and tariffs and shortages related to the COVID-19 pandemic. 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, ransomware, 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 or industrial processes 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 significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.
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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 HVAC 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 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 2021, approximately 81% 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, 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, including armed conflicts, 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.
Climate change and legal or regulatory responses thereto may have an adverse impact on our business and results of operations.
There is growing concern that increases in global average temperatures as a result of increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant adverse long-term climate changes, as well as more near-term changes in weather patterns that could adversely impact our operations. Moreover, growing concern over climate change may result in additional legal or regulatory requirements designed to reduce or mitigate the effects of carbon dioxide and other greenhouse gas emissions on the environment. Many of our manufacturing plants and the products we manufacture, particularly in the HVAC reportable segment, use significant amounts of electricity generated by burning fossil fuels, which releases carbon dioxide. Additionally, many of the products we manufacture in the HVAC reportable segment use natural gas or oil as a fuel source and may be subject to increasing regulatory restrictions aimed at “de-carbonization” or the elimination of such fuel sources. Increased energy or compliance costs and expenses as a result of increased legal or regulatory requirements may cause disruptions in, or an increase in the costs associated with, the manufacturing and distribution of our products and we may be required to develop product improvements to satisfy developing energy-efficiency targets in order to remain competitive. In addition, the impacts of climate change and legal or regulatory initiatives to address climate change could have a long-term adverse impact on our business and results of operations. If we fail to achieve or improperly report on our progress on environmental and sustainability programs and initiatives or fail to develop product improvements to satisfy developing energy-efficiency targets, the results could have an adverse impact on our business, results of operations and financial condition.
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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.
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. 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,”
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“MD&A - Results of Discontinued Operations,” and Note 4 to our consolidated financial statements for the status of our divestitures.
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.
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, 2021, we had six domestic collective bargaining agreements covering approximately 300 of our over 3,100 employees. Three of these collective bargaining agreements expire in 2022 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
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 - Liquidity and Financial Condition - Senior Credit Facilities” 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.
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
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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 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, 2021, we had goodwill and other intangible assets, net, of $872.8. 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
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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, 2021, our net liability to these plans was $115.5. 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.
Our incurrence of additional indebtedness may affect our business and may restrict our operating flexibility.
At December 31, 2021, we had $246.0 in total indebtedness. On that same date, we had $437.8 of available borrowing capacity under our revolving credit facilities, after giving effect to $12.2 reserved for outstanding letters of credit. In addition, at December 31, 2021, we had $30.3 of available issuance capacity under our foreign credit instrument facilities after giving effect to $24.7 reserved for outstanding letters of credit. At December 31, 2021, our cash and equivalents balance was $396.0. See “MD&A - Liquidity and Financial Condition - Borrowings” 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. Increases in the level of our indebtedness relative to our cash balances 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.
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Failure of our internal control over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance.
We have identified a material weakness in our internal control over financial reporting. If this material weakness is not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Management identified a material weakness in our internal control over financial reporting related to the available insurance coverage for liabilities associated with alleged exposure to asbestos-containing materials. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As discussed in Item 9A. “Controls and Procedures” of this filing, management has evaluated its assessment of the effectiveness of internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of December 31, 2021.
We are committed to remediating the material weakness as promptly as possible, and management is in the process of implementing the remediation plan; however, there can be no assurance as to when the material weaknesses will be remediated or that additional material weaknesses will not arise in the future. If we are unable to maintain effective internal control over financial reporting, our ability to record, process and report financial information timely and accurately could be adversely affected.
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 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, 2021, we had the ability to issue up to an additional 4.074 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.
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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, 2021:
| No. of | Approximate Square Footage | ||||||||||||||||||||||
| Location | Facilities | Owned | Leased | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| HVAC reportable segment | 9 U.S. states and 2 foreign countries | 16 | 1.7 | 1.5 | |||||||||||||||||||
Detection and Measurement reportable segment | 8 U.S. states and 4 foreign countries | 18 | 0.4 | 0.3 | |||||||||||||||||||
| Corporate | 1 U.S. state | 1 | — | 0.1 | |||||||||||||||||||
| Total | 35 | 2.1 | 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.
On May 11, 2021, our Board of Directors authorized management to repurchase our capital stock over a period expiring at the earlier of May 10, 2022 or such earlier time determined by our Board of Directors in its sole discretion. Under the authorization, we may repurchase shares through open market purchases, privately negotiated transactions or otherwise, and at prices and times and in amounts as we determine, subject to applicable restrictions under our senior credit agreement. Our senior credit agreement permits an unlimited amount of share repurchases if our consolidated leverage ratio (as calculated under the senior credit agreement) is less than 2.75 to 1.00. Otherwise, the senior credit agreement restricts our repurchase of shares if the amount of repurchases in any fiscal year exceeds $100.0 million plus a basket amount based on our cumulative consolidated net income from a specified date.
We have not repurchased any shares under this authorization, and there were no repurchases of common stock during the three months ended December 31, 2021. The number of stockholders of record of our common stock as of February 18, 2022 was 2,355.
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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, 2016 and the reinvestment of dividends.
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
| SPX Corporation | $ | 100.00 | $ | 132.34 | $ | 118.09 | $ | 214.50 | $ | 229.93 | $ | 251.60 | ||||||||
| S&P 500 | 100.00 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 | ||||||||||||||
| S&P 1500 Industrials | 100.00 | 121.06 | 104.87 | 136.12 | 152.03 | 185.75 | ||||||||||||||
| S&P 600 | 100.00 | 111.73 | 100.83 | 121.86 | 133.53 | 167.28 | ||||||||||||||
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ITEM 6. [Reserved]
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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.
COVID-19 Pandemic, Supply Chain Disruptions and Labor Shortages, and the Related Impacts to Our Business
The COVID-19 pandemic had an adverse impact on our consolidated results of operations in the first half of 2020, with diminishing impacts during the second half of 2020 and during 2021. During the second half of 2021, certain of our businesses began to experience supply chain disruptions and labor shortages, which have negatively impacted their production of goods and, thus, resulted in lower absorption of manufacturing costs and, in some cases, delays in shipments to customers. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further actions.
