SPX FLOW, INC. (All currency and share amounts are in millions, unless otherwise noted)
The following should be read in conjunction with the other sections of this
Annual Report on Form 10-K, including our audited consolidated financial
statements and the related notes and " Business ." The following discussion
contains certain forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors
including, but not limited to, those discussed under the heading " Risk
Factors ."
Our audited consolidated financial statements, which we discuss below, reflect
our historical financial condition, results of operations and cash flows. The
financial information discussed below and included in this Annual Report on Form
10-K, however, may not necessarily reflect what our financial condition, results
of operations or cash flows may be in the future.
We experienced the adverse impacts of the novel coronavirus pandemic ("COVID-19"
or the "COVID-19 pandemic") beginning in the first quarter of 2020 and these
adverse impacts continued through 2020 and 2021. Despite the adverse impacts,
there are no indications that the COVID-19 pandemic has resulted in a material
decline in the carrying value of any assets, or a material change in the
estimate of any contingent amounts, recorded in our consolidated balance sheet
as of December 31, 2021 . However, there is uncertainty as to the duration and
overall impact of the COVID-19 pandemic, including due to the emergence of
variants, which could result in an adverse material change in a future period to
the estimates we have made related to the valuation of assets and contingent
amounts, which could result in the impairment of certain assets or the
recognition of costs due to increases in contingent amounts.
Unless otherwise indicated, amounts reported in this MD&A pertain to continuing operations only.
EXECUTIVE OVERVIEWSPX FLOW, Inc. and its consolidated subsidiaries ("SPX FLOW ," ''the Company,'' "we," "us," or "our") operate in two business segments. In 2021,SPX FLOW had approximately$1.5 billion in annual revenues with approximately 40%, 35%, and 25% from sales into theAmericas , EMEA, andAsia Pacific regions, respectively, and with operations in more than 30 countries and sales in more than 140 countries.
Summary of Results from Continuing Operations
The following summary is intended to provide a few highlights of the discussion and analysis that follows (all comparisons are to the prior year):
Revenues
•In 2021, increased 13.2% to$1,529.0 , driven primarily by (i) an increase in organic revenue and, to a lesser extent, (ii) revenues associated with businesses acquired in the third quarter of 2020 and first and second quarters of 2021 and (iii) the weakening of theU.S. dollar against various foreign currencies during the period. The increase in organic revenue was driven primarily by higher volumes of revenue from (i) Nutrition and Health segment components and aftermarket products and, to a lesser extent, systems, and (ii) broad-based strengthening across most short-cycle Precision Solutions segment product lines, attributable primarily to increased demand due to reduced adverse effects of the COVID-19 pandemic. •In 2020, decreased 10.4% to$1,350.6 , due primarily to decreases in organic revenue in both business segments. The decreases in organic revenue were due primarily to (i) a lower level of revenue from Nutrition and Health systems projects, including large dry-dairy projects, and (ii) broad-based weakness across most Precision Solutions segment product lines, attributable primarily to reduced demand due to the effects of the COVID-19 pandemic.
Income before Income Taxes
•In 2021, increased from$49.5 to$119.9 . Among other items, the increase in pre-tax income was due primarily to the effects of an increase in segment income and, to a lesser extent, increases in various components of other income, net, reductions in interest expense, and the effects of recognition of a gain on the sale of the primary assets of a product line (in 2021) and a loss on the sale of a business (in 2020). 24 -------------------------------------------------------------------------------- •In 2020, decreased from$85.5 to$49.5 . Among other items, the decline in pre-tax income was due to (i) a reduction in segment income, resulting from the lower levels of organic revenue discussed above and (ii) the recognition of a loss on the early extinguishment of our senior notes dueAugust 2024 during the third quarter of 2020. Such reductions in pre-tax income were partially offset by the effect of a reduction in asset impairment charges, as the third quarter of 2019 included a charge related to the marketing of a corporate asset for sale which did not recur in 2020. Cash Flows from Operations •In 2021, decreased to$69.7 (from$120.3 in 2020), primarily as a result of increases in net working capital driven by (i) year-over-year organic volume growth of our business as well as (ii) our intentional plan to build certain types of inventory levels during the latter half of 2021 in order to continue to address customer needs and contractual scheduling requirements during a period of heightened global and broad-based supply chain disruption. •In 2020, decreased to$120.3 (from$130.1 in 2019), primarily as a result of reduced cash flows from lower segment income, due partially to the effects of the COVID-19 pandemic as previously noted.
RESULTS OF CONTINUING OPERATIONS
Cyclicality of End Markets, Seasonality and Competition - The financial results of many of our businesses closely follow changes in the industries and end markets they serve.
In our Nutrition and Health reportable segment, system revenues are highly correlated to timing on capital projects, which may cause significant fluctuations in our financial performance from period to period. Fluctuations in dairy commodity prices and production of dairy related products, particularly those aimed at serving theChina market, can influence the timing of capital spending by many end customers in our Nutrition and Health reportable segment. Although our businesses operate in highly competitive markets, our competitive position cannot be determined accurately in the aggregate or by segment since our competitors do not offer all the same product lines or serve all the same markets. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors. See " Business " for a discussion of our competitors. Non-GAAP Measures - Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations and business acquisitions which occurred in the third quarter of 2020 and first and second quarters of 2021, and a business disposal which occurred in the fourth quarter of 2020. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as, when read in conjunction with our revenues, it presents a tool to evaluate our ongoing operations and provides investors with a metric they can use to evaluate our management of assets held from period to period. In addition, organic revenue growth (decline) is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted inthe United States ("GAAP"), should not be considered a substitute for net revenue growth (decline) as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies. 25 --------------------------------------------------------------------------------
Years Ended
The following table provides selected financial information for the years endedDecember 31, 2021 , 2020 and 2019, including the reconciliation of organic revenue growth (decline) to net revenue growth (decline). Information related to our operating results for 2019 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K filed with the SEC and is incorporated by reference into this Annual Report on Form 10-K. Year ended December 31, 2021 2020 2019 2021 vs. 2020 % 2020 vs. 2019 % Revenues$ 1,529.0 $ 1,350.6 $ 1,506.6 13.2 (10.4) Gross profit 535.2 468.9 520.4 14.1 (9.9) % of revenues 35.0 % 34.7 % 34.5 % Selling, general and administrative 379.2 357.2 372.8 6.2 (4.2) % of revenues 24.8 % 26.4 % 24.7 % Intangible amortization 17.9 11.7 11.4 53.0 2.6 Asset impairment charges - 3.2 11.2 (100.0) (71.4) Restructuring and other related charges 12.7 11.7 9.3 8.5 25.8 Loss (gain) on sale of business and (5.6) 4.2 - * * product line assets Other income (expense), net 17.3 9.5 (0.5) 82.1 * Interest expense, net (16.0) (29.9) (29.7) (46.5) 0.7 Loss on early extinguishment of debt (12.4) (11.0) - 12.7 * Income from continuing operations before 119.9 49.5 85.5 142.2 (42.1) income taxes Income tax provision (53.5) (6.2) (28.9) * (78.5) Income from continuing operations 66.4 43.3 56.6 53.3 (23.5) Income (loss) from discontinued 0.7 (36.8) (149.7) (101.9) (75.4) operations, net of tax Net income (loss) 67.1 6.5 (93.1) * 107.0 Less: Net income attributable to 0.4 0.6 2.0 (33.3) (70.0) noncontrolling interests Net income (loss) attributable to SPX$ 66.7 $ 5.9 $ (95.1) * 106.2 FLOW, Inc. Components of consolidated revenue growth (decline): Organic 7.1 (10.3) Business combinations 3.8 0.1 Foreign currency 2.3 (0.2) Net revenue 13.2 (10.4) * Not meaningful for comparison purposes. Revenues - For 2021, the increase in revenues, compared to 2020, was driven primarily by (i) an increase in organic revenue and, to a lesser extent, (ii) revenues associated with businesses acquired in the third quarter of 2020 and first and second quarters of 2021 and (iii) the weakening of theU.S. dollar against various foreign currencies during the period. The increase in organic revenue was driven primarily by higher volumes of revenue from (i) Nutrition and Health segment components and aftermarket products and, to a lesser extent, systems, and (ii) broad-based strengthening across most short-cycle Precision Solutions segment product lines, attributable primarily to increased demand due to reduced adverse effects of the COVID-19 pandemic. For 2020, the decrease in revenues, compared to 2019, was primarily due to (i) a decrease in organic revenue and, to a modest extent, (ii) a strengthening of theU.S. dollar during the period against various foreign currencies, partially offset by (iii) revenues associated with a business acquired in the third quarter of 2020. The decrease in organic revenue was due to (i) a lower level of systems revenue in our Nutrition and Health segment, including large dry-dairy systems revenues, as anticipated, as well as lower components and aftermarket service revenues, and (ii) reduced demand and shipments across the majority of our short-cycle Precision Solutions segment product lines and end markets, primarily associated with global macroeconomic conditions resulting from the effects of the COVID-19 pandemic. Additionally, the Precision Solutions segment had lower opening shippable backlog in 2020 than in 2019.
