UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017, or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-37393
SPX FLOW, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
13320 Ballantyne Corporate Place
Charlotte, NC
(Address of Principal Executive Offices)
47-3110748
(I.R.S. Employer Identification No.)
28277
(Zip Code)
Registrant’s Telephone Number, Including Area Code (704) 752-4400
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, Par Value $0.01
Name of Each Exchange on Which Registered
New York Stock Exchange
None
N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past
90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer x
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Accelerated Filer o
Smaller Reporting Company o
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ☒ No
Common shares outstanding as of February 2, 2018 were 42,492,776.
Documents incorporated by reference: Portions of the registrant’s definitive proxy statement to be filed within 120 days of the close of the registrant’s fiscal year in
connection with the registrant’s Annual Meeting to be held on May 9, 2018 (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on
Form 10-K.
SPX FLOW, INC. AND SUBSIDIARIES
FORM 10-K INDEX
PART I
Item 1 – Business
Item 1A – Risk Factors
Item 1B – Unresolved Staff Comments
Item 2 – Properties
Item 3 – Legal Proceedings
Item 4 – Mine Safety Disclosures
PART II
Item 5 – Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6 – Selected Financial Data
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
Item 8 – Consolidated and Combined Financial Statements and Supplementary Data
Consolidated and Combined Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Comprehensive Income (Loss) for the Years Ended December 31,
2017, 2016 and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated and Combined Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated and Combined Financial Statements
Item 9 – Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A – Controls and Procedures
Item 9B – Other Information
PART III
Item 10 – Directors, Executive Officers and Corporate Governance
Item 11 – Executive Compensation
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 – Certain Relationships and Related Transactions, and Director Independence
Item 14 – Principal Accountant Fees and Services
PART IV
Item 15 – Exhibits and Financial Statement Schedules
Item 16 – Form 10-K Summary
Signatures
Index to Exhibits
1
4
13
13
14
14
15
17
20
36
40
41
42
43
45
46
88
88
89
90
91
91
91
91
92
92
93
94
PART I
ITEM 1. Business
(All currency and share amounts are in millions)
FORWARD-LOOKING STATEMENTS
Some of the statements in this document and any documents incorporated by reference, including any statements as to operational and financial
projections, constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that
may cause our businesses’ or our industries’ actual results, levels of activity, performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. Such statements may address our plans, our strategies, our prospects, or changes and trends in our business and
the markets in which we operate under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) or
in other sections of this document. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “would,” “should,”
“expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential” or “continue” or the negative of those terms or similar
expressions. Particular risks facing us include business, internal operations, legal and regulatory risks, costs of raw materials, pricing pressures, and changes
in the economy. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other
factors, and forward-looking statements should not be relied upon as a prediction of actual results. In addition, management’s estimates of future operating
results are based on our current complement of businesses, which is subject to change as management selects strategic markets.
All the forward-looking statements in this document are qualified in their entirety by reference to the factors discussed under the heading “Risk
Factors” and in any documents incorporated by reference herein that describe risks and factors that could cause results to differ materially from those
projected in these forward-looking statements. We caution you that these risk factors may not be exhaustive. We operate in a continually changing business
environment and frequently enter into new businesses and product lines. We cannot predict these new risk factors, and we cannot assess the impact, if any, of
these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those
projected in any forward-looking statements. Accordingly, you should not rely on forward-looking statements as a prediction of actual results. We undertake
no obligation to update or publicly revise any forward-looking statements to reflect events or circumstances that arise after the date of this document.
BUSINESS
Our Business
SPX FLOW, Inc. and its consolidated subsidiaries (“SPX FLOW,” ‘‘the Company,’’ “we,” “us,” or “our”) were wholly-owned by SPX Corporation
(the “former Parent”) until September 26, 2015, at which time the former Parent distributed 100% of our outstanding common stock to its shareholders
through a tax-free spin-off transaction (the “Spin-Off”). Since that time we have been an independent, publicly-traded company on the NYSE under the
ticker symbol FLOW.
We are a global supplier of highly specialized, engineered solutions with approximately 7,000 employees, operations in over 30 countries and sales
in over 150 countries around the world. We innovate with customers to help feed and enhance the world by designing, delivering and servicing high value
solutions at the heart of growing and sustaining our diverse communities. We aspire to be a worldwide leader in sustainable solutions which ensure the
controlled and measured movements of life’s essential elements.
Our total revenue in 2017 was $2.0 billion, with approximately 40%, 37%, and 23% from sales into the Americas, EMEA, and Asia Pacific regions,
respectively. We report our business results in three segments: Food and Beverage, Power and Energy and Industrial. In 2017, 37% of our revenues were
reported in our Food and Beverage reportable segment, 35% of revenues were reported in our Industrial reportable segment and 28% of revenues were
reported in our Power and Energy reportable segment.
Our product portfolio of pumps, valves, mixers, filters, air dryers, hydraulic tools, homogenizers, separators and heat exchangers, along with the
related aftermarket parts and services, supports global industries, including food and beverage, oil and gas, power generation (including nuclear and
conventional), chemical processing, compressed air and mining. Our products
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are used across a variety of severe duty and high standard customer applications as well as certain highly regulated environments such as sanitary processing
and nuclear power applications.
Our core strengths include expertise in rotating, actuating and hydraulic equipment, a highly skilled workforce, global capabilities, product breadth,
and a deep application knowledge that enables us to optimize configuration and create custom-engineered solutions for diverse processes.
Between 2015 and 2017 we executed a multi-year, global realignment plan to transition our organization to an operating structure, improve our
competitive position and increase our ability to serve customers. As part of this plan, we optimized our global footprint by consolidating eight manufacturing
sites and a shared service center. In addition, we improved our capabilities in high value countries, streamlined several business processes and reduced
selling, general and administrative expense across our support functions. The majority of the improvements tied to the global realignment program are
structural in nature to allow us to operate at a lower cost structure and more efficiently.
We have aligned our segment teams to focus primarily on developing intimate customer relationships and expanding our relevance to customers
within each end market. The key areas our end market teams are emphasizing include (i) product management, (ii) channel development, (iii) localization
and (iv) project execution and delivery. We made substantial progress in these areas during 2016 and 2017. Our ultimate goal was to create a more customer-
centric, service-oriented organization and deliver greater value to our customers, investors and employees.
REPORTABLE SEGMENTS
Our business is organized into three reportable segments — Food and Beverage, Power and Energy and Industrial. The following summary describes
the products and services offered by each of our reportable segments:
Food and Beverage: Our Food and Beverage reportable segment had revenues of $715.9, $728.3, and $869.8 in 2017, 2016 and 2015, respectively, and
backlog of $371.7 and $295.7 as of December 31, 2017 and 2016, respectively. Approximately 76% of the segment's backlog as of December 31, 2017 is
expected to be recognized as revenue during 2018. The Food and Beverage reportable segment operates in a regulated, global industry with customers who
demand highly engineered, turn-key solutions. Key demand drivers include dairy consumption, emerging market capacity expansion, sustainability and
productivity initiatives, customer product innovation and food safety. Key products for the segment include mixing, drying, evaporation and separation
systems and components, heat exchangers, and reciprocating and centrifugal pump technologies. We also design and construct turn-key systems that integrate
many of these products for our customers. Our core brands include Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital and Waukesha
Cherry-Burrell. The segment's primary competitors are Alfa Laval AB, Fristam Pumps, GEA Group AG, Krones AG, Südmo, Tetra Pak International S.A.,
and various regional companies.