Change in Accounting Method
Historically, certain of our domestic businesses within our HVAC reportable segment accounted for their inventories under the last-in, last-out (“LIFO”) method. During the fourth quarter of 2021, as a means of harmonizing our accounting method for inventories across all of our businesses, we converted the inventory accounting for these businesses to the first-in, first-out (“FIFO”) method. This change in accounting has been retrospectively applied to our consolidated financial statements. See Note 9 to our consolidated financial statements for further discussion of this change, including the impact of the change on our prior years’ consolidated financial statements.
Executive Overview
Revenues for 2021 totaled $1,219.5, compared to $1,128.1 in 2020 (and $1,123.6 in 2019). The increase in revenues during 2021, compared to 2020, was due primarily to (i) the impact of the ULC and Sensors & Software acquisitions in 2020 and the Sealite, ECS and Cincinnati Fan acquisitions in 2021 and (ii) an increase in organic revenue. The increase in organic revenue was due primarily to higher sales of heating and underground pipe and locator products, partially offset by lower sales of cooling products. During the first half of 2020, sales of heating and underground pipe and locator products were impacted negatively by the COVID-19 pandemic. Sales of cooling products declined in 2021, as several large cooling projects favorably impacted sales in 2020. The increase in revenues in 2020, compared to 2019, was due to the impact of the acquisitions of SGS and Patterson-Kelley during 2019 and ULC and Sensors & Software during 2020, partially offset by a decline in organic revenue in 2020. The decline in organic revenue during 2020 was due primarily to lower sales of heating products, domestic cooling products, and communication technologies products, partially offset by higher sales of cooling products in the international markets. A portion of the organic revenue decline in 2020 was attributable to a decline in customer demand and order delays caused by the COVID-19 pandemic.
For 2021, operating income totaled $73.7, compared to $96.9 in 2020 (and $114.0 in 2019). The decrease in operating income in 2021, compared to 2020, was due primarily to increases in asbestos product liability charges of $16.9 and corporate expense of $10.8. The increase in asbestos product liability charges was due primarily to a continuing unfavorable trend in the percentage of claims with payment (versus claims dismissed without payment), while the increase in corporate expense was due to additional investments in continuous improvement and strategic initiatives and higher incentive compensation expense in 2021. The decrease in operating income in 2020, compared to 2019, was due primarily to declines in profitability associated with lower sales of heating products and higher-margin communication technologies products.
Operating cash flows from continuing operations totaled $131.2 in 2021, compared to $105.2 in 2020 (and $110.0 in 2019). The increase in operating cash flows from continuing operations in 2021, compared to 2020, was due primarily to (i) improved cash flows within our heating and underground pipe and locator businesses associated with improved profitability, (ii) a decline in working capital at certain of our businesses, (iii) insurance proceeds of $15.0 associated with the settlement of an asbestos insurance coverage matter, and (iv) income tax refunds, net of tax payments, of $5.5 in 2021 (compared to income tax payments, net of refunds, of $7.6 in 2020). The decrease in operating cash flows from continuing operations in 2020, 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 year-to-year.
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Additional details on certain matters noted above as well as significant items impacting the financial results for 2021, 2020, and 2019 are as follows:
2021:
•On April 19, 2021, we completed the acquisition of Sealite.
◦The purchase price for Sealite was $80.3, net of cash acquired of $2.3.
◦The post-acquisition operating results of Sealite are reflected within our Detection and Measurement reportable segment.
•On August 2, 2021, we completed the acquisition of ECS.
◦The purchase price for ECS was $39.4, net of cash acquired of $5.1.
◦The seller is eligible for additional cash consideration of up to $16.8, upon achievement of certain financial performance milestones.
▪The estimated fair value of such contingent consideration was $8.2 as of the date of acquisition, which we reflected as a liability in our condensed consolidated balance sheet as of the end of the third quarter of 2021.
▪During the fourth quarter of 2021, we concluded that the probability of achieving the above financial performance milestones had lessened due to a delay in the execution of a large order, resulting in a reduction of the estimated fair value/liability of $6.7, with such amount recorded to "Other operating expenses, net" during the quarter.
◦The post-acquisition operating results of ECS are included within our Detection and Measurement reportable segment.
•On December 15, 2021, we completed the acquisition of Cincinnati Fan.
◦The purchase price for Cincinnati Fan was $145.2, net of cash acquired of $2.5.
◦The post-acquisition operating results of Cincinnati Fan are included within our HVAC reportable segment.
•On October 1, 2021, we completed the sale of Transformer Solutions.
◦Transformer Solutions is included in discontinued operations for all periods presented.
◦We received net cash proceeds of $620.6 and recorded a gain of $382.2 to “Gain (loss) on disposition of discontinued operations, net of tax.”
•Change in Segment Reporting Structure:
◦In connection with the disposition of Transformer Solutions and its classification as a discontinued operation, we have eliminated the Engineered Solutions reportable segment.
◦The remaining operations of the former Engineered Solutions reportable segment have been reflected within our HVAC reportable segment for all periods presented.
•DBT (our South Africa subsidiary):
◦Large Power Projects
▪On February 22, 2021 and April 28, 2021, DBT received favorable rulings from dispute adjudication panels.
•In connection with the rulings, DBT received South African Rand 126.6 ($8.6 at time of payment) and South African Rand 82.0 ($6.0 at the time of payment), respectively.
•As the rulings are subject to further arbitration, such amounts have not been reflected in our consolidated statement of operations.
•On July 5, 2021, DBT received notice from Mitsubishi Heavy Industries Power – ZAF (or “MHI”) of its intent to seek final and binding arbitration on the matter related to the February 22, 2021 dispute adjudication panel's ruling.
▪In May 2021, and in connection with certain claims made by MHI, MHI made a demand and received payment of South African Rand 178.7 (or $12.5 at the time of payment) on bonds issued by a bank.
•Under the terms of the bonds and our senior credit agreement, we were required to fund the payment.
•DBT denies liability for these claims and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of the South African Rand 178.7.
