Notes to Consolidated Financial Statements
December 31, 2022
(All currency and share amounts are in millions, except per share and par value data)
(1) Basis of Presentation and Summary of Significant Accounting Policies
Our significant accounting policies are described below, as well as in other Notes that follow. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only (see Note 4 for information on discontinued operations).
Merger and Consummation of Holding Company Reorganization — As of August 15, 2022, SPX Technologies, Inc. (“SPX”, “our”, “we”, or the “Company”) is the successor registrant pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, to SPX Corporation (“Legacy SPX”) as a result of the completion on August 15, 2022 of a holding company reorganization (the “Holding Company Reorganization”) effected as a merger of Legacy SPX with and into SPX Merger, LLC, a subsidiary of the Company. Each share of Legacy SPX’s common stock, par value $0.01 per share, issued and outstanding immediately prior to the consummation of the Holding Company Reorganization was automatically converted into an equivalent corresponding share of the Company's common stock having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Legacy SPX common stock being converted. Accordingly, upon consummation of the Holding Company Reorganization, Legacy SPX stockholders became stockholders of the Company. The terms “SPX,” “we” and “our” include Legacy SPX for periods prior to the consummation of the Holding Company Reorganization as the context requires.
Principles of Consolidation — The consolidated financial statements include our accounts prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) after the elimination of intercompany transactions. Investments in unconsolidated companies where we exercise significant influence but do not have control are accounted for 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 of the entity that could potentially be significant to the VIE. All of our VIEs are immaterial, individually and in aggregate, to our consolidated financial statements.
Shift Away from the Power Generation Markets — On September 26, 2015, we completed the spin-off to our stockholders (the “Spin-Off”) of all the outstanding shares of SPX FLOW, Inc., 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 transformers and process cooling systems business. As a result, we have significantly reduced our exposure to the power generation markets as indicated by the activities summarized below:
•Sale of Dry Cooling Business – On March 30, 2016, we completed the sale of our dry cooling business, a business that provides dry cooling systems to the global power generation markets.
•Sale of Balcke Dürr Business – On December 30, 2016, we completed the sale of Balcke Dürr, a business that provides heat exchangers and other related components to the European and Asian power generation markets. Balcke Dürr historically had been the most significant of our power generation businesses. As we considered the disposition of Balcke Dürr to be the cornerstone of our strategic shift away from the power generation markets, and given the significance of Balcke Dürr’s financial results to our overall operations prior to its disposition, we began classifying Balcke Dürr as a discontinued operation at the time of its disposition.
•Wind-Down of the SPX Heat Transfer Business – After an unsuccessful attempt to sell the SPX Heat Transfer (“Heat Transfer”) business, and as a continuation of our strategic shift away from power generation markets, we initiated a wind-down plan for the business in 2018. During the fourth quarter of 2020, we completed the 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 in the accompanying consolidated financial statements. See Note 4 for additional details.
•Wind-Down of DBT Technologies Business – As a culmination of our strategic shift away from power generation markets, in 2021 we substantially ceased all operations of, and have ceased accepting new businesses in, our South African subsidiary, DBT Technologies (PTY) LTD (“DBT”). As a result, we are reporting DBT as a discontinued operation in the accompanying consolidated financial statements. DBT continues to be involved in various dispute resolution matters related to two large power projects. See Note 4 for additional details regarding DBT's presentation as a discontinued operation and Note 15 regarding the dispute resolution matters.
Sale of Transformer Solutions Business — 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 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 was 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 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. During 2022, we agreed to the final adjustment of the purchase price which resulted in a payment to the Purchaser of $13.9 with an increase to the gain on sale of $0.2. Historically, Transformer Solutions’ operations had a significant impact on our consolidated financial results, with revenues totaling approximately 25% of our total consolidated revenues. As we no longer have a consequential presence in the power transmission and distribution markets, and given Transformer Solutions' significance to our historical consolidated financial results, we concluded that the sale of Transformer Solutions represents a strategic shift. Accordingly, we have classified the business as a discontinued operation in the accompanying consolidated financial statements. See Note 4 for additional details.
Divestiture of Asbestos Liabilities and Certain Assets — On November 1, 2022, we divested three wholly-owned subsidiaries that hold asbestos liabilities and certain assets, including related insurance assets, to Canvas Holdco LLC (“Canvas”), an entity formed by a joint venture of Global Risk Capital LLC and an affiliate of Premia Holdings Ltd. In connection with the divestiture (the “Asbestos Portfolio Sale”), we contributed $138.8 in cash to the divested subsidiaries, financed with cash on hand; while Canvas made a capital contribution to the divested subsidiaries of $8.0. The divestiture resulted in a loss of $73.9, recorded to “Other operating (income) expense, net,” which includes the write-off of certain deferred income tax assets recorded by the divested subsidiaries. The divested subsidiaries have agreed to indemnify us and our affiliates for their asbestos-related liabilities, which encompassed all of our consolidated asbestos-related liabilities and contingent liabilities immediately prior to the divestiture. These indemnification obligations are not subject to any cap or time limitation. As a result of this transaction, the Company divested all obligations with respect to pending and future asbestos claims relating to these matters. The board of managers of the divested subsidiaries each received a solvency opinion from an independent advisory firm that the divested subsidiaries were solvent after giving effect to the Asbestos Portfolio Sale.
The agreement for the Asbestos Portfolio Sale contains customary representations and warranties with respect to the divested subsidiaries, the Company, and Canvas. Pursuant to the agreement, the Company and Canvas will each indemnify the other for breaches of representation and warranties or breaches of covenants, subject to certain limitations as set forth in the agreement. Refer to Note 4 for additional details.
Acquisitions in 2022:
•ITL - On March 31, 2022, we completed the acquisition of International Tower Lighting, LLC (“ITL”), a leader in the design and manufacture of highly-engineered Aids to Navigation systems, including obstruction lighting for telecommunications towers, wind turbines and numerous other terrestrial obstructions. We purchased ITL for cash proceeds of $40.4, net of cash acquired of $1.1. The post-acquisition operating results of ITL are reflected within our Detection and Measurement reportable segment.
The assets acquired and liabilities assumed in the ITL transaction have been recorded at estimates of fair value as determined by management, based on information available and assumptions as to future operations and are subject to change, primarily for the final assessment and valuation of certain income tax amounts.
Acquisitions in 2021:
•Sealite - On April 19, 2021, we completed the acquisition of Sealite Pty Ltd and affiliated entities, including Sealite USA, LLC (doing business as Avlite Systems) and Star2M Pty Ltd (collectively, “Sealite”). Sealite is a leader in the design and manufacture of marine and aviation Aids to Navigation products. We purchased Sealite for cash proceeds of $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.
•ECS - On August 2, 2021, we completed the acquisition of Enterprise Control Systems Ltd (“ECS”), a leader in the design and manufacture of highly-engineered tactical datalinks and radio frequency (“RF”) countermeasures, including counter-drone and counter-IED RF jammers. We purchased ECS for cash proceeds of $39.4, net of cash acquired of $5.1. Under the terms of the purchase and sales agreement, the seller was eligible for additional cash consideration of up to $15.0, with payment to be made in 2022 upon successful achievement of certain financial performance milestones. The estimated fair value of such contingent consideration as of the date of acquisition was $8.2. 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 liability of $6.7, with such amount recorded within “Other operating (income) expense, net” in the 2021 consolidated statement of operations. During the first and second quarters of 2022, we further reduced the estimated liability by $0.9 and $0.4, respectively, with such amount recorded within “Other operating (income) expense, net” in the 2022 consolidated statement of operations. The estimated fair value of such contingent consideration, which we have reflected as a liability in our consolidated balance sheets, was $0.0 and $1.5 at December 31, 2022 and 2021, respectively. The post-acquisition operating results of ECS are reflected within our Detection and Measurement reportable segment.
•Cincinnati Fan - 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. We purchased Cincinnati Fan for cash proceeds of $145.2, net of cash acquired of $2.5. During 2022, we agreed to a final adjustment of the purchase price, related to acquired working capital, resulting in our receiving $0.4. The post-acquisition operating results of Cincinnati Fan are reflected within our HVAC reportable segment.
Acquisitions in 2020:
•ULC – On September 2, 2020, we completed the acquisition of ULC Robotics (“ULC”), a leading developer of robotic systems, machine learning applications, and inspection technology for the energy, utility, and industrial markets, for cash proceeds of $89.2, net of cash acquired of $4.0. Under the terms of the purchase and sales agreement, the seller was eligible for additional cash consideration of up to $45.0, with payments scheduled to be made upon successful achievement of certain operational and financial performance milestones. At the time of the acquisition, we recorded a liability of $24.3, which represented the estimated fair value of the contingent consideration. During the third quarter of 2021, we concluded that the operational and financial performance milestones noted above would not be achieved. As a result, we reversed the liability of $24.3, with the offset recorded to “Other operating (income) expense, net” and also recorded an impairment charge related to ULC’s goodwill and intangible assets of $24.3. See Note 10 for further discussion of impairments related to ULC. The post-acquisition operating results of ULC are reflected within our Detection and Measurement reportable segment.
•Sensors & Software – On November 11, 2020, we completed the acquisition of Sensors & Software Inc. (“Sensors & Software”), a leading manufacturer and distributor of ground penetrating radar products used for locating underground utilities, detecting unexploded ordinances, and geotechnical and geological investigations, for cash proceeds of $15.5, net of cash acquired of $0.3. Under the terms of the purchase and sales agreement, the seller was eligible for additional cash consideration of up to $3.7, with payment scheduled to be made upon successful achievement of defined financial performance milestones during the twelve months following the date of acquisition. At the time of the acquisition, we recorded a liability of $0.7 which represented the estimated fair value of the contingent consideration. During the fourth quarter of 2021, we concluded that certain of these financial performance milestones had been achieved, resulting in an increase to the liability of $0.6, with the offset reflected in “Other operating (income) expense, net” in the accompanying 2021 consolidated statement of operations. The estimated fair value of such contingent consideration of $1.3 is reflected as a liability in the accompanying consolidated balance sheet as of December 31, 2021 and was paid during 2022. The post-acquisition operating results of Sensors & Software are reflected within our Detection and Measurement reportable segment.
Foreign Currency Translation and Transactions — The financial statements of our foreign subsidiaries are translated into U.S. dollars in accordance with the Foreign Currency Matters Topic of the Financial Accounting Standards Board Codification (“Codification”). Gains and losses on foreign currency translations are reflected as a separate component of stockholders' equity and other comprehensive income/loss. Foreign currency transaction gains and losses, as well as gains and losses related to foreign currency forward contracts, are included in “Other income (expense), net,” with the related net losses totaling $1.1, $0.9 and $0.6 in 2022, 2021 and 2020, respectively.
Cash Equivalents — We consider highly liquid money market investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Revenue Recognition — We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606. See Note 5 for our policy for recognizing revenue under ASC 606 as well as the various other disclosures required by ASC 606.
Research and Development Costs — We expense research and development costs as incurred. We charge costs incurred in the research and development of new software included in products to expense until technological feasibility is established. After technological feasibility is established, additional eligible costs are capitalized until the product is available for general release. We amortize these costs over the economic lives of the related products and include the amortization in cost of products sold. We perform periodic reviews of the recoverability of these capitalized software costs. If, and at the time, we determine that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, we write off any unrecoverable capitalized amounts. Capitalized software, net of amortization, totaled $1.2 and $0.1 as of December 31, 2022 and 2021, respectively. Capitalized software amortization expense totaled $0.1, $1.3, and $2.5 in 2022, 2021, and 2020, respectively. We expensed research activities relating to the development and improvement of our products of $39.1, $30.7 and $28.1 in 2022, 2021 and 2020, respectively.
Property, Plant and Equipment — Property, plant and equipment (“PP&E”) is stated at cost, less accumulated depreciation. We use the straight-line method for computing depreciation expense over the useful lives of PP&E, which do not exceed 40 years for buildings and range from 3 to 15 years for machinery and equipment. Depreciation expense, including amortization of finance leases, was $17.8, $19.4 and $15.4 for the years ended December 31, 2022, 2021 and 2020, respectively. Leasehold improvements are amortized over the life of the related asset or the life of the lease, whichever is shorter. Interest is capitalized on significant construction or installation projects. No interest was capitalized during 2022, 2021 or 2020.
Pension and Postretirement — We recognize changes in the fair value of plan assets and actuarial gains and losses in earnings during the fourth quarter of each year, unless earlier remeasurement is required, as a component of net periodic benefit expense/income and, accordingly, recognize the effects of plan investment performance, interest rate changes, and changes in actuarial assumptions as a component of earnings in the year in which they occur. The remaining components of pension/postretirement expense/income, primarily interest costs and expected return on plan assets, are recorded on a quarterly basis.
Income Taxes — We account for income taxes based on the requirements of the Income Taxes Topic of the Codification, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, federal or foreign statutory tax audits or estimates and judgments used.
Derivative Financial Instruments — We use foreign currency forward contracts to manage our exposures to fluctuating currency exchange rates and interest rate protection agreements to manage our exposures to fluctuating interest rate risk on variable rate debt. In addition, prior to the sale of Transformers Solutions, we used forward contracts to manage the exposure on forecasted purchases of commodity raw materials (“commodity contracts”). Derivatives are recorded on the balance sheet and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the change in fair value of the derivatives is recorded in accumulated other comprehensive income (“AOCI”) and subsequently recognized in earnings when the forecasted transaction impacts earnings. We do not enter into financial instruments for speculative or trading purposes.
For those transactions that are designated as cash flow hedges, on the date the derivative contract is entered into, we document our hedge relationship, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking the hedge transaction. We also assess, both at inception and quarterly thereafter, whether such derivatives are highly effective in offsetting changes in the fair value of the hedged item. See Notes 14 and 17 for further information.
Cash flows from hedging activities are included in the same category as the items being hedged, which are primarily operating activities.
Correction of Prior-Year Classification and Disclosure – Subsequent to issuance of the December 31, 2021 financial statements, management concluded that the impairment charge of $24.3 related to our ULC business’ goodwill and intangible assets mentioned above should have been reported in a separate line item within our consolidated statement of operations for the year ended December 31, 2021. This amount, which was previously classified within “Other operating (income) expense, net,” has been reclassified to “Impairment of goodwill and intangible assets” for the year ended December 31, 2021. As a result of this immaterial correction, “Other operating (income) expense, net” for the year ended December 31, 2021 reflects income of $4.1 whereas the expense disclosed prior to reclassification for the year ended December 31, 2021 was $20.2.
In addition, management concluded that, although the assessment of our reportable segments was performed using the appropriate measures as defined by the Segment Reporting Topic of the Codification, the disclosure of operating income for each of our reportable segments (“Segment Income”) was not consistent with the measure used by our Chief Operating Decision Maker (“CODM”) when evaluating the results of, or allocating resources to, our reportable segments. We previously disclosed that Segment Income is determined before considering impairments and special charges, long-term incentive compensation, certain other operating income/expense, and other indirect corporate expenses. Our CODM also excludes the impact of intangible asset amortization, inventory step-up charges, and certain other acquisition-related costs from Segment Income. Accordingly, Segment Income, as presented in Note 7, now excludes all of the items noted above. This change had no impact to the amounts previously presented in our consolidated statements of operations for the years ended December 31, 2021 and 2020. Although the impact of this change to previously disclosed Segment Income is not material, we revised the prior year presentation to be consistent with the current year disclosure. The impact of this change on the Segment Income previously presented for the years ended December 31, 2021 and 2020 is summarized below:
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| December 31, 2021 | | December 31, 2020 |
| As Previously Presented | | Effect of Change | | Current Presentation | | As Previously Presented | | Effect of Change | | Current Presentation |
Income: | | | | | | | | | | | |
| | | | | | | | | | | |
HVAC reportable segment | $ | 104.2 | | | $ | 3.5 | | | $ | 107.7 | | | $ | 102.7 | | | $ | 3.5 | | | $ | 106.2 | |
Detection and Measurement reportable segment | 69.7 | | | 23.2 | | | 92.9 | | | 69.1 | | | 11.8 | | | 80.9 | |
Total income for segments | 173.9 | | | 26.7 | | | 200.6 | | | 171.8 | | | 15.3 | | | 187.1 | |
| | | | | | | | | | | |
Corporate expense | 60.5 | | | — | | | 60.5 | | | 49.7 | | | — | | | 49.7 | |
Acquisition related costs (1) | — | | | 5.1 | | | 5.1 | | | — | | | 1.3 | | | 1.3 | |
Long-term incentive compensation expense | 12.8 | | | — | | | 12.8 | | | 13.1 | | | — | | | 13.1 | |
Amortization of intangible assets | — | | | 21.6 | | | 21.6 | | | — | | | 14.0 | | | 14.0 | |
Impairment of goodwill and intangible assets | 30.0 | | | — | | | 30.0 | | | 0.7 | | | — | | | 0.7 | |
Special charges, net | 1.0 | | | — | | | 1.0 | | | 2.4 | | | — | | | 2.4 | |
Other operating (income) expense, net | (4.1) | | | — | | | (4.1) | | | 9.0 | | | — | | | 9.0 | |
Consolidated operating income | $ | 73.7 | | | $ | — | | | $ | 73.7 | | | $ | 96.9 | | | $ | — | | | $ | 96.9 | |
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(1)Includes cost incurred in connection with acquisitions, including additional “Cost of products sold” related to the step-up of inventory (to fair value) acquired in connection with acquisitions of $2.6 and $0.3 during the years ended December 31, 2021 and 2020, respectively, as well as integration costs of $0.7 and $1.0 during the years ended December 31, 2021 and 2020, respectively. The year ended December 31, 2021 also includes a non-cash impairment charge of $1.8.
(2) Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from the estimates and assumptions used in the consolidated financial statements and related notes.
Listed below are certain significant estimates and assumptions used in the preparation of our consolidated financial statements. Certain other estimates and assumptions are further explained in the related notes.
Accounts Receivable Allowances — We provide allowances for estimated losses on uncollectible accounts based on our historical experience, current and future economic and market conditions, and the evaluation of the likelihood of success in
collecting specific customer receivables. In addition, we maintain allowances for customer returns, discounts and invoice pricing discrepancies, with such allowances primarily based on historical experience. Summarized below is the activity for these allowance accounts.
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| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | 10.4 | | | $ | 11.5 | | | $ | 8.5 | |
Acquisitions | 0.1 | | | — | | | 0.3 | |
Allowances provided | 17.9 | | | 14.9 | | | 18.6 | |
Write-offs, net of recoveries, credits issued and other | (18.0) | | | (16.0) | | | (15.9) | |
Balance at end of year | $ | 10.4 | | | $ | 10.4 | | | $ | 11.5 | |
Inventory — We estimate losses for excess and/or obsolete inventory and the net realizable value of inventory based on the aging and historical utilization of the inventory and the evaluation of the likelihood of recovering the inventory costs based on anticipated demand and selling price.
Long-Lived Assets and Intangible Assets Subject to Amortization — We continually review whether events and circumstances subsequent to the acquisition of any long-lived assets, including intangible assets subject to amortization, have occurred that indicate the remaining estimated useful lives of those assets may warrant revision or that the remaining balance of those assets may not be fully recoverable. If events and circumstances indicate that the long-lived assets should be reviewed for possible impairment, we use projections to assess whether future cash flows on an undiscounted basis related to the assets are likely to exceed the related carrying amount. We will record an impairment charge to the extent that the carrying value of the assets exceed their fair values as determined by valuation techniques appropriate in the circumstances, which could include the use of similar projections on a discounted basis.
In determining the estimated useful lives of definite-lived intangibles, we consider the nature, competitive position, life cycle position, and historical and expected future operating cash flows of each acquired asset, as well as our commitment to support these assets through continued investment and legal infringement protection.
Goodwill and Indefinite-Lived Intangible Assets — We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter and continually assess whether a triggering event has occurred to determine whether the carrying value exceeds the implied fair value. In reviewing goodwill for impairment, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If we determine that an impairment is more likely than not, we then perform a quantitative impairment test (described below). Otherwise, no further analysis is required. Our qualitative evaluation is an assessment of factors, including reporting unit-specific operating results, as well as industry, market, and general economic conditions. Our quantitative analysis of the fair value of reporting units is based generally on discounted projected cash flows, but we also consider factors such as comparable industry price multiples. We employ cash flow projections that we believe to be reasonable under current and forecasted circumstances, the results of which form the basis for making judgments about the carrying values of the reported net assets of our reporting units. 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, as well as estimates associated with cost reduction initiatives, capacity utilization and assumptions for inflation and foreign currency changes.