See " Results of Reportable Segments " for additional details.
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Gross Profit - For 2021, the increase in gross profit, compared to 2020, was
driven primarily by the increased revenues as noted above. The increase in gross
margin, compared to 2020, was primarily attributable to the favorable impact on
operating leverage of the higher volumes of revenues, favorable price
realization, and an improved mix of higher-quality revenue in our Nutrition and
Health segment, the favorable effects of which were partially mitigated by
inflationary pressures in certain operational areas such as freight and certain
types of labor costs.
For 2020, the decrease in gross profit, compared to 2019, was due primarily to
the decrease in organic revenue discussed above. The effects of the reduction in
volumes in both segments on margin in 2020, compared to 2019, were more than
offset by strong operational and project execution on an improved mix of
revenue, savings from cost reduction actions and net price benefits.
See " Results of Reportable Segments " for additional details.
Selling, General and Administrative ("SG&A") Expense - For 2021, the increase in
SG&A expense, compared to 2020, was due primarily to (i) SG&A expense associated
with businesses acquired in 2021 and the related transaction costs incurred in
connection with completing such acquisitions, (ii) professional fees incurred in
connection with the Merger Agreement, (iii) the weakening of the U.S. dollar
against various foreign currencies during the period and, to a lesser extent,
(iv) increases in stock-based compensation costs. These increases in costs were
partially offset by savings from (i) reductions in force associated with
restructuring actions taken in 2020, as well as in connection with our global
cost productivity program initiated during the first quarter of 2021, and (ii)
reductions in discretionary spending.
For 2020, the decrease in SG&A expense, compared to 2019, was due primarily to lower variable selling costs, resulting from the decline in organic revenue volumes discussed above, as well as savings from cost reduction actions and reductions in discretionary spending. Such reductions in SG&A expense were partially offset by an increase in variable incentive compensation.
Intangible Amortization - For 2021, the increase in intangible amortization, compared to 2020, was primarily due to amortization of intangible assets acquired in the POSI LOCK,UTG Mixing Group and Philadelphia Mixing acquisitions closed in the third quarter of 2020 and first and second quarters of 2021, respectively.
For 2020, the increase in intangible amortization, compared to 2019, was primarily due to the effects of amortization recognized on intangibles acquired in connection with the POSI-LOCK acquisition, which occurred in the third quarter of 2020.
Asset Impairment Charges - During 2020, we recorded an asset impairment charge of$3.2 , of which (i)$1.9 resulted from management's decision during the first quarter of 2020 to discontinue a product line within the Precision Solutions reportable segment, and (ii)$1.3 resulted from management's decision during the second quarter of 2020 to consolidate and relocate the operations of aU.S. manufacturing facility within the Precision Solutions reportable segment to existing facilities in theU.S. as well as in our EMEA andAsia Pacific regions.
See Note 10 to our consolidated financial statements for further discussion of asset impairment charges.
Restructuring and Other Related Charges - Restructuring and other related charges for 2021 related to a global cost productivity program initiated during the first quarter of 2021. For 2021,$12.2 of these charges related primarily to severance and other costs associated with the termination of commercial, engineering and certain operational employees across both segments and across each region in which our segments operate, as well as certain functional support employees across most of our corporate functions. The remaining$0.5 of restructuring charges in 2021 related to certain facility consolidation costs, including the closure and relocation of operations of aU.S. manufacturing facility, initiated in 2020 and as discussed further below. For 2020,$9.8 of our restructuring charges were related primarily to reductions in force of certain engineering, commercial, operations and other functional support employees within our segments, across all regions in which the segments operate, and the rationalization and outsourcing of certain corporate support functions. The remaining$1.9 of restructuring charges in 2020 related primarily to the consolidation and relocation of the operations of aU.S. manufacturing facility to existing facilities in theU.S. as well as in our EMEA andAsia Pacific regions.
See Note 8 to our consolidated financial statements for the details of restructuring actions taken in 2021, 2020 and 2019.
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Loss (Gain) on Sale of Business and Product Line Assets - On July 30, 2021 , we
completed the sale of the primary assets of a product line to a third-party
buyer for cash proceeds of $8.0 . Revenues associated with this product line were
less than $4.0 in 2020, and the results of this product line are included in our
Precision Solutions reportable segment. In connection with the sale, goodwill of
$1.6 , trademarks of $0.5 and inventories of $0.3 were disposed of, and we
recorded a pre-tax gain of $5.6 during our third quarter of 2021.
In November 2020 , we completed the sale of a business in our Precision Solutions
segment in the Asia Pacific region to a third-party buyer for total proceeds of
$4.7 net of cash disposed, which resulted in a pre-tax loss of $4.2 during the
fourth quarter of 2020. Prior to its sale, this business recognized revenues of
$6.7 during 2020.
See N ote 4 to our consolidated financial statements for further details regarding these disposals.