•As such, the amount has been reflected as a non-current asset in our consolidated balance sheet as of December 31, 2021.
▪On June 4, 2021, DBT received a revised version of the interim claim from MHI that was provided on February 26, 2019. DBT has numerous defenses and, thus, does not believe it has a probable liability associated with these claimed damages.
◦In the fourth quarter of 2021, we completed the wind-down of DBT.
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▪The wind-down was a culmination of a strategic shift away from the power generation markets.
▪As a result of completing the wind-down plan, we are now reporting DBT as a discontinued operation for all periods presented.
•Asbestos Product Liability Matters:
◦During 2021, we recorded charges of $51.2 related to asbestos product liability matters, with such charges related primarily to a continuing unfavorable trend in the percentage of claims with payment (versus dismissed without payment).
◦Of such charges, $48.6 were reflected in “Income from continuing operations before income taxes” and the remainder in “Gain (loss) on disposition of discontinued operations, net of tax.”
◦Insurance recoveries for asbestos product liability matters, net of payments, totaled $0.3 in 2021.
◦Insurance recoveries included $15.0 associated with the settlement of an insurance coverage matter.
◦See Note 15 to our consolidated financial statements for additional details.
•Actuarial Losses on Pension and Postretirement Plans:
◦We recorded net actuarial gains of $9.9 in the fourth quarter of 2021 in connection with the annual remeasurement of our pension and postretirement plans, with such gains resulting primarily from increases in discount rates.
◦See Notes 1 and 11 to our consolidated financial statements for additional details.
•Changes in the Estimated Fair Value of an Equity Security:
◦Recorded gains of $11.8 within “Other income (expense), net” related to increases in the estimated fair value of an equity security that we hold.
◦See Note 17 to our consolidated financial statements for additional details.
•ULC Contingent Consideration, Indefinite-Lived Intangible Assets, and Goodwill:
◦The seller of ULC was eligible for additional cash consideration of up to $45.0, upon achievement of certain operating and financial performance milestones.
◦During the third quarter of 2021, we concluded that the operating and financial milestones associated with the ULC contingent consideration would not be achieved.
◦As a result, we reversed the related liability of $24.3, with the offset to “Other operating expenses, net.”
◦We also concluded that the lack of achievement of the above milestones, along with lower than anticipated future cash flows, were indicators of potential impairment related to ULC’s indefinite-lived intangible assets and goodwill.
◦As such, we tested ULC’s infinite-lived intangible assets and goodwill for impairment during the third quarter of 2021.
◦Based on such testing, we determined that the carrying value of ULC’s net assets exceeded the implied fair value of the business.
◦As a result, we recorded an impairment charge of $24.3 to “Other operating expenses, net,” with $23.3 related to goodwill and the remainder to trademarks.
◦During the fourth quarter of 2021, we performed our annual analysis of ULC’s indefinite-lived intangible assets and goodwill. As a result of such analysis, we recorded impairment charges of $5.2, with $0.3 related to trademarks and $4.9 to goodwill.
◦See Note 1 and 10 to our consolidated financial statements for additional details.
•Sensors & Software Contingent Consideration:
◦The seller of Sensors & Software was eligible for additional cash consideration of up to $3.9, upon achievement of certain financial performance milestones.
◦During the fourth quarter of 2021, we concluded that certain of the financial milestones associated with the Sensors & Software contingent consideration had been achieved.
◦As a result, we recorded an additional charge of $0.6 to “Other operating expenses, net.”
◦The estimated fair value of such contingent consideration is $1.3 and $0.7, which is reflected as a liability in our consolidated balance sheets at December 31, 2021 and 2020, respectively.
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:
◦Had an initial 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.
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•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 post-acquisition operating results of ULC are reflected within our Detection and Measurement reportable segment.
•In September 2020, MHI 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 $15.0 and $16.3 at December 31, 2021 and 2020, respectively) within non-current assets on our consolidated balance sheets as of December 31, 2021 and 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 $15.5, net of cash acquired of $0.3.
◦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 was part of a strategic shift away from the power generation markets.
◦As a result of completing the wind-down plan, we are 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.
◦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.
◦The post-acquisition operating results of Sabik are reflected within our Detection and Measurement reportable segment.
•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.
◦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.
◦The post-acquisition operating results of Patterson-Kelley are reflected within our HVAC reportable segment.
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•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.
•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, 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 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.
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 a reduction in revenue during 2021 associated with the settlement of claims on a legacy dry cooling project. 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 GAAP, should not be considered a substitute for net revenue growth (decline) as determined in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.
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The following table provides selected financial information for the years ended December 31, 2021, 2020, and 2019, including the reconciliation of organic revenue increase (decline) to net revenue increase:
| Year ended December 31, | 2021 vs | 2020 vs | |||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2020 % | 2019 % | |||||||||||||||||||||||||
| Revenues | $ | 1,219.5 | $ | 1,128.1 | $ | 1,123.6 | 8.1 | % | 0.4 | % | |||||||||||||||||||
| Gross profit | 431.8 | 395.5 | 402.0 | 9.2 | (1.6) | ||||||||||||||||||||||||
| % of revenues | 35.4 | % | 35.1 | % | 35.8 | % | |||||||||||||||||||||||
| Selling, general and administrative expense | 309.6 | 272.5 | 275.8 | 13.6 | (1.2) | ||||||||||||||||||||||||
| % of revenues | 25.4 | % | 24.2 | % | 24.5 | % | |||||||||||||||||||||||
| Intangible amortization | 21.6 | 14.0 | 8.9 | 54.3 | 57.3 | ||||||||||||||||||||||||
| Impairment of goodwill and intangible assets | 5.7 | 0.7 | — | * | * | ||||||||||||||||||||||||
| Special charges, net | 1.0 | 2.4 | 1.5 | (58.3) | 60.0 | ||||||||||||||||||||||||
| Other operating expenses, net | 20.2 | 9.0 | 1.8 | * | * | ||||||||||||||||||||||||
| Other income (expense), net | 9.0 | (0.1) | (5.2) | * | * | ||||||||||||||||||||||||
| Interest expense, net | (12.8) | (18.2) | (19.4) | (29.7) | (6.2) | ||||||||||||||||||||||||
| Loss on amendment/refinancing of senior credit agreement | — | — | (0.6) | * | * | ||||||||||||||||||||||||
| Income from continuing operations before income taxes | 69.9 | 78.6 | 88.8 | (11.1) | (11.5) | ||||||||||||||||||||||||
| Income tax provision | (10.9) | (4.8) | (12.5) | * | * | ||||||||||||||||||||||||
| Income from continuing operations | 59.0 | 73.8 | 76.3 | (20.1) | (3.3) | ||||||||||||||||||||||||
| Components of consolidated revenue increase: | |||||||||||||||||||||||||||||
| Organic | 2.6 | (4.7) | |||||||||||||||||||||||||||
| Foreign currency | 0.7 | — | |||||||||||||||||||||||||||
| Settlement of legacy dry cooling contract | (0.4) | — | |||||||||||||||||||||||||||
| Acquisitions | 5.2 | 5.1 | |||||||||||||||||||||||||||
| Net revenue increase | 8.1 | 0.4 | |||||||||||||||||||||||||||
___________________________________________________________________
* Not meaningful for comparison purposes.
