0001104659-14-054978.txt : 20140730 0001104659-14-054978.hdr.sgml : 20140730 20140730164715 ACCESSION NUMBER: 0001104659-14-054978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20140628 FILED AS OF DATE: 20140730 DATE AS OF CHANGE: 20140730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPX CORP CENTRAL INDEX KEY: 0000088205 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 381016240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06948 FILM NUMBER: 141003377 BUSINESS ADDRESS: STREET 1: 13320 BALLANTYNE CORPORATE PLACE CITY: CHARLOTTE STATE: NC ZIP: 28277 BUSINESS PHONE: 704-752-4400 MAIL ADDRESS: STREET 1: 13320 BALLANTYNE CORPORATE PLACE CITY: CHARLOTTE STATE: NC ZIP: 28277 FORMER COMPANY: FORMER CONFORMED NAME: SEALED POWER CORP DATE OF NAME CHANGE: 19880515 10-Q 1 a14-13932_110q.htm 10-Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 28, 2014

 

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

 

For the transition period from            to            

 

Commission file number 1-6948

 

SPX CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

38-1016240

(State or Other Jurisdiction of Incorporation or
Organization)

 

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

 

13320 Ballantyne Corporate Place, Charlotte, North Carolina 28277

(Address of Principal Executive Offices) (Zip Code)

 

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

 

 

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes o No

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Common shares outstanding July 25, 2014 42,561,551

 

 

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

1,179.7

 

$

1,161.9

 

$

2,249.1

 

$

2,252.4

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products sold

 

839.6

 

831.8

 

1,610.3

 

1,629.2

 

Selling, general and administrative

 

242.2

 

233.1

 

507.8

 

485.8

 

Intangible amortization

 

8.3

 

8.2

 

16.6

 

16.2

 

Impairment of intangible assets

 

 

 

 

2.0

 

Special charges, net

 

4.5

 

17.8

 

14.2

 

18.2

 

Operating income

 

85.1

 

71.0

 

100.2

 

101.0

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

(1.2

)

(2.3

)

489.4

 

(0.1

)

Interest expense

 

(16.3

)

(27.1

)

(35.6

)

(56.3

)

Interest income

 

2.3

 

1.5

 

4.5

 

3.6

 

Loss on early extinguishment of debt

 

 

 

(32.5

)

 

Equity earnings in joint ventures

 

0.5

 

10.1

 

0.5

 

19.2

 

Income from continuing operations before income taxes

 

70.4

 

53.2

 

526.5

 

67.4

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

(16.9

)

(14.0

)

(176.6

)

(13.6

)

Income from continuing operations

 

53.5

 

39.2

 

349.9

 

53.8

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

2.6

 

5.3

 

3.0

 

5.9

 

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

 

(6.1

)

2.7

 

14.9

 

(2.5

)

Income (loss) from discontinued operations, net of tax

 

(3.5

)

8.0

 

17.9

 

3.4

 

 

 

 

 

 

 

 

 

 

 

Net income

 

50.0

 

47.2

 

367.8

 

57.2

 

Net income (loss) attributable to noncontrolling interests

 

(1.2

)

2.0

 

(1.6

)

3.3

 

Net income attributable to SPX Corporation common shareholders

 

$

51.2

 

$

45.2

 

$

369.4

 

$

53.9

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to SPX Corporation common shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

54.7

 

$

37.2

 

$

351.5

 

$

50.7

 

Income (loss) from discontinued operations, net of tax

 

(3.5

)

8.0

 

17.9

 

3.2

 

Net income

 

$

51.2

 

$

45.2

 

$

369.4

 

$

53.9

 

 

 

 

 

 

 

 

 

 

 

Basic income per share of common stock:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to SPX Corporation common shareholders

 

$

1.27

 

$

0.81

 

$

8.05

 

$

1.10

 

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

 

(0.08

)

0.18

 

0.41

 

0.07

 

Net income per share attributable to SPX Corporation common shareholders

 

$

1.19

 

$

0.99

 

$

8.46

 

$

1.17

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding — basic

 

43.068

 

45.678

 

43.649

 

46.044

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share of common stock:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to SPX Corporation common shareholders

 

$

1.25

 

$

0.81

 

$

7.90

 

$

1.09

 

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

 

(0.08

)

0.17

 

0.40

 

0.06

 

Net income per share attributable to SPX Corporation common shareholders

 

$

1.17

 

$

0.98

 

$

8.30

 

$

1.15

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding — diluted

 

43.900

 

45.972

 

44.487

 

46.704

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

41.9

 

$

55.9

 

$

365.6

 

$

(19.9

)

 

The accompanying notes are an integral part of these statements.

 

2



 

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

 

 

 

June 28,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

466.2

 

$

691.8

 

Accounts receivable, net

 

1,172.8

 

1,206.7

 

Inventories, net

 

551.2

 

502.2

 

Other current assets

 

124.7

 

104.3

 

Deferred income taxes

 

125.2

 

119.6

 

Assets of discontinued operations

 

64.5

 

148.3

 

Total current assets

 

2,504.6

 

2,772.9

 

Property, plant and equipment:

 

 

 

 

 

Land

 

51.9

 

45.4

 

Buildings and leasehold improvements

 

383.0

 

384.4

 

Machinery and equipment

 

811.9

 

789.7

 

 

 

1,246.8

 

1,219.5

 

Accumulated depreciation

 

(563.4

)

(527.2

)

Property, plant and equipment, net

 

683.4

 

692.3

 

Goodwill

 

1,519.6

 

1,517.0

 

Intangibles, net

 

915.0

 

924.7

 

Other assets

 

817.9

 

949.3

 

TOTAL ASSETS

 

$

6,440.5

 

$

6,856.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

495.6

 

$

494.6

 