Power and Energy: Our Power and Energy reportable segment had revenues of $543.2, $562.7 and $750.2 in 2017, 2016 and 2015, respectively, and
backlog of $409.1 and $323.9 as of December 31, 2017 and 2016, respectively. Approximately 74% of the segment's backlog as of December 31, 2017 is
expected to be recognized as revenue during 2018. The Power and Energy reportable segment primarily serves customers in the oil and gas industry and, to a
lesser extent, the nuclear and other conventional power industries. A large portion of the segment's revenues are concentrated in oil extraction, production and
transportation at existing wells, and in pipeline applications. The underlying driver of this segment includes demand for power and energy. Key products for
the segment include pumps, valves and the related accessories, while the core brands include APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan,
Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes. The segment's primary competitors are Cameron, Ebara Fluid Handling, Flowserve
Corporation, ITT Goulds Pumps, KSB AG, and Sulzer Ltd.
Industrial: Our Industrial reportable segment had revenues of $692.4, $705.0 and $768.5 in 2017, 2016 and 2015, respectively, and backlog of $217.3 and
$164.5 as of December 31, 2017 and 2016, respectively. Approximately 90% of the segment's backlog as of December 31, 2017 is expected to be recognized
as revenue during 2018. The Industrial reportable segment primarily serves customers in the chemical, air treatment, mining, pharmaceutical, marine,
shipbuilding, infrastructure construction, general industrial and water treatment industries. Key demand drivers of this segment are tied to macroeconomic
conditions and growth in the respective end markets we serve. Key products for the segment are air dryers, filtration equipment, mixers, pumps, hydraulic
technologies and heat exchangers. Core brands include Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power
Team, and Stone. The segment's primary competitors are Alfa Laval AB, Chemineer Inc., EKATO, Actuant, Enerpac, IDEX Viking Pump, KSB AG, Parker
Domnick Hunter and various regional companies.
See Note 4 to our consolidated and combined financial statements for more information on the results of our reportable segments, including revenues
by geographic area.
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Acquisitions
We did not acquire any businesses in 2017. As part of our long-term strategy, we plan to evaluate potential acquisitions that (a) are complementary to
our existing products and services, (b) increase our relevance to customers and our capabilities to serve them, (c) expand our global capabilities and accelerate
our localization strategy and (d) expand our end market reach.
International Operations
We are a multinational corporation with operations in over 30 countries. Sales outside the United States were $1,258.5, $1,298.8 and $1,552.0 in
2017, 2016 and 2015, respectively.
See Note 4 to our consolidated and combined financial statements for more information on our international operations.
Research and Development
We are actively engaged in research and development programs designed to improve existing products and manufacturing methods and to develop
new products to better serve our current and future customers. We place particular emphasis on the development of new products that are compatible with,
and build upon, our manufacturing and marketing capabilities. We expensed $17.4, $19.4 and $19.1 in 2017, 2016 and 2015, respectively, of research
activities relating to the development and improvement of our products.
Intellectual Property
We own approximately 153 domestic and 271 foreign patents, including 58 patents that were issued in 2017, covering a variety of our products and
manufacturing methods. We also own a number of registered trademarks. Although in the aggregate our patents and trademarks are of considerable
importance in the operation of our business, we do not consider any single patent or trademark to be of such importance that its absence would adversely
affect our ability to conduct business as presently constituted. We are both a licensor and licensee of patents. For more information, please refer to "Risk
Factors."
Raw Materials
We purchase a wide variety of raw materials, including steel, titanium, nickel and petroleum-based products. Where appropriate, we may enter into
long-term supply arrangements or fixed-cost contracts to lower the overall cost of raw materials. In addition, due to our diverse product and service offering,
as well as the wide geographic dispersion of our production facilities, we use numerous sources for the raw materials needed in our operations. However, we
are not dependent on any one supplier or a limited number of suppliers. Lastly, we continue to centralize certain aspects of supply chain management in an
effort to ensure adequate materials are available for production at low cost.
Competition
The markets we serve are highly competitive and fragmented. Our competitors are diverse, ranging from large multi-nationals to regional and local
companies. Our principal global competitors include Alfa Laval AB, Flowserve Corporation, GEA Group AG, IDEX Corporation, ITT Goulds Pumps, Sulzer
Ltd., and Tetra Pak International S.A. We do not have any one competitor with all the same product offerings, nor do we have any one competitor which
serves all the same end markets.
Our ability to compete effectively depends on a variety of factors including breadth of product offering, product quality, engineering strength, brand
reputation, lead times, global capabilities, service capabilities, and cost. As many of our products are sold through distributors and independent
representatives, our success also depends on building and partnering with a strong channel network.
Environmental Matters
See "MD&A — Critical Accounting Policies and Use of Estimates — Contingent Liabilities," "Risk Factors" and Note 13 to our consolidated and
combined financial statements for information regarding environmental matters.
Employment
As of December 31, 2017, we had approximately 7,000 employees. Less than 1% of our U.S. employees are covered under collective bargaining
agreements, while certain of our non-U.S. employee groups are covered by various collective labor
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arrangements. While we generally have experienced satisfactory labor relations, we are subject to potential union campaigns, work stoppages, union
negotiations and other potential labor disputes.
Executive Officers
See Part III, Item 10 of this report for information about our executive officers.
Other Matters
No customer or group of customers that, to our knowledge, are under common control, accounted for more than 10% of our consolidated and
combined revenues for any period presented.
Our businesses maintain sufficient levels of working capital to support customer requirements, particularly inventory. We believe our businesses'
sales and payment terms are generally similar to those of our competitors.
The financial results of many of our businesses closely follow changes in the industries and end markets they serve. In addition, certain of our
businesses have seasonal fluctuations. In aggregate, our businesses tend to be stronger in the second half of the calendar year. Additionally, timing of revenue
recognition on large Food and Beverage systems projects, Power and Energy projects and large Industrial orders may cause significant fluctuations in
financial performance from period to period.
Our website address is www.spxflow.com. Information on our website is not incorporated by reference herein. We file reports with the U.S.
Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
and certain amendments to these reports. Copies of these reports are available free of charge on our website as soon as reasonably practicable after we file the
reports with the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Additionally, you may read and copy any materials that we file with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330.
ITEM 1A. Risk Factors
You should consider the risks described below and elsewhere in our documents filed with the SEC before investing in any of our securities. We may
amend, supplement or add to the risk factors described below from time to time in future reports filed with the SEC.
Difficulties presented by international economic, political, legal, accounting and business factors could negatively affect our business.