Accrued Expenses — We make estimates and judgments in establishing accruals as required under GAAP. Summarized in the table below are the components of accrued expenses at December 31, 2022 and 2021.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Employee benefits | $ | 58.3 | | | $ | 66.7 | |
Warranty | 12.9 | | | 11.8 | |
Other (1) | 76.8 | | | 139.4 | |
Total | $ | 148.0 | | | $ | 217.9 | |
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(1)Other consists of various items including, among other items, the current portion of our liabilities related to risk management matters, environmental remediation costs, and operating leases, as well as, accrued rebates, legal, interest and restructuring costs, none of which is individually material.
Legal — It is our policy to accrue for estimated losses from legal actions or claims when events exist that make the realization of the losses probable and they can be reasonably estimated. We do not discount legal obligations or reduce them by anticipated insurance recoveries. See Note 15 for additional details.
Environmental Remediation Costs — We expense costs incurred to investigate and remediate environmental issues unless they extend the economic useful lives of related assets. We record liabilities when it is probable that an obligation has been incurred and the amounts can be reasonably estimated. Our environmental accruals cover anticipated costs, including investigation, remediation and operation and maintenance of clean-up sites. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. We generally do not discount environmental obligations or reduce them by anticipated insurance recoveries.
Risk Management Matters — We are subject to claims associated with risk management matters (e.g., product liability, general liability, automobile, and workers’ compensation claims). The liabilities we record for these claims are based on a number of assumptions, including historical claims and payment experience and, prior to the Asbestos Portfolio Sale, with respect to asbestos claims, actuarial estimates of the future period during which additional claims were reasonably foreseeable. Prior to the Asbestos Portfolio Sale, we also recorded insurance recovery assets associated with the asbestos product liability matters. These assets represented amounts that we believe we were entitled to recover under agreements we had with insurance companies. The assets we recorded for these insurance recoveries were based on a number of assumptions, including the continued solvency of the insurers, and our legal interpretation of our rights for recovery under the agreements we had with the insurers. In addition, we are self-insured for certain of our workers’ compensation, automobile, product, general liability, disability and health costs, and we maintain adequate accruals to cover our retained liabilities. Our accruals for self-insurance liabilities are based on claims filed and an estimate of claims incurred but not yet reported, and generally are not discounted. We consider a number of factors, including third-party actuarial valuations, when making these determinations. We maintain third-party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts; however, this insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against potential loss exposures. The key assumptions considered in estimating the ultimate cost to settle reported claims and the estimated costs associated with incurred but not yet reported claims include, among other factors, our historical and industry claims experience, trends in health care and administrative costs, our current and future risk management programs, and historical lag studies with regard to the timing between when a claim is incurred and reported. See Note 15 for additional details.
Warranty — In the normal course of business, we issue product warranties for specific products and provide for the estimated future warranty cost in the period in which the sale is recorded. We provide for the estimate of warranty cost based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided. In addition, due to the seasonal fluctuations at certain of our businesses, the timing of warranty provisions and the usage of warranty accruals can vary period to period. We make adjustments to initial obligations for warranties as changes in the obligations become reasonably estimable. The following is an analysis of our product warranty accrual for the periods presented:
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| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | 34.8 | | | $ | 35.3 | | | $ | 31.7 | |
Acquisitions | 0.4 | | | 0.1 | | | 1.6 | |
Provisions | 10.6 | | | 8.5 | | | 12.4 | |
Usage | (10.8) | | | (9.1) | | | (10.6) | |
Currency translation adjustment | (0.3) | | | — | | | 0.2 | |
Balance at end of year | 34.7 | | | 34.8 | | | 35.3 | |
Less: Current portion of warranty | 12.9 | | | 11.8 | | | 11.6 | |
Non-current portion of warranty | $ | 21.8 | | | $ | 23.0 | | | $ | 23.7 | |
Income Taxes — We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain tax positions in accordance with the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions may be classified as “Income taxes payable” and “Deferred and other income taxes” in the accompanying consolidated balance sheets based on an expectation as to the timing of when the matter will be resolved. As events change or resolutions occur, these accruals are adjusted, such as in the case of audit settlements with taxing authorities. For tax positions where it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority, assuming such authority has full knowledge of all relevant information. These reviews also entail analyzing the realization of deferred tax assets. When we believe that it is more likely than not that we will not realize a benefit for a deferred tax asset based on all available evidence, we establish a valuation allowance.
Employee Benefit Plans — Defined benefit plans cover a portion of our salaried and hourly employees, including certain employees in foreign countries. As discussed in Note 1, we recognize changes in the fair value of plan assets and actuarial gains and losses associated with our pension and postretirement benefit plans in earnings during the fourth quarter of each year, unless earlier remeasurement is required, as a component of net periodic benefit expense. The remaining components of pension/postretirement expense, primarily interest costs and expected return on plan assets, are recorded on a quarterly basis. See Note 11 for further discussion of our pension and postretirement benefits.
We derive pension expense from an actuarial calculation based on the defined benefit plans’ provisions and our assumptions regarding discount rate. We primarily determine the discount rate for our plans by matching the expected projected benefit obligation cash flows for each of the plans to a yield curve that is representative of long-term, high-quality (rated AA or higher) fixed income debt instruments as of the measurement date. We also consult with independent actuaries in determining these assumptions.
Parent Guarantees and Bonds Associated with Balcke Dürr — In connection with the sale of Balcke Dürr in 2016, we became contingently obligated under existing parent company guarantees and bank and surety bonds which totaled approximately Euro 79.0 and Euro 79.0, respectively, at the time of sale. Since the sale of Balcke Dürr, the guarantees have expired and, as of the third quarter of 2021, all the bonds have been returned. We accounted for our contingent obligation in accordance with the Guarantees Topic of the Codification, which required that we record a liability for the estimated fair value of the parent company guarantees and the bonds in connection with the accounting for the sale of Balcke Dürr. Under the related purchase agreement, Balcke Dürr provided cash collateral and the parent company of the buyer provided a partial guarantee in the event any of the bonds were called. We recorded an asset for the estimated fair value of the cash collateral provided by Balcke Dürr and the partial guarantee provided by the parent company of the buyer, with the estimated fair values based on the terms and conditions and relative risk associated with each of these securities. As the guarantees have expired and the bonds have been returned, we no longer have assets or liabilities recorded for this matter. See Note 17 for additional details.
(3) New Accounting Pronouncements
The following is a summary of new accounting pronouncements that apply or may apply to our business.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13. ASU 2016-13 changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables, based on historical experience, current conditions, and reasonable and supportable forecasts. The requirements of ASU 2016-13 are to be applied on a modified retrospective basis, which entails recognizing the initial effect of adoption in retained earnings. We adopted ASU 2016-13 on January 1, 2020, which resulted in an increase of our retained deficit of $0.5.
The London Interbank Offered Rate (“LIBOR”) is scheduled to be discontinued on June 30, 2023. In an effort to address the various challenges created by such discontinuance, the FASB issued three amendments to existing guidance, ASU No. 2020-04, No. 2021-01 and No. 2022-06, Reference Rate Reform. The amended guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, etc.) necessitated by the reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by the reference rate reform. Application of the guidance in the amendments is optional, is only available in certain situations, and is only available for companies to apply until December 31, 2024. In conjunction with entering into an amended and restated credit agreement (the “Credit Agreement”) on August 12, 2022, we adopted this guidance with no material impact on our consolidated financial statements. Refer to Note 13 for additional information on the Credit Agreement.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This guidance is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The impact of adopting this guidance on our consolidated financial statements will depend on business combinations occurring on or after the effective date.
(4) Acquisitions, Discontinued Operations, and the Asbestos Portfolio Sale
Acquisitions
As indicated in Note 1, on September 2, 2020, November 11, 2020, April 19, 2021, August 2, 2021, December 15, 2021, and March 31, 2022, we completed the acquisitions of ULC, Sensors & Software, Sealite, ECS, Cincinnati Fan, and ITL, respectively. The pro forma effects of these acquisitions are not material to our consolidated results of operations.
Sale of Transformer Solutions Business
As discussed in Note 1, on October 1, 2021, we completed the sale of Transformer Solutions for net cash proceeds of $620.6. In connection with the sale, we recorded a gain of $382.2 to “Gain (loss) on disposition of discontinued operations, net of tax” within our consolidated statement of operations for the year ended December 31, 2021.
The results of Transformer Solutions are presented as a discontinued operation for all periods presented. Major line items constituting pre-tax income and after-tax income of Transformer Solutions for the period January 1, 2021 to October 1, 2021 and the year ended December 2020 are shown below:
| | | | | | | | | | | | | | |
| |
| | 2021 | | 2020 |
Revenues | | $ | 313.5 | | | $ | 427.4 | |
Costs and expenses: | | | | |
Cost of product sold | | 257.2 | | | 338.7 | |
Selling, general and administrative | | 28.4 | | | 32.7 | |
Other income, net | | — | | | 0.9 | |
Income before tax | | 27.9 | | | 56.9 | |
Income tax provision | | (7.0) | | | (14.0) | |
Income after tax | | $ | 20.9 | | | $ | 42.9 | |
Wind-Down of DBT Business
As discussed in Note 1, we completed the wind-down of our DBT business in the fourth quarter of 2021. As a result of completing the wind-down plan, we are reporting DBT as a discontinued operation 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 tax” 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.”
Major line items constituting pre-tax loss and after-tax loss of DBT for the years ended December 31, 2021 and 2020 are shown below:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Revenues | | $ | 0.5 | | | $ | 4.0 | |
Costs and expenses: | | | | |
Cost of product sold | | 0.9 | | | 6.9 | |
Selling, general and administrative | | 15.1 | | | 14.8 | |
Special charges, net | | 1.3 | | | 0.8 | |
Other income (expense), net | | (1.2) | | | 1.9 | |
Interest income, net | | 0.1 | | | — | |
Loss before tax | | (17.9) | | | (16.6) | |
Income tax benefit | | 2.7 | | 2.4 |
Loss after tax | | $ | (15.2) | | | $ | (14.2) | |
The assets and liabilities of DBT have been included within “Assets of DBT and Heat Transfer” and “Liabilities of DBT and Heat Transfer,” respectively, on the consolidated balance sheets as of December 31, 2022 and 2021. The major line items constituting DBT's assets and liabilities as of December 31, 2022 and 2021 are shown below:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
ASSETS | | | | |
Cash and equivalents | | $ | 9.3 | | | $ | 7.8 | |
Accounts receivable, net | | 7.6 | | | 9.1 | |
Other current assets | | 6.5 | | | 7.0 | |
Property, plant and equipment: | | | | |
Buildings and leasehold improvements | | 0.2 | | | 0.2 | |
Machinery and equipment | | 0.7 | | | 1.5 | |
| | 0.9 | | | 1.7 | |
Accumulated depreciation | | (0.8) | | | (1.5) | |
Property, plant and equipment, net | | 0.1 | | | 0.2 | |
Other assets | | 19.1 | | | 27.6 | |
Total assets of DBT | | $ | 42.6 | | | $ | 51.7 | |
LIABILITIES | | | | |
Accounts payable | | $ | 1.4 | | | $ | 2.3 | |
Contract liabilities | | 3.6 | | | 5.6 | |
Accrued expenses | | 22.0 | | | 22.4 | |
Other long-term liabilities | | 4.6 | | | 4.9 | |
Total liabilities of DBT | | $ | 31.6 | | | $ | 35.2 | |
Wind-Down of the Heat Transfer Business
As discussed in Note 1, we completed the wind-down of our Heat Transfer business in the fourth quarter of 2020. As a result of completing the wind-down plan, we are reporting Heat Transfer as a discontinued operation for all periods presented.
Major line items constituting pre-tax income and after-tax income of Heat Transfer for the year ended December 31, 2020 are shown below:
| | | | | | | | | | | |
| | | |
| | | | | 2020 |
Revenues | | | | | $ | 3.9 | |
Costs and expenses: | | | | | |
Cost of products sold | | | | | 3.1 | |
Selling, general and administrative | | | | | 0.1 | |
Special charges, net | | | | | 0.4 | |
| | | | | |
Income before tax | | | | | 0.3 | |
Income tax provision | | | | | (0.1) | |
Income after tax | | | | | $ | 0.2 | |
The assets and liabilities of Heat Transfer have been included within “Assets of DBT and Heat Transfer” and “Liabilities of DBT and Heat Transfer,” respectively, on the consolidated balance sheets as of December 31, 2022 and 2021. The major line items constituting Heat Transfer's assets and liabilities as of December 31, 2022 and 2021 are shown below:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
ASSETS | | | | |
Accounts receivable, net | | $ | — | | | $ | 0.1 | |
Other current assets | | 0.2 | | | 0.2 | |
Other assets | | 0.1 | | | 0.2 | |
Total assets of Heat Transfer | | $ | 0.3 | | | $ | 0.5 | |
LIABILITIES | | | | |
Accounts payable | | $ | 0.1 | | | $ | 0.3 | |
Accrued expenses | | 0.1 | | | 0.1 | |
Total liabilities of Heat Transfer | | $ | 0.2 | | | $ | 0.4 | |
For the years ended December 31, 2022, 2021 and 2020, results of operations from our businesses reported as discontinued operations were as follows:
| | | | | | | | | | | | | | | | | |
| |
| 2022 | | 2021 | | 2020 |
Transformer Solutions | | | | | |
Income (loss) from discontinued operations (1) | $ | (0.6) | | | $ | 454.9 | | | $ | 56.9 | |
Income tax (provision) benefit (2) | 0.9 | | | (51.8) | | | (14.0) | |
Income from discontinued operations, net | 0.3 | | | 403.1 | | | 42.9 | |
| | | | | |
DBT | | | | | |
Loss from discontinued operations (3) | (17.3) | | | (37.8) | | | (16.6) | |
Income tax benefit | 2.1 | | | 2.7 | | | 2.4 | |
Loss from discontinued operations, net | (15.2) | | | (35.1) | | | (14.2) | |
| | | | | |
Heat Transfer | | | | | |
Income (loss) from discontinued operations | (0.4) | | | (0.3) | | | 0.3 | |
Income tax (provision) benefit | 0.1 | | | — | | | (0.1) | |
Income (loss) from discontinued operations, net | (0.3) | | | (0.3) | | | 0.2 | |
| | | | | |
All other (4) | | | | | |
Loss from discontinued operations | (6.0) | | | (7.6) | | | (4.8) | |
Income tax benefit | 1.6 | | | 6.3 | | | 1.1 | |
Loss from discontinued operations, net | (4.4) | | | (1.3) | | | (3.7) | |
| | | | | |
Total | | | | | |
Income (loss) from discontinued operations | (24.3) | | | 409.2 | | | 35.8 | |
Income tax (provision) benefit | 4.7 | | | (42.8) | | | (10.6) | |
Income (loss) from discontinued operations, net | $ | (19.6) | | | $ | 366.4 | | | $ | 25.2 | |
________________________________________________
(1) Loss for the year ended December 31, 2022 resulted primarily from revisions to liabilities retained in connection with the disposition. Income for the year ended December 31, 2021 resulted primarily from the gain on sale of the business of $382.2, as well as the results of operations for the year. Income for the year ended December 31, 2020 related to the results of operations for the year.
(2) During the fourth quarter of 2021, we liquidated certain 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.
(3) Loss for the years ended December 31, 2022, 2021, and 2020 resulted primarily from legal costs incurred in connection with various dispute resolution matters related to two large power projects. In addition, and as previously noted, the year ended December 31, 2021 includes a charge of $19.9 related to the write-off of historical translation amounts.
(4) Loss for the years ended December 31, 2022, 2021, and 2020 resulted primarily from asbestos-related charges and revisions to liabilities, including income tax liabilities, retained in connection with prior dispositions.
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 previous business divestitures may be materially adjusted in subsequent periods.
Asbestos Portfolio Sale
As indicated in Note 1, we completed the Asbestos Portfolio Sale on November 1, 2022.
Below is a summary of the impact of the Asbestos Portfolio Sale, including the loss on sale, on our consolidated financial statements:
| | | | | | | | |
Cash contribution | | $ | (138.8) | |
Assets divested: | | |
Accounts receivable, net | | (5.0) | |
Other current assets | | (50.0) | |
Other assets | | (420.3) | |
Deferred tax assets | | (27.0) | |
Liabilities divested: | | |
Accrued liabilities | | 53.9 | |
Other long-term liabilities | | 518.0 | |
Loss on Asbestos Portfolio Sale, before transaction costs | | (69.2) | |
Transaction costs | | (4.7) | |
Loss on Asbestos Portfolio Sale | | $ | (73.9) | |
(5) Revenues from Contracts
Summarized below is our policy for recognizing revenue under ASC 606, as well as the various disclosures required by ASC 606.
Performance Obligations - Certain of our contracts are comprised of multiple deliverables, which can include hardware and software components, installation, maintenance, and extended warranties. For these contracts, we evaluate whether these deliverables represent separate performance obligations as defined by ASC 606. In some cases, a customer contracts with us to integrate a complex set of tasks and components into a single project or capability (even if the single project results in the delivery of multiple units). Hence, the entire contract is treated as a single performance obligation. In contrast, we may promise to provide distinct goods or services within a contract, in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. In cases where we sell standard products with observable standalone selling prices, these selling prices are used to determine the relative standalone selling price. In cases where we sell a customized customer specific solution, we typically use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Sales taxes and other usage-based taxes are excluded from revenue.
Remaining performance obligations represent performance obligations that have yet to be satisfied. As a practical expedient, we do not disclose performance obligations (i) that are part of a contract that has an original expected duration of less than one year and/or (ii) where our right to consideration corresponds directly to the value transferred to the customer. Performance obligations for contracts with an original duration in excess of one year that have yet to be satisfied as of the end of a period primarily relate to our Aids to Navigation systems, communication technologies products, large process cooling systems, as well as certain of our fare collection systems. As of December 31, 2022, the aggregate amount allocated to remaining performance obligations after the effect of practical expedients was $158.5. We expect to recognize revenue on approximately 72% and 89% of the remaining performance obligations over the next 12 and 24 months, respectively, with the remaining recognized thereafter.
Options - We offer options within certain of our contracts to purchase future goods or services. To the extent the option provides a material right to a future benefit (i.e., future goods and services at a discount from the relative standalone selling price), we separate the material right as a performance obligation and adjust the standalone selling price of the other performance obligations within the contract. When determining the relative standalone selling price of the option, we first determine the incremental discount that the customer would receive by exercising the option and then adjust that value based on the probability of option exercise (based, where possible, on historical experience). Revenue is recognized for the option as either the option is exercised or when it expires.
Contract Combination and Modification - We assess each contract at its inception to determine whether it should be combined with other contracts for revenue recognition purposes. When making this determination, we consider factors such as whether two or more contracts with a customer were negotiated at or near the same time or were negotiated with an overall profit objective. Contracts are sometimes modified for changes in contract specifications, scope, or price (or a combination of these). Contract modifications for goods or services that are not distinct within the context of the contract (generally associated with specification changes for certain product lines within our HVAC reportable segment) are accounted for as part of the existing contract. Contract modifications for goods or services that are distinct (i.e., adding or subtracting distinct goods or services) are accounted for as either a termination of the existing contract and the creation of a new contract (where the goods or services are not priced at their standalone selling price), or the creation of separate contract (where the goods or services are priced at their standalone selling price).
Variable Consideration - We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary, we estimate the variable consideration at the amount to which we expect to be entitled, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and, if necessary, constrain the amount of variable consideration recognized in order to mitigate this risk. Variable consideration primarily pertains to late delivery penalties and unapproved change orders and claims (levied by us and/or against us). Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary from our estimates, we will adjust these estimates, which would affect revenue and earnings, in the period such variances become known.
As noted above, the nature of our contracts gives rise to several types of variable consideration, including unapproved change orders and claims. We include in our contract estimates additional revenue for unapproved change orders or claims against the customer when we believe we have an enforceable right to the unapproved change order or claim, the amount can be reliably estimated, and the above criteria have been met. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs, and the objective evidence available to support the claim. These estimates are also based on historical award experience.
Returns, Customer Sales Incentives and Warranties - We have certain arrangements that require us to estimate, at the time of sale, the amounts of variable consideration that should be excluded from revenue as (i) certain amounts are not expected to be collected from customers and/or (ii) the product may be returned. We principally rely on historical experience, specific customer agreements, and anticipated future trends to estimate these amounts at the time of shipment and to reduce the transaction price. These arrangements include volume rebates, which are estimated using the most likely amount method, as well as early payment discounts and promotional and advertising allowances, which are estimated using the expected value method. We primarily offer assurance-type standard warranties that the product will conform to published specifications for a defined period of time after delivery. These types of warranties do not represent separate performance obligations. We establish provisions for estimated returns and warranties primarily based on contract terms and historical experience, using the expected value method. Certain businesses offer extended warranties, which are considered separate performance obligations.