Accrued expenses

 

929.3

 

989.2

 

Income taxes payable

 

134.1

 

73.1

 

Short-term debt

 

74.5

 

26.9

 

Current maturities of long-term debt

 

9.4

 

558.7

 

Liabilities of discontinued operations

 

14.5

 

31.9

 

Total current liabilities

 

1,657.4

 

2,174.4

 

 

 

 

 

 

 

Long-term debt

 

1,181.3

 

1,090.0

 

Deferred and other income taxes

 

358.2

 

427.2

 

Other long-term liabilities

 

987.2

 

992.6

 

Total long-term liabilities

 

2,526.7

 

2,509.8

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

SPX Corporation shareholders’ equity:

 

 

 

 

 

Common stock (99,984,314 and 42,929,329 issued and outstanding at June 28, 2014, respectively, 99,801,498 and 45,281,329 issued and outstanding at December 31, 2013, respectively)

 

1,007.4

 

1,004.5

 

Paid-in capital

 

1,589.7

 

1,571.5

 

Retained earnings

 

2,640.1

 

2,303.1

 

Accumulated other comprehensive income

 

284.7

 

287.5

 

Common stock in treasury (57,054,985 and 54,520,169 shares at June 28, 2014 and December 31, 2013, respectively)

 

(3,278.1

)

(3,008.6

)

Total SPX Corporation shareholders’ equity

 

2,243.8

 

2,158.0

 

Noncontrolling interests

 

12.6

 

14.0

 

Total equity

 

2,256.4

 

2,172.0

 

TOTAL LIABILITIES AND EQUITY

 

$

6,440.5

 

$

6,856.2

 

 

The accompanying notes are an integral part of these statements.

 

3



 

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

 

 

 

Six months ended

 

 

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

Cash flows used in operating activities:

 

 

 

 

 

Net income

 

$

367.8

 

$

57.2

 

Less: Income from discontinued operations, net of tax

 

17.9

 

3.4

 

Income from continuing operations

 

349.9

 

53.8

 

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

 

 

 

 

 

Special charges, net

 

14.2

 

18.2

 

Impairment of intangible assets

 

 

2.0

 

Gain on asset sales

 

(491.1

)

 

Loss on early extinguishment of debt

 

32.5

 

 

Deferred and other income taxes

 

(52.5

)

89.5

 

Depreciation and amortization

 

57.3

 

54.8

 

Pension and other employee benefits

 

32.1

 

0.9

 

Stock-based compensation

 

29.3

 

25.6

 

Other, net

 

0.1

 

3.7

 

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

 

 

 

 

 

Accounts receivable and other assets

 

19.0

 

(5.7

)

Inventories

 

(46.9

)

(84.9

)

Accounts payable, accrued expenses and other

 

(27.4

)

(196.0

)

Discretionary pension contribution

 

 

(250.0

)

Cash spending on restructuring actions

 

(15.7

)

(10.8

)

Net cash used in continuing operations

 

(99.2

)

(298.9

)

Net cash used in discontinued operations

 

(2.8

)

(11.2

)

Net cash used in operating activities

 

(102.0

)

(310.1

)

Cash flows from (used in) investing activities:

 

 

 

 

 

Proceeds from asset sales and other, net

 

581.2

 

(1.3

)

Increase in restricted cash

 

(0.7

)

 

Capital expenditures

 

(23.6

)

(34.5

)

Net cash from (used in) continuing operations

 

556.9

 

(35.8

)

Net cash from (used in) discontinued operations

 

100.5

 

(6.0

)

Net cash from (used in) investing activities

 

657.4

 

(41.8

)

Cash flows used in financing activities:

 

 

 

 

 

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

 

(530.6

)

 

Borrowings under senior credit facilities

 

157.0

 

287.0

 

Repayments under senior credit facilities

 

(20.0

)

(287.0

)

Borrowings under trade receivables agreement

 

 

35.0

 

Repayments under trade receivables agreement

 

 

(35.0

)

Net repayments under other financing arrangements

 

(52.6

)

(3.4

)

Purchases of common stock

 

(274.4

)

(249.0

)

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

 

(12.2

)

(14.5

)

Financing fees paid

 

(0.4

)

 

Dividends paid

 

(28.6

)

(12.2

)

Net cash used in continuing operations

 

(761.8

)

(279.1

)

Net cash from discontinued operations

 

 

 

Net cash used in financing activities

 

(761.8

)

(279.1

)

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

 

(19.2

)

(0.2

)

Net change in cash and equivalents

 

(225.6

)

(631.2

)

Consolidated cash and equivalents, beginning of period

 

691.8

 

984.1

 

Consolidated cash and equivalents, end of period

 

$

466.2

 

$

352.9

 

 

The accompanying notes are an integral part of these statements.

 

4



 

SPX CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; in millions, except per share data)

 

(1)                                 BASIS OF PRESENTATION

 

We prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally required by accounting principles generally accepted in the United States (“GAAP”) can be condensed or omitted. The financial statements represent our accounts after the elimination of intercompany transactions and, in our opinion, include the adjustments (consisting only of normal and recurring items) necessary for their fair presentation.

 

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

 

We account for investments in unconsolidated companies where we exercise significant influence but do not have control using the equity method. In determining whether we are the primary beneficiary of a variable interest entity (“VIE”), we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties to determine which party has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and which party has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We have interests in VIEs, primarily joint ventures, in which we are the primary beneficiary and others in which we are not. Our VIEs are considered immaterial, individually and in aggregate, to our condensed consolidated financial statements.