In 2017, approximately 64% of our revenues were generated outside the United States, and approximately 24% of our revenues were generated from
sales into emerging markets. We manage businesses with manufacturing facilities worldwide. Our reliance on non-U.S. revenues and non-U.S. manufacturing
bases exposes us to a number of risks, including:
•
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Significant competition could come from local or long-term participants in non-U.S. markets who may have significantly greater market knowledge
and substantially greater resources than we do;
Local customers may have a preference for locally-produced products;
Credit risk or financial condition of local customers and distributors could affect our ability to market our products or collect receivables;
Regulatory or political systems or barriers may make it difficult or impossible to enter or remain in new markets. In addition, these barriers may
impact our existing businesses, including making it more difficult for them to grow;
Local political, economic and social conditions, including the possibility of hyperinflationary conditions, political instability, nationalization of
private enterprises, or unexpected changes relating to currency could adversely impact our operations;
Customs and tariffs may make it difficult or impossible for us to move our products or assets across borders in a cost-effective manner;
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Complications related to shipping, including delays due to weather, labor action, or customs, may impact our profit margins or lead to lost business;
Government embargoes or foreign trade restrictions such as anti-dumping duties, as well as the imposition of trade sanctions by the United States or
the European Union against a class of products imported from or sold and exported to, or the loss of "normal trade relations" status with, countries in
which we conduct business, could significantly increase our cost of products imported into the United States or Europe or reduce our sales and harm
our business;
Environmental and other laws and regulations could increase our costs or limit our ability to run our business;
Our ability to obtain supplies from foreign vendors and ship products internationally may be impaired during times of crisis or otherwise;
Local, regional or worldwide hostilities could impact our operations; and
Distance, language and cultural differences may make it more difficult to manage our business and employees and to effectively market our products
and services.
Any of the above factors or other factors affecting social and economic activity in emerging markets or affecting the movement of people and
products into and from these countries to our major markets, including North America and Europe, could have a significant negative effect on our operations.
Our global operations could be negatively impacted by the economic and political instability caused by the United Kingdom ("UK") vote to leave the
European Union ("EU").
The UK held a referendum on June 23, 2016 on its membership in the EU. A majority of UK voters voted to exit the EU (“Brexit”), and negotiations
have commenced to determine the future terms of the UK’s relationship with the EU. The UK has formally initiated the withdrawal process and is scheduled
to exit the EU on March 29, 2019, a date that can be extended by vote of the member nations. Brexit has created instability and volatility in the global markets
and could adversely affect European or worldwide economic or market conditions. Although it is unknown what the terms of exit will be, they may impair the
ability of our operations in the EU to transact business in the future in the UK, and similarly the ability of our UK operations to transact business in the future
in the EU. Specifically, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries and increased regulatory
complexities. These changes may adversely affect our operations and financial results. In addition, Brexit could lead to legal uncertainty and potentially
divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Further, among other things, Brexit could reduce capital
spending in the UK and the EU, which could result in decreased demand for our products. Any of these effects of Brexit, and others we cannot anticipate,
could adversely affect our business, business opportunities, financial condition, results of operations and cash flows.
Many of the markets in which we operate are cyclical or are subject to industry events, and our results have been and could be affected as a result.
Many of the markets in which we operate are subject to general economic cycles or industry events. We have significant exposure to companies
operating in or selling to oil and gas markets. Declines in the price of oil have depressed demand in these markets, and continued low oil prices may continue
or exacerbate the decline in this market. Other of our markets, including food and beverage, chemical, mining, and petrochemical, particularly chemical
companies and general industrial companies, are to varying degrees cyclical and have experienced, and may continue to experience, periodic downturns.
Cyclical changes and specific industry events could also affect sales of products in our other businesses. Downturns in the business cycles of our different
operations may occur at the same time, which could exacerbate any adverse effects on our business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Results of Reportable Segments."
Contract timing on large construction projects, including food and beverage systems and projects in the oil and gas industries, may cause significant
fluctuations in revenues and profits from period to period.
In addition, certain of our businesses have seasonal fluctuations. Historically, some of our key businesses tend to be stronger in the second half of the
year.
Our business depends on capital investment and maintenance expenditures by our customers.
Demand for most of our products and services depends on the level of new capital investment and planned maintenance expenditures by our
customers. The level of capital expenditures by our customers fluctuates based on planned expansions, new builds and repairs, general economic conditions,
availability of credit, and expectations of future market behavior. Any of these
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factors, individually or in the aggregate, could have a material adverse effect on our customers and, in turn, our business, financial condition, results of
operations and cash flows.
Our customers could be impacted by commodity availability and price fluctuations.
A number of factors outside our control, including fluctuating commodity prices, impact the demand for our products. Increased commodity prices
may increase our customers' cost of doing business, thus causing them to delay or cancel large capital projects.
On the other hand, declining commodity prices may cause mines, oil refineries, oil and gas extraction fields and other customers to delay or cancel
projects relating to the production of such commodities. Also, oversupply could cause manufacturers to cut back on expenditures. Reduced demand for our
products and services could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our
absorption of fixed manufacturing costs. This reduced demand may also erode average selling prices in the relevant market.
Our ordinary course and future restructuring activities, including our global realignment program, could result in additional costs and operational
difficulties which may affect our business.
We face risks relating to our efforts to reduce global costs, including those designed to reduce headcount and consolidate our manufacturing
footprint. In addition to the typical risks we face, our global realignment program is designed to further optimize our global footprint, streamline business
processes and reduce selling, general and administrative expense across operating sites and corporate and global functions over the next year. The financial
costs and savings associated with the realignment program are expected to continue to be well in excess of our historical, ordinary course restructuring
activities. Consequently, charges to earnings as a result of these activities can vary significantly from period to period and, as a result, we may experience
fluctuations in our reported cash flows, results of operations or earnings per share due to the timing of restructuring actions.
We risk the loss of valuable employees, operational difficulties, product quality, higher than expected restructuring costs, and difficulties arising from
negotiations with work councils and other labor groups. We also risk disruption to our customer relationships if we are unable to meet our commitments to
them. Further, these actions may take longer than anticipated, prove more costly than expected and distract management from other activities. Finally, we may
not fully realize the expected benefits of these activities.
The price and availability of raw materials may adversely affect our business.
We are exposed to a variety of risks relating to the price and availability of raw materials. In recent years, we have faced volatility in the prices of
many of our key raw materials, including petroleum-based products, steel and copper. Increases in the prices of raw materials or shortages or allocations of
materials may have a material adverse effect on our financial position, results of operations or cash flows, as we may not be able to pass cost increases on to
our customers, or our sales may be reduced. We are subject to long-term supplier contracts that may increase our exposure to pricing fluctuations.
Credit and counterparty risks could harm our business.
The financial condition of our customers could affect our ability to market our products or collect receivables. In addition, financial difficulties faced
by our customers may lead to cancellation or delay of orders.
Our customers may suffer financial difficulties that make them unable to pay for a project when completed or as payment milestones become due, or
they may decide not to pay us, either as a matter of corporate decision-making or in response to changes in local laws and regulations. We cannot assure you
that expenses or losses for uncollectible amounts will not have a material adverse effect on our revenues, earnings and cash flows.
Failure to protect or unauthorized use of our intellectual property may harm our business.
Despite our efforts to protect our proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use our products or
technology. The steps we have taken may not prevent unauthorized use of our technology or knowledge, particularly in foreign countries where the laws may
not protect our proprietary rights to the same extent as in the United States. Costs incurred to defend our rights may be material.
If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be
disrupted.