Other Income (Expense), net - Other income, net, for 2021 was composed of investment-related gains of$11.9 , net gains on other asset sales of$2.2 , income from a transition services agreement (the "TSA") entered into in connection with the sale of our former Power and Energy segment of$1.9 , and non-service-related pension and postretirement benefit income of$1.9 , partially offset by foreign currency ("FX") losses of$0.6 . The investment-related gains related to an increase in the net asset value of our investment in an equity security (see Note 17 to our consolidated financial statements for additional details). See Note 4 for additional details regarding the TSA and Note 11 for additional details regarding results associated with our pension and postretirement benefit plans. Other income, net, for 2020 was composed of investment-related gains of$8.6 , income from theTSA of$4.2 , net gains on asset sales and other of$2.5 , partially offset by non-service-related pension and postretirement benefit costs of$2.4 and FX losses of$3.4 . The investment-related gains related to an increase in the net asset value of our investment in an equity security. Interest Expense, net - Interest expense, net, was comprised primarily of interest expense related to our senior credit facilities and former senior notes and, to a lesser extent, finance lease obligations and miscellaneous lines of credit, partially offset by interest income on cash and cash equivalents. Interest expense, net, included interest expense of$19.1 ,$33.9 , and$36.6 and interest income of$3.1 ,$4.0 , and$6.9 during 2021, 2020 and 2019, respectively. The decrease in interest expense in 2021, compared to 2020, was due primarily to the early redemption of our 5.625% senior notes inAugust 2020 and 5.875% senior notes inSeptember 2021 . The decrease in interest expense in 2020, compared to 2019, was due primarily to the early redemption of our 5.625% senior notes inAugust 2020 , and a lower level of average outstanding borrowings under our former term loan facilities. See Note 13 to our consolidated financial statements for additional details on our third-party debt, including further discussion of (i) the early redemption of our 5.625% senior notes during the third quarter of 2020, (ii) the early redemption of our 5.875% senior notes during the third quarter of 2021, and (iii) the amendment of our senior credit facilities during the third quarter of 2021, and Note 4 for additional details regarding our allocation of certain interest expense to discontinued operations. Loss on Early Extinguishment of Debt - OnSeptember 2, 2021 , with a cash payment, we redeemed our 5.875% senior notes due inAugust 2026 (the "2026 Notes") in full, pursuant to the redemption provisions of the indenture governing the 2026 Notes. As a result of the redemption, we recorded a charge of$11.3 during 2021, which related to premiums paid to redeem the 2026 Notes of$8.8 and the write-off of unamortized deferred financing fees of$2.5 . In addition, onAugust 3, 2021 , we amended and restated our senior credit facilities, and recorded a charge of$1.1 during 2021 which related primarily to the write-off of unamortized deferred financing fees associated with the former senior credit facilities. OnAugust 15, 2020 , with a cash payment, we redeemed our 5.625% senior notes due inAugust 2024 (the "2024 Notes") in full, pursuant to the redemption provisions of the indenture governing the 2024 Notes. As a result of the redemption, we recorded a charge of$11.0 during 2020, which related to premiums paid to redeem the 2024 Notes of$8.4 , the write-off of unamortized deferred financing fees of$2.5 , and other costs associated with the extinguishment of$0.1 . Income Tax Provision - During 2021, we recorded an income tax provision of$53.5 on$119.9 of income before income taxes, resulting in an effective tax rate of 44.6%. The effective tax rate for 2021 was impacted by income tax charges of (i)$9.5 resulting from withholding and other taxes on amounts which the Company intends to distribute from certain of its subsidiaries in theAsia Pacific region, (ii)$4.5 resulting from the disallowance of tax year 2020 interest deductions pursuant to the German Act Implementing the EU Anti-Tax Avoidance Directive, enactedJune 30, 2021 , (iii)$2.3 resulting from certain federal tax return adjustments, (iv)$1.7 resulting from examinations by taxing authorities of certain of the Company's subsidiaries, and (v)$1.0 related to transfer pricing adjustments. 28 -------------------------------------------------------------------------------- During 2020, we recorded an income tax provision of$6.2 on$49.5 of income before income taxes, resulting in an effective tax rate of 12.5%. The effective tax rate for 2020 was impacted by income tax benefits of (i)$7.2 resulting from adjustments to the deemed repatriation tax and certain additional foreign tax credits from the re-characterization of a prior outbound transfer of an affiliate to non-U.S. entities, (ii)$3.0 related to an intercompany transfer of a business between certain of the Company's non-U.S. subsidiaries, (iii)$1.9 related to a reduction in valuation allowance in a jurisdiction where the full benefit of the incentive carryforward is now expected to be realized, and (iv)$1.2 resulting from tax return adjustments for certain of the Company's subsidiaries, which were partially offset by income tax charges of$1.6 related to an increase in valuation allowance related to certain jurisdictions where the tax benefit of losses are no longer expected to be realized.
Income (Loss) from Discontinued Operations, Net of Tax - See " Results of Discontinued Operations " below for additional details.
RESULTS OF REPORTABLE SEGMENTS
The following information should be read in conjunction with our consolidated
financial statements and related notes. Information related to the results of
reportable segments for 2019 is included in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our 2020 Form
10-K filed with the SEC and is incorporated by reference into this Annual
Report on Form 10-K.
Non-GAAP Measures - Throughout the following discussion of reportable segments,
we use "organic revenue" growth (decline) to facilitate explanation of the
operating performance of our reportable segments. Organic revenue growth
(decline) is a non-GAAP financial measure and is not a substitute for net
revenue growth (decline). Refer to the explanation of this measure and purpose
of use by management under " Results of Continuing Operations - Non-GAAP
Measures."
Nutrition and Health
Year ended December 31,
2021 2020 2019 2021 vs. 2020% 2020 vs. 2019%
Backlog $ 283.1 $ 291.6 $ 275.3 (2.9) 5.9
Orders 699.0 635.1 669.0 10.1 (5.1)
Revenues $ 676.4 $ 630.8 $ 702.9 7.2 (10.3)
Income 110.0 88.2 90.5 24.7 (2.5)
% of revenues 16.3 % 14.0 % 12.9 %
Components of revenue growth
(decline):
Organic 4.9 (10.1)
Foreign currency 2.3 (0.2)
Net revenue 7.2 (10.3)
Revenues - For 2021, the increase in revenues, compared to 2020, was driven
primarily by an increase in organic revenue and, to a lesser extent, a weakening
of the U.S. dollar during the period against various foreign currencies. The
increase in organic revenue was due to higher volumes of components and
aftermarket revenues and, to a lesser degree, of systems revenues, partially
attributable to reduced adverse effects of the COVID-19 pandemic.
For 2020, the decrease in revenues, compared to 2019, was due to a decrease in
organic revenue and, to a lesser extent, a strengthening of the U.S. dollar
during the period against various foreign currencies. The decrease in organic
revenue was primarily due to a lower level of systems revenue, including large
dry-dairy systems revenues, as anticipated, as well as lower components and
aftermarket service revenues.
Income - For 2021, income and margin increased, compared to 2020, driven
primarily by the favorable impact on operating leverage of higher volumes of
revenues, an improved mix of higher-quality revenue and cost savings from the
global cost productivity program noted above, partially offset by the effects of
inflationary pressures in certain operational areas such as freight and certain
types of labor costs.
For 2020, the moderate decrease in income, compared to 2019, was primarily due
to the decrease in organic revenue described above. The effect of the reduction
in volume on margin in 2020, compared to 2019, was more than offset by strong
operational and project execution on an improved mix of revenue, savings from
cost reduction actions and net price benefits.
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Backlog - The segment had backlog of $283.1 and $291.6 as of December 31, 2021
and 2020, respectively. Of the $8.5 year-over-year decrease in backlog, $10.2
resulted from the unfavorable impact of fluctuations in foreign currencies
relative to the U.S. dollar, offset by a $1.7 organic increase. Approximately
90% of the segment's backlog as of December 31, 2021 is expected to be
recognized as revenue during 2022.