 

On January 7, 2014, we completed the sale of our 44.5% interest in the EGS Electrical Group, LLC and Subsidiaries (“EGS”) joint venture to Emerson Electric Co. for cash proceeds of $574.1. As a result of the sale, we recorded a gain of $491.2 to “Other income (expense), net” during the first quarter of 2014. Prior to the sale, we accounted for our investment in EGS on a three-month lag. As a result of the sale, we recorded no equity earnings related to this investment during the three and six months ended June 28, 2014, while equity earnings related to this investment totaled $9.9 and $19.1 during the three and six months ended June 29, 2013.

 

Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2013 Annual Report on Form 10-K. Interim results are not necessarily indicative of full year results. We have reclassified certain prior year amounts, including the results of discontinued operations, to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. See Note 3 for information on discontinued operations.

 

We establish actual interim closing dates using a “fiscal” calendar, which requires our businesses to close their books on the Saturday closest to the end of the first calendar quarter, with the second and third quarters being 91 days in length. Our fourth quarter ends on December 31. The interim closing dates for the first, second and third quarters of 2014 are March 29, June 28 and September 27, compared to the respective March 30, June 29 and September 28, 2013 dates. We had one less day in the first quarter of 2014 and will have one more day in the fourth quarter of 2014 than in the respective 2013 periods.

 

(2)                                 NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

In March 2013, the Financial Accounting Standards Board (“FASB”) issued an amendment to guidance to resolve the diversity in practice relating to a parent entity’s accounting for the cumulative translation adjustment (“CTA”) upon derecognition of

 

5



 

foreign subsidiaries or groups of assets. The amendment requires that any CTA related to the parent entity’s investment in a foreign entity be released into earnings when a sale or transfer of the foreign subsidiary or group of assets results in the complete or substantially complete liquidation of the foreign entity. This amendment is effective for interim and annual reporting periods beginning after December 15, 2013, and shall be applied prospectively. We adopted this guidance on January 1, 2014, with no material impact on our condensed consolidated financial statements.

 

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

 

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

 

In May 2014, the FASB issued a new standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The new standard contains a five-step approach that entities will apply to determine the measurement of revenue and timing of when it is recognized, including (i) identifying the contract(s) with a customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to separate performance obligations, and (v) recognizing revenue when (or as) each performance obligation is satisfied.  The new standard requires a number of disclosures intended to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue, and the related cash flows.  The disclosures include qualitative and quantitative information about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The new standard is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted.  We are currently evaluating the impact that this new standard will have on our consolidated financial statements.

 

(3)                                 DISCONTINUED OPERATIONS

 

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

 

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

 

6



 

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

 

Business

 

Quarter
Discontinued

 

Quarter of Sale
or Termination
of Operations

 

SPX Precision Components (“Precision Components”)

 

Q3 2013

 

Q2 2014

 

Thermal Product Solutions (“TPS”)

 

Q3 2013

 

Q1 2014

 

Broadcast Antenna System business (“Dielectric”)

 

Q2 2013

 

Q2 2013

 

Crystal Growing business (“Kayex”)

 

Q1 2013

 

Q1 2013

 

 

Precision Components — Sold for cash consideration of $63.0 during the second quarter of 2014, resulting in a loss, net of taxes, of $7.3.

 

TPS — Sold for cash consideration of $38.5 and a promissory note of $4.0 during the first quarter of 2014, resulting in a gain, net of taxes, of $21.5. The promissory note is payable in full by the buyer on or before February 28, 2016.

 

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

 

KayexWe closed the business during the first quarter of 2013. In connection with the closure, we recorded a loss, net of taxes, of $2.1 during the first quarter of 2013, with such loss related primarily to severance costs and asset impairment charges. During the third and fourth quarters of 2013, we recorded an aggregate gain, net of taxes, of $3.4 associated primarily with the sale of a perpetual license related to certain of the business’s intangible assets. Proceeds from the sale of the perpetual license totaled $6.9.

 

In addition to the businesses discussed above, we recognized net gains of $1.2 and $0.7 during the three and six months ended June 28, 2014, respectively, and net gains (losses) of $2.7 and $(0.4) during the three and six months ended June 29, 2013, respectively, resulting from adjustments to gains/losses on dispositions of previously discontinued businesses. Refer to the consolidated financial statements contained in our 2013 Annual Report on Form 10-K for the disclosure of all businesses discontinued during 2011, 2012 and 2013.

 

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

 

For the three and six months ended June 28, 2014 and June 29, 2013, income (loss) from discontinued operations and

the related income taxes are shown below:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Income (loss) from discontinued operations

 

$

(0.9

)

$

6.9

 

$

33.6

 

$

4.3

 

Income tax (provision) benefit

 

(2.6

)

1.1

 

(15.7

)

(0.9

)

Income (loss) from discontinued operations, net

 

$

(3.5

)

$

8.0

 

$

17.9

 

$

3.4

 

 

7



 

For the three and six months ended June 28, 2014 and June 29, 2013, results of operations for discontinued

operations were as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

16.0

 

$

56.1

 

$

49.7

 

$

103.5

 

Pre-tax income

 

4.0

 

7.4

 

4.6

 

7.3

 

 

The major classes of assets and liabilities, excluding intercompany balances, of the businesses reported as discontinued

operations included in the accompanying condensed consolidated balance sheets are as follows:

 

 

 

June 28,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Accounts receivable, net

 

$

10.3

 

$

22.8

 

Inventories, net

 

11.9

 

37.6

 

Other current assets

 

0.5

 

1.2

 

Property, plant and equipment, net

 

4.1

 

16.3

 

Goodwill and intangibles, net

 

37.7

 

70.4

 

Assets of discontinued operations

 

$

64.5

 

148.3

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

6.2

 

$

13.3

 

Accrued expenses

 

8.3

 

18.6

 

Liabilities of discontinued operations

 

$

14.5

 

$

31.9

 

 

(4)                                 INFORMATION ON REPORTABLE SEGMENTS AND OTHER OPERATING SEGMENTS

 

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

 

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

 

The factors considered in determining our aggregated segments are the economic similarity of the businesses, the nature of products sold or services provided, production processes, types of customers and distribution methods. In determining our segments, we apply the threshold criteria of the Segment Reporting Topic of the Codification to operating income or loss of each segment before considering impairment and special charges, pension and postretirement expense/income, stock-based compensation and other indirect corporate expenses. This is consistent with the way our chief operating decision maker evaluates the results of each segment.