We are increasingly dependent on information technology ("IT") networks and systems, including the Internet, to process, transmit and store
electronic information. In particular, we depend on such IT infrastructure for electronic communications among
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our locations around the world and between our personnel and suppliers and customers, and we rely on the systems and services of a variety of vendors to
meet our data processing and communication needs. Despite our implementation of security measures, cybersecurity threats, such as malicious software,
phishing attacks, computer viruses and attempts to gain unauthorized access, cannot be completely mitigated. Security breaches of our, our customers' and our
vendors' IT infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information, including our intellectual property,
trade secrets, customer information, other confidential business information or other information subject to data privacy laws. If we are unable to prevent,
detect or adequately respond to such breaches, our operations could be disrupted, our competitiveness could be adversely affected or we may suffer financial
damage or loss because of lost or misappropriated information or regulatory penalties. Such incidents also could require significant management attention and
resources and result in increased costs.
Currency conversion risk could have a material impact on our reported results of business operations.
Our operating results are translated into U.S. dollars for reporting purposes. The strengthening or weakening of the U.S. dollar against other
currencies in which we conduct business could result in unfavorable translation effects as the results of transactions in foreign countries are translated into
U.S. dollars. Increased strength of the U.S. dollar will increase the effective price of our products sold in U.S. dollars into other countries, which may have a
material adverse effect on sales or require us to lower our prices, and also decrease our reported revenues or margins related to sales conducted in foreign
currencies to the extent we are unable or determine not to increase local currency prices. Likewise, decreased strength of the U.S. dollar could have a material
adverse effect stemming from the cost of materials and products purchased overseas.
Failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other applicable anti-bribery laws could have an adverse effect on
our business.
The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their
intermediaries from making improper payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-
bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the
SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our
policies mandate compliance with anti-bribery laws. However, we operate in certain countries that are recognized as having governmental and commercial
corruption. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or third-party
intermediaries. Violations of these anti-bribery laws may result in criminal or civil sanctions, which could have a material adverse effect on our business,
financial condition and results of operations.
We could experience operational difficulties and additional expense related to further implementations of Enterprise Resource Planning ("ERP")
software.
We are engaged in a significant, multi-year process of upgrading, and where necessary, implementing, a standard ERP software program across
certain of our business locations. Our expanded ERP software platform has involved, and will continue to involve, substantial expenditures on system
hardware and software, as well as design, development and implementation activities. Operational disruptions during the course of these activities could
materially impact our operations. For example, our ability to forecast sales demand, ship products, manage our product inventory, and record and report
financial and management information on a timely and accurate basis could be impaired if there are significant problems implementing the expansion.
Additionally, our cost estimates related to our new ERP system are based on assumptions which are subject to wide variability, requiring a great deal
of judgment.
Changes in tax laws and regulations or other factors could cause our income tax rate to increase, potentially reducing our earnings and adversely
affecting our cash flows.
As a global manufacturing company, we are subject to taxation in various jurisdictions around the world. In preparing our financial statements, we
calculate our effective income tax rate based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions. Our
future effective income tax rate, however, may be higher due to numerous factors, including changes in tax laws or regulations. An effective income tax rate
significantly higher than our expectations could have an adverse effect on our business, results of operations and liquidity.
We seek to optimize our tax footprint across all operations in U.S. and non-U.S. jurisdictions alike. These benefits are contingent upon existing tax
laws and regulations in the U.S. and in the countries in which our international operations are located. Future changes in domestic or international tax laws
and regulations could adversely affect our ability to continue to realize these tax benefits. Additionally, in 2015, the Organisation for Economic Co-operation
and Development ("OECD"), an international association of 34 countries, including the U.S., released the final reports from its Base Erosion and Profit
Shifting ("BEPS") Action Plans. The BEPS recommendations covered a number of issues, including country-by-country reporting, permanent
7
establishment rules, hybrid mismatch rules, anti-tax avoidance rules, transfer pricing rules and tax treaties. Recently, the European Commission ("EC")
concluded its investigations into tax ruling practices of certain EU member countries. The EC concluded that certain member countries had granted unlawful
rulings that artificially reduced tax burdens and has ordered the recovery of the unpaid taxes. Future tax reform resulting from these developments may result
in changes to long-standing tax principles, which could adversely affect our effective tax rate or result in higher cash tax liabilities.
Our effective tax rate could also be adversely affected by different and evolving interpretations of existing law or regulations, which in turn would
negatively impact our operating and financial results as a whole. Additionally, our effective tax rate could also be adversely affected if there is a change in
international operations, our tax structure and how our operations are managed and structured, which could have a material adverse effect on our business,
financial condition and results of operations.
Cost overruns, delays, penalties or liquidated damages could negatively impact our results, particularly with respect to long-term fixed-price contracts.
Substantially all our revenues are recorded and earned under fixed-price arrangements. A portion of our revenues and earnings is generated through
long-term contracts. We recognize revenues for the majority of these long-term contracts using the percentage-of-completion method of accounting whereby
revenues and expenses, and thereby profit, in a given period are determined based on our estimates as to the project status and the costs remaining to complete
a particular project. During 2017, 2016 and 2015, approximately 13.7%, 17.0% and 20.5%, respectively, of our total revenues were recorded under the
percentage-of-completion method.
Estimates of total revenues and cost at completion are subject to many variables, including the length of time to complete a contract. In addition,
contract delays may negatively impact these estimates and our revenues and earnings results for affected periods.
To the extent that we underestimate the remaining cost or time to complete a project, we may overstate the revenues and profit in a particular period.
Further, certain of these contracts provide for penalties or liquidated damages for failure to timely perform our obligations under the contract, or require that
we, at our expense, correct and remedy to the satisfaction of the other party certain defects. Because substantially all of our long-term contracts are at a fixed
price, we face the risk that cost overruns, delays, penalties or liquidated damages may exceed, erode or eliminate our expected profit margin, or cause us to
record a loss on our projects.
See Note 3 to our consolidated and combined financial statements for discussion regarding the expected impact of our adoption of new guidance for
revenue recognition effective in the first quarter of 2018.
The loss of key personnel and an inability to attract and retain qualified employees could have a material adverse effect on our operations.
We are dependent on the continued services of our leadership team. The loss of these personnel without adequate replacement could have a material
adverse effect on our operations. Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience in
many locations in order to operate our business successfully. From time to time, there may be a shortage of skilled labor, which may make it more difficult
and expensive for us to attract and retain qualified employees. If we were unable to attract and retain sufficient numbers of qualified individuals or our costs
to do so were to increase significantly, our operations could be materially adversely affected.
We operate in highly competitive markets. Our failure to compete effectively could harm our business.
We sell our products in highly competitive markets, which could result in pressure on our profit margins and limit our ability to maintain or increase
the market share of our products. We compete on a number of fronts, including on the basis of product offerings, technical capabilities, quality, service and
pricing. We have a number of competitors with substantial technological and financial resources, brand recognition and established relationships with global
service providers. Some of our competitors have low cost structures, support from local governments, or both. In addition, new competitors may enter the
markets in which we participate. Competitors may be able to offer lower prices, additional products or services or a more attractive mix of products or
services, or services or incentives that we cannot or will not match. These competitors may be in a stronger position to respond quickly to new or emerging
technologies and may be able to undertake more extensive marketing campaigns, and make more attractive offers to potential customers, employees and
strategic partners. In addition, competitive environments in slow-growth markets, to which some of our businesses have exposure, have been inherently more
influenced by pricing and domestic and global economic conditions. To remain competitive, we must invest in manufacturing, marketing, customer service
and support and our distribution networks. We cannot assure you that we will have sufficient resources to continue to make the investment required to
maintain or increase our market share or that our investments will be successful. If we do not compete successfully, our business, financial condition, results
of operations and cash flows could be materially adversely affected.