Revenues - For 2021, the increase in revenues, compared to 2020, was due primarily to (i) the impact of the acquisitions of ULC and Sensors & Software in 2020 and Sealite, ECS and Cincinnati Fan in 2021 and (ii) an increase in organic revenue. The increase in organic revenue was due primarily to higher sales of heating and underground pipe and locator products, partially offset by lower sales of cooling products. During the first half of 2020, sales of heating and underground pipe and locator products were impacted negatively by the COVID-19 pandemic. Sales of cooling products declined in 2021, as there were several large cooling projects that favorably impacted sales in 2020.
For 2020, the increase in revenues, compared to 2019, was due to the impact of the acquisitions of SGS and Patterson-Kelley during 2019 and ULC and Sensors & Software during 2020, partially offset by a decline in organic revenue in 2020. The decline in organic revenue was due primarily to lower sales of heating products, domestic cooling products, and communication technologies products, partially offset by higher sales of cooling products in the international markets. 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” for additional details.
Gross Profit - For 2021, the increase in gross profit and gross profit as a percentage of revenues, compared to 2020, was due primarily to the revenue increases noted above.
For 2020, the decrease in gross profit and gross profit as a percentage of revenues, compared to 2019, was due primarily to lower sales of high-margin communication technologies products and heating products.
Selling, General and Administrative (“SG&A”) Expense — For 2021, the increase in SG&A expense, compared to 2020, was due primarily to SG&A associated with Sealite, ECS and Cincinnati Fan since their dates of acquisition in 2021 and the impact of a full year’s SG&A associated with the 2020 acquisitions of ULC and Sensors and Software. Also, additional corporate expense in 2021 associated with (i) increased investments in continuous improvement and strategic initiatives and (ii) higher incentive compensation contributed to the increase in SG&A in 2021.
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For 2020, the decrease in SG&A expense, compared to 2019, was due primarily to lower incentive compensation and lower travel expense during 2020, with the lower travel expense due to the impact of the COVID-19 pandemic.
Intangible Amortization — For 2021, the increase in intangible amortization, compared to 2020, was due to the amortization expense associated with Sealite, ECS and Cincinnati Fan since their dates of acquisition in 2021 and the impact of a full year’s amortization expense on the 2020 acquisitions of ULC and Sensors and Software.
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.
Impairment of Goodwill and Intangible Assets — During 2021, we recorded impairment charges of $5.2 related to the goodwill and trademarks of ULC and $0.5 related to certain other trademarks. During 2020, we recorded $0.7 of impairment charges related to certain trademarks. See Note 10 to our consolidated financial statements for additional details.
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 2021, 2020, and 2019. The components of special charges, net, are as follows:
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Employee termination costs | $ | 1.0 | $ | 1.0 | $ | 0.5 | |||||||||||
| Facility consolidation costs | — | — | 0.5 | ||||||||||||||
| Other cash costs, net | — | 1.0 | — | ||||||||||||||
| Non-cash asset write-downs | — | 0.4 | 0.5 | ||||||||||||||
| Total | $ | 1.0 | $ | 2.4 | $ | 1.5 | |||||||||||
Other Operating Expenses, Net – During 2021, we recorded charges of $26.3 for asbestos product liability matters related to products that we no longer manufacture, along with a charge of $0.6 related to revisions to the contingent consideration liability associated with the Sensors and Software acquisition, partially offset by income of $6.7 associated with a reduction in the liability associated with the contingent consideration related to the ECS acquisition. The charges for the asbestos product liability matters were due to a change in assumptions for estimating the related liabilities primarily as a result of a continuing unfavorable trend in the percentage of claims with payment (versus claims dismissed without payment). The charge of $0.6 was the result of finalizing the contingent consideration amount that is due on the Sensors & Software acquisition. The income associated with the ECS contingent consideration was due to a change in fair value of the related liability resulting from a lower probability of the business achieving certain defined financial milestones.
During 2020, we recorded charges of $9.4 for asbestos product liability matters, 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, 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 2021 was composed primarily of pension and post retirement income of $16.4, a gain of $11.8 related to changes in the estimated fair value of an equity security we hold, and income derived from company-owned life insurance policies of $3.2, partially offset by charges of $21.0 associated with asbestos product liability matters. The charges associated with asbestos product liability matters were the result of a change in assumptions for estimating the related liabilities due primarily to a continuing unfavorable trend in the percentage of claims with payment (versus claims dismissed without payment).
Other expense, net, for 2020 was composed primarily of charges of $7.6 associated with asbestos product liability matters, pension and postretirement expense of $3.0, environmental remediation charges of $1.5, and foreign currency transaction losses
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of $0.6, partially offset by 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.
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 $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.
Interest Expense, Net — Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during 2021, compared to 2020, was the result of lower average effective interest rates and lower average debt balances during 2021.
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.
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.