Contract Costs - We have elected to apply the practical expedient provided under ASC 606 which allows an entity to expense incremental costs of obtaining or fulfilling a contract when incurred if the amortization period of the asset that the entity otherwise would have recorded is one year or less. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of products sold. The net asset recorded for incremental costs incurred to obtain or fulfill contracts, after consideration of the practical expedient mentioned above, is not material to our consolidated financial statements.
Nature of Goods and Services, Satisfaction of Performance Obligations, and Payment Terms
Our HVAC product lines include package and process cooling equipment, residential and commercial boilers, comfort heating and ventilation products, and engineered air movement solutions. Performance obligations for our HVAC product lines relate primarily to the delivery of equipment and components, construction and reconstruction of cooling towers and other
components, and providing installation, replacement/spare parts and various other services. Performance obligations related to equipment and components are satisfied at the time of shipment or delivery (i.e., control is transferred at a point in time). The typical length of these contracts is one to three months and payment terms are generally 15 to 60 days after shipment to the customer. Performance obligations for construction and reconstruction of cooling towers and other components, and providing installation and various other services, are typically satisfied through a contract with us to provide a customer-specific solution. The customer typically controls the work in process due to contractual termination clauses whereby we have an enforceable right to recovery of cost incurred including a reasonable profit for work performed to date on products or services that do not have an alternative use to us. Additionally, certain projects are performed on customer sites such that the customer controls the asset as it is created or enhanced. As such, performance obligations for these product lines are generally satisfied over time, with the related revenue recorded based on the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion, as this method best depicts how control of the product or service is being transferred. The length of customer contract for these product lines is generally 6 to 18 months. Revenue for sales of certain engineered components and all replacement/spare parts is recognized upon shipment or delivery (i.e., at a point in time). Payments on longer-term contracts are generally commensurate with milestones defined in the related contract, while payments for the replacement/spare parts contracts typically occur 30 to 60 days after delivery.
Our detection and measurement product lines include underground pipe and cable locators, inspection and rehabilitation equipment, robotic systems, fare collection systems, communication technologies, and obstruction lighting. Performance obligations for these product lines relate to delivery of equipment and components, installation and other short-term services, long-term maintenance and software subscription services, pipeline remediation services and development of robotics, and obstruction lighting solutions. Performance obligations for equipment and components generally are satisfied at the time of shipment or delivery (i.e., control is transferred at a point in time). Performance obligations for installation and other short-term services, pipeline remediation, and development of robotics are satisfied over time as the installation or service is performed. Performance obligations for maintenance and software subscription services are satisfied over time, with the related revenue recorded evenly throughout the contract service period as this method best depicts how control of the service is transferred. Payment terms for equipment and components are typically 30 to 60 days after shipment or delivery, while payment for services typically occurs at completion for shorter-term engagements (less than three months in duration) and throughout the service period for longer-term engagements (generally greater than three months in duration). These product lines have varying contract lengths ranging from one to eighteen months (with the longer term contracts generally associated with our Aids to Navigation systems, fare collection systems, and communication technologies products lines), with the typical duration being one to three months.
Customer prepayments, progress billings, and retention payments are customary for some of our longer-term contracts. Customer prepayments, progress billings, and retention payments are not considered a significant financing component because they are intended to protect either the customer or ourselves in the event that some or all of the obligations under the contract are not completed. Additionally, most contract assets are expected to convert to accounts receivable, and contract liabilities are expected to convert to revenue, within one year. As such, after applying the practical expedient to exclude potential financing components that are less than one year in duration, we do not have any such financing components.
Disaggregated Revenues
We disaggregate revenue from contracts with customers by major product line and based on the timing of recognition for each of our reportable segments, as we believe such disaggregation best depicts how the nature, amount, timing, and uncertainty of our revenues and cash flows are effected by economic factors, with such disaggregation presented below for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
Reportable Segments | | HVAC | | Detection and Measurement | | Total |
| | | | | | |
Major product lines | | | | | | |
Package and process cooling equipment and services, and engineered air quality solutions | | $ | 537.0 | | | $ | — | | | $ | 537.0 | |
Boilers, comfort heating, and ventilation | | 376.8 | | | — | | | 376.8 | |
Underground locators, inspection and rehabilitation equipment, and robotic systems | | — | | | 262.1 | | | 262.1 | |
Communication technologies, obstruction lighting, and fare collection systems | | — | | | 285.0 | | | 285.0 | |
| | $ | 913.8 | | | $ | 547.1 | | | $ | 1,460.9 | |
| | | | | | |
Timing of Revenue Recognition | | | | | | |
Revenues recognized at a point in time | | $ | 838.0 | | | $ | 455.1 | | | $ | 1,293.1 | |
Revenues recognized over time | | 75.8 | | | 92.0 | | | 167.8 | |
| | $ | 913.8 | | | $ | 547.1 | | | $ | 1,460.9 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
Reportable Segments | | HVAC | | Detection and Measurement | | Total |
| | | | | | |
Major product lines | | | | | | |
Package and process cooling equipment and services, and engineered air quality solutions | | $ | 433.8 | | | $ | — | | | $ | 433.8 | |
Boilers, comfort heating, and ventilation | | 318.3 | | | — | | | 318.3 | |
Underground locators, inspection and rehabilitation equipment, and robotic systems | | — | | | 256.8 | | | 256.8 | |
Communication technologies, obstruction lighting, and fare collection systems | | — | | | 210.6 | | | 210.6 | |
| | $ | 752.1 | | | $ | 467.4 | | | $ | 1,219.5 | |
| | | | | | |
Timing of Revenue Recognition | | | | | | |
Revenues recognized at a point in time | | $ | 661.2 | | | $ | 415.9 | | | $ | 1,077.1 | |
Revenues recognized over time | | 90.9 | | | 51.5 | | | 142.4 | |
| | $ | 752.1 | | | $ | 467.4 | | | $ | 1,219.5 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
Reportable Segments | | HVAC | | Detection and Measurement | | Total |
| | | | | | |
Major product lines | | | | | | |
Package and process cooling equipment and services | | $ | 447.1 | | | $ | — | | | $ | 447.1 | |
Boilers, comfort heating, and ventilation | | 293.7 | | | — | | | 293.7 | |
Underground locators, inspection and rehabilitation equipment, and robotic systems | | — | | | 217.8 | | | 217.8 | |
Communication technologies, obstruction lighting, and fare collection systems | | — | | | 169.5 | | | 169.5 | |
| | $ | 740.8 | | | $ | 387.3 | | | $ | 1,128.1 | |
| | | | | | |
Timing of Revenue Recognition | | | | | | |
Revenues recognized at a point in time | | $ | 622.2 | | | $ | 341.9 | | | $ | 964.1 | |
Revenues recognized over time | | 118.6 | | | 45.4 | | | 164.0 | |
| | $ | 740.8 | | | $ | 387.3 | | | $ | 1,128.1 | |
Contract Balances
Our customers are invoiced for products and services at the time of delivery or based on contractual milestones, resulting in outstanding receivables with payment terms from these customers (“Contract Accounts Receivable”). In some cases, the timing of revenue recognition, particularly for revenue recognized over time, differs from when such amounts are invoiced to customers, resulting in a contract asset (revenue recognition precedes the invoicing of the related revenue amount) or a contract liability (payment from the customer precedes recognition of the related revenue amount). Contract assets and liabilities are generally classified as current. On a contract-by-contract basis, the contract assets and contract liabilities are reported net within our consolidated balance sheets. Our contract balances consisted of the following as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
Contract Balances | December 31, 2022 | | December 31, 2021 | | Change |
Contract Accounts Receivable (1) | $ | 259.9 | | | $ | 215.3 | | | $ | 44.6 | |
Contract Assets | 23.9 | | | 28.9 | | | (5.0) | |
Contract Liabilities - current | (52.8) | | | (44.7) | | | (8.1) | |
Contract Liabilities - non-current (2) | (4.7) | | | (5.8) | | | 1.1 | |
Net contract balance | $ | 226.3 | | | $ | 193.7 | | | $ | 32.6 | |
_____________________
(1) Included in “Accounts receivable, net” within the accompanying consolidated balance sheets.
(2) Included in “Other long-term liabilities” within the accompanying consolidated balance sheets.
The $32.6 increase in our net contract balance from December 31, 2021 to December 31, 2022 was due primarily to revenue recognized during the period, partially offset by cash payments received from customers during the period.
During 2022, we recognized revenues of $38.0 related to our contract liabilities at December 31, 2021.
(6) Leases
Summarized below is our policy under, as well as the various other disclosures required by, ASC 842.
We have elected to account for lease agreements with lease and non-lease components as a single component for all leases. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term.
We review if an arrangement is a lease at inception and conclude whether the contract contains an identified asset if we have the right to obtain substantially all the economic benefit and direct the use of the asset. Operating leases with right-of-use (“ROU”) assets are reflected within “Other assets,” “Accrued expenses,” and “Other long-term liabilities” within our consolidated balance sheets. Finance leases are included in “Property, plant and equipment,” “Current maturities of long-term debt,” and “Long-term debt.”
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and the related liabilities are recognized at commencement date based on the present value of lease payments over the lease term. These payments include renewal options when reasonably certain to be exercised, and exclude termination options. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease payments and excludes lease incentives.
We have operating and finance leases for facilities, equipment, and vehicles. Our leases have remaining lease terms of one year to 10 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the lease within one year. We rent or sublease certain space within owned facilities to third parties under operating leases, with the impact of these lease arrangements being immaterial to our consolidated financial statements.
The components of lease expense were as follows:
| | | | | | | | | | | | |
| Year ended | |
| December 31, 2022 | | December 31, 2021 | |
Operating lease cost (1) | $ | 15.3 | | | $ | 13.5 | | |
Variable lease cost | 0.4 | | | 0.1 | | |
| | | | |
Finance lease cost: | | | | |
Amortization of right-of-use assets | $ | 0.5 | | | $ | 0.6 | | |
Interest on lease liabilities | — | | | — | | |
Total finance lease cost | $ | 0.5 | | | $ | 0.6 | | |
__________________________
(1) Includes short-term lease cost of $3.7 and $4.3, at December 31, 2022 and 2021 respectively.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Year ended |
| December 31, 2022 | | December 31, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows used in operating leases | $ | 11.4 | | | $ | 9.4 | |
Operating cash flows from finance leases | — | | | — | |
Financing cash flows used in finance leases | 0.4 | | | 0.6 | |
Non-cash activities: | | | |
Operating lease right-of-use assets obtained in exchange for new lease obligations | 16.4 | | | 9.1 | |
Finance lease right-of-use assets obtained in exchange for new lease obligations | — | | | 0.4 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
| December 31, | |
| 2022 | | 2021 | |
Operating Leases: | | | | Affected Line Item in the Consolidated Balance Sheets |
Operating lease ROU assets | $ | 46.3 | | | $ | 41.7 | | Other assets |
| | | | |
Operating lease current liabilities | $ | 10.1 | | | $ | 7.7 | | Accrued expenses |
Operating lease non-current liabilities | 33.8 | | | 31.5 | | Other long-term liabilities |
Total operating lease liabilities | $ | 43.9 | | | $ | 39.2 | | |
| | | | |
Finance Leases: | | | | |
Finance lease assets | $ | 0.7 | | | $ | 1.0 | | Property, plant and equipment, net |
| | | | |
Finance lease current liabilities | $ | 0.5 | | | $ | 0.5 | | Current maturities of long-term debt |
Finance lease non-current liabilities | 0.2 | | | 0.6 | | Long-term debt |
Total finance lease liabilities | $ | 0.7 | | | $ | 1.1 | | |
The weighted average remaining lease terms (years) of our leases as of December 31, 2022 and December 31, 2021, were as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Operating Leases | 6.0 | | 6.6 |
Finance Leases | 1.7 | | 2.3 |
The discount rate utilized to determine the present value of lease payments over the lease term is our incremental borrowing rate based on the information available at lease commencement date. In developing the incremental borrowing rate, we considered the interest rate that reflects a term similar to the underlying lease term on a fully collateralized basis. We concluded to apply the incremental borrowing rate at a consolidated portfolio level using a five-year term, as the results did not materially differ upon further stratification. The weighted-average discount rate for our operating leases was 3.0% and 3.1% at December 31, 2022 and 2021, respectively, and finance leases was 2.9% and 3.0% at December 31, 2022 and 2021, respectively.
The future minimum payments under our operating and finance leases were as follows as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
| | | | | |
Next 12 months | $ | 11.1 | | | $ | 0.5 | | | $ | 11.6 | |
12 to 24 months | 10.8 | | | 0.2 | | | 11.0 | |
24 to 36 months | 6.1 | | | — | | | 6.1 | |
36 to 48 months | 4.9 | | | — | | | 4.9 | |
48 to 60 months | 4.4 | | | — | | | 4.4 | |
Thereafter | 10.5 | | | — | | | 10.5 | |
Total lease payments | 47.8 | | | 0.7 | | | 48.5 | |
Less imputed interest | 3.9 | | | — | | | 3.9 | |
Total | $ | 43.9 | | | $ | 0.7 | | | $ | 44.6 | |
(7) Information on Reportable Segments
We are a global supplier of highly specialized, engineered solutions with operations in 15 countries and sales in over 100 countries around the world.
We have aggregated our operating segments 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 Codification. Segment Income is determined before considering impairment and special charges, long-term incentive compensation, certain other operating income/expense, other indirect corporate expenses, intangible asset amortization expense, inventory step-up charges, and certain other acquisition-related costs. This is consistent with the way our CODM evaluates the results of each segment.
HVAC Reportable Segment
Our HVAC reportable segment engineers, designs, manufactures, installs and services package and process cooling products and engineered air movement solutions for the HVAC industrial and power generation markets, as well as boilers and comfort 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.
Detection and Measurement Reportable Segment
Our Detection and Measurement reportable segment engineers, designs, manufactures, services, and installs underground pipe and cable locators, inspection and rehabilitation equipment, robotic systems, 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.
Corporate Expense
Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters.
Financial data for our reportable segments for the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenues: | | | | | |
HVAC reportable segment | $ | 913.8 | | | $ | 752.1 | | | $ | 740.8 | |
Detection and Measurement reportable segment | 547.1 | | | 467.4 | | | 387.3 | |
Consolidated revenues | $ | 1,460.9 | | | $ | 1,219.5 | | | $ | 1,128.1 | |
| | | | | |
Income: | | | | | |
HVAC reportable segment | $ | 135.5 | | | $ | 107.7 | | | $ | 106.2 | |
Detection and Measurement reportable segment | 114.1 | | | 92.9 | | | 80.9 | |
Total income for segments | 249.6 | | | 200.6 | | | 187.1 | |
Corporate expense | 68.6 | | | 60.5 | | | 49.7 | |
Acquisition related and other costs (1) | 1.9 | | | 5.1 | | | 1.3 | |
Long-term incentive compensation expense | 10.9 | | | 12.8 | | | 13.1 | |
Amortization of intangible assets | 28.5 | | | 21.6 | | | 14.0 | |
Impairment of goodwill and intangible assets (2) | 13.4 | | | 30.0 | | | 0.7 | |
Special charges, net | 0.4 | | | 1.0 | | | 2.4 | |
Other operating (income) expense, net (3) | 74.9 | | | (4.1) | | | 9.0 | |
Consolidated operating income | $ | 51.0 | | | $ | 73.7 | | | $ | 96.9 | |
| | | | | |
| | | | | |
Capital expenditures: | | | | | |
HVAC reportable segment | $ | 10.1 | | | $ | 5.3 | | | $ | 7.0 | |
Detection and Measurement reportable segment | 4.6 | | | 3.4 | | | 2.7 | |
General corporate | 1.2 | | | 0.9 | | | 5.6 | |
Total capital expenditures | $ | 15.9 | | | $ | 9.6 | | | $ | 15.3 | |
Depreciation and amortization: | | | | | |
HVAC reportable segment | $ | 20.5 | | | $ | 11.5 | | | $ | 11.0 | |
Detection and Measurement reportable segment | 23.5 | | | 28.0 | | | 17.6 | |
General corporate | 2.4 | | | 2.8 | | | 3.3 | |
Total depreciation and amortization | $ | 46.4 | | | $ | 42.3 | | | $ | 31.9 | |
| | | | | |
| | | | | |
| 2022 | | 2021 | | 2020 |
Identifiable assets: | | | | | |
HVAC reportable segment | $ | 853.3 | | | $ | 808.4 | | | $ | 632.2 | |
Detection and Measurement reportable segment | 920.1 | | | 835.4 | | | 772.5 | |
General corporate and eliminations (4) | 114.6 | | | 406.4 | | | 45.6 | |
Insurance recovery assets (5) | — | | | 526.2 | | | 496.4 | |
Discontinued operations | 42.9 | | | 52.2 | | | 387.0 | |
Total identifiable assets | $ | 1,930.9 | | | $ | 2,628.6 | | | $ | 2,333.7 | |
Geographic Areas: | | | | | |
Revenues: (6) | | | | | |
United States | $ | 1,223.5 | | | $ | 991.5 | | | $ | 935.7 | |
China | 51.0 | | | 57.9 | | | 41.7 | |
United Kingdom | 96.5 | | | 80.1 | | | 88.4 | |
Other | 89.9 | | | 90.0 | | | 62.3 | |
| $ | 1,460.9 | | | $ | 1,219.5 | | | $ | 1,128.1 | |
| | | | | |
| | | | | |
Tangible Long-Lived Assets: | | | | | |
United States | $ | 275.0 | | | $ | 762.4 | | | $ | 695.6 | |
Other | 35.0 | | | 37.8 | | | 26.8 | |
Long-lived assets of continuing operations | 310.0 | | | 800.2 | | | 722.4 | |
Long-lived assets of discontinued operations, DBT and Heat Transfer | 19.3 | | | 28.0 | | | 109.1 | |
Total tangible long-lived assets | $ | 329.3 | | | $ | 828.2 | | | $ | 831.5 | |
_______________________________________________________________
(1)Represents cost incurred in connection with acquisitions of $1.9, $3.3, and $1.3, including additional “Cost of products sold” related to the step-up of inventory (to fair value) acquired in connection with these acquisitions of $1.1, $2.6 and $0.3 during the years ended December 31, 2022, 2021 and 2020, respectively. The year ended December 31, 2021 also includes a non-cash impairment charge of $1.8.
(2)The year ended December 31, 2022 includes impairment charges of $12.9 related to the goodwill and trademarks of ULC and $0.5 related to certain other trademarks. The year ended December 31, 2021 includes impairment charges of $29.5 related to the goodwill and trademarks of ULC and $0.5 related to certain other trademarks. The year ended December 31, 2020 includes impairment charges of $0.7 related to certain other trademarks.
(3)The year ended December 31, 2022 includes a loss on the Asbestos Portfolio Sale of $73.9 as well as charges of $2.3 for asbestos product liability matters incurred prior to the Asbestos Portfolio Sale, partially offset by a reduction in the fair value/liability associated with contingent consideration related to the ECS acquisition of $1.3. For 2021, includes income of $24.3 and $6.7 related to the reduction of the liabilities associated with contingent consideration for the ULC and ECS acquisitions, respectively, partially offset by charges of (i) $26.3 for asbestos product liability matters and (ii) $0.6 related to revisions to the liability associated with the contingent consideration for the Sensors & Software acquisition. For 2020, includes charges of $9.4 for asbestos product liability matters, net of a gain of $0.4 related to revisions to certain liabilities retained in connection with the 2016 sale of the dry cooling business.
(4)General corporate and eliminations is comprised of general corporate assets and includes elimination or netting of intercompany amounts, primarily related to certain deferred tax balances and cash management arrangements.
(5)Insurance recovery assets were associated with asbestos product liability matters. As indicated in Note 1, we divested these assets on November 1, 2022 in connection with the Asbestos Portfolio Sale. Refer to Notes 1 and 4 for additional details.
(6)Revenues are included in the above geographic areas based on the country that recorded the revenue.