 

Flow Technology Reportable Segment

 

Our Flow Technology reportable segment engineers, designs, manufactures and markets products and solutions used to process, blend, filter, dry, meter and transport fluids with a focus on original equipment installation, including turnkey systems, skidded systems and components, as well as comprehensive aftermarket components and support services. Primary component offerings include engineered pumps, valves, mixers, plate heat exchangers, and dehydration and filtration technologies. The segment primarily serves customers in food and beverage, power and energy and industrial end markets. The segment continues to focus on

 

8



 

innovation and new product development, optimizing its global footprint while taking advantage of cross-product integration opportunities and increasing its competitive position in global end markets. Flow Technology’s solutions focus on key business drivers, such as product flexibility, process optimization, sustainability and safety.

 

Thermal Equipment and Services Reportable Segment

 

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

 

Industrial Products and Services and Other

 

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

 

Corporate Expense

 

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

 

9



 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues: (1)

 

 

 

 

 

 

 

 

 

Flow Technology reportable segment

 

$

661.4

 

$

653.4

 

$

1,278.1

 

$

1,266.4

 

Thermal Equipment and Services reportable segment

 

327.3

 

350.3

 

606.9

 

655.4

 

Industrial Products and Services and Other

 

191.0

 

158.2

 

364.1

 

330.6

 

Total revenues

 

$

1,179.7

 

$

1,161.9

 

$

2,249.1

 

$

2,252.4

 

 

 

 

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

Flow Technology reportable segment

 

$

88.3

 

$

67.0

 

$

154.5

 

$

122.0

 

Thermal Equipment and Services reportable segment

 

9.5

 

26.2

 

18.7

 

27.9

 

Industrial Products and Services and Other

 

25.2

 

21.8

 

47.6

 

44.4

 

Total income for reportable and other operating segments

 

123.0

 

115.0

 

220.8

 

194.3

 

 

 

 

 

 

 

 

 

 

 

Corporate expense

 

(25.8

)

(25.1

)

(54.3

)

(56.0

)

Pension and postretirement (expense) income

 

(3.0

)

4.2

 

(22.8

)

8.5

 

Stock-based compensation expense

 

(4.6

)

(5.3

)

(29.3

)

(25.6

)

Impairment of intangible assets

 

 

 

 

(2.0

)

Special charges, net

 

(4.5

)

(17.8

)

(14.2

)

(18.2

)

 

 

 

 

 

 

 

 

 

 

Consolidated operating income

 

$

85.1

 

$

71.0

 

$

100.2

 

$

101.0

 

 


(1)                                 Under the percentage of completion method, we recognized revenues of $295.8 and $353.0 in the three months ended June 28, 2014 and June 29, 2013, respectively. For the six months ended June 28, 2014 and June 29, 2013, revenues under the percentage of completion method were $570.0 and $695.7, respectively. Costs and estimated earnings in excess of billings on uncompleted contracts accounted for under the percentage of completion method were $275.3 and $285.3 as of June 28, 2014 and December 31, 2013, respectively, and are reported as a component of ‘‘Accounts receivable, net’’ in the condensed consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted contracts accounted for under the percentage of completion method were $214.3 and $218.4 as of June 28, 2014 and December 31, 2013, respectively, and are reported as a component of ‘‘Accrued expenses’’ in the condensed consolidated balance sheets.

 

(5)                                 SPECIAL CHARGES, NET

 

Special charges, net, for the three and six months ended June 28, 2014 and June 29, 2013 are described in more

detail below:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Flow Technology reportable segment

 

$

1.2

 

$

5.6

 

$

10.1

 

$

5.0

 

Thermal Equipment and Services reportable segment

 

1.4

 

11.1

 

1.5

 

11.6

 

Industrial Products and Services and Other

 

1.6

 

1.1

 

1.7

 

1.1

 

Corporate

 

0.3

 

 

0.9

 

0.5

 

Total

 

$

4.5

 

$

17.8

 

$

14.2

 

$

18.2

 

 

Flow Technology Reportable Segment — Charges for the three and six months ended June 28, 2014 related primarily to severance and other costs associated with restructuring initiatives at various Flow locations in Europe and the U.S. These actions were taken primarily to reduce the cost base of Clyde Union as we continue to integrate the business into our Flow Technology reportable segment. Charges for the three and six months ended June 29, 2013 related primarily to severance costs associated with restructuring initiatives at Clyde Union locations in the U.K. and the U.S.

 

10



 

Thermal Equipment and Services Reportable Segment — Charges for the three and six months ended June 28, 2014 related primarily to severance and other costs associated with (i) the closure of a facility in China and (ii) finalizing restructuring initiatives in Germany that commenced in 2013. Charges for the three and six months ended June 29, 2013 related primarily to severance costs associated with restructuring actions at our Balcke Duerr business in Germany.

 

Industrial Products and Services and Other — Charges for the three and six months ended June 28, 2014 and June 29, 2013 related primarily to costs associated with restructuring initiatives at various locations in the U.S.

 

Corporate — Charges for the three and six months ended June 28, 2014 related primarily to costs associated with our initial efforts to better align our corporate overhead structure with the new operational alignment we implemented in the second half of 2013. Charges for the six months ended June 29, 2013 related to costs associated with the early termination of two building leases and an asset impairment charge of $0.3.