Income Taxes — During 2021, we recorded an income tax provision of $10.9 on $69.9 of pre-tax income from continuing operations, resulting in an effective tax rate of 15.6%. The most significant items impacting the effective income tax rate for 2021 were (i) earnings in jurisdictions with lower statutory rates, (ii) $4.3 of income tax benefits related to various valuation allowance adjustments, primarily due to foreign tax credits for which the future realization is now considered likely, and (iii) a benefit of $3.5 related to the resolution of certain liabilities for uncertain tax positions and interest associated with various refund claims, partially offset by $13.2 of tax expense associated with global intangible low-taxed income created by the liquidation of various recently acquired entities.
During 2020, we recorded an income tax provision of $4.8 on $78.6 of pre-tax income from continuing operations, resulting in an effective tax rate of 6.1%. The most significant items impacting the effective tax rate for 2020 were (i) earnings in jurisdictions with lower statutory tax rates, (ii) $4.2 of tax benefits related to various audit settlements, statute expirations, and other adjustments to liabilities for uncertain tax positions, and (iii) $2.8 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 $12.5 on $88.8 of pre-tax income from continuing operations, resulting in an effective tax rate of 14.1%. The most significant items impacting the effective tax rate for 2019 were (i) $1.6 of excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during the year, (ii) $1.3 of tax benefits related to our U.S. tax credits and incentives, and (iii) $1.2 of tax benefits related to various audit settlements, statute expirations, and other adjustments to liabilities for uncertain tax positions.
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. 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 reporting Heat Transfer as a discontinued operation for all periods presented.
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Sale of Transformer Solutions Business
On October 1, 2021, we completed the sale of Transformer Solutions pursuant to the terms of the Stock Purchase Agreement dated June 8, 2021. We transferred all of the outstanding common stock of Transformer Solutions to the Purchaser for an aggregate cash purchase price of $645.0 (the “Transaction”). The purchase price is subject to potential adjustment based on Transformer Solutions’ cash, debt and working capital on the date the Transaction was consummated, as well as for specified transaction expenses and other specified items. In connection with the sale, we received net cash proceeds of $620.6 and recorded a gain of $382.2 to “Gain (loss) on disposition of discontinued operations, net of tax” within our 2021 consolidated statement of operations. We have classified the business as a discontinued operation in our consolidated financial statements for all periods presented. See Notes 1 and 4 to our consolidated financial statements for additional details.
Wind-Down of DBT Business
As a culmination of our strategic shift away from power generation markets, we completed the wind-down of our DBT business. As a result, we are now reporting DBT as a discontinued operation in our consolidated financial statements for all periods presented. In connection with the wind-down, we recorded a charge of $19.9 to “Gain (loss) on disposition of discontinued operations, net of taxes” within our consolidated statement of operations for the year ended December 31, 2021 to reflect the write-off of historical currency translation amounts associated with DBT that had been previously reported within “Stockholders' equity” of our consolidated balance sheet. DBT continues to be engaged in various dispute resolution matters related to two large power projects, as indicated in Note 15 to the consolidated financial statements.
Other Discontinued Operations Activity
In addition to Heat Transfer, Transformer Solutions, and DBT, we recognized net losses of $1.3, $3.7 and $4.4 during 2021, 2020 and 2019, respectively. The net losses for 2021, 2020, and 2019 resulted primarily from revisions to liabilities, including income tax liabilities, retained in connection with prior businesses classified as discontinued operations.
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.
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For the years ended December 31, 2021, 2020 and 2019, results of operations from our businesses reported as discontinued operations were as follows:
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Transformer Solutions | |||||||||||||||||
| Income from discontinued operations | $ | 454.9 | $ | 56.9 | $ | 39.4 | |||||||||||
Income tax provision (1) | (51.8) | (14.0) | (8.8) | ||||||||||||||
| Income from discontinued operations, net | 403.1 | 42.9 | 30.6 | ||||||||||||||
| DBT | |||||||||||||||||
| Loss from discontinued operations | (37.8) | (16.6) | (43.1) | ||||||||||||||
| Income tax benefit | 2.7 | 2.4 | 7.3 | ||||||||||||||
| Loss from discontinued operations, net | (35.1) | (14.2) | (35.8) | ||||||||||||||
| Heat Transfer | |||||||||||||||||
| Income (loss) from discontinued operations | (0.3) | 0.3 | (1.8) | ||||||||||||||
| Income tax (provision) benefit | — | (0.1) | 0.4 | ||||||||||||||
| Income (loss) from discontinued operations, net | (0.3) | 0.2 | (1.4) | ||||||||||||||
| All other | |||||||||||||||||
| Loss from discontinued operations | (7.6) | (4.8) | (4.0) | ||||||||||||||
| Income tax (provision) benefit | 6.3 | 1.1 | (0.4) | ||||||||||||||
| Loss from discontinued operations, net | (1.3) | (3.7) | (4.4) | ||||||||||||||
| Total | |||||||||||||||||
| Income (loss) from discontinued operations | 409.2 | 35.8 | (9.5) | ||||||||||||||
| Income tax provision | (42.8) | (10.6) | (1.5) | ||||||||||||||
| Income (loss) from discontinued operations, net | $ | 366.4 | $ | 25.2 | $ | (11.0) | |||||||||||
________________________________________________
(1) During the fourth quarter of 2021, we liquidated various recently acquired entities. As a result of this action, we recorded a net income tax benefit of $16.5 within our 2021 consolidated statement of operations, which included an income tax charge of $10.9 within continuing operations and income tax benefit of $27.4 within discontinued operations.
Results of Reportable Segments
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.
Non-GAAP Measures — Throughout the following discussion of reportable 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.”