(8) Special Charges, Net
As part of our business strategy, we periodically right-size and consolidate operations to improve long-term results. Additionally, from time to time, we alter our business model to better serve customer demand, discontinue lower-margin product lines and rationalize and consolidate manufacturing capacity. Our restructuring and integration decisions are based, in part, on discounted cash flows and are designed to achieve our goals of reducing structural footprint and maximizing profitability. As a result of our strategic review process, we recorded net special charges of $0.4 in 2022, $1.0 in 2021, and $2.4 in 2020. These net special charges were primarily related to restructuring initiatives to consolidate manufacturing and sales facilities, reduce workforce, and rationalize certain product lines.
The components of the charges have been computed based on actual cash payouts, including severance and other employee benefits based on existing severance policies, local laws, and other estimated exit costs, and our estimate of the realizable value of the affected tangible assets.
Impairments of long-lived assets, which represent non-cash asset write-downs, typically arise from business restructuring decisions that lead to the disposition of assets no longer required in the restructured business. For these situations, we recognize a loss when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Fair values for assets subject to impairment testing are determined primarily by management, taking into consideration various factors including third-party appraisals, quoted market prices and previous experience. If an asset remains in service at the decision date, the asset is written down to its fair value and the resulting net book value is depreciated over its remaining economic useful life. When we commit to a plan to sell an asset, including the initiation of a plan to locate a buyer, and it is probable that the asset will be sold within one year based on its current condition and sales price, depreciation of the asset is discontinued and the asset is classified as an asset held for sale. The asset is written down to its fair value less any selling costs.
Liabilities for exit costs, including, among other things, severance, other employee benefit costs, and operating lease obligations on idle facilities, are measured initially at their fair value and recorded when incurred.
We anticipate that the liabilities related to restructuring actions will be paid within one year from the period in which the action was initiated.
Special charges for the years ended December 31, 2022, 2021 and 2020 are described in more detail below and in the applicable sections that follow:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Employee termination costs | $ | 0.1 | | | $ | 1.0 | | | $ | 1.0 | |
| | | | | |
Other cash costs, net | — | | | — | | | 1.0 | |
Non-cash asset write-downs | 0.3 | | | — | | | 0.4 | |
Total | $ | 0.4 | | | $ | 1.0 | | | $ | 2.4 | |
2022 Charges:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee Termination Costs | | | | Other Cash Costs, Net | | Non-Cash Asset Write-downs | | Total Special Charges |
HVAC reportable segment | $ | 0.1 | | | | | $ | — | | | $ | — | | | $ | 0.1 | |
Detection and Measurement reportable segment | — | | | | | — | | | 0.3 | | | 0.3 | |
Corporate | — | | | | | — | | | — | | | — | |
Total | $ | 0.1 | | | | | $ | — | | | $ | 0.3 | | | $ | 0.4 | |
HVAC – Charges for 2022 related to severance costs associated with a restructuring action at one of the segment’s cooling businesses. This action resulted in the termination of 2 employees.
Detection & Measurement – Charges for 2022 related to asset impairment charges associated with the relocation of certain operations at the segment’s obstruction lighting business.
2021 Charges:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee Termination Costs | | | | Other Cash Costs, Net | | Non-Cash Asset Write-downs | | Total Special Charges |
HVAC reportable segment | $ | 0.1 | | | | | $ | — | | | $ | — | | | $ | 0.1 | |
Detection and Measurement reportable segment | 0.9 | | | | | — | | | — | | | 0.9 | |
Corporate | — | | | | | — | | | — | | | — | |
Total | $ | 1.0 | | | | | $ | — | | | $ | — | | | $ | 1.0 | |
HVAC – Charges for 2021 related to severance costs associated with a restructuring action at one of the segment’s heating businesses. This action resulted in the termination of 6 employees.
Detection & Measurement – Charges for 2021 related primarily to severance costs associated with restructuring actions at the segment’s location and inspection businesses. These actions resulted in the termination of 44 employees.
2020 Charges:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee Termination Costs | | | | Other Cash Costs, Net | | Non-Cash Asset Write-downs | | Total Special Charges |
HVAC reportable segment | $ | 0.5 | | | | | $ | — | | | $ | — | | | $ | 0.5 | |
Detection and Measurement reportable segment | 0.3 | | | | | — | | | — | | | 0.3 | |
Corporate | 0.2 | | | | | 1.0 | | | 0.4 | | | 1.6 | |
Total | $ | 1.0 | | | | | $ | 1.0 | | | $ | 0.4 | | | $ | 2.4 | |
HVAC — Charges for 2020 related to severance costs associated with restructuring actions at the segment’s Cooling Americas and heating businesses. These actions resulted in the termination of 11 employees.
Detection & Measurement — Charges for 2020 related to severance costs for a restructuring action at the segment's fare collection systems business. The action resulted in the termination of 5 employees.
Corporate — Charges for 2020 related primarily to (i) asset impairment and other charges associated with the move to a new corporate headquarters and (ii) cost incurred for a legal entity reorganization initiative.
The following is an analysis of our restructuring liabilities for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| |
| 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | 0.3 | | | $ | 0.9 | | | $ | 0.4 | |
Special charges (1) | 0.1 | | | 1.0 | | | 2.0 | |
Utilization — cash | (0.4) | | | (1.6) | | | (1.5) | |
| | | | | |
Balance at the end of year | $ | — | | | $ | 0.3 | | | $ | 0.9 | |
___________________________________________________________________
(1)The years ended December 31, 2022, 2021 and 2020 excluded $0.3, $0.0 and $0.4, respectively, of non-cash charges that impacted special charges but not the restructuring liabilities.
(9) Inventories, Net
Inventories are accounted for under the first-in, first-out method and are comprised of the following at December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Finished goods | $ | 73.0 | | | $ | 55.1 | |
Work in process | 25.7 | | | 21.1 | |
Raw materials and purchased parts | 145.3 | | | 113.6 | |
Total inventories | $ | 244.0 | | | $ | 189.8 | |
Inventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated net realizable values.
(10) Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill, for the year ended December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Goodwill Resulting from Business Combinations (1) | | | | Impairments (2) | | Foreign Currency Translation | | December 31, 2022 |
HVAC reportable segment | | | | | | | | | | | |
Gross goodwill | $ | 528.9 | | | $ | 8.9 | | | | | $ | — | | | $ | (8.3) | | | $ | 529.5 | |
Accumulated impairments | (334.1) | | | — | | | | | — | | | 5.9 | | | (328.2) | |
Goodwill | 194.8 | | | 8.9 | | | | | — | | | (2.4) | | | 201.3 | |
Detection and Measurement reportable segment | | | | | | | | | | | |
Gross goodwill | 424.9 | | | 11.0 | | | | | — | | | (10.7) | | | 425.2 | |
Accumulated impairments | (162.4) | | | — | | | | | (12.0) | | | 3.2 | | | (171.2) | |
Goodwill | 262.5 | | | 11.0 | | | | | (12.0) | | | (7.5) | | | 254.0 | |
Total | | | | | | | | | | | |
Gross goodwill | 953.8 | | | 19.9 | | | | | — | | | (19.0) | | | 954.7 | |
Accumulated impairments | (496.5) | | | — | | | | | (12.0) | | | 9.1 | | | (499.4) | |
Goodwill | $ | 457.3 | | | $ | 19.9 | | | | | $ | (12.0) | | | $ | (9.9) | | | $ | 455.3 | |
___________________________________________________________________
(1) Reflects (i) goodwill acquired with the ITL acquisition of $10.8, (ii) an increase in Sealite’s goodwill of $0.2 resulting from revisions to the valuation of certain assets and liabilities, and (iii) an increase in Cincinnati Fan’s goodwill of $8.9 resulting from revisions to the valuation of certain assets and liabilities. As indicated in Note 1, the acquired assets, including goodwill, and liabilities assumed in the ITL acquisition have been recorded at estimates of fair value and are subject to change upon completion of acquisition accounting.
(2) During the fourth quarter of 2022, in connection with the annual impairment analyses of ULC’s goodwill and indefinite-lived intangible assets, we determined that the carrying value of ULC’s net assets exceeded the estimated fair value of the business, resulting in an impairment charge of $12.9, with $12.0 related to goodwill and $0.9 to the ULC trademarks. After such impairment charge, ULC had no goodwill and $5.4 of trademarks included in our consolidated balance sheet as of December 31, 2022.
The changes in the carrying amount of goodwill, for the year ended December 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Goodwill Resulting from Business Combinations (1) | | Impairments (2) | | | | Foreign Currency Translation | | December 31, 2021 |
HVAC reportable segment | | | | | | | | | | | |
Gross goodwill | $ | 492.2 | | | $ | 46.0 | | | $ | — | | | | | $ | (9.3) | | | $ | 528.9 | |
Accumulated impairments | (340.6) | | | — | | | — | | | | | 6.5 | | | (334.1) | |
Goodwill | 151.6 | | | 46.0 | | | — | | | | | (2.8) | | | 194.8 | |
Detection and Measurement reportable segment | | | | | | | | | | | |
Gross goodwill | 351.5 | | | 78.7 | | | — | | | | | (5.3) | | | 424.9 | |
Accumulated impairments | (134.5) | | | — | | | (28.2) | | | | | 0.3 | | | (162.4) | |
Goodwill | 217.0 | | | 78.7 | | | (28.2) | | | | | (5.0) | | | 262.5 | |
Total | | | | | | | | | | | |
Gross goodwill | 843.7 | | | 124.7 | | | — | | | | | (14.6) | | | 953.8 | |
Accumulated impairments | (475.1) | | | — | | | (28.2) | | | | | 6.8 | | | (496.5) | |
Goodwill | $ | 368.6 | | | $ | 124.7 | | | $ | (28.2) | | | | | $ | (7.8) | | | $ | 457.3 | |
___________________________________________________________________
(1) Reflects (i) goodwill acquired with the Sealite, ECS and Cincinnati Fan acquisitions of $47.7, $25.9 and $46.0, respectively, (ii) and increase in ULC’s goodwill of $3.1 resulting from revisions to the valuation of certain assets and liabilities, and (iii) an increase in Sensors & Software's goodwill of $2.0 resulting from revisions to the valuation of certain assets and liabilities.
(2) As indicated in Note 1, we concluded during the third quarter of 2021 that the operating and financial performance milestones related to the ULC contingent consideration would not be achieved, resulting in the reversal of the related liability of $24.3, with the offset to “Other operating (income) expense, net.” We also concluded that the lack of achievement of these 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 performed quantitative analyses of ULC’s goodwill and indefinite-lived intangible assets 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 during the third quarter, with $23.3 related to goodwill and the remainder to trademarks. In connection with our annual impairment analyses of ULC’s goodwill and indefinite-lived intangibles, during the fourth quarter of 2021, we determined that the carrying value of ULC’s net assets exceeded the implied fair value of the business by $5.2. As a result, we recorded impairment charges of $4.9 and $0.3 related to the business’s goodwill and trademarks, respectively.
Identifiable intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Intangible assets with determinable lives:(1) | | | | | | | | | | | |
Customer relationships | $ | 198.9 | | | $ | (41.7) | | | $ | 157.2 | | | $ | 188.2 | | | $ | (26.7) | | | $ | 161.5 | |
Technology | 81.5 | | | (18.4) | | | 63.1 | | | 80.1 | | | (11.9) | | | 68.2 | |
Patents | 4.5 | | | (4.5) | | | — | | | 4.5 | | | (4.5) | | | — | |
Other | 36.7 | | | (24.1) | | | 12.6 | | | 31.6 | | | (18.0) | | | 13.6 | |
| 321.6 | | | (88.7) | | | 232.9 | | | 304.4 | | | (61.1) | | | 243.3 | |
Trademarks with indefinite lives (2) | 168.7 | | | — | | | 168.7 | | | 172.2 | | | — | | | 172.2 | |
Total | $ | 490.3 | | | $ | (88.7) | | | $ | 401.6 | | | $ | 476.6 | | | $ | (61.1) | | | $ | 415.5 | |
___________________________________________________________________
(1)The identifiable intangible assets associated with the ITL acquisition consist of customer relationships of $14.0, definite-lived trademarks of $3.0, technology of $2.9, and non-compete agreements of $2.6.
(2)During the fourth quarter of 2022, in connection with our annual impairment analyses, we recorded impairment charges of $1.4, with $0.9 related to ULC’s trademarks (see above) and the remainder to certain other trademarks. Other changes during 2022 related primarily to foreign currency translation.
Amortization expense was $28.5, $21.6 and $14.0 for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization expense is approximately $25.0 for 2023 and each of the four years thereafter.
At December 31, 2022, the net carrying value of intangible assets with determinable lives consisted of $94.6 in the HVAC reportable segment and $138.3 in the Detection and Measurement reportable segment. Trademarks with indefinite lives consisted of $105.0 in the HVAC reportable segment and $63.7 in the Detection and Measurement reportable segment.
As indicated in Note 1, we review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter. In addition, we test goodwill for impairment on a more frequent basis if there are indications of potential impairment. In reviewing goodwill for impairment, we initially perform a qualitative analysis. If there is an indication of impairment, we then perform a quantitative analysis. During the fourth quarter of 2022, we performed quantitative analyses on the goodwill of our Cincinnati Fan and ULC reporting units. The Cincinnati Fan analysis indicated that the fair value of its net assets exceeded the related carrying value by less than 10%. A change in assumptions used in Cincinnati Fan’s quantitative analysis (e.g., projected revenues and profit growth rates, discount rates, industry price multiples, etc.) could result in the reporting unit’s estimated fair value being less than the carrying value. If Cincinnati Fan is unable to achieve its current financial forecast, we may be required to record an impairment charge in a future period related to its goodwill. As of December 31, 2022, Cincinnati Fan’s goodwill totaled $54.8. As previously discussed, our fourth quarter 2022 quantitative analysis of the ULC reporting unit resulted in an impairment charge of $12.9, with $12.0 related to goodwill and $0.9 to the ULC trademarks. After recording this impairment charge, there is no goodwill remaining related to the ULC acquisition.
Our quantitative analysis of trademarks is based on applying estimated royalty rates to projected revenues, with resulting cash flows discounted at a rate of return that reflects current market conditions. In addition to the impairment charges related to the ULC trademarks of $0.9 and $1.3, respectively, during 2022 and 2021, we recorded impairment charges of $0.5, $0.5 and $0.7, respectively, during 2022, 2021, and 2020 related to certain other trademarks.
(11) Employee Benefit Plans
Overview — Defined benefit pension plans cover a portion of our salaried and hourly paid employees, including certain employees in foreign countries. Beginning in 2001, we discontinued providing these pension benefits generally to newly hired employees. Effective January 31, 2018, we discontinued providing service credits to active participants.
We have domestic postretirement plans that provide health and life insurance benefits to certain retirees and their dependents. Beginning in 2003, we discontinued providing these postretirement benefits generally to newly hired employees.
The plan year-end date for all our plans is December 31.
Actuarial Gains and Losses - As indicated in Notes 1 and 2, changes in fair value of plan assets and actuarial gains and losses related to our pension and postretirement plans are recorded to earnings during the fourth quarter of each year, unless earlier remeasurement is required.
Defined Benefit Pension Plans
Plan assets — Our investment strategy is based on the long-term growth and protection of principle while mitigating overall risk to ensure that funds are available to pay benefit obligations. The domestic plan assets are invested in a broad range of investment classes, including fixed income securities and domestic and international equities. We engage various investment managers who are regularly evaluated on long-term performance, adherence to investment guidelines and the ability to manage risk commensurate with the investment style and objective for which they were hired. We continuously monitor the value of assets by class and routinely rebalance our portfolio with the goal of meeting our target allocations.
The strategy for bonds emphasizes investment-grade corporate and government debt with maturities matching the longer duration pension liabilities. The bonds strategy also includes a high yield element, although minimal, which is generally shorter in duration. The strategy for equity assets is to minimize concentrations of risk by investing primarily in companies in a diversified mix of industries worldwide, while targeting neutrality in exposure to global versus regional markets, fund types and fund managers. A small portion of U.S. plan assets (Level 3 assets) is allocated to private equity partnerships and real estate asset fund investments for diversification, providing opportunities for above market returns.
Allowable investments under the plan agreements include fixed income securities, equity securities, mutual funds, venture capital funds, real estate and cash and equivalents. In addition, investments in futures and option contracts, commodities and other derivatives are allowed in commingled fund allocations managed by professional investment managers. Investments prohibited under the plan agreements include private placements and short selling of stock. No shares of our common stock were held by our defined benefit pension plans as of December 31, 2022 or 2021.
Actual asset allocation percentages of each class of our domestic and foreign pension plan assets as of December 31, 2022 and 2021, along with the current targeted asset investment allocation percentages, each of which is based on the midpoint of an allocation range, were as follows:
Domestic Pension Plans | | | | | | | | | | | | | | | | | |
| Actual Allocations | | Mid-point of Target Allocation Range |
| 2022 | | 2021 | | 2022 |
Fixed income common trust funds | 68 | % | | 67 | % | | 65 | % |
Commingled global fund allocation | 6 | % | | 6 | % | | 6 | % |
| | | | | |
Global equity common trust funds | 15 | % | | 15 | % | | 15 | % |
| | | | | |
U.S. Government securities | 8 | % | | 10 | % | | 12 | % |
Short-term investments and other (1) | 3 | % | | 2 | % | | 2 | % |
| | | | | |
Total | 100 | % | | 100 | % | | 100 | % |
___________________________________________________________________
(1)Short-term investments are generally invested in actively managed common trust funds or interest-bearing accounts.
Foreign Pension Plans | | | | | | | | | | | | | | | | | |
| Actual Allocations | | Mid-point of Target Allocation Range |
| 2022 | | 2021 | | 2022 |
Global equity common trust funds | 11 | % | | 9 | % | | 11 | % |
| | | | | |
Fixed income common trust funds | 65 | % | | 61 | % | | 66 | % |
Commingled global fund allocation | 23 | % | | 27 | % | | 23 | % |
| | | | | |
Non-U.S. Government securities | — | % | | — | % | | — | % |
Short-term investments (1) | 1 | % | | 3 | % | | — | % |
Total | 100 | % | | 100 | % | | 100 | % |
___________________________________________________________________
(1)Short-term investments are generally invested in actively managed common trust funds or interest-bearing accounts.
The fair values of pension plan assets at December 31, 2022, by asset class, were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Asset class: | | | | | | | |
Debt securities: | | | | | | | |
Fixed income common trust funds (1) (2) | $ | 196.4 | | | $ | — | | | $ | 196.4 | | | $ | — | |
| | | | | | | |
Non-U.S. Government securities | 0.3 | | | — | | | 0.3 | | | — | |
U.S. Government securities | 13.9 | | | — | | | 13.9 | | | — | |
Equity securities: | | | | | | | |
Global equity common trust funds (1) (3) | 38.0 | | | — | | | 38.0 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Alternative investments: | | | | | | | |
Commingled global fund allocations (1) (4) | 37.2 | | | — | | | 37.2 | | | — | |
Other: | | | | | | | |
Short-term investments (5) | 6.0 | | | 6.0 | | | — | | | — | |
Other | 0.9 | | | — | | | — | | | 0.9 | |
Total | $ | 292.7 | | | $ | 6.0 | | | $ | 285.8 | | | $ | 0.9 | |
The fair values of pension plan assets at December 31, 2021, by asset class, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Asset class: | | | | | | | |
Debt securities: | | | | | | | |
Fixed income common trust funds (1) (2) | $ | 291.2 | | | $ | — | | | $ | 291.2 | | | $ | — | |
| | | | | | | |
Non-U.S. Government securities | 0.3 | | | — | | | 0.3 | | | — | |
U.S. Government securities | 25.8 | | | — | | | 25.8 | | | — | |
Equity securities: | | | | | | | |
Global equity common trust funds (1) (3) | 58.0 | | | — | | | 58.0 | | | — | |
Alternative Investments: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Commingled global fund allocations (1) (4) | 67.4 | | | — | | | 67.4 | | | — | |
Other: | | | | | | | |
Short-term investments (5) | 10.4 | | | 10.4 | | | — | | | — | |
Other | 0.9 | | | — | | | — | | | 0.9 | |
Total | $ | 454.0 | | | $ | 10.4 | | | $ | 442.7 | | | $ | 0.9 | |
___________________________________________________________________
(1)Common/commingled trust funds are similar to mutual funds, with a daily net asset value per share measured by the fund sponsor and used as the basis for current transactions. These investments, however, are not registered with the U.S. Securities and Exchange Commission and participation is not open to the public. The funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.
(2)This class represents investments in actively managed common trust funds that invest in a variety of fixed income investments, which may include corporate bonds, both U.S. and non-U.S. municipal and government securities, interest rate swaps, options and futures.