Precision Solutions
Year ended December 31,
2021 2020 2019 2021 vs. 2020% 2020 vs. 2019%
Backlog $ 326.6 $ 254.2 $ 243.9 28.5 4.2
Orders 880.9 723.6 790.5 21.7 (8.5)
Revenues $ 852.6 $ 719.8 $ 803.7 18.4 (10.4)
Income 98.2 80.5 110.5 22.0 (27.1)
% of revenues 11.5 % 11.2 % 13.7 %
Components of revenue growth
(decline):
Organic 9.0 (10.5)
Business combinations 7.1 0.3
Foreign currency 2.3 (0.2)
Net revenue 18.4 (10.4)
Revenues - For 2021, the increase in revenues, compared to 2020, was driven
primarily by (i) an increase in organic revenue, (ii) revenues associated with
businesses acquired in the third quarter of 2020 and first and second quarters
of 2021, and, to a lesser extent, (iii) a weakening of the U.S. dollar during
the period against various foreign currencies. The increase in organic revenue
was driven primarily by increased shipments across substantially all of our
short-cycle Precision Solutions segment product lines and end markets, primarily
associated with reduced adverse effects of the COVID-19 pandemic, partially
offset by a decline in heat exchanger shipments due in part to an increased
selectivity of heat exchanger orders accepted by the Company.
For 2020, the decrease in revenues, compared to 2019, was primarily due to (i) a
decrease in organic revenue and, to a modest extent, (ii) a strengthening of the
U.S. dollar during the period against various foreign currencies, partially
offset by (iii) revenues associated with a business acquired in the third
quarter of 2020. The decrease in organic revenue was due to reduced demand and
shipments across the majority of our short-cycle Precision Solutions segment
product lines and end markets, primarily associated with global macroeconomic
conditions resulting from the effects of the COVID-19 pandemic. Additionally,
the segment had lower opening shippable backlog in 2020 than in 2019.
Income - For 2021, income and margin increased, compared to 2020, primarily
driven by higher volumes of revenues as discussed above and improved operating
leverage on such higher volumes, favorable impacts of price realization, and
cost savings realized from our global cost productivity program announced during
the first quarter of 2021, partially offset by the effects of cost increases in
certain operational areas such as freight and certain types of labor costs,
increased intangible amortization expense and amortization of fair value
adjustments to inventory acquired in business combinations.
For 2020, income and margin decreased, compared to 2019, primarily due to broad-based volume declines, including less favorable mix. The income and margin declines were partially offset by cost reduction efforts.
Backlog - The segment had backlog of$326.6 and$254.2 as ofDecember 31, 2021 and 2020, respectively. The$72.4 year-over-year increase in backlog was attributable to (i) a$39.4 increase in backlog related to legacy operations, reflecting organic order growth across substantially all of our short-cycle Precision Solutions segment product lines (partially offset by a decline in heat exchanger orders due in part to an increased selectivity of such orders accepted by the Company) and (ii) a$39.1 increase in backlog associated with acquired businesses, partially offset by (iii) a$6.1 unfavorable impact of fluctuations in foreign currencies relative to theU.S. Dollar. Approximately 96% of the segment's backlog as ofDecember 31, 2021 is expected to be recognized as revenue during 2022. 30 --------------------------------------------------------------------------------
CORPORATE EXPENSE AND PENSION AND POSTRETIREMENT SERVICE COSTS
Year ended December 31,
2021 2020 2019 2021 vs. 2020 % 2020 vs. 2019 %
Total consolidated revenues $ 1,529.0 $ 1,350.6 $ 1,506.6 13.2 (10.4)
Corporate expense 69.2 67.8 63.9 2.1 6.1
% of revenues 4.5 % 5.0 % 4.2 %
Pension and postretirement service costs 0.9 0.9 0.9 - -
Corporate Expense - Corporate expense generally relates to the cost of our
Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai,
China . Corporate expense also reflects stock-based compensation costs associated
with corporate employees.
The increase in corporate expense during 2021, compared to 2020, was due
primarily to the effects of increased professional fees and transaction costs
associated with the Merger Agreement and completing the UTG Mixing Group and
Philadelphia Mixing acquisitions in 2021 and, to a lesser extent, increased
stock-based compensation costs. Such increases in corporate expense were
partially offset by actions taken to manage costs on a year-over-year basis,
including (i) reductions in force of certain functional support employees across
most of our corporate functions and (ii) reductions in discretionary spending,
related to our global cost productivity program announced during the first
quarter of 2021, as well as in response to the ongoing effects of the COVID-19
pandemic.
The increase in corporate expense during 2020, compared to 2019, was due
primarily to (i) an increase in variable incentive compensation and (ii) merger
and acquisition activities, partially offset by a reduction in professional fees
associated with the further development of the Company's enterprise strategy and
long-term value creation planning.
See Note 15 to our consolidated financial statements for further details regarding our stock-based compensation awards.
Pension and Postretirement Service Costs - The Company sponsors a number of defined benefit pension plans and a postretirement plan. For all of these plans, changes in the fair value of plan assets and actuarial gains and losses are recognized in earnings in the fourth quarter of each year as a component of net periodic benefit expense, unless earlier remeasurement is required. The remaining components of pension and postretirement expense, primarily service and interest costs and expected return on plan assets, are recorded on a quarterly basis. Non-service-related pension and postretirement costs (benefits) are recorded in "Other income (expense), net." During 2021, 2020 and 2019, pension and postretirement service costs remained consistent as there were no significant changes to plans, plan participation or vesting.
See Note 11 to our consolidated financial statements for further details regarding our pension and postretirement plans.
RESULTS OF DISCONTINUED OPERATIONS
We report business or asset groups as discontinued operations when, among other
things, we commit to a plan to divest the business or asset group, we actively
begin marketing the business or asset group, and when the sale of the business
or asset group is deemed probable of occurrence within the next twelve months.
Information related to the results of discontinued operations in 2019 is
included in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our 2020 Form 10-K filed with the SEC and is
incorporated by reference into this Annual Report on Form 10-K.
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The following table provides selected financial information of our discontinued
operations for the years ended
Year ended December 31,
2021 2020 2019 2021 vs. 2020 % 2020 vs. 2019 %
Backlog $ - $ - $ 382.6 * *
Orders - 102.9 496.7 * *
Revenues - 112.7 489.7 * *
Operating income (loss) 1.1 (7.4) (171.6) * *
% of revenues * (6.6) % (35.0) %
Other income (expense), net - (0.3) (1.6) * *
Interest expense, net - (1.6) (11.8) * *
Income tax benefit (provision) (0.4) (27.5) 35.3 * *
Income (loss) from discontinued 0.7
operations, net of tax (36.8) (149.7) * *
*Not meaningful for comparison purposes, note that the 2020 results represent results of discontinued operations substantially through the
closing of the sale in
Revenues of Discontinued Operations - For 2020, the decrease in revenues,
compared to 2019, is a result of the timing of the closing of the sale with the
Buyer, which was substantially finalized on
Operating Income (Loss) of Discontinued Operations - For 2021, the operating income was primarily due to the collection during 2021 of certain previously aged and fully-reserved trade accounts receivable balances for which the Company had the rights to recovery, based on a provision contained in the sale agreement with the Buyer. For 2020, the operating loss was primarily due to (i) the recognition of a loss on discontinued operations of$12.1 to reduce the carrying value of the discontinued operations business to our estimate of fair value (the net proceeds expected to be realized at closing), less estimated costs to sell and, to a lesser extent, to reflect the results of subsequent negotiations with the Buyer related to the settlement of net working capital and related deductions, as well as (ii) the timing within the year of the closing of the sale with the Buyer, substantially finalized onMarch 30, 2020 .