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HVAC Reportable Segment
| Year Ended December 31, | 2021 vs. 2020 % | 2020 vs. 2019 % | |||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Revenues | $ | 752.1 | $ | 740.8 | $ | 738.7 | 1.5 | 0.3 | |||||||||||||||||||||
| Income | 104.2 | 102.7 | 103.2 | 1.5 | (0.5) | ||||||||||||||||||||||||
| % of revenues | 13.9 | % | 13.9 | % | 14.0 | % | |||||||||||||||||||||||
| Components of revenue increase: | |||||||||||||||||||||||||||||
| Organic | 1.3 | (4.8) | |||||||||||||||||||||||||||
| Foreign currency | 0.5 | (0.1) | |||||||||||||||||||||||||||
| Settlement of legacy dry cooling contract | (0.6) | — | |||||||||||||||||||||||||||
| Acquisitions | 0.3 | 5.2 | |||||||||||||||||||||||||||
| Net revenue increase | 1.5 | 0.3 | |||||||||||||||||||||||||||
Revenues — For 2021, the increase in revenues, compared to 2020, was due primarily to an increase in organic revenue for the segment’s heating businesses, partially offset by a decline in organic revenue at the segment's cooling businesses due to several large projects that contributed significant revenue to the segment's results in 2020. Sales of heating products during the first half of 2020 were impacted negatively by (i) a warmer than normal winter and (ii) the COVID-19 pandemic.
For 2020, the increase in revenues, compared to 2019, was due to the impact of the SGS and Patterson-Kelley acquisitions in 2019, partially offset by a decline in organic revenue. 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 half 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.
Income — For 2021, the increase in income, compared to 2020, was due primarily to the increase in revenues noted above.
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.
Backlog — The segment had backlog of $226.9 (including $20.4 related to Cincinnati Fan) and $150.1 as of December 31, 2021 and 2020, respectively. Approximately 97% of the segment’s backlog as of December 31, 2021 is expected to be recognized as revenue during 2022.
Detection and Measurement Reportable Segment
| Year Ended December 31, | 2021 vs. 2020 % | 2020 vs. 2019 % | |||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Revenues | $ | 467.4 | $ | 387.3 | $ | 384.9 | 20.7 | 0.6 | |||||||||||||||||||||
| Income | 69.7 | 69.1 | 81.7 | 0.9 | (15.4) | ||||||||||||||||||||||||
| % of revenues | 14.9 | % | 17.8 | % | 21.2 | % | |||||||||||||||||||||||
| Components of revenue increase: | |||||||||||||||||||||||||||||
| Organic | 5.0 | (4.4) | |||||||||||||||||||||||||||
| Foreign currency | 1.1 | 0.1 | |||||||||||||||||||||||||||
| Acquisitions | 14.6 | 4.9 | |||||||||||||||||||||||||||
| Net revenue increase | 20.7 | 0.6 | |||||||||||||||||||||||||||
Revenues — For 2021, the increase in revenues, compared to 2020, was due primarily to the impact of the acquisitions of ECS and Sealite in 2021 and ULC and Sensors and Software in 2020 and, to a lesser extent, organic revenue growth and the impact of foreign currency exchange rates. The increase in organic revenue was primarily the result of higher sales of underground pipe and locator products and, to a lesser extent, higher sales of communication technologies and obstruction
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lighting products. These increases in organic revenue were offset partially by lower sales of bus fare collection systems. During the first half of 2020, sales of underground pipe and locator products were impacted negatively by the COVID-19 pandemic, while the decline in sales of bus fare collection systems in the current year was due primarily to the timing of large projects, as the extent of such projects can fluctuate from year-to-year.
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.
Income — For 2021, the increase in income, compared to 2020, was due primarily to the increase in revenue noted above, partially offset by increases in amortization expense of $7.1 and inventory step-up charges of $2.3 associated with the acquisitions noted above. The year-over-year decrease in margins was due primarily to the increases in amortization expense and inventory step-up charges noted above.
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.
Backlog — The segment had backlog of $153.6 (including $50.8 related to Sealite and ECS) and $89.3 as of December 31, 2021 and 2020, respectively. Approximately 71% of the segment’s backlog as of December 31, 2021 is expected to be recognized as revenue during 2022.
Corporate Expense and Other Expense
| Year Ended December 31, | 2021 vs. 2020 % | 2020 vs. 2019 % | |||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Total consolidated revenues | $ | 1,219.5 | $ | 1,128.1 | $ | 1,123.6 | 8.1 | 0.4 | |||||||||||||||||||||
| Corporate expense | 60.5 | 49.7 | 55.0 | 21.7 | (9.6) | ||||||||||||||||||||||||
| % of revenues | 5.0 | % | 4.4 | % | 4.9 | % | |||||||||||||||||||||||
| Long-term incentive compensation expense | 12.8 | 13.1 | 12.6 | (2.3) | 4.0 | ||||||||||||||||||||||||
Corporate Expense — Corporate expense generally relates to the cost associated with our Charlotte, NC corporate headquarters. The increase in corporate expense during 2021, compared to 2020, was due primarily to increased investments in continuous improvement and other strategic initiatives and higher incentive compensation during 2021.
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.
Long-Term Incentive Compensation Expense — The decrease in long-term incentive compensation in 2021, compared to 2020, was due primarily to revisions to/finalization of the liability associated with the 2018 long-term cash awards during the first quarter of 2021, partially offset by the impact of a lower amount of award forfeitures during 2021. The increase in long-term incentive compensation in 2020, compared to 2019, was due primarily to the accelerated expense in 2020 on certain awards.
See Note 16 to our consolidated financial statements for further details on our long-term incentive compensation plans.
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Liquidity and Financial Condition
Cash Flows
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, 2021, 2020 and 2019.
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Continuing operations: | |||||||||||||||||
| Cash flows from operating activities | $ | 131.2 | $ | 105.2 | $ | 110.0 | |||||||||||
| Cash flows used in investing activities | (306.0) | (119.9) | (154.9) | ||||||||||||||
| Cash flows from (used in) financing activities | (167.8) | 16.3 | 4.7 | ||||||||||||||
| Cash flows from discontinued operations | 663.7 | 14.5 | 24.0 | ||||||||||||||
Change in cash and equivalents due to changes in foreign currency exchange rates | 6.6 | (2.5) | 2.1 | ||||||||||||||
| Net change in cash and equivalents | $ | 327.7 | $ | 13.6 | $ | (14.1) | |||||||||||
2021 Compared to 2020
Operating Activities – The increase in cash flows from operating activities, compared to 2020, was due primarily to (i) improved cash flows within our heating and underground pipe and locator businesses associated with improved profitability, (ii) a decline in working capital at certain of our businesses, (iii) insurance proceeds of $15.0 associated with the settlement of an asbestos insurance coverage matter, and (iv) income tax refunds, net of tax payments, of $5.5 in 2021 (compared to income tax payments, net of refunds, of $7.6 in 2020).