 

Expected charges still to be incurred under actions approved as of June 28, 2014 are approximately $2.0.

 

The following is an analysis of our restructuring liabilities for the six months ended June 28, 2014 and June 29, 2013:

 

 

 

Six months ended

 

 

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

Balance at beginning of period

 

$

19.0

 

$

16.4

 

Special charges (1)

 

14.2

 

17.0

 

Utilization — cash (2)

 

(15.8

)

(10.8

)

Currency translation adjustment and other

 

0.5

 

(0.1

)

Balance at end of period

 

$

17.9

 

$

22.5

 

 


(1)                                 The six months ended June 29, 2013 excluded $1.2 of non-cash charges that did not impact the restructuring liabilities.

 

(2)                                 The six months ended June 28, 2014 included $0.1 of cash utilized to settle retained liabilities of discontinued operations.

 

(6)                                 INVENTORIES, NET

 

Inventories, net, were as follows:

 

 

 

June 28,

 

December 31,

 

 

 

2014

 

2013

 

Finished goods

 

$

167.1

 

$

147.5

 

Work in process

 

164.3

 

165.0

 

Raw materials and purchased parts

 

240.6

 

210.6

 

Total FIFO cost

 

572.0

 

523.1

 

Excess of FIFO cost over LIFO inventory value

 

(20.8

)

(20.9

)

Total inventories, net

 

$

551.2

 

$

502.2

 

 

Inventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated net realizable values. Certain domestic inventories are valued using the last-in, first-out (“LIFO”) method. These inventories were approximately 20% and 19% of total inventory at June 28, 2014 and December 31, 2013, respectively. Other inventories are valued using the first-in, first-out (“FIFO”) method.

 

11



 

(7)            GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill, by reportable segment and other operating segments, were as follows:

 

 

 

 

 

Goodwill

 

 

 

Foreign

 

 

 

 

 

 

 

Resulting from

 

 

 

Currency

 

 

 

 

 

December 31,

 

Business

 

 

 

Translation

 

June 28,

 

 

 

2013

 

Combinations

 

Impairments

 

and Other

 

2014

 

Flow Technology reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

1,120.2

 

$

 

$

 

$

2.1

 

$

1,122.3

 

Accumulated impairments

 

 

 

 

 

 

Goodwill

 

1,120.2

 

 

 

2.1

 

1,122.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Thermal Equipment and Services reportable segment

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

570.0

 

 

 

(0.5

)

569.5

 

Accumulated impairments

 

(399.5

)

 

 

0.3

 

(399.2

)

Goodwill

 

170.5

 

 

 

(0.2

)

170.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Products and Services and Other

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

366.8

 

 

 

1.9

 

368.7

 

Accumulated impairments

 

(140.5

)

 

 

(1.2

)

(141.7

)

Goodwill

 

226.3

 

 

 

0.7

 

227.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

2,057.0

 

 

 

3.5

 

2,060.5

 

Accumulated impairments

 

(540.0

)

 

 

(0.9

)

(540.9

)

Goodwill

 

$

1,517.0

 

$

 

$

 

$

2.6

 

$

1,519.6

 

 

Other Intangibles

 

Identifiable intangible assets comprised the following:

 

 

 

 

June 28, 2014

 

December 31, 2013

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Intangible assets with determinable lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent

 

$11.6

 

$(8.6

)

$3.0

 

$11.5

 

$(8.3

)

$3.2

 

Technology

 

197.7

 

(58.6

)

139.1

 

196.3

 

(52.4

)

143.9

 

Customer relationships

 

415.7

 

(88.8

)

326.9

 

412.0

 

(78.6

)

333.4

 

Other

 

30.4

 

(19.0

)

11.4

 

31.0

 

(18.6

)

12.4

 

 

 

655.4

 

(175.0

)

480.4

 

650.8

 

(157.9

)

492.9

 

Trademarks with indefinite lives

 

434.6

 

 

434.6

 

431.8

 

 

431.8

 

Total

 

$1,090.0

 

$(175.0

)

$915.0

 

$1,082.6

 

$(157.9

)

$924.7

 

 

At June 28, 2014, the net carrying value of intangible assets with determinable lives consisted of $427.9 in the Flow Technology reportable segment, $44.7 in the Thermal Equipment and Services reportable segment and $7.8 in Industrial Products and Services and Other. At June 28, 2014, trademarks with indefinite lives consisted of $289.6 in the Flow Technology reportable segment, $126.3 in the Thermal Equipment and Services reportable segment and $18.7 in Industrial Products and Services and Other.

 

12



 

We perform our annual goodwill impairment testing during the fourth quarter in conjunction with our annual financial planning process, with such testing based primarily on events and circumstances existing as of the end of the third quarter. In addition, we test goodwill for impairment on a more frequent basis if there are indications of potential impairment. A significant amount of judgment is involved in determining if an indication of impairment has occurred between annual testing dates.  Such indications may include:  a significant decline in expected future cash flows; a significant adverse change in legal factors or the business climate; unanticipated competition; and a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit.

 

We perform our annual trademarks impairment testing during the fourth quarter or on a more frequent basis if there are indications of potential impairment. The fair values of our trademarks are determined by applying estimated royalty rates to projected revenues, with the resulting cash flows discounted at a rate of return that reflects current market conditions.