Other Income (Expense), net, of Discontinued Operations - Other expense, net, for 2020 was composed of FX losses.
Interest Expense, net, of Discontinued Operations - In addition to any business-specific interest expense and income, the interest expense, net, of discontinued operations reflects an allocation of interest expense, including the amortization of deferred financing fees, related to the Company's former senior notes, former senior credit facilities and former trade receivables financing arrangement. Interest expense related to such debt instruments and allocated to discontinued operations was$1.6 and$11.7 for 2020 and 2019, respectively. See Note 4 to the accompanying consolidated financial statements for further information about the allocation of such interest expense to discontinued operations.
Income Tax Benefit (Provision) of Discontinued Operations - During 2021, we
recorded an income tax provision of
During 2020, we recorded an income tax provision of$27.5 on$9.3 of pre-tax loss from discontinued operations. The effective tax rate for 2020 was impacted by income tax charges of (i)$32.1 composed of theU.S. tax expense on the tax gain on sale of discontinued operations entities sold by theU.S. parent, (ii)$0.9 in reduction of the benefit to be realized through the disposition of held-for-sale assets and (iii)$0.4 resulting from adjustments to theU.S. tax liability for prior years, which were partially offset by an income tax benefit of$5.8 related to a loss for global intangible low-taxed income purposes on the sale of certain non-U.S. entities. The significant non-U.S. sales of discontinued operations entities were in locations where local law did not require any gain to be taxed or permit any loss to result in a future benefit and on a net basis these significant non-U.S. sales resulted in a loss without a corresponding tax benefit.
See Note 4 for additional information regarding discontinued operations.
32
--------------------------------------------------------------------------------LIQUIDITY AND FINANCIAL CONDITION
Listed below are the cash flows from (used in) operating, investing, and financing activities, as well as the net change in cash, cash equivalents and restricted cash, for the years endedDecember 31, 2021 , 2020 and 2019. Information related to liquidity and financial condition for 2019 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K filed with the SEC and is incorporated by reference into this Annual Report on Form 10-K. Cash Flow Year ended December 31, 2021 2020 2019 Cash flows from (used in) continuing operations: Cash flows from operating activities$ 69.7 $ 120.3 $ 130.1 Cash flows used in investing activities (122.8) (21.9) (23.5) Cash flows used in financing activities (64.4) (361.4) (55.2) Cash flows from discontinued operations 0.9 387.7 35.1
Change in cash, cash equivalents and restricted cash due to changes in foreign currency exchange rates
(11.1) 13.5 2.6
Net change in cash, cash equivalents and restricted cash
Operating Activities - During 2021, the decrease in cash flows from operating activities, compared to 2020, was primarily attributable to increases in net working capital driven by (i) year-over-year organic volume growth of our business as well as (ii) our intentional plan to build certain types of inventory levels during the latter half of 2021 in order to continue to address customer needs and contractual scheduling requirements during a period of heightened global and broad-based supply chain disruption.
During 2020, the decrease in cash flows from operating activities, compared to 2019, was primarily attributable to reduced cash flows from lower segment income, due partially to the effects of the COVID-19 pandemic as previously noted.
Investing Activities - During 2021, cash flows used in investing activities were comprised of cash paid for the acquisitions ofUTG Mixing Group andPhiladelphia Mixing, net of cash acquired, of$102.3 and, to a lesser extent, capital expenditures of$32.6 associated generally with the upgrades of manufacturing facilities and information technology, partially offset by proceeds from the sale of the primary assets of a product line previously reported in our Precision Solutions segment of$8.0 , which closed in the third quarter of 2021, and proceeds from certain asset sales and other of$4.1 , primarily related to sale of certain real property previously owned by the Company. During 2020, cash flows used in investing activities were comprised of capital expenditures of$22.4 associated generally with the upgrades of manufacturing facilities and information technology, as well as cash paid for the acquisition of POSI LOCK of$10.0 , partially offset by proceeds from asset sales and other of$5.8 , primarily related to the sales of certain real properties previously owned by the Company, and proceeds from the sale of a business based in ourAsia Pacific region of$4.7 , which closed during the fourth quarter of 2020. Financing Activities - During 2021, cash flows used in financing activities related primarily to (i) the redemption of the 2026 Notes, including premiums, of$308.8 , (ii) the repayment and extinguishment of our former term loan of$100.0 , (iii) purchases of common stock of$40.2 associated with a written trading plan under Rule 10b5-1(c) of the Securities and Exchange Act of 1934, as amended, (iv) payments of minimum withholdings on behalf of employees in connection with net share settlements of$12.7 and (v) dividend payments of$11.4 , partially offset by borrowings under the term loan facilities of our amended senior credit facilities of$400.0 and proceeds received from the exercise of employee stock options of$17.6 . During 2020, cash flows used in financing activities related primarily to (i) the redemption of the 2024 Notes, including premiums, of$308.4 , (ii) purchases of common stock of$19.9 associated with a written trading plan under Rule 10b5-1(c) of the Securities and Exchange Act of 1934, as amended, (iii) the purchase of certain noncontrolling interests in a subsidiary of$15.0 , (iv) repayments of purchase card program debt of$7.9 , and (v) payments of minimum withholdings on behalf of employees in connection with net share settlements of$7.0 . Discontinued Operations - During 2020, cash flows from discontinued operations were comprised primarily of net proceeds received from the disposition of theDisposal Group of$401.1 , net cash used in operating activities of discontinued operations of$7.6 primarily related to the payment of professional fees associated with the disposition of theDisposal Group , and capital expenditures during the first quarter of 2020 of$5.5 related to theDisposal Group . 33 -------------------------------------------------------------------------------- Change in Cash, Cash Equivalents and Restricted Cash due to Changes in Foreign Currency Exchange Rates - The (decrease)/increase in cash, cash equivalents and restricted cash due to foreign currency exchange rates of$(11.1) and$13.5 during 2021 and 2020, respectively, reflected primarily a (decrease)/increase inU.S. dollar equivalent balances of foreign-denominated cash, cash equivalents and restricted cash as a result of changes in theU.S. dollar against various foreign currencies during the respective periods.