Investing Activities - Cash flows used in investing activities for 2021 were comprised primarily of cash utilized in the acquisitions of Sealite, ECS and Cincinnati Fan of $264.9, net expenditures related to company-owned life insurance policies of $31.2, and capital expenditures of $9.6. Cash flows used in investing activities in 2020 were comprised primarily of cash utilized in the acquisitions of ULC and Sensors & Software of $104.4 and capital expenditures of $15.3.
Financing Activities – Cash flows used in financing activities during 2021 were comprised primarily of net repayments on our various debt instruments of $164.5. Cash flows from financing activities during 2020 were comprised primarily of net borrowings on our various debt instruments of $15.6.
Discontinued Operations – Cash flows from discontinued operations for 2021 related primarily to proceeds received in connection with the sale of Transformer Solutions of $620.6. In addition cash flows from discontinued operations include cash flows from operations generated by Transformer Solutions, partially offset by cash flows used in DBT's operations and disbursements related to liabilities retained in connection with other dispositions. Cash flows from discontinued operations for 2020 related primarily to cash flows generated by Transformer Solutions and Heat Transfer, partially offset by cash flows used in DBT's operations and disbursements for liabilities retained in connection with other 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 2021 and 2020.
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 year-to-year.
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 $15.3. 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 $13.5, partially offset by proceeds from company-owned life insurance policies of $5.9.
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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 from financing activities during 2019 were comprised primarily of net borrowings on various debt instruments of $10.0.
Discontinued Operations – Cash flows from discontinued operations for 2020 related primarily to cash flows generated by Transformer Solutions and Heat Transfer, partially offset by cash flows used in DBT operations and disbursements for liabilities retained in connection with other dispositions. Cash flows from discontinued operations for 2019 related primarily to cash flows generated by Transformer Solutions and proceeds of $5.5 received in connection with the sale of Heat Transfer's manufacturing facility, partially offset by disbursements for liabilities retained in connection with other dispositions, net cash flows used in operations by Heat Transfer and DBT, and 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).
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.
Borrowings
The following summarizes our debt activity (both current and non-current) for the year ended December 31, 2021:
| December 31, 2020 | Borrowings | Repayments | Other (5) | December 31, 2021 | |||||||||||||||||||||||||
Revolving loans (1) | $ | 129.8 | $ | 209.9 | $ | (339.7) | $ | — | $ | — | |||||||||||||||||||
Term loan (2) | 248.6 | — | (6.3) | 0.4 | 242.7 | ||||||||||||||||||||||||
Trade receivables financing arrangement (3) | 28.0 | 179.0 | (207.0) | — | — | ||||||||||||||||||||||||
Other indebtedness (4) | 6.0 | 0.6 | (1.0) | (2.3) | 3.3 | ||||||||||||||||||||||||
| Total debt | 412.4 | $ | 389.5 | $ | (554.0) | $ | (1.9) | 246.0 | |||||||||||||||||||||
| Less: short-term debt | 101.2 | 2.2 | |||||||||||||||||||||||||||
| Less: current maturities of long-term debt | 7.2 | 13.0 | |||||||||||||||||||||||||||
| Total long-term debt | $ | 304.0 | $ | 230.8 | |||||||||||||||||||||||||
_____________________________________________________________
(1)While not due for repayment until December 2024 under the terms of our senior credit agreement, we classify 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 $1.0 and $1.4 at December 31, 2021 and December 31, 2020, respectively.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. At December 31, 2021, there was no available borrowing capacity under the agreement.
(4)Primarily includes balances under a purchase card program of $2.2 and $1.7 and finance lease obligations of $1.1 and $2.6 at December 31, 2021 and 2020, 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, 2021 are are $13.0, $12.9, $218.9, $0.0, and $0.0 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. On May 24, 2021, we elected to reduce our participating foreign credit instrument facility and bilateral foreign credit instrument facility, available for performance letters of credit and guarantees, by an aggregate amount of $20.0 and $25.0, respectively. The facility reduction resulted in a write-off of deferred finance costs of $0.2, recorded to “Interest expense” in the consolidated statement of operations for the year ended December 31, 2021. After this reduction, and repayments of term loans through December 31, 2021, our committed senior secured financing consists of the following at December 31, 2021 (each with a final maturity of December 17, 2024):
•A term loan facility with a remaining principle amount, as of December 31, 2021, of $243.7;
•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 Pound 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 $35.0; 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 $20.0.
The Credit Agreement also:
•Requires that we maintain a 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 | % | 1.500 | % | 0.500 | % | ||||||||||||||||||||||||||||||
Less than 1.75 to 1.0 | 0.250 | % | 0.250 | % | 1.375 | % | 0.250 | % | 0.800 | % | 1.375 | % | 0.375 | % | ||||||||||||||||||||||||||||||
The interest rates applicable to loans under the Credit Agreement are, at our option, equal to either (i) an alternate base rate (the highest of (a) the federal funds effective rate plus 0.5%, (b) the prime rate of Bank of America, N.A., and (c) the one-month LIBOR rate plus 1.0%) or (ii) a reserve-adjusted LIBOR rate for dollars (Eurodollars) plus, in each case, an applicable margin percentage as previously discussed, which varies based on our Consolidated Leverage Ratio (defined in the Credit Agreement generally as the ratio of consolidated total debt (excluding the face amount of undrawn letters of credit, bank undertakings and analogous instruments and net of cash and cash equivalents) at the date of determination to consolidated adjusted EBITDA for the four fiscal quarters ended most recently before such date). We may elect interest periods of one, two, three or six months (and, if consented to by all relevant lenders, twelve months) for Eurodollar borrowings.