 

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

 

(8)                                 WARRANTY

 

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

 

 

 

Six months ended

 

 

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

Balance at beginning of period

 

$

54.8

 

$

59.7

 

Provisions

 

11.4

 

12.2

 

Usage

 

(14.8

)

(17.9

)

Balance at end of period

 

51.4

 

54.0

 

Less: Current portion of warranty

 

39.3

 

44.3

 

Non-current portion of warranty

 

$

12.1

 

$

9.7

 

 

(9)                                 EMPLOYEE BENEFIT PLANS

 

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

 

13



 

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

 

Domestic Pension Plans

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

1.8

 

$

1.9

 

$

3.6

 

$

3.7

 

Interest cost

 

4.5

 

12.0

 

11.2

 

24.0

 

Expected return on plan assets

 

(4.7

)

(18.8

)

(10.2

)

(37.5

)

Settlement charges, net (1)

 

 

 

0.5

 

 

Recognized net actuarial loss (2)

 

 

 

14.8

 

 

Total net periodic pension benefit expense (income)

 

$

1.6

 

$

(4.9

)

$

19.9

 

$

(9.8

)

 


(1)                                 For the six months ended June 28, 2014, includes the settlement charge of $4.6 associated with the lump-sum payment action that took place during the first quarter of 2014 (see above), net of a $4.1 reduction to the estimated settlement charge that was recorded during the fourth quarter of 2013 in connection with the transfer of the pension obligation for the retirees of the Plan to Massachusetts Mutual Life Insurance Company.

 

(2)                                 For the six months ended June 28, 2014, includes the actuarial loss resulting from the remeasurement of the assets and obligations of the Plan in the first quarter of 2014, which was required in connection with the lump-sum payment action noted above.

 

Foreign Pension Plans

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

0.7

 

$

0.7

 

$

1.4

 

$

1.4

 

Interest cost

 

3.5

 

3.3

 

7.0

 

6.6

 

Expected return on plan assets

 

(4.2

)

(4.3

)

(8.5

)

(8.7

)

Total net periodic pension benefit income

 

 

(0.3

)

(0.1

)

(0.7

)

Less: Net periodic pension benefit income of discontinued operations

 

 

 

(0.2

)

(0.1

)

Net periodic pension benefit expense (income) of continuing operations

 

$

 

$

(0.3

)

$

0.1

 

$

(0.6

)

 

Postretirement Plans

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

0.2

 

$

0.1

 

$

0.3

 

$

0.2

 

Interest cost

 

1.3

 

1.2

 

2.6

 

2.4

 

Amortization of unrecognized prior service credits

 

(0.1

)

(0.3

)

(0.1

)

(0.7

)

Net periodic postretirement benefit expense

 

$

1.4

 

$

1.0

 

$

2.8

 

$

1.9

 

 

Employer Contributions

 

During the first half of 2014, we made contributions to our domestic and foreign pension plans of approximately $9.0, of which $1.5 related to businesses that have been disposed of and had been classified as discontinued operations.

 

14



 

(10)                          INDEBTEDNESS

 

The following summarizes our debt activity (both current and non-current) for the six months ended June 28, 2014:

 

 

 

December 31,

 

 

 

 

 

 

 

June 28,

 

 

 

2013

 

Borrowings

 

Repayments

 

Other (5)

 

2014

 

Domestic revolving loan facility

 

$

 

$

57.0

 

$

(20.0

)

$

 

$

37.0

 

Term loan (1)

 

475.0

 

100.0

 

 

 

575.0

 

6.875% senior notes, due in August 2017

 

600.0

 

 

 

 

600.0

 

7.625% senior notes (2)

 

500.0

 

 

(500.0

)

 

 

Trade receivables financing arrangement (3)

 

 

 

 

 

 

Other indebtedness (4)

 

100.6

 

10.6

 

(63.2

)

5.2

 

53.2

 

Total debt

 

1,675.6

 

$

167.6

 

$

(583.2

)

$

5.2

 

1,265.2

 

Less: short-term debt

 

26.9

 

 

 

 

 

 

 

74.5

 

Less: current maturities of long-term debt

 

558.7

 

 

 

 

 

 

 

9.4

 

Total long-term debt

 

$

1,090.0

 

 

 

 

 

 

 

$

1,181.3

 

 


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

 

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

 

(3)                                 Under this arrangement, we can borrow, on a continuous basis, up to $80.0, as available. At June 28, 2014, we had $80.0 of available borrowing capacity under this facility.

 

(4)                                 Primarily included capital lease obligations of $15.7 and $73.0 and balances under purchase card programs of $30.8 and $25.4 at June 28, 2014 and December 31, 2013, respectively. During the first quarter of 2014, we purchased our corporate headquarters facility for cash consideration of $60.8, resulting in the extinguishment of the related capital lease obligation.

 

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

 

Senior Credit Facilities

 

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

 

At June 28, 2014, we had $53.5 and $723.2, respectively, of outstanding letters of credit issued under our revolving credit and our foreign credit instrument facilities of our senior credit agreement. In addition, we had $5.8 of letters of credit outstanding under separate arrangements in China and India.

 

The weighted-average interest rate of outstanding borrowings under our senior credit facilities was approximately 1.7% at June 28, 2014.

 

At June 28, 2014, we were in compliance with all covenants of our senior credit facilities and our senior notes. Restrictions on our ability to repurchase shares or pay dividends are described in our 2013 Annual Report on Form 10-K.

 

15



 

(11)                          FINANCIAL INSTRUMENTS

 

Currency Forward Contracts

 

We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the Euro, South African Rand, Chinese Yuan and Great Britain Pound.

 

From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries (“FX forward contracts”). In addition, some of our contracts contain currency forward embedded derivatives (“FX embedded derivatives”), because the currency of exchange is not “clearly and closely” related to the functional currency of either party to the transaction. Certain of our FX forward contracts are designated as cash flow hedges. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (“AOCI”). These changes in fair value are reclassified into earnings as a component of revenues or cost of products sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction is no longer probable, the cumulative change in the derivatives’ fair value is recorded as a component of “Other income (expense), net” in the period in which the transaction is no longer considered probable of occurring. To the extent a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period in which it occurs.