(3)This class represents investments in actively managed common trust funds that invest primarily in equity securities, which may include common stocks, options and futures.
(4)This class represents investments in actively managed common trust funds with investments in both equity and debt securities. The investments may include common stock, corporate bonds, U.S. and non-U.S. municipal securities, interest rate swaps, options and futures.
(5)Short-term investments are valued at $1.00/unit, which approximates fair value. Amounts are generally invested in actively managed common trust funds or interest-bearing accounts.
Employer Contributions — We currently fund U.S. pension plans in amounts equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus additional amounts that may be approved from time to time. During 2022, we made no contributions to our qualified domestic pension plans, and direct benefit payments of $5.6 to our non-qualified domestic pension plans. In 2023, we do not expect to make any minimum required funding contributions to our qualified domestic pension plans and expect to make direct benefit payments of $5.3 to our non-qualified domestic pension plans.
In 2022, we made contributions of $1.0 to our foreign pension plans. In 2023, we expect to make contributions of $0.9 to our foreign pension plans.
Estimated Future Benefit Payments — Following is a summary, as of December 31, 2022, of the estimated future benefit payments for our pension plans in each of the next five fiscal years and in the aggregate for five fiscal years thereafter. Benefit payments are paid from plan assets or directly by us for our non-funded plans. The expected benefit payments are estimated based on the same assumptions used at December 31, 2022 to measure our obligations and include benefits attributable to estimated future employee service.
Estimated future benefit payments:
(Domestic and foreign pension plans)
| | | | | | | | | | | |
| Domestic Pension Benefits | | Foreign Pension Benefits |
2023 | $ | 24.1 | | | $ | 6.6 | |
2024 | 24.2 | | | 5.5 | |
2025 | 23.0 | | | 6.5 | |
2026 | 24.5 | | | 6.3 | |
2027 | 23.6 | | | 6.7 | |
Subsequent five years | 92.4 | | | 35.5 | |
Obligations and Funded Status — The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. Our non-funded pension plans account for $47.3 of the current underfunded status, as these plans are not required to be funded. The following tables show the domestic and foreign pension plans’ funded status and amounts recognized in our consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Pension Plans | | Foreign Pension Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in projected benefit obligation: | | | | | | | |
Projected benefit obligation — beginning of year | $ | 335.4 | | | $ | 364.7 | | | $ | 182.4 | | | $ | 192.2 | |
| | | | | | | |
Service cost | — | | | — | | | — | | | — | |
Interest cost | 10.5 | | | 8.4 | | | 3.7 | | | 3.4 | |
| | | | | | | |
Actuarial gains | (66.4) | | | (12.9) | | | (52.7) | | | (4.8) | |
Settlements | (17.1) | | | (10.5) | | | — | | | (3.0) | |
| | | | | | | |
| | | | | | | |
Benefits paid | (15.5) | | | (14.3) | | | (6.9) | | | (5.1) | |
Foreign exchange and other | — | | | — | | | (17.0) | | | (0.3) | |
Projected benefit obligation — end of year | $ | 246.9 | | | $ | 335.4 | | | $ | 109.5 | | | $ | 182.4 | |
The actuarial gains and losses for all pension plans in 2022 and 2021 were primarily related to a change in the discount rate used to measure the benefit obligations of those plans.
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Pension Plans | | Foreign Pension Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in plan assets: | | | | | | | |
Fair value of plan assets — beginning of year | $ | 260.4 | | | $ | 279.8 | | | $ | 193.6 | | | $ | 198.3 | |
Actual return on plan assets | (56.6) | | | (0.1) | | | (54.4) | | | 3.6 | |
Contributions (employer and employee) | 5.6 | | | 5.5 | | | 1.0 | | | 0.9 | |
Settlements | (17.1) | | | (10.5) | | | — | | | (3.0) | |
Benefits paid | (15.5) | | | (14.3) | | | (6.9) | | | (5.1) | |
| | | | | | | |
Foreign exchange and other | — | | | — | | | (17.4) | | | (1.1) | |
| | | | | | | |
Fair value of plan assets — end of year | $ | 176.8 | | | $ | 260.4 | | | $ | 115.9 | | | $ | 193.6 | |
Funded status at year-end | $ | (70.1) | | | $ | (75.0) | | | $ | 6.4 | | | $ | 11.2 | |
Amounts recognized in the consolidated balance sheets consist of: | | | | | | | |
Other assets | $ | 1.8 | | | $ | 2.2 | | | $ | 6.5 | | | $ | 11.4 | |
| | | | | | | |
Accrued expenses | (5.1) | | | (5.2) | | | — | | | — | |
| | | | | | | |
Other long-term liabilities | (66.8) | | | (72.0) | | | (0.1) | | | (0.2) | |
Net amount recognized | $ | (70.1) | | | $ | (75.0) | | | $ | 6.4 | | | $ | 11.2 | |
Amount recognized in accumulated other comprehensive income (pre-tax) consists of — net prior service costs (credits) | $ | — | | | $ | (0.1) | | | $ | 1.0 | | | $ | 1.2 | |
The following is information about our pension plans that had accumulated benefit obligations in excess of the fair value of their plan assets at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Pension Plans | | Foreign Pension Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
Projected benefit obligation | $ | 242.1 | | | $ | 329.0 | | | $ | 0.1 | | | $ | 0.2 | |
Accumulated benefit obligation | 242.1 | | | 329.0 | | | 0.1 | | | 0.2 | |
Fair value of plan assets | 170.2 | | | 251.8 | | | — | | | — | |
The accumulated benefit obligation for all domestic and foreign pension plans was $246.9 and $109.5, respectively, at December 31, 2022 and $335.4 and $182.4, respectively, at December 31, 2021.
Components of Net Periodic Pension Benefit (Income) Expense — Net periodic pension benefit (income) expense for our domestic and foreign pension plans included the following components:
Domestic Pension Plans
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Service cost | $ | — | | | $ | — | | | $ | — | |
Interest cost | 10.5 | | | 8.4 | | | 10.8 | |
Expected return on plan assets | (8.2) | | | (8.7) | | | (9.5) | |
Amortization of unrecognized prior service credits | (0.1) | | | (0.1) | | | (0.1) | |
Recognized net actuarial (gains) losses (1) | (1.6) | | | (4.2) | | | 4.7 | |
Total net periodic pension benefit (income) expense | $ | 0.6 | | | $ | (4.6) | | | $ | 5.9 | |
___________________________________________________________________
(1)Consists primarily of our reported actuarial (gains) losses, the difference between actual and expected returns on plan assets, and settlement losses.
Foreign Pension Plans
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Service cost | $ | — | | | $ | — | | | $ | — | |
Interest cost | 3.7 | | | 3.4 | | | 3.8 | |
Expected return on plan assets | (5.6) | | | (5.8) | | | (5.7) | |
Amortization of unrecognized prior service costs | 0.1 | | | — | | | — | |
Recognized net actuarial (gains) losses (1) | 6.4 | | | (1.8) | | | 0.2 | |
Total net periodic pension benefit (income) expense | $ | 4.6 | | | $ | (4.2) | | | $ | (1.7) | |
___________________________________________________________________
(1)Consists of our reported actuarial (gains) losses and the difference between actual and expected returns on plan assets.
Assumptions — Actuarial assumptions used in accounting for our domestic and foreign pension plans were as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Domestic Pension Plans | | | | | |
Weighted-average actuarial assumptions used in determining net periodic pension expense: | | | | | |
Discount rate (1) | 3.99 | % | | 2.35 | % | | 3.16 | % |
Rate of increase in compensation levels | N/A | | N/A | | N/A |
Expected long-term rate of return on assets | 3.23 | % | | 3.22 | % | | 3.75 | % |
Weighted-average actuarial assumptions used in determining year-end benefit obligations: | | | | | |
Discount rate | 5.54 | % | | 2.83 | % | | 2.35 | % |
Rate of increase in compensation levels | N/A | | N/A | | N/A |
Foreign Pension Plans | | | | | |
Weighted-average actuarial assumptions used in determining net periodic pension expense: | | | | | |
Discount rate | 2.19 | % | | 1.76 | % | | 2.27 | % |
Rate of increase in compensation levels | N/A | | N/A | | N/A |
Expected long-term rate of return on assets | 3.44 | % | | 3.31 | % | | 3.81 | % |
Weighted-average actuarial assumptions used in determining year-end benefit obligations: | | | | | |
Discount rate | 5.15 | % | | 2.19 | % | | 1.76 | % |
Rate of increase in compensation levels | N/A | | N/A | | N/A |
___________________________________________________________________
(1) The discount rate for the year ended December 31, 2022 includes adjustments due to remeasurements in the U.S. Plan during the second and third quarters.
We review the pension assumptions annually. Pension income or expense for the year is determined using assumptions as of the beginning of the year (except for the effects of recognizing changes in the fair value of plan assets and actuarial gains and losses in the fourth quarter of each year), while the funded status is determined using assumptions as of the end of the year. We determined assumptions and established them at the respective balance sheet date using the following principles: (i) the expected long-term rate of return on plan assets is established based on forward looking long-term expectations of asset returns over the expected period to fund participant benefits based on the target investment mix of our plans and (ii) the discount rate is primarily determined by matching the expected projected benefit obligation cash flows for each of the plans to a yield curve that is representative of long-term, high-quality (rated AA or higher) fixed income debt instruments as of the measurement date.
Postretirement Benefit Plans
Transfer of Retiree Life Insurance Benefits - On February 17, 2022, we transferred our existing liability under the SPX Postretirement Benefit Plans (the “Plans”) for a group of participants with retiree life insurance benefits to an insurance carrier for consideration paid to the insurance carrier of $10.0. This transaction resulted in a settlement loss of $0.7 recorded to “Other income (expense), net” during 2022. In addition, and in connection with this transfer, we remeasured the assets and liabilities of the Plans as of the transfer date, which resulted in an actuarial gain of $0.4 recorded to “Other income (expense), net”.
Employer Contributions and Future Benefit Payments — Our postretirement medical plans are unfunded and have no plan assets, but are instead funded by us on a pay-as-you-go basis in the form of direct benefit payments or policy premium payments. In 2022, we made benefit payments of $4.4 to our postretirement benefit plans. Following is a summary, as of December 31, 2022, of the estimated future benefit payments for our postretirement plans in each of the next five fiscal years and in the aggregate for five fiscal years thereafter. The expected benefit payments are estimated based on the same assumptions used at December 31, 2022 to measure our obligations and include benefits attributable to estimated future employee service.
| | | | | |
| Postretirement Payments |
2023 | $ | 4.1 | |
2024 | 3.7 | |
2025 | 3.3 | |
2026 | 3.0 | |
2027 | 2.7 | |
Subsequent five years | 10.1 | |
Obligations and Funded Status — The following tables show the postretirement plans’ funded status and amounts recognized in our consolidated balance sheets:
| | | | | | | | | | | |
| Postretirement Plans |
| 2022 | | 2021 |
Change in projected postretirement benefit obligation: | | | |
Projected postretirement benefit obligation — beginning of year | $ | 51.7 | | | $ | 60.5 | |
| | | |
Interest cost | 1.1 | | | 1.0 | |
Loss on settlement of retiree life insurance benefits | 0.7 | | | — | |
Actuarial gains | (7.0) | | | (3.9) | |
Transfer to insurance carrier for cash consideration | (10.0) | | | — | |
Benefits paid | (4.4) | | | (5.9) | |
| | | |
| | | |
| | | |
Projected postretirement benefit obligation — end of year | $ | 32.1 | | | $ | 51.7 | |
Funded status at year-end | $ | (32.1) | | | $ | (51.7) | |
Amounts recognized in the consolidated balance sheets consist of: | | | |
Accrued expenses | $ | (4.0) | | | $ | (5.9) | |
| | | |
Other long-term liabilities | (28.1) | | | (45.8) | |
Net amount recognized | $ | (32.1) | | | $ | (51.7) | |
Amount recognized in accumulated other comprehensive income (pre-tax) consists of — net prior service credits | $ | (11.1) | | | $ | (15.5) | |
The actuarial gains and losses for our postretirement benefit plans in 2022 and 2021 were primarily related to a change in the discount rate used to measure the benefit obligations of those plans.
The net periodic postretirement benefit (income) expense included the following components:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Service cost | $ | — | | | $ | — | | | $ | — | |
Interest cost | 1.1 | | | 1.0 | | | 1.6 | |
Amortization of unrecognized prior service credits | (4.4) | | | (4.7) | | | (4.7) | |
| | | | | |
Settlement loss (1) | 0.7 | | | — | | | — | |
Recognized net actuarial (gains) losses | (7.0) | | | (3.9) | | | 1.9 | |
Net periodic postretirement benefit income | $ | (9.6) | | | $ | (7.6) | | | $ | (1.2) | |
___________________________________________________________________
(1)Relates to the transfer of the retiree life insurance benefits obligation.
Actuarial assumptions used in accounting for our domestic postretirement plans were as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Assumed health care cost trend rates: | | | | | |
Health care cost trend rate for next year | 7.00 | % | | 6.25 | % | | 6.50 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.00 | % | | 5.00 | % | | 5.00 | % |
Year that the rate reaches the ultimate trend rate | 2031 | | 2027 | | 2027 |
Discount rate used in determining net periodic postretirement benefit expense (1) | 2.84 | % | | 2.00 | % | | 2.97 | % |
Discount rate used in determining year-end postretirement benefit obligation | 5.50 | % | | 2.56 | % | | 2.00 | % |
___________________________________________________________________
(1) The discount rate for the year ended December 31, 2022 includes an adjustment due to a remeasurement in the Plans that took place in the first quarter.
The accumulated postretirement benefit obligation was determined using the terms and conditions of our various plans, together with relevant actuarial assumptions and health care cost trend rates. It is our policy to review the postretirement assumptions annually. The assumptions are determined by us and are established based on our prior experience and our expectations that future health care cost trend rates will decline. In addition, we consider advice from independent actuaries.
Defined Contribution Retirement Plans
We maintain a defined contribution retirement plan (the “DC Plan”) pursuant to Section 401(k) of the U.S. Internal Revenue Code. Under the DC Plan, eligible U.S. employees may voluntarily contribute up to 50% of their compensation into the DC Plan and we match a portion of participating employees’ contributions. Our matching contributions are primarily made in newly issued shares of SPX common stock and are issued at the prevailing market price. The matching contributions vest with the employee immediately upon the date of the match and there are no restrictions on the resale of SPX common stock held by employees.
Under the DC Plan, we contributed 0.149, 0.135 and 0.192 shares of our common stock to employee accounts in 2022, 2021 and 2020, respectively. Compensation expense is recorded based on the market value of shares as the shares are contributed to employee accounts. We recorded $7.8 in 2022, $7.8 in 2021 and $7.7 in 2020 as compensation expense related to the matching contribution.
Certain collectively-bargained employees participate in the DC Plan with company contributions not being made in SPX common stock, although SPX common stock is offered as an investment option under these plans.
We also maintain a Supplemental Retirement Savings Plan (“SRSP”), which permits certain members of our senior management and executive groups to defer eligible compensation in excess of the amounts allowed under the DC Plan. We match a portion of participating employees’ deferrals to the extent allowable under the SRSP provisions. The matching contributions vest with the participant immediately. Our funding of the participants’ deferrals and our matching contributions are held in certain mutual funds (as allowed under the SRSP), as directed by the participant. The fair values of these assets, which totaled $13.8 and $18.3 at December 31, 2022 and 2021, respectively, are based on quoted prices in active markets for identical assets (Level 1). In addition, the assets under the SRSP are available to the general creditors in the event of our bankruptcy and, thus, are maintained on our consolidated balance sheets within “Other assets,” with a corresponding amount in “Other long-term liabilities” for our obligation to the participants. Lastly, these assets are accounted for as trading securities. During 2022, 2021 and 2020, we recorded compensation expense of $0.2, $0.2 and $0.2, respectively, relating to our matching contributions to the SRSP.
(12) Income Taxes
Income (loss) from continuing operations before income taxes and the (provision for) benefit from income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Income (loss) from continuing operations: | | | | | |
United States | $ | (37.7) | | | $ | 17.2 | | | $ | 39.6 | |
Foreign | 64.8 | | | 52.7 | | | 39.0 | |
| $ | 27.1 | | | $ | 69.9 | | | $ | 78.6 | |
(Provision for) benefit from income taxes: | | | | | |
Current: | | | | | |
United States | $ | (18.9) | | | $ | (5.4) | | | $ | (0.7) | |
Foreign | (9.8) | | | (6.9) | | | (3.8) | |
Total current | (28.7) | | | (12.3) | | | (4.5) | |
Deferred and other: | | | | | |
United States | 17.2 | | | 0.8 | | | (0.3) | |
Foreign | 4.2 | | | 0.6 | | | — | |
Total deferred and other | 21.4 | | | 1.4 | | | (0.3) | |
Total provision | $ | (7.3) | | | $ | (10.9) | | | $ | (4.8) | |
The reconciliation of income tax computed at the U.S. federal statutory tax rate to our effective income tax rate was as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Tax at U.S. federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State and local taxes, net of U.S. federal benefit | 9.6 | % | | 0.4 | % | | 1.8 | % |
U.S. credits and exemptions | (13.4) | % | | (20.4) | % | | (4.4) | % |
Foreign earnings/losses taxed at different rates | (9.7) | % | | 12.6 | % | | (4.6) | % |
Nondeductible expenses | 7.7 | % | | 3.3 | % | | 2.2 | % |
Adjustments to uncertain tax positions | (9.4) | % | | (2.4) | % | | (4.4) | % |
Changes in valuation allowance (1) | (19.6) | % | | 47.9 | % | | (0.6) | % |
Share-based compensation | (6.4) | % | | (1.8) | % | | (3.6) | % |
| | | | | |
| | | | | |
Capital loss (1) | — | % | | (42.5) | % | | — | % |
Goodwill impairment and basis adjustments | (3.9) | % | | 7.3 | % | | — | % |
Statutory rate changes | — | % | | 2.1 | % | | — | % |
Adjustments to contingent consideration | (0.9) | % | | (8.9) | % | | — | % |
| | | | | |
Non-deductible loss on Asbestos Portfolio Sale (2) | 53.7 | % | | — | % | | — | % |
Other | (1.8) | % | | (3.0) | % | | (1.3) | % |
| 26.9 | % | | 15.6 | % | | 6.1 | % |
___________________________________________________________________
(1) During the fourth quarter of 2021, we generated a capital loss in connection with the liquidation of certain recently acquired entities. All but $2.0 of the income tax benefit associated with the capital loss has been reflected in “Gain (loss) from discontinued operations, net of tax” in the accompanying consolidated statement of operations for the year ended December 31, 2021. As such, the capital loss had only a minimal impact on our effective income tax rate for continuing operations during the year ended December 31, 2021.
(2) The income tax benefit associated with the loss of $73.9 on the Asbestos Portfolio Sale totaled $1.1.
Significant components of our deferred tax assets and liabilities were as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
NOL and credit carryforwards | $ | 77.3 | | | $ | 118.6 | |
Pension, other postretirement and postemployment benefits | 26.1 | | | 31.1 | |
Payroll and compensation | 15.6 | | | 16.3 | |
Legal, environmental and self-insurance accruals | 15.7 | | | 35.9 | |
Working capital accruals | 17.5 | | | 17.0 | |
Research and experimental expenditures | 13.6 | | | — | |
| | | |
Other | 8.1 | | | 9.8 | |
Total deferred tax assets | 173.9 | | | 228.7 | |
Valuation allowance | (69.1) | | | (89.8) | |
Net deferred tax assets | 104.8 | | | 138.9 | |
Deferred tax liabilities: | | | |
Intangible assets recorded in acquisitions | 84.5 | | | 79.4 | |
Basis difference in affiliates | 15.3 | | | 19.8 | |
Accelerated depreciation | 14.4 | | | 13.3 | |
Deferred income | — | | | 20.2 | |
Other | 16.2 | | | 16.8 | |
Total deferred tax liabilities | 130.4 | | | 149.5 | |
| $ | (25.6) | | | $ | (10.6) | |
General Matters
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We periodically assess deferred tax assets to determine if they are likely to be realized and the adequacy of deferred tax liabilities, incorporating the results of local, state, federal and foreign tax audits in our estimates and judgments.
At December 31, 2022, we had $24.9 of federal, $242.9 of state, and $171.0 of foreign tax loss carryforwards available. We also had federal and state tax credit carryforwards of $6.9. Of these amounts, $8.4 expire in 2023 and $235.7 expire at various times between 2024 and 2040. The remaining carryforwards have no expiration date.