Borrowings and Availability
Borrowings
Debt at
December 31,
2021 2020
Term loans, due in August 2026 $ 395.0 $ -
Former term loan(1) - 100.0
5.875% senior notes (2) - 300.0
Other indebtedness(3) 14.0 13.0
Less: deferred financing fees(4) (1.1) (3.1)
Total debt 407.9 409.9
Less: short-term debt 13.8 12.5
Less: current maturities of long-term debt 20.0 0.1 Total long-term debt
$ 374.1 $ 397.3 (1)As discussed further below, onAugust 3, 2021 , and as subsequently amended onAugust 16, 2021 , we entered into amended and restated senior credit facilities with a syndicate of lenders. In connection with the amendment and restatement, our former term loan facility was extinguished and we entered into a new term loan facility. In connection with the amendment and extinguishment of the former term loan and other related facilities, we recorded a pre-tax charge of$1.1 to "Loss on early extinguishment of debt" during our third quarter of 2021 which was primarily related to the write-off of certain unamortized deferred financing fees. (2)As discussed further below, onSeptember 2, 2021 , we redeemed our 5.875% Senior Notes due in 2026 (the "2026 Notes") in full, pursuant to the redemption provisions of the indenture governing the 2026 Notes for a total redemption price of$308.8 , plus accrued and unpaid interest. As a result of the redemption, we recorded a pre-tax charge of$11.3 to "Loss on early extinguishment of debt" during our third quarter of 2021, which related to premiums paid to redeem the 2026 Notes of$8.8 and the write-off of unamortized deferred financing fees of$2.5 . (3)Primarily includes balances under a purchase card program of$13.8 and$12.5 and finance lease obligations of$0.2 and$0.5 as ofDecember 31, 2021 and 2020, respectively. The purchase card program allows for payment beyond the normal payment terms for goods and services acquired under the program. As this arrangement extends the payment of these purchases beyond their normal payment terms through third-party lending institutions, we have classified these amounts as short-term debt. (4)As ofDecember 31, 2021 , deferred financing fees were comprised of fees related to the term loans due inAugust 2026 . As ofDecember 31, 2020 , deferred financing fees were comprised of fees related to the 2026 Notes and the former term loan.
Amendment and Restatement of Senior Credit Facilities
On
•a domestic revolving credit facility, available for loans and letters of
credit, in an aggregate principal amount up to
•a global revolving credit facility, available for loans in Euros, Sterling, and
other currencies, in an aggregate principal amount up to the equivalent of
•a bilateral foreign credit instrument facility, available for performance letters of credit and guarantees in Euros, Sterling, and other currencies, in an aggregate principal amount up to the equivalent of$105.6 , with a final maturity ofAugust 3, 2026 ; and
•term loan facilities in an aggregate principal amount of
34
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Our senior credit facilities contain 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, or engage in certain transactions with affiliates, and
otherwise restrict certain corporate activities. Our senior credit facilities
contain customary representations, warranties, affirmative covenants and events
of default. Indebtedness under our senior credit facilities is secured by a
pledge of the capital stock of domestic subsidiaries and 65% of the capital
stock of material first-tier foreign subsidiaries (in each case subject to
certain exceptions), security interests and liens on substantially all of the
personal property of the Company and its domestic subsidiaries guaranteeing such
indebtedness (subject to certain exceptions) and a lien on our corporate
headquarters.
At
Refer to Note 13 to our consolidated financial statements for further information regarding (i) our redemption of the full principal amount of the 2026 Notes, and (ii) the amendment and restatement of our senior credit facilities.
Availability
AtDecember 31, 2021 , we had$495.6 of borrowing capacity under our revolving credit facilities after giving effect to$4.4 reserved for outstanding letters of credit. In addition, atDecember 31, 2021 , we had$47.2 of available issuance capacity under our foreign credit instrument facilities after giving effect to$55.3 reserved for outstanding bank guarantees and$3.1 of outstanding bank guarantees that are in the process of being re-issued under the amended and restated foreign credit instrument facilities but which do not represent additional available capacity.
Refer to Note 13 to our consolidated financial statements for further
information on our borrowings as of
Financial Instruments
We measure our financial assets and liabilities on a recurring basis, and nonfinancial assets and liabilities on a non-recurring basis, at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or significant unobservable inputs (Level 3). Our derivative financial assets and liabilities include FX forward contracts and FX embedded derivatives measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments active. As ofDecember 31, 2021 , there had been no significant impact to the fair value of our derivative liabilities due to our own credit risk as the related instruments were 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. We primarily use the income approach, market approach, or both approaches, as appropriate. The income approach uses valuation techniques to convert future amounts to a single present amount. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Assets and liabilities measured at fair value on a recurring basis are further discussed below.
Currency Forward Contracts and Currency Forward Embedded Derivatives
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 (see
Note 14 to our consolidated financial statements). Our principal currency exposures relate to the Euro, Chinese Yuan and British Pound.
35
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We had FX forward contracts with an aggregate notional amount of $39.2 and $40.7
outstanding as of December 31, 2021 and 2020, respectively, with all such
contracts scheduled to mature within one year. We also had FX embedded
derivatives with an aggregate notional amount of $0.0 and $5.5 at December 31,
2021 and 2020, respectively. There were no unrealized gains or losses recorded
in "Accumulated Other Comprehensive Loss" related to FX forward contracts as of
December 31, 2021 and 2020. The net losses recorded in "Other income (expense),
net" related to FX losses totaled $0.6 , $3.4 and $3.1 for the years ended
December 31, 2021 , 2020 and 2019, respectively.
The net fair values of our FX forward contracts and FX embedded derivatives were
Other Fair Value Financial Assets and Liabilities
The carrying amounts of cash and equivalents, receivables and contract assets reported in our consolidated balance sheets approximate fair value due to the short-term nature of those instruments. The fair value of our debt instruments (excluding finance leases and deferred financing fees), based on borrowing rates available to us atDecember 31, 2021 for similar debt, was$408.8 , compared to our carrying value of$408.8 .
As of
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and equivalents, trade accounts receivable, contract assets and FX forward contracts. These financial instruments, other than trade accounts receivable and contract assets, 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, 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. Except as is provided for in our accompanying consolidated balance sheets through an allowance for uncollectible accounts for certain accounts receivable, we anticipate 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 and contract assets 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 the fiscal years endedDecember 31, 2021 , 2020 and 2019.