8
Our strategy to outsource various elements of the products and services we sell subjects us to the business risks of our suppliers and subcontractors,
which could have a material adverse impact on our operations.
In areas where we depend on third-party suppliers and subcontractors for outsourced products, components or services, we are subject to the risk of
customer dissatisfaction with the quality or performance of the products or services we sell due to supplier or subcontractor failure. In addition, business
difficulties experienced by a third-party supplier or subcontractor can lead to the interruption of our ability to obtain outsourced products or services and
ultimately our inability to supply products or services to our customers. Third-party supplier and subcontractor business interruptions can include, but are not
limited to, work stoppages, union negotiations and other labor disputes. Current or future economic conditions could also impact the ability of suppliers and
subcontractors to access credit and, thus, impair their ability to provide us quality products or services in a timely manner, or at all.
We are subject to laws, regulations and potential liability relating to claims, complaints and proceedings, including those relating to environmental and
other matters.
We are subject to various laws, ordinances, regulations and other requirements of government authorities in the United States and other nations. With
respect to acquisitions, divestitures and continuing operations, we may acquire or retain liabilities of which we are not aware, or which are of a different
character or magnitude than expected. Additionally, changes in laws, ordinances, regulations or other governmental policies may significantly increase our
expenses and liabilities.
In addition, costs associated with regulatory compliance can be difficult to predict. If we underestimate the time or costs required to comply with our
legal and regulatory obligations, our actual costs may significantly exceed our projections, which could impact our results of operations.
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. We cannot assure you that our compliance obligations
with environmental protection laws and regulations, individually or in the aggregate, will not have a material adverse effect on our financial position, results
of operations or cash flows.
Numerous 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), environmental matters, and risk management matters (e.g., product
and general liability, personal injury claims, automobile, and workers' compensation claims), have been filed or are pending against us and certain of our
subsidiaries. From time to time, we face actions by governmental authorities, both in and outside the United States. Additionally, we may become subject to
significant claims of which we are currently unaware or the claims of which we are aware may result in our incurring a significantly greater liability than we
anticipate. Our insurance may be insufficient or unavailable (e.g., because of insurer insolvency, a significant adverse change in claim experience, or
insurance coverage is not available in applicable insured periods) to protect us against potential loss exposures.
We devote significant time and expense to defend against the various claims, complaints and proceedings brought against us, and we cannot assure
you that the expenses or distractions from operating our businesses arising from these defenses will not increase materially.
We cannot assure you that our accruals and rights to indemnity and insurance will be sufficient, that recoveries from insurance or indemnification
claims will be available or that any of our current or future claims or other matters will not have a material adverse effect on our financial position, results of
operations or cash flows.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates-
Contingent Liabilities" and Note 13 to our consolidated and combined financial statements for further discussion.
If the fair value of any of our reporting units is insufficient to recover the carrying value of the goodwill and other intangibles of the respective reporting
unit, a material non-cash charge to earnings could result.
At December 31, 2017, we had goodwill and other intangible assets, net, of $1,121.6. We conduct annual impairment testing to determine if we will
be able to recover all or a portion of the carrying value of goodwill and indefinite-lived intangibles. In addition, we review goodwill and indefinite-lived
intangible assets for impairment more frequently if impairment indicators arise. If the fair value is insufficient to recover the carrying value of our reporting
units and indefinite-lived intangibles, we may be required to record a material non-cash charge to earnings.
The fair values of our reporting units generally are based on discounted cash flow projections that are believed to be reasonable under current and
forecasted circumstances, the results of which form the basis for making judgments about the
9
recoverability of carrying values of the reported net assets of our reporting units. Other considerations are also incorporated, including comparable price
multiples. The financial results of many of our businesses closely follow changes in the industries and end markets that they serve. For example, following
declines in the price of oil and the resultant impact on oil markets, the results of our goodwill impairment test conducted during the second quarter of 2016
indicated the estimated fair value of our Power and Energy reporting unit was less than its carrying value, and we recorded a goodwill impairment charge of
$252.8. We also recorded intangible asset impairment charges of $115.9, $30.9 and $26.8 related to customer relationships, technology assets and trademarks,
respectively, during the same quarter. Accordingly, we consider estimates and judgments that affect future cash flow projections, including principal methods
of competition such as volume, price, service, product performance and technical innovations and estimates associated with cost reduction initiatives, capacity
utilization, and assumptions for inflation and foreign currency changes. We monitor impairment indicators across all of our businesses. Significant changes in
market conditions and estimates or judgments used to determine expected future cash flows that indicate a reduction in carrying value may give rise to
impairments in the period that the change becomes known.
We are subject to potential work stoppages, labor disputes and other matters associated with our labor force, which may adversely impact our operations
and cause us to incur incremental costs.
We have various collective labor arrangements covering certain U.S. and non-U.S. employee groups. We are subject to potential work stoppages and
other potential labor disputes. Further, we may be subject to work stoppages, which are beyond our control, at our suppliers or customers.
Our technology is important to our success, and failure to develop new products may result in a significant competitive disadvantage.
We believe the development of our intellectual property rights is critical to the success of our business. In order to maintain our market positions and
margins, we need to continually develop and introduce high quality, technologically advanced and cost-effective products on a timely basis, in many cases in
multiple jurisdictions around the world. The failure to do so could result in a significant competitive disadvantage.
Our current and planned products may contain defects or errors that are detected only after delivery to customers. If that occurs, our reputation may be
harmed and we may face additional costs.
We cannot assure you that our product development, manufacturing and integration testing will be adequate to detect all defects, errors, failures and
quality issues that could impact customer satisfaction or result in claims against us with regard to our products. As a result, we may have, and from time to
time have had, to replace certain components and/or provide remediation in response to the discovery of defects in products that are shipped. The occurrence
of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our
customers or our customers' end users and other losses to us or to any of our customers or end users, and could also result in the loss of or delay in market
acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.
Increases in the number of shares of our outstanding common stock could adversely affect our common stock price or dilute our earnings per share.
Sales of a substantial number of shares of common stock into the public market, or the perception that these sales could occur, could have a material
adverse effect on our stock price. As of December 31, 2017, we had the ability to issue up to an additional 1.4 shares as restricted stock shares, restricted
stock units, or stock options under our SPX FLOW Stock Compensation Plan. Additionally, we may issue a significant number of additional shares, in
connection with acquisitions or otherwise. We also may issue a significant number of additional shares through other mechanisms. Additional shares granted
and/or issued would have a dilutive effect on our earnings per share.
Provisions in our corporate documents and Delaware law may delay or prevent a change in control of our company, and accordingly, we may not
consummate a transaction that our shareholders consider favorable.