Realization of deferred tax assets, including those associated with net operating loss and credit carryforwards, is dependent upon generating sufficient taxable income in the appropriate tax jurisdiction. We believe that it is more likely than not that we may not realize the benefit of certain of these deferred tax assets and, accordingly, have established a valuation allowance against these deferred tax assets. Although realization is not assured for the remaining deferred tax assets, we believe it is more likely than not that the deferred tax assets will be realized through future taxable earnings or tax planning strategies. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced or tax planning strategies are no longer viable. Our valuation allowance decreased by $20.7 in 2022 and by $2.2 in 2021. The 2022 decrease was primarily driven by the utilization of certain attributes in foreign jurisdictions.
The amount of income tax that we pay annually is dependent on various factors, including the timing of certain deductions. These deductions can vary from year-to-year, and, consequently, the amount of income taxes paid in future years will vary from the amounts paid in prior years.
Undistributed Foreign Earnings
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of December 31, 2022, we had $225.6 of undistributed earnings of our foreign subsidiaries. The majority of these earnings have already been reinvested in our overseas businesses. Further, we believe future domestic cash generation will be sufficient to meet future domestic cash needs. For this reason, we have not recorded a provision for U.S. or foreign withholding taxes on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such amounts may become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of a deferred tax liability related to the
undistributed earnings of our foreign subsidiaries in the event that these earnings are no longer considered to be indefinitely reinvested, due to the hypothetical nature of the calculation.
Unrecognized Tax Benefits
As of December 31, 2022, we had gross and net unrecognized tax benefits of $4.5 and $4.0, respectively. All of these net unrecognized tax benefits would impact our effective tax rate from continuing operations if recognized. Similarly, at December 31, 2021 and 2020, we had gross unrecognized tax benefits of $7.1 (net unrecognized tax benefits of $6.4) and $13.6 (net unrecognized tax benefits of $11.0), respectively.
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision/benefit. As of December 31, 2022, gross accrued interest totaled $1.9 (net accrued interest of $1.7), while the related amounts as of December 31, 2021 and 2020 were $2.6 (net accrued interest of $2.2) and $3.8 (net accrued interest of $3.0), respectively. Our income tax provision for the years ended December 31, 2022, 2021, and 2020 included gross interest income of $0.6, $1.0, and $0.2, respectively, resulting from adjustments to our liability for uncertain tax positions. As of December 31, 2022, 2021, and 2020, we had no accrual for penalties included in our unrecognized tax benefits.
Based on the outcome of certain examinations or as a result of the expiration of statutes of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by up to $3.0. The previously unrecognized tax benefits relate to a variety of tax matters including transfer pricing and various state matters.
The aggregate changes in the balance of unrecognized tax benefits for the years ended December 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Unrecognized tax benefit — opening balance | $ | 7.1 | | | $ | 13.6 | | | $ | 17.2 | |
Gross increases — tax positions in prior period | — | | | 0.7 | | | 0.3 | |
Gross decreases — tax positions in prior period | (0.7) | | | (6.4) | | | (2.2) | |
Gross increases — tax positions in current period | 0.1 | | | 0.2 | | | 0.2 | |
Settlements | — | | | — | | | (0.3) | |
Statute expirations | (1.9) | | | (1.1) | | | (1.7) | |
| | | | | |
Change due to foreign currency exchange rates | (0.1) | | | 0.1 | | | 0.1 | |
Unrecognized tax benefit — ending balance | $ | 4.5 | | | $ | 7.1 | | | $ | 13.6 | |
Other Tax Matters
During 2022, our income tax provision was impacted most significantly by (i) the loss on the Asbestos Portfolio Sale (see Note 4) which generated a tax benefit of only $1.1, (ii) a tax benefit of $4.7 related to the release of valuation allowances recognized against certain deferred tax assets, as we now expect to realize these deferred tax assets, primarily due to the 2022 Holding Company Reorganization (see Note 1), (iii) $3.0 of tax benefits related to statute expirations and other revisions to liabilities for uncertain tax positions, and (iv) $1.7 of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the year.
During 2021, our income tax provision was impacted most significantly by (i) earnings in jurisdictions with lower statutory tax 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 entities.
During 2020, our income tax provision was impacted most significantly by (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.
We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain positions when we determine that a tax position meets the criteria of the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions are recorded in “Income taxes payable” and “Deferred and other income taxes” in the accompanying consolidated
balance sheets based on the expectation as to the timing of when the matters will be resolved. As events change and resolutions occur, these accruals are adjusted, such as in the case of audit settlements with taxing authorities.
The Internal Revenue Service (“IRS”) concluded its audit of our 2013, 2014, 2015, 2016 and 2017 federal income tax returns. In connection with such, we recorded a tax benefit of $2.2 during 2021 related to the resolution of certain liabilities for uncertain tax positions and interest associated with various refund claims.
State income tax returns generally are subject to examination for a period of three to five years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination. We believe any uncertain tax positions related to these examinations have been adequately provided for.
We have various foreign income tax returns under examination. We believe that any uncertain tax positions related to these examinations have been adequately provided for.
An unfavorable resolution of one or more of the above matters could have a material adverse effect on our results of operations or cash flows in the quarter and year in which an adjustment is recorded or the tax is due or paid. As audits and examinations are still in process, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.
(13) Indebtedness
The following summarizes our debt activity (both current and non-current) for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Borrowings | | Repayments | | Other (5) | | December 31, 2022 |
Revolving loans | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Term loan (1)(2) | 242.7 | | | 245.0 | | | (243.7) | | | 0.3 | | | 244.3 | |
Trade receivables financing arrangement (3) | — | | | — | | | — | | | — | | | — | |
Other indebtedness (4) | 3.3 | | | 0.1 | | | (0.9) | | | — | | | 2.5 | |
Total debt | 246.0 | | | $ | 245.1 | | | $ | (244.6) | | | $ | 0.3 | | | 246.8 | |
Less: short-term debt | 2.2 | | | | | | | | | 1.8 | |
Less: current maturities of long-term debt | 13.0 | | | | | | | | | 2.0 | |
Total long-term debt | $ | 230.8 | | | | | | | | | $ | 243.0 | |
_____________________________________________________________
(1)As noted below, we amended our senior credit agreement on August 12, 2022. The amendment made available a new term loan facility in the amount of $245.0, the proceeds of which were primarily used to repay the outstanding balance of $237.4 under the then-existing term loan facility.
(2)The term loan is repayable in quarterly installments equal to 0.625% of the initial term loan balance of $245.0, beginning in December 2023 and in each of the first three quarters of 2024, and 1.25% during the fourth quarter of 2024, all quarters of 2025 and 2026, and the first two quarters of 2027. The remaining balance is payable in full on August 12, 2027. Balances are net of unamortized debt issuance costs of $0.7 and $1.0 at December 31, 2022 and December 31, 2021, respectively.
(3)Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses. At December 31, 2022, we had $45.7 of available borrowing capacity under this facility.
(4)Primarily includes balances under a purchase card program of $1.8 and $2.2 and finance lease obligations of $0.7 and $1.1 at December 31, 2022 and December 31, 2021, 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” includes 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, 2022 are $2.0, $7.9, $12.3, $12.3, and $211.2 respectively.
Senior Credit Facilities
On August 12, 2022, we entered into the Credit Agreement to, among other things, extend the term of the facilities 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 $770.0 which consists of the following facilities at December 31, 2022 (each with a final maturity of August 12, 2027):
•A term loan facility in an aggregate principal amount of $245.0;
•A multicurrency revolving credit facility, available for loans and letters of credit in Dollars, Euro, Sterling and other currencies, in an aggregate principal amount up to the equivalent of $500.0 (with sub-limits equal to the equivalents of $200.0 for financial letters of credit, $50.0 for non-financial letters of credit, and $150.0 for non-U.S. exposure); and
•A bilateral foreign credit instrument facility, available for performance letters of credit and bank undertakings, in an aggregate principal amount in various currencies up to the equivalent of $25.0.
The Credit Agreement also:
•Requires that we maintain a Consolidated Leverage Ratio (defined in the Credit Agreement) as of the last day of any fiscal quarter of not more than 3.75 to 1.00 (or (i) 4.00 to 1.00 for the four fiscal quarters after certain permitted acquisitions or (ii) 4.25 to 1.00 for the four fiscal quarters after certain permitted acquisitions with a minimum amount financed by unsecured debt);
•Requires that we maintain a Consolidated Interest Coverage Ratio (defined in the Credit Agreement) as of the last day of any fiscal quarter of at least 3.00 to 1.00;
•Allows SPX to seek additional commitments, without consent from the existing lenders, to add incremental term loan facilities and/or increase the commitments in respect of the revolving credit facility and/or the bilateral foreign credit instrument facility by up to an aggregate principal amount not to exceed (x) the greater of (i) $200.0 and (ii) the amount of Consolidated EBITDA (as defined in the Credit Agreement) for the four fiscal quarters ended most recently before the date of determination, plus (y) an unlimited amount so long as, immediately after giving effect thereto, our Consolidated Senior Secured 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, or analogous instruments and net of unrestricted cash and cash equivalents) at the date of determination secured by liens to Consolidated EBITDA for the four fiscal quarters ended most recently before such date) does not exceed 2.75:1.00, plus (z) an amount equal to all voluntary prepayments of the term loan facility and voluntary prepayments accompanied by permanent commitment reductions of the revolving credit facility and foreign credit instrument facility; and
•Establishes per annum fees charged and applies interest rate margins, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Leverage Ratio | | Revolving Commitment Fee | | Financial Letter of Credit Fee | | Foreign Credit Instrument (“FCI”) Commitment Fee | | FCI Fee and Non-Financial Letter of Credit Fee | | Term Secured Overnight Financing Rate (“SOFR”) Loans/Alternative Currency Loans | | ABR Loans | |
Greater than or equal to 3.00 to 1.00 | | 0.275 | % | | 1.750 | % | | 0.275 | % | | 1.000 | % | | 1.750 | % | | 0.750 | % | |
Between 2.00 to 1.00 and 3.00 to 1.00 | | 0.250 | % | | 1.500 | % | | 0.250 | % | | 0.875 | % | | 1.500 | % | | 0.500 | % | |
Between 1.50 to 1.00 and 2.00 to 1.00 | | 0.225 | % | | 1.375 | % | | 0.225 | % | | 0.800 | % | | 1.375 | % | | 0.375 | % | |
Less than 1.50 to 1.00 | | 0.200 | % | | 1.250 | % | | 0.200 | % | | 0.750 | % | | 1.250 | % | | 0.250 | % | |
The interest rates applicable to loans under the Senior Credit Facilities 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 Term SOFR rate plus 1.0%) or (ii) the Term SOFR rate for the applicable interest period plus 0.1%, plus, in each case, an applicable margin percentage, which varies based on the 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 or analogous instruments and net of unrestricted cash and cash equivalents) at the date of determination to Consolidated EBITDA for the four fiscal quarters ended most recently before such date). The interest rates applicable to loans in other currencies under the Senior Credit Facilities are, at the applicable borrower’s option, equal to either (a) an adjusted alternative currency daily rate or (b) an adjusted alternative currency term rate for the applicable interest period, plus, in each case, the applicable margin percentage. The borrowers may elect interest periods of one, three or six months (and, if consented to by all relevant lenders, any other period not greater than twelve months) for term rate borrowings, subject in each case to availability in the applicable currency.
The weighted-average interest rate of outstanding borrowings under our Senior Credit Facilities was approximately 5.8% at December 31, 2022.
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 Enterprises, LLC, the direct wholly owned subsidiary of the Company, is the borrower under each of above facilities, and SPX may designate certain foreign subsidiaries to be borrowers under the revolving credit facility and the foreign credit instrument facility. 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 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 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. Mandatory prepayments will be applied first to repay amounts outstanding under any term loans and then to amounts outstanding under the 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 the business of SPX within 360 days (and if committed to be reinvested, actually reinvested within 180 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 term 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 revolving credit 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) or our domestic subsidiary guarantors and 65% of the voting capital stock (and 100% of the non-voting capital stock) of 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 would exist, then all collateral security is to be released and the indebtedness under the Credit Agreement will 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 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 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, 2022, we had $489.0 of available borrowing capacity under our revolving credit facilities, after giving effect to $11.0 reserved for outstanding letters of credit. In addition, at December 31, 2022, we had $10.2 of available issuance capacity under our foreign credit instrument facilities after giving effect to $14.8 reserved for outstanding letters of credit.
At December 31, 2022, we were in compliance with all covenants of our Credit Agreement.
In connection with the August 2022 amendment of the Credit Agreement, we recorded charges of $1.1 to “Loss on amendment/refinancing of senior credit agreement” related to the write-off of unamortized deferred financing costs totaling $0.7 and transaction costs of $0.4. Additionally, $1.5 of fees paid in connection with the August 2022 amendment were capitalized, with $1.2 related to our revolving loans and $0.3 related to the term loan. During 2021, we reduced the issuance capacity of our then-existing foreign credit instrument facilities resulting in a charge of $0.2 to “Loss on amendment/refinancing of senior credit agreement” associated with the write-off of unamortized deferred financing costs.
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, 2022 and 2021, the participating businesses had $1.8 and $2.2, 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.
In addition, we maintain uncommitted line of credit facilities in China and South Africa available to fund operations in these regions, when necessary, and at the discretion of the lender. At December 31, 2022, the aggregate amount of borrowing capacity under these facilities was $20.0, while there were no borrowings outstanding.
(14) Derivative Financial Instruments and Concentrations of Credit Risk
Interest Rate Swaps
We previously maintained interest rate swap agreements that matured in March 2021 and effectively converted borrowings under our senior credit facilities to a fixed rate of 2.535%, plus the applicable margin.
In February 2020, and as a result of a December 2019 amendment that extended the maturity date of our senior credit facilities to December 17, 2024, we entered into additional interest swap agreements (“Swaps”). The Swaps have a remaining notional amount of $231.3, cover the period through November 2024, and effectively convert this portion of the borrowings under our senior credit facilities to a fixed rate of 1.077%, plus the applicable margin.
In connection with entering into the Credit Agreement, the Swaps were amended to be based on SOFR as opposed to LIBOR. As mentioned in Note 3, we applied the optional expedient per ASU No. 2020-04 and No. 2021-01 and, thus, continue to designate and account for our interest rate swap agreements as cash flow hedges. As of December 31, 2022 and 2021, the unrealized gain, net of tax, recorded in AOCI was $11.0 and $0.5, respectively. In addition, the fair value of our interest rate swap agreements was $14.7 (with $8.7 recorded as a current asset and $6.0 as a non-current asset) as of December 31, 2022, and $0.6 (with $2.5 recorded as a non-current asset and $1.9 as a current liability) as of December 31, 2021. Changes in fair value of our interest rate swap agreements are reclassified into earnings as a component of interest expense, when the forecasted transaction impacts earnings.
Currency Forward Contracts
We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the South African Rand, British Pound Sterling (“GBP”), and Euro.
From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries (“FX forward contracts”).
We had FX forward contracts with an aggregate notional amount of $6.9 and $8.7 outstanding as of December 31, 2022 and 2021, respectively, with all of the $6.9 scheduled to mature within one year. The fair value of our FX forward contracts was less than $0.1 at December 31, 2022 and 2021.
Commodity Contracts
For our Transformer Solutions business, we historically entered into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. As discussed in Note 1, on October 1, 2021, we completed the sale of Transformer Solutions, which has been presented within discontinued operations. Immediately prior to the sale, we extinguished the existing commodity contracts and reclassified from AOCI a net loss of $0.6 to “Gain (loss) on disposition of discontinued operations, net of tax” within our consolidated statement of operations for the year ended December 31, 2021. Prior to extinguishment, we designated and accounted for these contracts as cash flow hedges and, to the extent the commodity contracts were effective in offsetting the variability of the forecasted purchases, the change in fair value was included in AOCI. We reclassified amounts associated with our commodity contracts out of AOCI when the forecasted transaction impacted earnings.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and equivalents, trade accounts receivable, and interest rate swap and foreign currency forward contracts. These financial instruments, other than trade accounts receivable, are placed with high-quality financial institutions throughout the world. We periodically evaluate the credit standing of these financial institutions.
We maintain cash levels in bank accounts that, at times, may exceed federally-insured limits. We have not experienced significant loss, and believe we are not exposed to significant risk of loss, in these accounts.
We have credit loss exposure in the event of nonperformance by counterparties to the above financial instruments, but have no other off-balance-sheet credit risk of accounting loss. We anticipate, however, that counterparties will be able to fully satisfy their obligations under the contracts. We do not obtain collateral or other security to support financial instruments subject to credit risk, but we do monitor the credit standing of counterparties.
Concentrations of credit risk arising from trade accounts receivable are due to selling to customers in a particular industry. Credit risks are mitigated by performing ongoing credit evaluations of our customers’ financial conditions and obtaining collateral, advance payments, or other security when appropriate. No one customer, or group of customers that to our knowledge are under common control, accounted for more than 10% of our revenues for any period presented.
(15) Contingent Liabilities and Other Matters
General
Numerous claims, complaints and proceedings arising in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (collectively, “claims”). These claims relate to litigation matters (e.g., class actions, derivative lawsuits and contracts, intellectual property and competitive claims), environmental matters, product liability matters (which, prior to the Asbestos Portfolio Sale, were predominately associated with alleged exposure to asbestos-containing materials), and other risk management matters (e.g., general liability, automobile, and workers’ compensation claims). Additionally, we may become subject to other claims of which we are currently unaware, which may be significant, or the claims of which we are aware may result in our incurring significantly greater loss than we anticipate. While we (and our subsidiaries) maintain property, cargo, auto, product, general liability, environmental, and directors’ and officers’ liability insurance and have acquired rights under similar policies in connection with acquisitions that we believe cover a significant portion of these claims, this insurance may be insufficient or unavailable (e.g., in the case of insurer insolvency) to protect us against potential loss exposures. Also, while we believe we are entitled to indemnification from third parties for some of these claims, these rights may be insufficient or unavailable to protect us against potential loss exposures.
Our recorded liabilities related to these matters totaled $39.5 and $658.8 at December 31, 2022 and 2021, respectively. Of these amounts, $30.8 and $584.3 are included in “Other long-term liabilities” within our consolidated balance sheets at December 31, 2022 and 2021, respectively, with the remainder included in “Accrued expenses.” The decline in liabilities is primarily related to the Asbestos Portfolio Sale. The liabilities we record for these matters are based on a number of assumptions, including historical claims and payment experience. While we base our assumptions on facts currently known to us, they entail inherently subjective judgments and uncertainties. As a result, our current assumptions for estimating these liabilities may not
prove accurate, and we may be required to adjust these liabilities in the future, which could result in charges to earnings. These variances relative to current expectations could have a material impact on our financial position and results of operations.
Asbestos Matters
Prior to the Asbestos Portfolio Sale, our asbestos-related claims were typical in certain of the industries in which we operate or pertain to legacy businesses we no longer operate. Our recorded assets and liabilities related to asbestos-related claims were as follows at December 31, 2021:
| | | | | | | | | |
| | | December 31, |
| | | 2021 |
Insurance recovery assets (1) | | | $ | 526.2 | |
Liabilities for claims (2) | | | 616.5 |
_____________________________________________________________
(1)Of these amounts, $473.6 are included in “Other assets” at December 31, 2021, while the remainder is included in “Other current assets.”
(2)Of these amounts, $561.4 are included in “Other long-term liabilities” at December 31, 2021, while the remainder is included in “Accrued expenses.”
The liabilities we recorded for asbestos-related claims were based on a number of assumptions. In estimating our liabilities for asbestos-related claims, we considered, among other things, the following:
•The number of pending claims by disease type and jurisdiction.
•Historical information by disease type and jurisdiction with regard to:
◦Average number of claims settled with payment (versus dismissed without payment); and
◦Average claim settlement amounts.
•The period over which we could reasonably project asbestos-related claims (projected through 2057 at December 31, 2021).
The assets we recorded for asbestos-related claims represented amounts that we believe we were entitled to recover under agreements we had with insurance companies. The amount of these assets was based on a number of assumptions, including the continued solvency of the insurers and our legal interpretation of our rights for recovery under the agreements we had with the insurers.
During the years ended December 31, 2022, 2021, and 2020, our (receipts) payments for asbestos-related claims, net of respective insurance recoveries of $31.6, $53.9, and $35.4, were $20.1, $(0.3) and $19.3, respectively. The year ended December 31, 2021 includes insurance proceeds of $15.0, associated with the settlement of an asbestos insurance coverage matter.