Cash and Other Commitments
We use operating leases to finance certain properties, equipment and vehicles. AtDecember 31, 2021 , we had$50.5 of operating lease liabilities recognized on our consolidated balance sheet related to leases with initial non-cancelable terms in excess of one year. See Note 7 to our accompanying consolidated financial statements for further information regarding our operating leases. Capital expenditures for 2021 totaled$32.6 , compared to$22.4 and$28.5 in 2020 and 2019, respectively. Capital expenditures in 2021 related primarily to upgrades of manufacturing facilities and information technology. We expect 2022 capital expenditures to approximate$40 , with a significant portion related to additional upgrades of manufacturing facilities and information technology, as well as for manufacturing equipment to support productivity initiatives. While the impact of continued market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs and internal growth opportunities. 36 -------------------------------------------------------------------------------- In 2021, we made contributions and direct benefit payments of$2.6 to our defined benefit pension and postretirement plans. We expect to make$3.7 of minimum required funding contributions and direct benefit payments in 2022. Our pension plans have not experienced any liquidity difficulties or counterparty defaults due to the volatility in the credit markets. See Note 11 to our consolidated financial statements for further disclosure of expected future contributions and benefit payments. On a net basis, from both continuing and discontinued operations, we paid$45.6 ,$28.1 and$33.6 in income taxes in 2021, 2020 and 2019, respectively. The amount of income taxes we pay annually is dependent on various factors, including the timing of certain deductions. Deductions and the amount of income taxes can and do vary from year to year. See Note 12 to our consolidated financial statements for further disclosure of earnings held by foreign subsidiaries, amounts considered permanently reinvested, and our intentions with respect to repatriation of earnings. As of December 31, 2021, except as discussed in Note 16 to our consolidated financial statements and in the contractual obligation amounts discussed below, we did not have any material guarantees, off-balance sheet arrangements or purchase commitments. We periodically review each of our businesses in order to determine their long-term strategic fit. These reviews could result in selected acquisitions to expand an existing business or result in the disposition of an existing business. See " Risk Factors ," " Results of Reportable Segments " included in this " MD&A ," and " Business " for an understanding of the risks, uncertainties and trends facing our businesses. We enter into a variety of contractual obligations in connection with the execution of our business, in addition to capital expenditures. As ofDecember 31, 2021 , we had (i) debt obligations related to our$395.0 term loans which mature in 2026 and include cash interest payments of$5.7 in 2022 and$18.8 thereafter through 2026, (ii) operating and finance lease obligations that total$16.0 in cash payments in 2022 and$40.2 thereafter through 2026 and (iii) purchase obligations for raw materials and other parts of approximately$196.9 which we will incur during 2022. We expect to fund these cash requirements from cash on hand and cash generated from operations. Repayment of term loan balances due at maturity are expected to be funded by cash on hand and proceeds from refinancing, if necessary. We believe that our cash flows, together with cash and equivalents on hand, and availability under revolving credit facilities, provide us with the ability to fund our operations and make planned capital expenditure payments for at least the next twelve months. However, such cash flows are dependent upon our future operating performance which, in turn, is subject to prevailing economic conditions, the effects of the COVID-19 pandemic, and to financial, business and other factors, including the conditions of our markets, some of which are beyond our control. If, in the future, we cannot generate sufficient cash from operations to meet any future debt service obligations, we would need to refinance such debt obligations, obtain additional financing or sell assets. We cannot assure you that our business will generate cash from operations, or that we will be able to obtain financing from other sources, sufficient to satisfy any such debt service or other requirements.
OTHER MATTERS
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties are listed below. This section should be read in conjunction with Note 1 and Note 2 to our consolidated financial statements, which include a detailed discussion of these and other accounting policies.
Contract Revenues Recognized Over Time
Certain of our businesses recognize revenues and profits from long-term construction/installation contracts over time. Such method requires estimates of future revenues and costs over the full term of product delivery. We measure our performance, or percentage-of-completion, principally by the contract costs incurred to date as a percentage of the estimated total costs for that contract at completion. Under such method, we recognized revenues of$329.6 ,$289.7 and$343.7 during the years endedDecember 31, 2021 , 2020 and 2019, respectively. 37 -------------------------------------------------------------------------------- We record any provision for estimated losses on relevant uncompleted contracts in the period in which the losses are determined. In the case of customer change orders for such contracts, we include estimated recoveries for work performed in forecasting ultimate profitability on these contracts. Due to uncertainties inherent in the estimation process, it is reasonably possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised during the duration of a contract. These revisions to costs and income are recognized in the period in which the revisions are determined. Our estimation process for determining revenues and costs for contracts accounted for over time is based upon (i) our historical experience, (ii) the professional judgment and knowledge of our engineers, project managers, and operations and financial professionals, and (iii) an assessment of the key underlying factors (see below) that impact the revenues and costs of the relevant contracts. Each such contract is unique, but typically similar enough to other contracts that we can effectively leverage our experience. As these contracts generally range from six to eighteen months in duration, we typically reassess the estimated revenues and costs of these contracts on a quarterly basis, but may reassess more often as situations warrant. We record changes in estimates of revenues and costs when identified using the cumulative catch-up method prescribed by the applicable revenue recognition guidance. We believe the underlying factors used to estimate our costs to complete and percentage-of-completion are sufficiently reliable to provide a reasonable estimate of revenue and profit; however, due to the length of time over which revenue streams are generated and costs are incurred, along with the judgment required in developing the underlying factors, the variability of revenue and cost can be significant. Factors that may affect revenue and costs relating to contracts accounted for over time include, but are not limited to, the following:
•Sales Price Incentives and Sales Price Escalation Clauses - Sales price incentives and sales price escalations that are reasonably assured and reasonably estimable are recorded over the performance period of the contract. Otherwise, these amounts are recorded when awarded.
•Cost Recovery for Product Design Changes and Claims - On occasion, design
specifications may change during the course of the contract. Any additional
costs arising from these changes may be supported by change orders, or we may
submit a claim to the customer. Change orders are accounted for as described
above. See below for our accounting policies related to claims.
•Material Availability and Costs - Our estimates of material costs generally are
based on existing supplier relationships, adequate availability of materials,
prevailing market prices for materials and, in some cases, long-term supplier
contracts. Changes in our supplier relationships, delays in obtaining materials,
or changes in material prices can have an impact on our cost and profitability
estimates.
•Use of Sub-Contractors - Our arrangements with sub-contractors are generally
based on fixed prices; however, our estimates of the cost and profitability can
be impacted by sub-contractor delays, customer claims arising from
sub-contractor performance issues, or a sub-contractor's inability to fulfill
its obligations.
•Labor Costs and Anticipated Productivity Levels - Where applicable, we include
the impact of labor improvements in our estimation of costs, such as in cases
where we expect a favorable learning curve over the duration of the contract. In
these cases, if the improvements do not materialize, costs and profitability
could be adversely impacted. Additionally, to the extent we are more or less
productive than originally anticipated, estimated costs and profitability may
also be impacted.
•Effect of Foreign Currency Fluctuations - Fluctuations between currencies in
which our long-term contracts are denominated and the currencies under which
contract costs are incurred can have an impact on profitability. When the impact
on profitability is potentially significant, we may (but generally do not) enter
into FX forward contracts or prepay certain vendors for raw materials to manage
the potential exposure. See Note 14 to our consolidated financial statements
for additional details on our FX forward contracts.
Contract assets arise when revenues have been recorded but the amounts have not
been billed under the terms of the contracts. These amounts are recoverable from
customers upon various measures of performance, including achievement of certain
milestones, completion of specified units or completion of the contract.
38
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We periodically make claims against customers, suppliers and sub-contractors
associated with alleged non-performance and other disputes over contractual
terms. Claims related to contracts accounted for over time are recognized as
additional revenues or as a reduction of costs only after we have determined
that collection is probable and the amount is reasonably estimable. Claims made
by us may involve negotiation and, in certain cases, litigation or other
dispute-resolution processes. In the event we incur litigation or other
dispute-resolution costs in connection with claims, these costs are expensed as
incurred, although we may seek to recover these costs. Claims against us are
recognized when a loss is considered probable and amounts are reasonably
estimable.
See Note 1 to our consolidated financial statements for further information
regarding estimates and assumptions associated with our accounting for contracts
over time.
Impairment of
Goodwill and indefinite-lived intangible assets are not amortized, but instead are subject to annual impairment testing. We monitor the results of each of our reporting units as a means of identifying trends and/or matters that may impact their financial results and, thus, be an indicator of a potential impairment. The trends and/or matters that we specifically monitor for each of our reporting units are as follows:
•Significant variances in financial performance (e.g., revenues, earnings and cash flows) in relation to expectations and historical performance;
•Significant changes in end markets or other economic factors;
•Significant changes or planned changes in our use of a reporting unit's assets; and
•Significant changes in customer relationships and competitive conditions.