 

We had FX forward contracts with an aggregate notional amount of $192.6 and $191.3 outstanding as of June 28, 2014 and December 31, 2013, respectively, with all such contracts scheduled to mature within the next 12 months. We also had FX embedded derivatives with an aggregate notional amount of $122.3 and $145.8 at June 28, 2014 and December 31, 2013, respectively. The unrealized losses, net of taxes, recorded in AOCI related to FX forward contracts were $0.8 and $1.0 as of June 28, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of June 28, 2014 to income within 12 months.

 

Commodity Contracts

 

From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At June 28, 2014 and December 31, 2013, the outstanding notional amount of commodity contracts was 5.5 and 3.4 pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. As of June 28, 2014 and December 31, 2013, the fair value of these contracts was $0.1 and $0.4 (current assets), respectively. The unrealized gain (loss), net of taxes, recorded in AOCI was $(0.1) and $0.2 as of June 28, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of June 28, 2014 to income within 12 months.

 

16



 

The following summarizes the gross and net fair values of our FX forward and commodity contracts by counterparty at June 28, 2014 and December 31, 2013, respectively:

 

 

 

June 28, 2014

 

December 31, 2013

 

 

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

FX forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

$

0.3

 

$

(0.1

)

$

0.2

 

$

0.7

 

$

(0.1

)

$

0.6

 

Counterparty B

 

0.1

 

(0.1

)

 

0.1

 

(0.4

)

(0.3

)

Aggregate of other counterparties

 

0.6

 

(0.1

)

0.5

 

0.3

 

 

0.3

 

Totals (1)

 

$

1.0

 

$

(0.3

)

$

0.7

 

$

1.1

 

$

(0.5

)

$

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A (2)

 

$

0.1

 

$

 

$

0.1

 

$

0.4

 

$

 

$

0.4

 

 


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

 

 

 

June 28,

 

December 31,

 

 

 

2014

 

2013

 

Designated as hedging instruments:

 

 

 

 

 

Other current assets

 

$

0.2

 

$

0.3

 

Accrued expenses

 

(0.1

)

 

 

 

0.1

 

0.3

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

Other current assets

 

0.6

 

0.6

 

Accrued expenses

 

 

(0.3

)

 

 

0.6

 

0.3

 

Net fair value of FX forward contracts

 

$

0.7

 

$

0.6

 

 

(2)                   Related contracts are designated as hedging instruments. Net amounts at June 28, 2014 and December 31, 2013 are recorded in “Other current assets.”

 

The following summarizes the fair value of our FX embedded derivative instruments, which are not designated as hedging instruments, and the related balance sheet classification as of June 28, 2014 and December 31, 2013:

 

 

 

June 28,

 

December 31,

 

Balance Sheet Classification

 

2014

 

2013

 

Other current assets

 

$

0.4

 

$

0.7

 

Accrued expenses

 

(6.8

)

(6.5

)

Other long-term liabilities

 

(1.9

)

(2.1

)

 

 

$

(8.3

)

$

(7.9

)

 

17



 

The following summarizes the pre-tax gain (loss) recognized in AOCI resulting from derivative financial instruments designated as cash flow hedging relationships for the three and six months ended June 28, 2014 and June 29, 2013:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

0.2

 

$

(11.0

)

$

0.5

 

$

(4.1

)

Commodity contracts

 

0.6

 

(1.3

)

(0.7

)

(2.3

)

 

 

$

0.8

 

$

(12.3

)

$

(0.2

)

$

(6.4

)

 

The following summarizes the pre-tax loss related to derivative financial instruments designated as cash flow hedging relationships reclassified from AOCI to income through ‘‘Revenues’’ for FX forward contracts and ‘‘Cost of products sold’’ for commodity contracts for the three and six months ended June 28, 2014 and June 29, 2013:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

 

$

(0.2

)

$

 

$

(0.8

)

Commodity contracts

 

(0.1

)

0.1

 

(0.2

)

0.1

 

 

 

$

(0.1

)

$

(0.1

)

$

(0.2

)

$

(0.7

)

 

During the three and six months ended June 29, 2013, losses of $0.2 were recognized in ‘‘Other income (expense), net’’ relating to derivative ineffectiveness and amounts excluded from effectiveness testing.

 

The following summarizes the gain (loss) recognized in ‘‘Other income (expense), net’’ for the three and six months ended June 28, 2014 and June 29, 2013 related to derivative financial instruments not designated as cash flow hedging relationships:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

1.4

 

$

1.1

 

$

1.8

 

$

(1.9

)

FX embedded derivatives

 

0.1

 

2.6

 

(2.1

)

5.7

 

 

 

$

1.5

 

$

3.7

 

$

(0.3

)

$

3.8

 

 

(12)                          EQUITY AND STOCK-BASED COMPENSATION

 

Income Per Share

 

The following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income per share:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

 

2014

 

2013

 

2014

 

2013

 

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

 

43.068

 

45.678

 

43.649

 

46.044

 

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

 

0.832

 

0.294

 

0.838

 

0.660

 

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

 

43.900

 

45.972

 

44.487

 

46.704

 

 

There were no stock options outstanding during the six months ended June 28, 2014. All stock options outstanding were included in the computation of diluted income per share during the six months ended June 29, 2013.

 

All unvested restricted stock shares and restricted stock units were included in the computation of diluted income per share at June 28, 2014 because required market thresholds for vesting (as discussed in our 2013 Annual Report on Form 10-K) were met. The total number of unvested restricted stock shares and restricted stock units that were not included in the computation of diluted income per share because required market thresholds for vesting were not met was 1.181 and 0.708 for the three and six months ended June 29, 2013, respectively.