Provisions of our Certificate of Incorporation and By-laws may inhibit changes in control of our company not approved by our Board. These
provisions include, for example: a staggered board of directors; a prohibition on shareholder action by written consent; a requirement that special shareholder
meetings be called only by our Chairman, President or Board; advance notice requirements for shareholder proposals and nominations; limitations on
shareholders' ability to amend, alter or repeal the By-laws; enhanced voting requirements for certain business combinations involving substantial
shareholders; the authority of our Board to issue, without shareholder approval, preferred stock with terms determined in its discretion; and limitations on
shareholders' ability to remove directors. In addition, we are afforded the protections of Section 203 of the Delaware General Corporation Law, which could
have similar effects. In general, Section 203 prohibits us from engaging in a "business combination"
10
with an "interested shareholder" (each as defined in Section 203) for at least three years after the time the person became an interested shareholder unless
certain conditions are met. These protective provisions could result in our not consummating a transaction that our shareholders consider favorable or
discourage entities from attempting to acquire us, potentially at a significant premium to our then-existing stock price.
Our indebtedness may affect our business and may restrict our operating flexibility.
At December 31, 2017, we had $895.6 in total indebtedness. On that same date, we had $443.0 of borrowing capacity under our revolving credit
facilities, after giving effect to $7.0 reserved for outstanding letters of credit, and $33.8 of available borrowing capacity under our trade receivables financing
arrangement. Our trade receivables financing arrangement provides for a total commitment of $50.0 from associated lenders, depending upon our trade
receivables balance and other factors. In addition, at December 31, 2017, we had $313.1 of available issuance capacity under our foreign credit instrument
facilities after giving effect to $186.9 reserved for outstanding letters of credit. At December 31, 2017, our cash and equivalents balance was $263.7. See
MD&A and Note 10 to our consolidated and combined financial statements for further discussion. We may incur additional indebtedness in the future,
including indebtedness incurred to finance, or assumed in connection with, acquisitions. We may renegotiate or refinance our senior credit facilities, senior
notes or other debt facilities, or enter into additional agreements that have different or more stringent terms. The level of our indebtedness could:
•
•
•
•
•
•
Impact our ability to obtain new, or refinance existing, indebtedness on favorable terms or at all;
Limit our ability to obtain, or obtain on favorable terms, additional debt financing for working capital, capital expenditures or acquisitions;
Limit our flexibility in reacting to competitive and other changes in the industry and economic conditions;
Limit our ability to pay dividends on our common stock;
Coupled with a substantial decrease in net operating cash flows due to economic developments or adverse developments in our business, make it
difficult to meet debt service requirements; and
Expose us to interest rate fluctuations to the extent existing borrowings are, and any new borrowings may be, at variable rates of interest, which
could result in higher interest expense and interest payments in the event of increases in interest rates.
Our ability to make scheduled payments of principal or pay interest on, or to refinance, our indebtedness and to satisfy our other debt obligations will
depend upon our future operating performance, which may be affected by general economic, financial, competitive, legislative, regulatory, business and other
factors beyond our control. In addition, we cannot assure you that future borrowings or equity financing will be available for the payment or refinancing of
our indebtedness. If we are unable to service our indebtedness, whether in the ordinary course of business or upon an acceleration of such indebtedness, we
may pursue one or more alternative strategies, such as restructuring or refinancing our indebtedness, selling assets, reducing or delaying capital expenditures,
revising implementation of or delaying strategic plans or seeking additional equity capital. Any of these actions could have a material adverse effect on our
business, financial condition, results of operations and stock price. In addition, we cannot assure that we would be able to take any of these actions, that these
actions would enable us to continue to satisfy our capital requirements, or that these actions would be permitted under the terms of our various debt
agreements.
Numerous banks in many countries are syndicate members in our credit facility. Failure of one or more of our larger lenders, or several of our
smaller lenders, could significantly reduce availability of our credit, which could harm our liquidity.
We may not be able to finance future needs or adapt our business plan to react to changes in economic or business conditions because of restrictions
placed on us by our senior credit facilities and any existing or future instruments governing our other indebtedness.
Our senior credit facilities, the indentures governing our senior notes and agreements governing our other indebtedness contain, or future or revised
instruments may contain, various restrictions and covenants that limit our ability to make distributions or other payments to our investors and creditors unless
certain financial tests or other criteria are satisfied. We also must comply with certain specified financial ratios and tests. Our subsidiaries may also be subject
to restrictions on their ability to make distributions to us. In addition, our senior credit facilities, indentures governing our senior notes and agreements
governing our other indebtedness contain or may contain additional affirmative and negative covenants. Material existing restrictions are described more fully
in the MD&A and Note 10 to our consolidated and combined financial statements. Each of these restrictions could affect our ability to operate our business
and may limit our ability to take advantage of potential business opportunities, such as acquisitions.
11
If we do not comply with the covenants and restrictions contained in our senior credit facilities, indentures governing our senior notes and
agreements governing our other indebtedness, we could default under those agreements, and the debt, together with accrued interest, could be declared due
and payable. If we default under our senior credit facilities, the lenders could cause all our outstanding debt obligations under our senior credit facilities to
become due and payable or require us to repay the indebtedness under these facilities. If our debt is accelerated, we may not be able to repay or refinance our
debt. In addition, any default under our senior credit facilities, indentures governing our senior notes or agreements governing our other indebtedness could
lead to an acceleration of debt under other debt instruments that contain cross-acceleration or cross-default provisions. If the indebtedness under our senior
credit facilities is accelerated, we may not have sufficient assets to repay amounts due under our senior credit facilities, senior notes or other debt securities
then outstanding. Our ability to comply with these provisions of our senior credit facilities, indentures governing our senior notes and agreements governing
our other indebtedness will be affected by changes in the economic or business conditions or other events beyond our control. Complying with our covenants
may also cause us to take actions that are not favorable to us and may make it more difficult for us to successfully execute our business strategy and compete,
including against companies that are not subject to such restrictions.
Risks Related to our Spin-Off in 2015
In connection with our Spin-Off, our former Parent will indemnify us for certain liabilities and we will indemnify our former Parent for certain
liabilities. If we are required to act on these indemnities to our former Parent, we may need to divert cash to meet those obligations and our financial
results could be negatively impacted. The indemnity from our former Parent may not be sufficient to insure us against the full amount of liabilities for
which we will be allocated responsibility, and our former Parent may not be able to satisfy its indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement, the Employee Matters Agreement and the Tax Matters Agreement between us and our
former Parent, it has agreed to indemnify us for certain liabilities, and we have agreed to indemnify our former Parent for certain liabilities, in each case for
uncapped amounts. Such indemnities may be significant and could negatively impact our business, particularly our indemnity to our former Parent regarding
the intended tax-free treatment of the Spin-Off. Third parties could also seek to hold us responsible for any of the liabilities that our former Parent has agreed
to retain. Further, the indemnity from our former Parent may not be sufficient to protect us against the full amount of such liabilities, and our former Parent
may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from our former Parent any amounts
for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, financial
condition, results of operations and cash flows.
The Spin-Off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.