The identification and measurement of goodwill impairment involves the estimation of the fair value of reporting units. We consider a number of factors in conducting the impairment testing of our reporting units. We perform our impairment testing by comparing the estimated fair value of the reporting unit to the carrying value of the reported net assets, with such testing occurring during the fourth quarter of each year in conjunction with our annual financial planning process (or more frequently if impairment indicators arise), based primarily on events and circumstances existing as of the end of the third quarter. Fair value is generally based on the income approach using a calculation of discounted cash flows, based on the most recent financial projections for the reporting units, market participant discount rates, and EBITDA multiples observed of peer companies and in recent transactions in the industries we serve. The revenue growth rates included in the financial projections are our best estimates based on current and forecasted market conditions, and the profit margin assumptions are projected by each reporting unit based on current cost structure and, when applicable, anticipated net cost reductions.
The calculation of fair value for our reporting units incorporates many assumptions including future growth rates, profit margin and discount factors. Changes in economic and operating conditions impacting these assumptions, including the effects of the COVID-19 pandemic, could result in impairment charges in future periods.
Consistent with our accounting policy as stated above, we performed our annual goodwill impairment test as of the first day of our fiscal fourth quarter of 2021, 2020 and 2019, which indicated the estimated fair value of each of our reporting units significantly exceeded its respective book value. Additionally, we perform our annual trademarks impairment testing during the fourth quarter, or on a more frequent basis if there are indications of potential impairment. The fair values of our trademarks are determined by applying estimated royalty rates to projected revenues, with the resulting cash flows discounted at a rate of return that reflects current market conditions. In 2021, changes in the gross values of trademarks and other identifiable intangible assets related primarily to foreign currency translation, as well as the effects of theUTG Mixing Group and Philadelphia Mixing acquisitions and, to a lesser extent, the sale of the primary assets of a product line. In 2020, changes in the gross values of trademarks and other identifiable intangible assets related primarily to foreign currency translation, as well as the effects of the POSI-LOCK acquisition and the disposal of a business based in ourAsia Pacific region.
Refer to Note 10 to our consolidated financial statements for further
information regarding our goodwill and indefinite-lived intangible assets as of
and during the year ended
39
--------------------------------------------------------------------------------Income Taxes
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We periodically assess whether deferred tax assets will be realized and the adequacy of deferred tax liabilities, including the results of tax audits or estimates and judgments used. Realization of deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. We believe that it is more likely than not that we may not realize the benefit of certain deferred tax assets and, accordingly, have established a valuation allowance against them. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of and potential changes to ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Although realization is not assured for the remaining deferred tax assets, we believe it is more likely than not that the remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced or tax strategies are no longer viable. We review our income tax positions on a continuous basis and record unrecognized tax benefits for potential uncertain tax positions when we determine that an uncertain position meets the criteria of the Income Taxes Topic of the Financial Accounting Standards Board Codification. As events change or resolutions occur, adjustments are made to amounts previously provided, such as in the case of audit settlements with taxing authorities. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, statute expirations, new regulatory or judicial pronouncements, changes in tax laws, changes in projected levels of taxable income, future tax planning strategies, or other relevant events.
See Note 12 to our consolidated financial statements for additional details regarding our uncertain tax positions.
Leases
EffectiveJanuary 1, 2019 , we adopted theFinancial Accounting Standards Board's standard on accounting for leases, which requires a lessee to recognize on its balance sheet the assets and liabilities associated with the rights and obligations created by leases. Refer to Note 7 to our consolidated financial statements for further information regarding estimates and assumptions associated with our accounting for leases under this standard.
Contingent Liabilities and Other Matters
Various claims, complaints and proceedings arising in the ordinary course of business, including those relating to litigation matters (e.g., class actions, derivative lawsuits and contracts, intellectual property and competitive claims, and claims to certain indemnification obligations arising from previous acquisitions/dispositions), have been filed or are pending against us and certain of our subsidiaries. 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. We are subject to domestic and international environmental protection laws and regulations with respect to our business operations and are operating in compliance with, or taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our financial position, results of operations or cash flows. Refer to Note 16 to our consolidated financial statements for discussion regarding amounts reported in "Mezzanine equity" on the consolidated balance sheets as ofDecember 31, 2021 and 2020, including discussion regarding (i) the exercise of certain put options by a noncontrolling interest shareholder during 2020 and the related accounting effects on "Mezzanine equity", "Noncontrolling interests" and "Paid-in capital" in connection with the purchase of the noncontrolling interests in that joint venture by the Company and (ii) the exercise of certain put options by a noncontrolling interest shareholder duringDecember 2021 related to a different joint venture.
New Accounting Pronouncements
See Note 3 to our consolidated financial statements for a discussion of recent accounting pronouncements.
40
--------------------------------------------------------------------------------Potential Impacts from Climate Change
The impacts from climate change on the Company are likely to be driven by
several categories of risks related to the transition to a lower-carbon economy
("Transition Risks") and risks related to the physical impacts of climate change
("Physical Risks").
Transition Risks - The Company is subject to various domestic and international
laws and regulations relating to the protection of the environment. The effect
(material or not) on the Company of any new legislative or regulatory measures
will depend on the particular provisions that are ultimately adopted.
Legislative and regulatory measures to address climate change and greenhouse gas
emissions are in various phases of discussion or implementation. Legislation or
regulation that aims to reduce greenhouse gas emissions could also include
greenhouse gas emissions limits and reporting requirements, carbon taxes,
restrictive permitting, increased efficiency standards, and incentives or
mandates to conserve energy or use renewable energy sources. Federal, state or
local governments may provide tax advantages and other subsidies to support
alternative energy sources, mandate the use of specific fuels or technologies,
or promote research into new technologies to reduce the cost and increase the
scalability of alternative energy sources. For example, the state of New York ,
where one of our principal facilities is located, has enacted legislation that
mandates reduced greenhouse gas emissions to 60% of 1990 levels by 2030, and 15%
of 1990 levels by 2050, with the remaining emission reduction achieved by
controlled offsets.
These climate change and greenhouse gas initiatives could impact the Company's
customer base and assets depending on regulatory treatment afforded in the
process. The initiatives could also increase the Company's cost of environmental
compliance by increasing reporting requirements and requiring additional capital
expenditures related to compliance. They could also delay or otherwise
negatively affect efforts to obtain permits and other regulatory approvals with
regard to existing and new facilities and impose additional monitoring and
reporting requirements. Changing market conditions and new regulatory
requirements, as well as unanticipated or inconsistent application of existing
laws and regulations by administrative agencies, make it difficult to predict a
long-term business impact of such regulations.
Physical Risks - Operationally, climate change may result in more frequent
severe weather events, potential changes in precipitation patterns and extreme
variability in weather patterns, which can disrupt operations. Many of the
Company's manufacturing facilities are located in areas where severe weather
events could impact normal production. The Company has taken steps to prepare
facilities to better withstand severe weather resulting from climate change and
continues to study the long-term implications of changing climate parameters on
the locations of its manufacturing facilities. Preparedness plans are developed
that detail actions needed in the event of severe weather. These measures have
historically been in place and these activities and associated costs are driven
by normal operational preparedness.
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