The weighted-average interest rate of outstanding borrowings under our Senior Credit Facilities was approximately 1.5% at December 31, 2021.
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On December 9, 2021, in preparation of our adoption of Accounting Standards Update ("ASU") No. 2020-04 and No. 2021-01, Reference Rate Reform, we entered into a LIBOR transition amendment related to our global revolving credit facility for certain foreign currencies. This amendment provides for a transition from the LIBOR rate to a successor rate in accordance with the Credit Agreement.
The fees and bilateral foreign credit commitments are as specified above for foreign credit commitments unless otherwise agreed with the bilateral foreign issuing lender. We also pay fronting fees on the outstanding amounts of letters of credit and foreign credit instruments (in the participation facility) at the rates of 0.125% per annum and 0.25% per annum, respectively.
SPX is the borrower under each of the above facilities, and certain of our foreign subsidiaries are (and we may designate other foreign subsidiaries to be) borrowers under the global revolving credit facility and the foreign credit instrument facilities. All borrowings and other extensions of credit under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of defaults and accuracy in material respects of representations and warranties.
The letters of credit under the domestic revolving credit facility are stand-by letters of credit requested by SPX on behalf of any of our subsidiaries or certain joint ventures. The foreign credit instrument facility is used to issue foreign credit instruments, including bank undertakings to support our foreign operations.
The Credit Agreement requires mandatory prepayments in amounts equal to the net proceeds from the sale or other disposition of, including from any casualty to, or governmental taking of, property in excess of specified values (other than in the ordinary course of business and subject to other exceptions) by SPX or our subsidiaries. Mandatory prepayments will be applied to repay, first, amounts outstanding under any term loans and, then, amounts (or cash collateralize letters of credit) outstanding under the global revolving credit facility and the domestic revolving credit facility (without reducing the commitments thereunder). No prepayment is required generally to the extent the net proceeds are reinvested (or committed to be reinvested) in permitted acquisitions, permitted investments or assets to be used in our business within 360 days (and if committed to be reinvested, actually reinvested within 360 days after the end of such 360-day period) of the receipt of such proceeds.
We may voluntarily prepay loans under the Credit Agreement, in whole or in part, without premium or penalty. Any voluntary prepayment of loans will be subject to reimbursement of the lenders’ breakage costs in the case of a prepayment of Eurodollar rate borrowings other than on the last day of the relevant interest period. Indebtedness under the Credit Agreement is guaranteed by:
•Each existing and subsequently acquired or organized domestic material subsidiary with specified exceptions; and
•SPX with respect to the obligations of our foreign borrower subsidiaries under the global revolving credit facility, the participation foreign credit instrument facility and the bilateral foreign credit instrument facility.
Indebtedness under the Credit Agreement is secured by a first priority pledge and security interest in 100% of the capital stock of our domestic subsidiaries (with certain exceptions) held by SPX or our domestic subsidiary guarantors and 65% of the capital stock of our material first-tier foreign subsidiaries (with certain exceptions). If SPX obtains a corporate credit rating from Moody’s and S&P and such corporate credit rating is less than “Ba2” (or not rated) by Moody’s and less than “BB” (or not rated) by S&P, then SPX and our domestic subsidiary guarantors are required to grant security interests, mortgages and other liens on substantially all of their assets. If SPX’s corporate credit rating is “Baa3” or better by Moody’s or “BBB-” or better by S&P and no defaults then exist, all collateral security is to be released and the indebtedness under the Credit Agreement would be unsecured.
The Credit Agreement also contains covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens, make investments, loans, guarantees, or advances, make restricted junior payments, including dividends, redemptions of capital stock, and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions, or engage in certain transactions with affiliates, and otherwise restrict certain corporate activities. The Credit Agreement contains customary representations, warranties, affirmative covenants and events of default.
We are permitted under the Credit Agreement to repurchase our capital stock and pay cash dividends in an unlimited amount if our Consolidated Leverage Ratio is (after giving pro forma effect to such payments) less than 2.75 to 1.00. If our Consolidated Leverage Ratio is (after giving pro forma effect to such payments) greater than or equal to 2.75 to 1.00, the aggregate amount of such repurchases and dividend declarations cannot exceed (A) $100.0 in any fiscal year plus (B) an additional amount for all such repurchases and dividend declarations made after September 1, 2015 equal to the sum of (i) $100.0 plus (ii) a positive amount equal to 50% of cumulative Consolidated Net Income (as defined in the Credit Agreement
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generally as consolidated net income subject to certain adjustments solely for the purposes of determining this basket) during the period from September 1, 2015 to the end of the most recent fiscal quarter preceding the date of such repurchase or dividend declaration for which financial statements have been (or were required to be) delivered (or, in case such Consolidated Net Income is a deficit, minus 100% of such deficit) plus (iii) certain other amounts, less our previous usage of such additional amount for certain other investments and restricted junior payments.
At December 31, 2021, we had $437.8 of available borrowing capacity under our revolving credit facilities after giving effect to $12.2 reserved for outstanding letters of credit. In addition, at December 31, 2021, we had $30.3 of available issuance capacity under our foreign credit instrument facilities after giving effect to $24.7 reserved for outstanding letters of credit.
At December 31, 2021, we were in compliance with all covenants of our Credit Agreement.
Other Borrowings and Financing Activities
Certain of our businesses purchase goods and services under a purchase card program allowing for payment beyond their normal payment terms. As of December 31, 2021 and 2020, the participating businesses had $2.2 and $1.7, respectively, outstanding under this arrangement.
We are party to a trade receivables financing agreement, whereby we can borrow, on a continuous basis, up to $50.0. Availability of funds may fluctuate over time given, among other things, changes in eligible receivable balances, but will not exceed the $50.0 program limit. The facility contains representations, warranties, covenants and indemnities customary for facilities of this type. The facility does not contain any covenants that we view as materially constraining to the activities of our business.
Financial Instruments
We measure our financial assets and liabilities on a recurring basis, and nonfinancial assets and liabilities on a non-recurring basis, at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable quote