The Spin-Off is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an
entity engages in a constructive fraudulent conveyance when (1) the entity transfers assets and does not receive fair consideration or reasonably equivalent
value in return, and (2) the entity (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer, (b) has unreasonably small capital with
which to carry on its business, or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or
an entity acting on behalf of a creditor (including, without limitation, a trustee or debtor-in-possession in a bankruptcy by us or our former Parent or any of
our respective subsidiaries) may bring a lawsuit alleging that the Spin-Off or any of the related transactions constituted a constructive fraudulent conveyance.
If a court accepts these allegations, it could impose a number of remedies, including, without limitation, voiding our claims against our former Parent,
requiring our shareholders to return to our former Parent some or all of the shares of our common stock issued in the Spin-Off, or providing our former Parent
with a claim for monetary damages against us in an amount equal to the difference between the consideration received by our former Parent and the fair
market value of our company at the time of the Spin-Off.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction's law is applied. Generally, an
entity would be considered insolvent if (1) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities);
(2) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (3) it cannot pay its
debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (4) it has unreasonably small capital for the business in
which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that we, our former
Parent or any of our respective subsidiaries were solvent at the time of or after giving effect to the Spin-Off.
The distribution of our common stock is also subject to review under state corporate distribution statutes. Under the General Corporation Law of the
State of Delaware (the "DGCL"), a corporation may only pay dividends to its shareholders either (1) out of its surplus (net assets minus capital) or (2) if there
is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
12
Although we believe that we and our former Parent were each solvent at the time of the Spin-Off (including immediately after the distribution of
shares of SPX FLOW common stock), that we are able to repay our debts as they mature and have sufficient capital to carry on our businesses, and that the
distribution was made entirely out of surplus in accordance with Section 170 of the DGCL, we cannot assure you that a court would reach the same
conclusions in determining whether our former Parent or we were insolvent at the time of, or after giving effect to, the Spin-Off, or whether lawful funds were
available for the separation and the distribution to our former Parent's shareholders.
A court could require that we assume responsibility for obligations allocated to our former Parent under the Separation and Distribution Agreement.
Under the Separation and Distribution Agreement, both we and our former Parent are responsible for the debts, liabilities and other obligations
related to the business or businesses which it owns and operates. Although we do not expect to be liable for any obligations that are not allocated to us under
the Separation and Distribution Agreement, a court could disregard the allocation agreed to between the parties, and require that we assume responsibility for
obligations allocated to our former Parent (including, for example, environmental liabilities), particularly if our former Parent were to refuse or were unable to
pay or perform the allocated obligations.
We are subject to continuing contingent tax liabilities of our former Parent.
Under the Code and U.S. Treasury Regulations, each corporation that was a member of our former Parent's consolidated group for U.S. federal
income tax purposes during any taxable period (or portion thereof) ending on or before the effective time of the Spin-Off is jointly and severally liable for the
entire U.S. federal income tax liability of our former Parent's consolidated group for that taxable period subsequent to the year ended December 31, 2013. Our
Tax Matters Agreement with our former Parent generally allocates economic responsibility for taxes of our former Parent's consolidated group to our former
Parent. However, if our former Parent is unable to pay any such taxes, we could be liable for the entire amount of such taxes, which would include taxes
arising out of the Spin-Off if our former Parent were to take an action (over which we may have no control) that causes the Spin-Off to be taxable to our
former Parent.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The following is a summary of our principal properties, including manufacturing, engineering, and sales offices as of December 31, 2017:
Location
No. of Facilities
Owned
Leased
Approximate Square Footage
Food and Beverage
2 U.S. states and 10 foreign countries
Power and Energy
5 U.S. states and 9 foreign countries
Industrial
Total
6 U.S. states and 13 foreign countries
18
25
31
74
(in millions)
0.6
1.8
1.0
3.4
1.1
0.6
0.4
2.1
In addition to manufacturing plants, we own our corporate office in Charlotte, NC, and lease our Asia Pacific center in Shanghai, China, our
European shared service center in Manchester, United Kingdom and various sales, service and other locations throughout the world. We consider these
properties, as well as the related machinery and equipment, to be well maintained and suitable and adequate for their intended purposes.
13
The following table lists the locations of our primary manufacturing facilities as of December 31, 2017:
Americas
Burlington, Canada
Delavan, WI
Goldsboro, NC
Houston, TX
McKean, PA
Newport, NC
Ocala, FL
Rochester, NY
Rockford, IL
Sao Paulo, Brazil
EMEA
Asia Pacific
Ahmedabad, India
Busan, South Korea
Jaipur, India
New Delhi, India
Xidu, China
Annecy, France
Assen, Netherlands
Brixworth, U.K.
Budapest, Hungary
Bydgoszcz, Poland
Ekero, Sweden
Erpe-Mere, Belgium
Etten-Leur, Netherlands
Eygelshoven, Netherlands
Glasgow, U.K.
Killarney, Ireland
Moers, Germany
Newbury, U.K.
Norderstedt, Germany
Penistone, U.K.
Santorso, Italy
Silkeborg, Denmark
ITEM 3. Legal Proceedings
We are subject to legal proceedings and claims that arise in the normal course of business. We believe these matters are either without merit or of a
kind that should not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows; however, we cannot
assure you that these proceedings or claims will not have a material effect on our financial position, results of operations or cash flows.
See "Risk Factors," "MD&A — Critical Accounting Policies and Estimates — Contingent Liabilities," and Note 13 to our consolidated and
combined financial statements for further discussion of legal proceedings.
ITEM 4. Mine Safety Disclosures
Not applicable.
14
PART II
ITEM 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "FLOW."
The number of shareholders of record of our common stock as of February 2, 2018 was 3,262.
The following table sets forth the reported high and low trading prices for our common stock for each quarterly period during the years 2017 and
2016 as reported on the NYSE.
2017:
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2016:
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
$
High
Low
48.21 $
39.25
40.66
36.83
High
Low
33.86 $
31.06
31.58
28.56
38.80
31.10
33.15
31.06
22.34
23.50
23.71
14.85
Any dividends in future periods, including declaration, record and payment dates, will be at the discretion of our Board of Directors and will depend
on, among other things, our results of operations, ongoing capital needs, financial condition and other factors that the Board of Directors may deem relevant,
as well as our ability to declare and pay dividends.
The following table summarizes the repurchases of common stock during the three months ended December 31, 2017:
Issuer Purchases of Equity Securities
Period
10/1/17 - 10/31/17
11/1/17 - 11/30/17
12/1/17 - 12/31/17
Total
Total Number of Shares
Purchased(1)
Average Price Per Share
Total Number of Shares
Purchased as Part of a
Publicly Announced Plan or
Program
Maximum Approximate
Dollar Value of Shares That
May Yet be Purchased Under
the Plan or Program
— $
470
9,591
10,061
—
41.01
46.79
—
—
—
—
—
—
—
—
(1) Reflects the surrender to us of shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock shares and restricted
stock units.
15
This graph shows a comparison of cumulative total returns for SPX FLOW, the S&P 500 Index and the S&P Composite 1500 Industrials Index
beginning on September 28, 2015, the date that our common stock began open trading, assuming an initial investment of $100.