During the years ended December 31, 2022, 2021, and 2020, we recorded charges of $24.2, $51.2, and $21.3, respectively, as a result of changes in estimates associated with the liabilities and assets related to asbestos-related claims. Of these charges, $18.8, $48.6 and $19.2 were reflected in “Income from continuing operations before income taxes” for the years ended December 31, 2022, 2021, and 2020, respectively, and $5.4, $2.6, and $2.1, respectively, were reflected in “Gain (loss) on disposition of discontinued operations, net of tax.”
Large Power Projects in South Africa
Overview - Since 2008, DBT had been executing on two large power projects in South Africa (Kusile and Medupi), on which it has 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 subcontractors (including DBT and its subcontractors), and various suppliers. DBT’s remaining responsibilities relate largely to resolution of various claims, primarily between itself and one of its prime contractors, Mitsubishi Heavy Industries Power—ZAF (f.k.a. Mitsubishi-Hitachi Power Systems Africa (PTY) LTD), or “MHI.”
The challenges related to the projects have resulted in (i) significant adjustments to our revenue and cost estimates for the projects, (ii) DBT’s submission of numerous change orders to the prime contractors, (iii) various claims and disputes between
DBT and other parties involved with the projects (e.g., prime contractors, subcontractors, suppliers, etc.), and (iv) the possibility that DBT may become subject to additional claims, which could be significant. It is possible that some outstanding claims may not be resolved until after the prime contractors complete their scopes of work. Our future financial position, operating results, and cash flows could be materially impacted by the resolution of current and any future claims.
Claims by DBT - DBT has asserted claims against MHI of approximately South African Rand 1,000.0 (or $58.4). As DBT prepares these claims for dispute resolution processes, the amounts, along with the characterization, of the claims could change. Of these claims, South African Rand 732.6 (or $42.8), which is inclusive of the amounts awarded in the adjudications referred to below, are currently proceeding through contractual dispute resolution processes and DBT is likely to initiate additional dispute resolution processes. DBT is also pursuing several claims to force MHI to abide by its contractual obligations and provide DBT with certain benefits that MHI may have received from its customer on the projects. In addition to existing asserted claims, DBT believes it has additional claims and rights to recovery based on its performance under the contracts with, and actions taken by, MHI. DBT is continuing to evaluate the claims and the amounts owed to it under the contracts based on MHI's failure to comply with its contractual obligations. The amounts DBT may recover for current and potential future claims against MHI are not currently known given (i) the extent of current and potential future claims by MHI against DBT (see below for further discussion) and (ii) the unpredictable nature of any dispute resolution processes that may occur in connection with these current and potential future claims. No revenue has been recorded in the accompanying consolidated financial statements with respect to current or potential future claims against MHI.
On July 23, 2020, a dispute adjudication panel issued a ruling in favor of DBT on certain matters related to the Kusile and Medupi projects. The panel (i) ruled that DBT had achieved takeover on 9 of the units; (ii) ordered MHI to return $2.3 of bonds (which have been subsequently returned by MHI); (iii) ruled that DBT is entitled to the return of an additional $4.3 of bonds upon the completion of certain administrative milestones; (iv) ordered MHI to pay South African Rand 18.4 (or $1.1 at the time of the ruling) in incentive payments for work performed by DBT (which MHI has subsequently paid); and (v) ruled that MHI waived its rights to assert delay damages against DBT on one of the units of the Kusile project. The ruling is subject to MHI’s rights to seek further arbitration in the matter, as provided in the contracts. As such, the incentive payments noted above have not been recorded in our accompanying consolidated statements of operations.
On February 22, 2021, a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on two units of the Kusile project. In connection with the ruling, MHI paid DBT South African Rand 126.6 (or $8.6 at the time of payment). This ruling is subject to MHI’s rights to seek further arbitration in the matter and, thus, the amount awarded has not been reflected in our accompanying consolidated statements of operations. On July 5, 2021, DBT received notice from MHI of its intent to seek final and binding arbitration in this matter. The hearing on this matter occurred in December 2022, with the ruling from such hearing yet to be received.
On April 28, 2021, a dispute adjudication panel issued a ruling in favor of DBT related to costs incurred in connection with delays on two units of the Medupi project. In connection with the ruling, MHI paid DBT South African Rand 82.0 (or $6.0 at the time of payment). This ruling is subject to MHI’s rights to seek further arbitration in the matter and, thus, the amount awarded has not been reflected in our accompanying consolidated statements of operations.
Claims by MHI - On February 26, 2019, DBT received notification of an interim claim consisting of both direct and consequential damages from MHI alleging, among other things, that DBT (i) provided defective product and (ii) failed to meet certain project milestones. In September 2020, MHI made a demand on certain bonds issued in its favor by DBT, based solely on these alleged defects, but without further substantiation or other justification (see further discussion below). On December 30, 2020, MHI notified DBT of its intent to take these claims to binding arbitration even though the vast majority of these claims had not been brought appropriately before a dispute adjudication board as required under the relevant subcontracts. On June 4, 2021, in connection with the arbitration, DBT received a revised version of the claim. Similar to the interim claim, we believe the vast majority of the damages summarized in the revised claim are unsubstantiated and, thus, any loss for the majority of these claims is considered remote. The remainder of the claims in both the interim notification and the revised version largely appear to be direct in nature (approximately South African Rand 790.0 or $46.1). On September 21, 2022, an arbitration tribunal ruled that only South African Rand 349.6 (or $20.4) of MHI's revised claim had been brought appropriately before a dispute adjudication board as required under the relevant subcontracts, with MHI's other claims dismissed from the arbitration proceedings. On November 25, 2022, MHI notified DBT of its intent to refer the claims dismissed from the arbitration to a new dispute adjudication panel. DBT has numerous defenses and, thus, we do not believe that DBT has a probable loss associated with any of these claims. As such, no loss has been recorded in the accompanying consolidated financial statements with respect to these claims. DBT intends to vigorously defend itself against these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable to estimate the potential loss or range of potential loss associated with these claims due to the (i) lack of support provided by MHI for these claims; (ii) complexity of contractual
relationships between the end customer, MHI, and DBT; (iii) legal interpretation of the contract provisions and application of South African law to the contracts; and (iv) unpredictable nature of any dispute resolution processes that may occur in connection with these claims.
In April and July 2019, DBT received notifications of intent to claim liquidated damages totaling South African Rand 407.2 (or $23.8) from MHI alleging that DBT failed to meet certain project milestones related to the construction of the filters for both the Kusile and Medupi projects. DBT has numerous defenses against these claims and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the accompanying consolidated financial statements with respect to these claims. Although it is reasonably possible that some loss may be incurred in connection with these claims, we currently are unable to estimate the potential loss or range of potential loss.
MHI has made other claims against DBT totaling South African Rand 176.2 (or $10.3) and has also alleged that it has incurred additional remedial costs related to portions of DBT’s scope of work. DBT has numerous defenses against these claims, as well as claims, if any, that may result from the above unsubstantiated allegations, and, thus, we do not believe that DBT has a probable loss associated with these claims. As such, no loss has been recorded in the accompanying consolidated financial statements with respect to these claims and allegations.
Bonds Issued in Favor of MHI - DBT is obligated with respect to bonds issued by banks in favor of MHI. In September of 2020, MHI made a demand, and received payment of South African Rand 239.6 (or $14.3 at the time of payment), on certain of these bonds. In May 2021, MHI made an additional demand, and received payment of South African Rand 178.7 (or $12.5 at time of payment), on certain of the remaining bonds at such time. In both cases, we funded the payment as required under the terms of the bonds and our senior credit agreement. In its demands, MHI purported that DBT failed to carry out its obligations to rectify certain alleged product defects and that DBT failed to meet certain project milestones. DBT denies liability for such allegations and, thus, fully intends to seek, and believes it is legally entitled to, reimbursement of the South African Rand 418.3 (or $24.4) that has been paid. On October 11, 2022, a dispute adjudication panel ruled MHI drew on amounts in excess of the bond values stipulated in the contracts and was required to refund DBT South African Rand 90.8 (or $5.0 at the time of payment) of the previously demanded amounts, plus interest of South African Rand 12.5 (or $0.7 at the time of payment). MHI paid these amounts on October 14, 2022. We have reflected the remaining South African Rand 327.5 (or $19.1) within “Assets of DBT and Heat Transfer” on the accompanying consolidated balance sheet as of December 31, 2022.
The remaining bond of South African Rand 29.2 (or $1.7) was issued to MHI as a performance guarantee in the event of a breach of DBT’s contractual obligations. In the event that MHI were to receive payment on a portion, or all, of the remaining bond, we would be required to reimburse the issuing bank.
In addition, SPX Technologies, Inc. has guaranteed DBT’s performance on these projects to the prime contractors, including MHI.
Claim against Surety - On February 5, 2021, DBT received payment of $6.7 on bonds issued in support of performance by one of DBT’s sub-contractors. The sub-contractor maintains a right to seek recovery of such amount and, thus, the amount received by DBT has not been reflected in our consolidated statements of operations.
Claim for Contingent Consideration Related to ULC Acquisition
In connection with our acquisition of ULC in September 2020, the seller of ULC was eligible for additional cash consideration of up to $45.0 upon achievement of certain operating and financial performance milestones. At the time of the acquisition, we recorded a liability of $24.3, which represented the estimated fair value of the contingent consideration. During the third quarter of 2021, we concluded that the operational and financial performance milestones noted above were not achieved. As a result, we reversed the liability of $24.3 during the third quarter of 2021, with the offset recorded to “Other operating (income) expense, net.”
On August 23, 2022, the seller of ULC initiated a breach-of-contract lawsuit against us in the United States District Court for the Eastern District of New York claiming that it is entitled to a portion of the additional cash consideration totaling $15.0 linked to certain operating performance milestones. SPX has numerous defenses against this claim and, thus, we do not believe we have a probable loss associated with the claim.
Litigation Matters
We are subject to other legal matters that arise in the normal course of business. We believe these matters are either without merit or of a kind that should not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows; however, we cannot give assurance that these proceedings or claims will not have a material effect on our financial position, results of operations or cash flows.
Environmental Matters
Our operations and properties are subject to federal, state, local and foreign regulatory requirements relating to environmental protection. It is our policy to comply fully with all applicable requirements. As part of our effort to comply, we have a comprehensive environmental compliance program that includes environmental audits conducted by internal and external independent professionals, as well as regular communications with our operating units regarding environmental compliance requirements and anticipated regulations. Based on current information, we believe that our operations are in substantial compliance with applicable environmental laws and regulations, and we are not aware of any violations that could have a material effect, individually or in the aggregate, on our business, financial condition, and results of operations or cash flows. We had liabilities for site investigation and/or remediation at 17 sites, that we own or control, as of December 31, 2022 (18 sites as of December 31, 2021). In addition, while we believe that we maintain adequate accruals to cover the costs of site investigation and/or remediation, we cannot provide assurance that new matters, developments, laws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future.
Our environmental accruals cover anticipated costs, including investigation, remediation, and maintenance of clean-up sites. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. Accordingly, our estimates may change based on future developments, including new or changes in existing environmental laws or policies, differences in costs required to complete anticipated actions from estimates provided, future findings of investigation or remediation actions, or alteration to the expected remediation plans. It is our policy to revise an estimate once it becomes probable and the amount of change can be reasonably estimated. We generally do not discount our environmental accruals and do not reduce them by anticipated insurance recoveries. We take into account third-party indemnification from financially viable parties in determining our accruals where there is no dispute regarding the right to indemnification.
In the case of contamination at offsite, third-party disposal sites, as of December 31, 2022 and December 31, 2021, we have been notified that we are potentially responsible and have received other notices of potential liability pursuant to various environmental laws at 9 sites, at which the liability has not been settled, and all of which have been active in the past few years. These laws may impose liability on certain persons that are considered jointly and severally liable for the costs of investigation and remediation of hazardous substances present at these sites, regardless of fault or legality of the original disposal. These persons include the present or former owners or operators of the site and companies that generated, disposed of or arranged for the disposal of hazardous substances at the site. We are considered a “de minimis” potentially responsible party at most of the sites, and we estimate that our aggregate liability, if any, related to these sites is not material to our consolidated financial statements. We conduct extensive environmental due diligence with respect to potential acquisitions, including environmental site assessments and such further testing as we may deem warranted. If an environmental matter is identified, we estimate the cost and either establish a liability, purchase insurance or obtain an indemnity from a financially sound seller; however, in connection with our acquisitions or dispositions, we may assume or retain significant environmental liabilities, some of which we may be unaware. The potential costs related to these environmental matters and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of various clean-up technologies, the uncertain level of insurance or other types of recovery, and the questionable level of our responsibility. We record a liability when it is both probable and the amount can be reasonably estimated.
In our opinion, after considering accruals established for such purposes, the cost of remedial actions for compliance with the present laws and regulations governing the protection of the environment are not expected to have a material impact, individually or in the aggregate, on our financial position, results of operations or cash flows.
Self-Insured Risk Management Matters
We are self-insured for certain of our workers’ compensation, automobile, product and general liability, disability and health costs, and we believe that we maintain adequate accruals to cover our retained liability. Our accruals for risk management matters are determined by us, are based on claims filed and estimates of claims incurred but not yet reported, and generally are not discounted. We consider a number of factors, including third-party actuarial valuations, when making these determinations. We maintain third-party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts. This insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against loss exposures.
Executive Agreements
The Board of Directors has approved an employment agreement for our President and Chief Executive Officer. This agreement had an initial term through December 31, 2017 and, thereafter, rolling terms of one year, and specifies the executive’s current compensation, benefits and perquisites, severance entitlements, and other employment rights and responsibilities. The Compensation Committee of the Board of Directors has approved severance benefit agreements for our other six executive officers. These agreements cover each executive’s entitlements in the event that the executive’s employment is terminated for
other than cause, death or disability, or the executive resigns with good reason. The Compensation Committee of the Board of Directors has also approved change of control agreements for each of our executive officers, which cover each executive’s entitlements following a change of control.
(16) Stockholders’ Equity and Long-Term Incentive Compensation
Income Per Share
The following table sets forth the computations of the components used for the calculation of basic and diluted income per share:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Income from continuing operations | $ | 19.8 | | | $ | 59.0 | | | $ | 73.8 | |
Income (loss) from discontinued operations, net of tax | $ | (19.6) | | | $ | 366.4 | | | $ | 25.2 | |
| | | | | |
| | | | | |
Denominator: | | | | | |
Weighted-average number of common shares used in basic income per share | 45.345 | | | 45.289 | | | 44.628 | |
Dilutive securities — Employee stock options and restricted stock units | 0.876 | | | 1.206 | | | 1.138 | |
Weighted-average number of common shares and dilutive securities used in diluted income per share | 46.221 | | | 46.495 | | | 45.766 | |
For the years ended December 31, 2022, 2021, and 2020, 0.240, 0.245, and 0.300, respectively, of unvested restricted stock units were excluded from the computation of diluted earnings per share as the assumed proceeds for these instruments exceeded the average market value of the underlying common stock for the related years. For the years ended December 31, 2022, 2021, and 2020, 0.695, 0.627, and 0.793, respectively, of outstanding stock options were excluded from the computation of diluted earnings per share as the assumed proceeds for these instruments exceeded the average market value of the underlying common stock for the related years.
Common Stock and Treasury Stock
On May 10, 2022, our Board of Directors re-authorized management, in its sole discretion, to repurchase, in any fiscal year, up to $100.0 of our common stock, subject to maintaining compliance with all covenants of our Credit Agreement. Pursuant to this re-authorization, during the second quarter of 2022, we repurchased 0.707 shares of our common stock for aggregate cash payments of $33.7. As of December 31, 2022, the remaining maximum approximate amount of our common stock that may be purchased under this authorization is $66.3.
At December 31, 2022, we had 200.0 authorized shares of common stock (par value $0.01). Common shares issued, treasury shares and shares outstanding are summarized in the table below.
| | | | | | | | | | | | | | | | | |
| Common Stock Issued | | Treasury Stock | | Shares Outstanding |
Balance at December 31, 2019 | 52.017 | | | (7.814) | | | 44.203 | |
| | | | | |
| | | | | |
Restricted stock units | — | | | 0.141 | | | 0.141 | |
Other | 0.688 | | | — | | | 0.688 | |
Balance at December 31, 2020 | 52.705 | | | (7.673) | | | 45.032 | |
| | | | | |
Restricted stock units | — | | | 0.130 | | | 0.130 | |
| | | | | |
Other | 0.306 | | | — | | | 0.306 | |
Balance at December 31, 2021 | 53.011 | | | (7.543) | | | 45.468 | |
| | | | | |
Restricted stock units | — | | | 0.191 | | | 0.191 | |
| | | | | |
Share repurchases | — | | | (0.707) | | | (0.707) | |
Other | 0.340 | | | — | | | 0.340 | |
Balance at December 31, 2022 | 53.351 | | | (8.059) | | | 45.292 | |
Long-Term Incentive Compensation
On May 9, 2019, our stockholders approved our 2019 Stock Compensation Plan (the “2019 Plan”) which replaced our 2002 Stock Compensation Plan, as amended in 2006, 2011, 2012 and 2015 (the “Prior Plan”). As a result of the approval of the 2019 Plan, no further awards were permitted to be made under the Prior Plan. Up to 3.851 shares of our common stock were available for grant at December 31, 2022 under the 2019 Plan. The 2019 Plan permits the issuance of new shares or shares from treasury upon the exercise of options, vesting of time-based restricted stock units (“RSU’s”) and performance stock units (“PSU’s”). Each RSU and PSU granted reduces availability by two shares. Similar awards were permitted to be granted under the Prior Plan before the approval of the 2019 Plan.
PSU’s and RSU’s may be granted to certain eligible employees or non-employee directors in accordance with applicable equity compensation plan documents and agreements. Subject to participants’ continued employment and other plan terms and conditions, the restrictions lapse and awards generally vest over a period of time, generally one or three years. In some instances, such as death, disability, or retirement, stock may vest concurrently with or following an employee’s termination. PSU’s are eligible to vest at the end of the performance period, with performance based on the total return of our stock over the three-year performance period against a peer group within the S&P 600 Capital Goods Index, while the RSU’s vest based on the passage of time since grant date. PSU’s and RSU’s that do not vest within the applicable vesting period are forfeited.
We grant RSU’s to non-employee directors under the 2019 Plan. The 2022, 2021 and 2020 grants to non-employee directors generally vest over a 1 year-period, with the 2022 grants scheduled to vest in their entirety immediately prior to the annual meeting of stockholders in May 2023.
Stock options may be granted to key employees in the form of incentive stock options or non-qualified stock options. The option price per share may be no less than the fair market value of our common stock at the close of business the day prior to the date of grant. Upon exercise, the employee has the option to surrender previously owned shares at current value in payment of the exercise price and/or for withholding tax obligations.
The recognition of compensation expense for share-based awards, including stock options, is based on their grant date fair values. The fair value of each award is amortized over the lesser of the award’s requisite or derived service period, which is generally up to three years. Compensation expense within income from continuing operations related to PSU’s, RSU’s and stock options totaled $10.9, $12.9 and $12.0 for the years ended December 31, 2022, 2021 and 2020, respectively, with the related tax benefit being $1.7, $2.2 and $2.0 for the years ended December 31, 2022, 2021 and 2020, respectively.
In years prior to 2020, annual long-term cash awards were granted to executive officers and other members of senior management. These awards were eligible to vest at the end of a three-year performance measurement period, with performance based on our achievement of a target segment income amount over the three-year measurement period. Long-term incentive compensation expense for 2022, 2021, and 2020 included $0.0, $(0.1) and $1.1, respectively, associated with long-term cash awards.
We use the Monte Carlo simulation model valuation technique to determine fair value of our restricted stock awards that contain a market condition (i.e., the PSU’s). The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each PSU. We issued PSU’s to eligible participants on March 1, 2022 and 2021, and February 20, 2020. We used the following assumptions in determining the fair value of these awards:
| | | | | | | | | | | | | | | | | | | | | | | |
| Annual Expected Stock Price Volatility | | Annual Expected Dividend Yield | | Risk-Free Interest Rate | | Correlation Between Total Shareholder Return for SPX and the Applicable S&P Index |
March 1, 2022 | | | | | | | |
SPX | 43.04 | % | | — | % | | 1.44 | % | | 62.44 | % |
Peer group within S&P 600 Capital Goods Index | 50.98 | % | | n/a | | 1.44 | % | | |
March 1, 2021 | | | | | | | |
SPX | 42.88 | % | | — | % | | 0.25 | % | | 60.24 | % |
Peer group within S&P 600 Capital Goods Index | 51.25 | % | | n/a | | 0.25 | % | | |
February 20, 2020 | | | | | | | |
SPX | 29.47 | % | | — | % | | 1.35 | % | | 35.47 | % |
Peer group within S&P 600 Capital Goods Index | 34.93 | % | | n/a | | 1.35 | % | | |
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Annual expected stock price volatility is based on the three-year historical volatility. There is no annual expected dividend yield as we discontinued dividend payments in 2015 and do not expect to pay dividends for the foreseeable future. The average risk-free interest rate is based on the one-year through three-year daily treasury yield curve rate as of the grant date.