 

18



 

Stock-based Compensation

 

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

 

Compensation expense within income from continuing operations related to restricted stock shares and restricted stock units totaled $4.6 and $5.3 for the three months ended June 28, 2014 and June 29, 2013, respectively, and $29.3 and $25.6 for the six months ended June 28, 2014 and June 29, 2013, respectively. The related tax benefit was $1.7 and $2.0 for the three months ended June 28, 2014 and June 29, 2013, respectively, and $10.6 and $9.3 for the six months ended June 28, 2014 and June 29, 2013, respectively.

 

Accumulated Other Comprehensive Income

 

The changes in the components of accumulated other comprehensive income, net of tax, for the three months ended June 28, 2014 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

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

 

Net Unrealized
Losses on
Available-for-
Sale Securities

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

294.8

 

$

(1.5

)

$

(0.2

)

$

0.4

 

$

293.5

 

Other comprehensive income (loss) before reclassifications

 

(9.5

)

0.5

 

(0.2

)

 

(9.2

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.1

 

0.4

 

(0.1

)

0.4

 

Current-period other comprehensive income (loss)

 

(9.5

)

0.6

 

0.2

 

(0.1

)

(8.8

)

Balance at end of period

 

$

285.3

 

$

(0.9

)

$

 

$

0.3

 

$

284.7

 

 


(1)                   Net of tax benefit of $0.9 and $1.2 as of June 28, 2014 and March 29, 2014, respectively.

 

(2)                   Net of tax provision of $(0.1) as of June 28, 2014 and March 29, 2014.

 

19



 

The changes in the components of accumulated other comprehensive income, net of tax, for the six months ended June 28, 2014 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Losses on
Qualifying Cash
Flow Hedges (1)

 

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

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

296.8

 

$

(0.8

)

$

(3.7

)

$

(4.8

)

$

287.5

 

Other comprehensive income (loss) before reclassifications

 

(11.5

)

(0.3

)

3.6

 

0.2

 

(8.0

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.2

 

0.1

 

4.9

 

5.2

 

Current-period other comprehensive income (loss)

 

(11.5

)

(0.1

)

3.7

 

5.1

 

(2.8

)

Balance at end of period

 

$

285.3

 

$

(0.9

)

$

 

$

0.3

 

$

284.7

 

 


(1)      Net of tax benefit of $0.9 and $1.0 as of June 28, 2014 and December 31, 2013, respectively.

 

(2)      Net of tax (provision) benefit of $(0.1) and $2.2 as of June 28, 2014 and December 31, 2013, respectively. The balance as of December 31, 2013 primarily includes $(5.0), net of tax, related to our share of the pension liability adjustment for EGS as of December 31, 2013. In connection with the sale of our interest in EGS during the first quarter of 2014, as described in Note 1, we recognized our share of the pension liability adjustment for EGS as a component of the gain on sale of our investment interest.

 

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

June 29, 2013 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

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

 

Net Unrealized
Losses on
Available-for-
Sale Securities

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

206.6

 

$

0.7

 

$

(3.6

)

$

(4.1

)

$

199.6

 

Other comprehensive income (loss) before reclassifications

 

14.9

 

(5.2

)

(0.2

)

 

9.5

 

Amounts reclassified from accumulated other comprehensive income

 

 

0.1

 

 

(0.2

)

(0.1

)

Current-period other comprehensive income (loss)

 

14.9

 

(5.1

)

(0.2

)

(0.2

)

9.4

 

Balance at end of period

 

$

221.5

 

$

(4.4

)

$

(3.8

)

$

(4.3

)

$

209.0

 

 


(1)      Net of tax benefit of $2.9 and $0.0 as of June 29, 2013 and March 30, 2013, respectively.

 

(2)      Net of tax benefit of $1.9 and $1.8 as of June 29, 2013 and March 30, 2013, respectively. Includes $(5.0) related to our share of the pension liability adjustment for EGS as of June 29, 2013 and March 30, 2013.

 

20



 

The changes in the components of accumulated other comprehensive income, net of tax, for the six months ended June 29, 2013 were as follows:

 

 

 

Foreign
Currency
Translation
Adjustment

 

Net Unrealized
Losses on
Qualifying Cash
Flow Hedges (1)

 

Net Unrealized
Losses on
Available-for-
Sale Securities

 

Pension and
Postretirement
Liability Adjustment
and Other (2)

 

Total

 

Balance at beginning of period

 

$

293.8

 

$

(3.3

)

$

(3.1

)

$

(2.6

)

$

284.8

 

Other comprehensive loss before reclassifications

 

(72.3

)

(1.6

)

(0.7

)

(1.2

)

(75.8

)

Amounts reclassified from accumulated other comprehensive income

 

 

0.5

 

 

(0.5

)

 

Current-period other comprehensive loss

 

(72.3

)

(1.1

)

(0.7

)

(1.7

)

(75.8

)

Balance at end of period

 

$

221.5

 

$

(4.4

)

$

(3.8

)

$

(4.3

)

$

209.0

 

 


(1)                   Net of tax benefit of $2.9 and $2.5 as of June 29, 2013 and December 31, 2012, respectively.

 

(2)                   Net of tax benefit of $1.9 and $1.2 as of June 29, 2013 and December 31, 2012, respectively. Includes $(5.0) and $(3.8) related to our share of the pension liability adjustment for EGS as of June 29, 2013 and December 31, 2012, respectively.

 

The following summarizes amounts reclassified from each component of accumulated comprehensive loss for the

three months ended June 28, 2014 and June 29, 2013:

 

 

 

Amount Reclassified from AOCI

 

 

 

 

 

Three months ended

 

Affected Line Item in the Condensed

 

 

 

June 28, 2014

 

June 29, 2013

 

Consolidated Statements of Operations

 

(Gains) losses on qualifying cash flow hedges:

 

 

 

 

 

 

 

Commodity contracts

 

$

0.1