The following table summarizes the PSU and RSU activity from December 31, 2019 through December 31, 2022:
| | | | | | | | | | | |
| Unvested PSU’s and RSU’s | | Weighted-Average Grant-Date Fair Value Per Share |
December 31, 2019 | 0.606 | | | $ | 36.17 | |
Granted | 0.277 | | | 46.61 | |
Vested | (0.233) | | | 31.49 | |
Forfeited | (0.006) | | | 41.37 | |
December 31, 2020 | 0.644 | | | 42.32 | |
Granted | 0.243 | | | 57.24 | |
Vested | (0.219) | | | 37.40 | |
Forfeited | (0.032) | | | 53.69 | |
December 31, 2021 | 0.636 | | | 49.14 | |
Granted | 0.307 | | | 48.72 | |
Vested | (0.332) | | | 44.16 | |
Forfeited | (0.081) | | | 53.41 | |
December 31, 2022 | 0.530 | | | $ | 51.38 | |
As of December 31, 2022, there was $9.8 of unrecognized compensation cost related to PSU’s and RSU’s. We expect this cost to be recognized over a weighted-average period of 1.9 years.
Stock Options
On March 1, 2022 and 2021, and February 20, 2020, we granted stock options totaling 0.105, 0.105, and 0.125, respectively. The exercise price per share of these options is $48.97, $58.34, and $50.09, respectively, and the maximum contractual term of these options is ten years.
The fair value of each stock option granted on March 1 2022 and 2021, and February 20, 2020 was $19.33, $23.49, and $17.40, respectively. The fair value of each option grant was estimated using a Black-Scholes option-pricing model with the following assumptions:
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| March 1, 2022 | | March 1, 2021 | | February 20, 2020 |
Annual expected stock price volatility | 38.62 | % | | 41.15 | % | | 33.48 | % |
Annual expected dividend yield | — | % | | — | % | | — | % |
Risk-free interest rate | 1.61 | % | | 0.91 | % | | 1.41 | % |
Expected life of stock option (in years) | 6.0 | | 6.0 | | 6.0 |
Annual expected stock price volatility for the March 1 2022 and 2021, and February 20, 2020 grants were based on a weighted average of SPX’s stock volatility since the Spin-Off and an average of the most recent six-year historical volatility of a peer company group. There is no annual expected dividend yield as we discontinued dividend payments in 2015 and do not expect to pay dividends for the foreseeable future. The average risk-free interest rate is based on the five-year and seven-year treasury constant maturity rates. The expected option life is based on a three-year pro-rata vesting schedule and represents the period of time that awards are expected to be outstanding.
The following table shows stock option activity from December 31, 2019 through December 31, 2022.
| | | | | | | | | | | |
| Shares | | Weighted- Average Exercise Price |
Options outstanding at December 31, 2019 | 1.692 | | | $ | 19.05 | |
Exercised | (0.412) | | | 14.97 | |
Forfeited | — | | | — | |
Granted | 0.139 | | | 49.57 | |
Options outstanding at December 31, 2020 | 1.419 | | | 23.21 | |
Exercised | (0.123) | | | 15.82 | |
Forfeited | (0.008) | | | 50.11 | |
Granted | 0.105 | | | 58.34 | |
Options outstanding at December 31, 2021 | 1.393 | | | 26.35 | |
Exercised | (0.191) | | | 26.64 | |
Forfeited | (0.043) | | | 51.32 | |
Granted | 0.127 | | | 50.14 | |
Options outstanding at December 31, 2022 | 1.286 | | | $ | 27.82 | |
As of December 31, 2022, 1.092 of the above stock options were exercisable and there was $2.2 of unrecognized compensation cost related to the outstanding stock options. We expect this cost to be recognized over a weighted-average period of 2.4 years.
Accumulated Other Comprehensive Income
The changes in the components of accumulated other comprehensive income, net of tax, for the year ended December 31, 2022 were as follows:
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| Foreign Currency Translation Adjustment | | Net Unrealized Gains on Qualifying Cash Flow Hedges(1) | | | | Pension and Postretirement Liability Adjustment(2) | | Total |
Balance at December 31, 2021 | $ | 252.7 | | | $ | 0.5 | | | | | $ | 10.7 | | | $ | 263.9 | |
Other comprehensive income (loss) before reclassifications | (13.6) | | | 11.7 | | | | | 0.1 | | | (1.8) | |
Amounts reclassified from accumulated other comprehensive income | — | | | (1.2) | | | | | (3.4) | | | (4.6) | |
Current-period other comprehensive income (loss) | (13.6) | | | 10.5 | | | | | (3.3) | | | (6.4) | |
Balance at December 31, 2022 | $ | 239.1 | | | $ | 11.0 | | | | | $ | 7.4 | | | $ | 257.5 | |
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(1) Net of tax provision of $3.7 and $0.1 as of December 31, 2022 and 2021, respectively.
(2) Net of tax provision of $2.7 and $3.7 as of December 31, 2022 and 2021, respectively. The balances as of December 31, 2022 and 2021 include unamortized prior service credits.
The changes in the components of accumulated other comprehensive income, net of tax, for the year ended December 31, 2021 were as follows:
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| Foreign Currency Translation Adjustment | | Net Unrealized Gains (Losses) on Qualifying Cash Flow Hedges (1) | | Pension and Postretirement Liability Adjustment (2) | | Total |
Balance at December 31, 2020 | $ | 238.6 | | | $ | (4.4) | | | $ | 14.3 | | | $ | 248.5 | |
Other comprehensive income (loss) before reclassifications | (5.8) | | | 5.3 | | | — | | | (0.5) | |
Amounts reclassified from accumulated other comprehensive income (loss) | 19.9 | | | (0.4) | | | (3.6) | | | 15.9 | |
Current-period other comprehensive income (loss) | 14.1 | | | 4.9 | | | (3.6) | | | 15.4 | |
Balance at December 31, 2021 | $ | 252.7 | | | $ | 0.5 | | | $ | 10.7 | | | $ | 263.9 | |
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(1) Net of tax (provision) benefit of $(0.1) and $1.4 as of December 31, 2021 and 2020, respectively.
(2) Net of tax provision of $3.7 and $4.9 as of December 31, 2021 and 2020, respectively. The balances as of December 31, 2021 and 2020 include unamortized prior service credits.
The following summarizes amounts reclassified from each component of accumulated comprehensive income for the years ended December 31, 2022 and 2021:
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| Amount Reclassified from AOCI | | Affected Line Items in the Consolidated Statements of Operations |
| Year ended December 31, | | |
| 2022 | | 2021 | | |
(Gains) losses on qualifying cash flow hedges: | | | | | |
| | | | | |
FX forward contracts | $ | (0.1) | | | $ | — | | | Revenues |
Commodity contracts | — | | | (3.8) | | | Income from discontinued operations, net of tax |
Swaps | (1.5) | | | 3.2 | | | Interest expense |
Pre-tax | (1.6) | | | (0.6) | | | |
Income taxes | 0.4 | | | 0.2 | | | |
| $ | (1.2) | | | $ | (0.4) | | | |
Gains on pension and postretirement items: | | | | | |
| | | | | |
Amortization of unrecognized prior service credits - Pre-tax | $ | (4.4) | | | $ | (4.8) | | | Other income (expense), net |
| | | | | |
Income taxes | 1.0 | | | 1.2 | | | |
| $ | (3.4) | | | $ | (3.6) | | | |
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Loss on reclassification of foreign currency translation adjustments: | | | | | |
DBT | $ | — | | | $ | 19.9 | | | Gain (loss) on disposition of discontinued operations, net of tax |
Income taxes | — | | | — | | | |
| $ | — | | | $ | 19.9 | | | |
Common Stock in Treasury
During the years ended December 31, 2022, 2021 and 2020, “Common stock in treasury” was decreased by the settlement of restricted stock units, net of recipient tax withholdings, issued from treasury stock of $12.1, $7.7 and $8.4, respectively. During the year ended December 31, 2022, “Common stock in treasury” was increased by the previously mentioned repurchase of our common stock for aggregate cash payments of $33.7.
Preferred Stock
None of our 3.0 shares of authorized no par value preferred stock was outstanding at December 31, 2022, 2021 or 2020.
(17) Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
•Level 1 — Quoted prices for identical instruments in active markets.
•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 — Significant inputs to the valuation model are unobservable.
There were no changes during the periods presented to the valuation techniques we use to measure asset and liability fair values on a recurring basis. There were no transfers between the three levels of the fair value hierarchy for the periods presented.
Valuation Methods Used to Measure Fair Value on a Non-Recurring Basis
Parent Guarantees and Bonds Associated with Balcke Dürr — In connection with the 2016 sale of Balcke Dürr, existing parent company guarantees and bank surety bonds, which totaled approximately Euro 79.0 and Euro 79.0, respectively, remained in place at the time of sale. These guarantees and bonds provided protections for Balcke Dürr customers in regard to advance payments, performance, and warranties on projects in existence at the time of sale. In addition, certain bonds related to lease obligations and foreign tax matters in existence at the time of sale. Balcke Dürr and the acquirer of Balcke Dürr provided us an indemnity in the event that any of the bonds were called or payments were made under the guarantees. Also, at the time of sale, Balcke Dürr provided cash collateral of Euro 4.0 and the parent company of the buyer provided a guarantee of Euro 5.0 as a security for the above indemnifications (Euro 0.0 and Euro 0.0, respectively, at December 31, 2022). In connection with the sale, we recorded a liability for the estimated fair value of the guarantees and bonds and an asset for the estimated fair value of the cash collateral and indemnities provided. As of December 31, 2021, the guarantees had expired and bonds had been returned. Summarized below are the liability (related to the parent company guarantees and bank and surety bonds) and asset (related to the cash collateral and guarantee provided by the parent company of the buyer) recorded at the time of sale, along with the change in the liability and the asset during 2021 and 2020.
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| | | | | | Year ended |
| | | December 31, 2021 | | December 31, 2020 |
| | | | | | Guarantees and Bonds Liability (1) | | Indemnification Assets (1) | | Guarantees and Bonds Liability (1) | | Indemnification Assets (1) |
Balance at beginning of year | | | | | | $ | 1.8 | | | $ | — | | | $ | 2.0 | | | $ | 0.3 | |
Reduction/Amortization for the period (2) | | | | | | (1.7) | | | — | | | (0.4) | | | (0.3) | |
Impact of changes in foreign currency rates | | | | | | (0.1) | | | — | | | 0.2 | | | — | |
Balance at end of period | | | | | | $ | — | | | $ | — | | | $ | 1.8 | | | $ | — | |
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(1)In connection with the sale, we estimated the fair value of the existing parent company guarantees and bank and surety bonds considering the probability of default by Balcke Dürr and an estimate of the amount we would be obligated to pay in the event of a default. Additionally, we estimated the fair value of the cash collateral provided by Balcke Dürr and the guarantee provided by the parent company of the buyer based on the terms and conditions and relative risk associated with each of these securities (unobservable inputs - Level 3).
(2)We reduced the liability generally at the earlier of the completion of the related underlying project milestones or the expiration of the guarantees or bonds. We amortized the asset based on the expiration terms of each of the securities. We recorded the reduction of the liability and the amortization of the asset to “Other income (expense), net.”
Contingent Consideration for Sensors & Software, ECS, and ULC Acquisitions — In connection with the acquisition of Sensors & Software, the sellers were eligible for additional cash consideration of up to $3.7, with payment of such contingent consideration dependent upon the achievement of certain milestones. The estimated fair value of such contingent consideration totaled $1.3 as of December 31, 2021 with the amount reflected as a liability within the respective consolidated balance sheet. The $1.3 was paid during 2022.
As it relates to the ULC acquisition, and as indicated in Note 1, we concluded during the third quarter of 2021 that the operating and financial milestones related to the ULC contingent consideration were not achieved, resulting in the reversal of the related liability of $24.3.
In connection with the acquisition of ECS, the seller was eligible for additional cash consideration of up to $15.0, with payment of such contingent consideration dependent upon the achievement of certain milestones. The estimated fair value of such contingent consideration was $8.2 as of the date of acquisition. During 2021, we concluded that the probability of achieving the financial performance milestone had lessened due to a delay in the execution of certain large orders, resulting in a reduction of the contingent fair value/liability of $6.7. During 2022, we further reduced the fair value/liability by $1.3. The estimated fair value of such contingent consideration was $0.0 and $1.5 at December 31, 2022 and December 31, 2021, respectively, with the latter amount reflected as a liability within the respective consolidated balance sheet.
We estimate the fair value of contingent consideration based on the probability of the acquired business achieving the applicable milestones.
Goodwill, Indefinite-Lived Intangible and Other Long-Lived Assets — Certain of our non-financial assets are subject to impairment analysis, including long-lived assets, indefinite-lived intangible assets and goodwill. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the instrument be recorded at its fair value. Refer to Note 10 for additional details.
Valuation Methods Used to Measure Fair Value on a Recurring Basis
Derivative Financial Instruments — Our financial derivative assets and liabilities include commodity contracts (until the sale of Transformer Solutions), interest rate swaps, and FX forward contracts, valued using models based on observable market inputs such as forward rates, interest rates, our own credit risk and the credit risk of our counterparties, which comprise investment-grade financial institutions. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. We have not made any adjustments to the inputs obtained from the independent sources. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments active. We primarily use the income approach, which uses valuation techniques to convert future amounts to a single present amount.
As of December 31, 2022, there had been no significant impact to the fair value of our derivative liabilities due to our own credit risk, as the related instruments are collateralized under our senior credit facilities. Similarly, there had been no significant impact to the fair value of our derivative assets based on our evaluation of our counterparties’ credit risks.
Equity Security - We estimate the fair value of an equity security that we hold utilizing a practical expedient under existing guidance, with such estimated fair value based on our ownership percentage applied to the net asset value as provided quarterly by the investee. The value is updated annually, during the first quarter, based on the investee’s most recent audited financial statements.
During the years ended December 31, 2022, 2021, and 2020, we recorded gains (losses) of $(3.0), $11.8 and $8.6, respectively, to “Other income (expense), net” related to changes in the estimated fair value of such equity security. In addition, we received a distribution during 2020 of $3.5 included within “cash flows from operating activities” in our consolidated statement of cash flows. As of December 31, 2022 and 2021, the equity security had an estimated fair value of $35.8 and $38.8, respectively. We are restricted from transferring this investment without approval of the manager of the investee.
Indebtedness — The estimated fair value of our debt instruments as of December 31, 2022 and December 31, 2021 approximated the related carrying values due primarily to the variable market-based interest rates for such instruments. See Note 13 for further details.
(18) Quarterly Results (Unaudited)
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| First (3) | | Second (3) | | Third (3) | | Fourth (3) |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | 307.1 | | | $ | 287.2 | | | $ | 354.0 | | | $ | 296.6 | | | $ | 370.5 | | | $ | 285.7 | | | $ | 429.3 | | | $ | 350.0 | |
Gross profit | 104.0 | | | 104.4 | | | 124.6 | | | 102.3 | | | 133.1 | | | 95.8 | | | 162.2 | | | 129.3 | |
Income (loss) from continuing operations, net of tax (1) | 13.0 | | | 23.0 | | | 19.1 | | | 17.7 | | | 12.5 | | | 13.9 | | | (24.8) | | | 4.4 | |
Income (loss) from discontinued operations, net of tax (1)(2) | (1.6) | | | 3.8 | | | (6.1) | | | 44.2 | | | (9.4) | | | 316.4 | | | (2.5) | | | 2.0 | |
Net income (loss) | $ | 11.4 | | | $ | 26.8 | | | $ | 13.0 | | | $ | 61.9 | | | $ | 3.1 | | | $ | 330.3 | | | $ | (27.3) | | | $ | 6.4 | |
Basic income (loss) per share of common stock: | | | | | | | | | | | | | | | |
Continuing operations, net of tax | $ | 0.29 | | | $ | 0.51 | | | $ | 0.42 | | | $ | 0.39 | | | $ | 0.28 | | | $ | 0.31 | | | $ | (0.55) | | | $ | 0.10 | |
Discontinued operations, net of tax | (0.04) | | | 0.08 | | | (0.13) | | | 0.98 | | | (0.21) | | | 6.98 | | | (0.05) | | | 0.04 | |
Net income (loss) | $ | 0.25 | | | $ | 0.59 | | | $ | 0.29 | | | $ | 1.37 | | | $ | 0.07 | | | $ | 7.29 | | | $ | (0.60) | | | $ | 0.14 | |
Diluted income (loss) per share of common stock: | | | | | | | | | | | | | | | |
Continuing operations, net of tax | $ | 0.28 | | | $ | 0.50 | | | $ | 0.41 | | | $ | 0.38 | | | $ | 0.27 | | | $ | 0.30 | | | $ | (0.55) | | | $ | 0.10 | |
Discontinued operations, net of tax | (0.03) | | | 0.08 | | | (0.13) | | | 0.95 | | | (0.20) | | | 6.78 | | | (0.05) | | | 0.04 | |
Net income (loss) | $ | 0.25 | | | $ | 0.58 | | | $ | 0.28 | | | $ | 1.33 | | | $ | 0.07 | | | $ | 7.08 | | | $ | (0.60) | | | $ | 0.14 | |
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Note: The sum of the quarters' income per share may not equal the full year per share amounts.
(1) During the second and third quarters of 2022, we recognized pre-tax actuarial losses of $3.8 and $2.4, respectively, associated with our pension and postretirement benefit plans.
During the fourth quarter of 2022 and 2021, we recognized pre-tax actuarial gains of $8.0 and $9.9, respectively, associated with our pension and postretirement benefit plans.
During the third quarter of 2022, we recorded charges of $21.7 ($16.5 to continuing operations and $5.2 to discontinued operations) as a result of changes in estimates associated with the assets recorded for asbestos product liability matters.
During the fourth quarter of 2021, we recorded charges of $46.3 ($44.6 to continuing operations and $1.7 to discontinued operations) as a result of changes in estimates associated with the assets and liabilities recorded for asbestos product liability matters. See Note 15 for additional details.
During the fourth quarter of 2022, we recorded a loss of $73.9 as a result of the Asbestos Portfolio Sale.
During the fourth quarter of 2022, we recorded impairment charges of $13.4 related to (i) the goodwill and indefinite-lived intangible assets of ULC ($12.9) and (ii) certain other indefinite-lived intangible assets ($0.5).
During the fourth quarter of 2021, we recorded impairment charges of $5.7 related to (i) the goodwill and indefinite-lived intangible assets of ULC ($5.2) and (ii) certain other indefinite-lived intangible assets ($0.5).
(2) During the second quarter of 2021, we recorded tax benefits of $33.0 in “Income from discontinued operations, net of tax” including (i) $28.6 for the excess tax basis in the stock of Transformer Solutions and (ii) $4.4 for previously unrecognized state net operating losses, each as a result of the definitive agreement to sell the business.
As discussed in Note 1, on October 1, 2021, we completed the sale of Transformer Solutions for net cash proceeds of $620.6. In connection with the sale, we recorded a gain of $357.7 to “Gain (loss) on disposition of discontinued operations, net of tax” within our consolidated statement of operations for the third quarter 2021.
During the fourth quarter of 2021, we increased the gain on the sale of Transformer Solutions by $24.5, with the additional gain related primarily to the utilization of income tax benefits associated with liquidating certain recently acquired entities.
In the fourth quarter of 2021, and in connection with the completion of the wind-down of our DBT business, we recorded a charge of $19.9 to discontinued operations to reflect the write-off of historical currency translation amounts associated with DBT that had been previously reported within “Stockholders’ equity.”
(3) 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 2022 were April 2, July 2 and October 1, compared to the respective April 3, July 3 and October 2, 2021 dates. This practice only affects the quarterly reporting periods and not the annual reporting period. We had one less day in the first quarter of 2022 and had one more day in the fourth quarter of 2022 than in the respective 2021 periods.