Company Performance
SPX FLOW
S&P 500
9/26/2015
12/31/2015
4/2/2016
7/2/2016
10/1/2016
12/31/2016
4/1/2017
7/1/2017
9/30/2017
12/31/2017
$
$
$
$
$
$
$
$
$
$
100.00 $
82.10 $
70.88 $
70.79 $
90.03 $
94.29 $
102.09 $
108.47 $
113.41 $
139.85 $
16
S&P 1500 Industrials
100.00
100.00 $
109.20 $
109.80 $
110.99 $
114.85 $
118.97 $
125.56 $
128.78 $
133.88 $
142.08 $
109.60
112.92
114.10
119.48
128.34
133.10
138.31
144.02
152.41
ITEM 6. Selected Financial Data
The following table presents our selected historical consolidated and combined financial data as of and for each of the years in the five-year period
ended December 31, 2017. Our historical consolidated and combined financial statements, prior to the Spin-Off, included certain expenses of our former
Parent that were charged to us for certain corporate centralized functions and programs, including information technology, payroll services, shared services
for accounting, supply chain and manufacturing operations, and business and health insurance coverage. In addition, for purposes of preparing the
consolidated and combined financial statements prior to the Spin-Off, a portion of our former Parent’s total corporate costs were allocated to such financial
statements, with the allocations related primarily to (i) the support provided by our former Parent's executive management, finance and accounting, legal, risk
management, and human resource functions and (ii) costs associated with our former Parent's Charlotte, NC corporate headquarters and its Asia Pacific
corporate center in Shanghai, China. Our historical consolidated and combined financial statements, prior to the Spin-Off, also do not reflect the allocation of
certain assets and liabilities between our former Parent and us. Consequently, the financial information included here may not necessarily reflect our financial
position, results of operations and cash flows in the future or what our financial condition, results of operations and cash flows would have been had we been
an independent, publicly-traded company during the historical periods presented.
The selected historical consolidated and combined financial data presented below should be read in conjunction with our audited combined financial
statements included in our registration statement on Form 10 (as filed by SPX FLOW with the SEC and declared effective on September 11, 2015), as well as
our audited consolidated and combined financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
(in millions, except per share amounts)
Summary of operations:
Revenues
Operating income (loss)(1)(2)
Other income (expense), net(3)
Interest expense, net(4)
Loss on early extinguishment of debt(5)
Income (loss) before income taxes
Income tax benefit (provision)(6)
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to SPX FLOW, Inc.
Basic income (loss) per share of common stock
Diluted income (loss) per share of common stock
Other financial data:
Total assets(7)
Total debt(8)
Other long-term obligations
Mezzanine equity(9)
SPX FLOW, Inc. shareholders' equity(9)
Noncontrolling interests(9)
Capital expenditures
Depreciation and amortization
As of and for the year ended December 31,
2017
2016
2015
2014
2013
$
1,951.5 $
1,996.0 $
2,388.5 $
2,769.6 $
2,804.8
119.1
1.3
(62.5)
—
57.9
(11.1)
46.8
0.4
(382.6)
(3.4)
(57.1)
(38.9)
(482.0)
101.0
(381.0)
0.8
46.4 $
1.11 $
1.10 $
(381.8) $
(9.23) $
(9.23) $
154.4
0.9
(18.1)
—
137.2
(49.8)
87.4
(0.1)
87.5 $
2.14 $
2.14 $
285.4
(28.6)
(23.4)
—
233.4
(97.5)
135.9
1.4
134.5 $
3.30 $
3.29 $
2,689.0 $
2,603.2 $
3,304.2 $
4,028.1 $
895.6
188.8
22.2
942.1
9.7
19.4
61.2
1,108.8
187.7
20.1
740.6
1.5
44.0
64.7
1,032.1
275.4
—
1,021.1
342.8
—
1,259.1
1,925.4
11.5
57.0
61.9
13.4
40.7
65.8
238.0
(12.0)
(34.7)
—
191.3
(58.8)
132.5
1.5
131.0
3.21
3.20
4,490.7
1,006.4
382.7
—
2,238.9
11.6
23.4
69.9
$
$
$
$
(1)
During 2017, we recognized Special Charges totaling $18.5 related to our global realignment program, which included, amongst other costs, charges associated with (i) the
consolidation and relocation of various manufacturing operations primarily within the EMEA region into an existing facility in Poland, (ii) severance and other costs associated
with the reorganization and consolidation of certain commercial, operational, and administrative functions across all segments and regions, (iii) severance and other costs
associated with the relocation of certain engineering functions, principally in our Food and Beverage and Industrial segments, to lower-cost countries, and (iv) asset
impairment and other related charges of $3.6 in connection with the sale of certain corporate assets during the year.
17
During 2016, we recognized Special Charges totaling $77.8 related to our global realignment program, which included (i) charges of $16.5 associated with the continued
consolidation and relocation of manufacturing facilities in Germany and Denmark to an existing facility in Poland, (ii) various other global restructuring initiatives across our
business and corporate support functions, (iii) corporate asset impairment charges of $17.8 incurred primarily in connection with the decision to market certain corporate assets
for sale, and, to a lesser extent, (iv) a reorganization of the Company's segment management structures.
During 2015, we recognized Special Charges totaling $23.0 related to the ongoing consolidation and relocation of two manufacturing facilities, located in Germany and
Denmark, to an existing facility in Poland.
(2)
During 2016, we recorded impairment charges of $252.8, $115.9, $37.1 and $30.9 related to goodwill, customer relationships, trademarks and certain technology assets of
certain businesses within our Power and Energy reportable segment, respectively, and of $5.5 related to a certain technology asset of a business within our Food and Beverage
reportable segment.
During 2015, we recorded impairment charges of $15.0 and $0.6 related to the trademarks of certain businesses within our Power and Energy and Food and Beverage
reportable segments, respectively, and $7.1 related to certain technology assets of a business within our Food and Beverage reportable segment.
During 2014, we recorded impairment charges of $7.3 and $4.4 related to the trademarks of certain businesses within our Power and Energy and Industrial reportable
segments, respectively.
During 2013, we recorded impairment charges of $3.4 and $1.3 related to the trademarks of certain businesses within our Power and Energy and Food and Beverage reportable
segments, respectively.
See Note 7 to our consolidated and combined financial statements for further discussion of impairment charges associated with goodwill and intangible assets.
(3)
(4)
(5)
(6)
During 2017, 2016, 2015, 2014, and 2013, we recognized expense (benefit) related to changes in the fair value of plan assets, actuarial gains/losses, and settlement/curtailment
gains/losses of $(2.0), $0.5, $6.3, $25.8, and $2.0, respectively, associated with our and our former Parent's pension and postretirement benefit plans. See Note 8 to our
consolidated and combined financial statements for further discussion of employee benefit plans sponsored by us and sponsored by our former Parent. During 2017, we also
recognized a benefit of $3.5 related to the remeasurement of an indemnification receivable from a third party related to certain of our foreign defined benefit pension
obligations.
During 2015, 2014, and 2013, we recognized interest expense, net, of $2.2, $25.8, and $36.3 on related party notes receivable and payable in which our former Parent, or its
affiliates that were not part of the Spin-Off, were the counterparties.
During 2016, we completed the redemption of all of our 6.875% senior notes due in August 2017 for a total redemption price of $636.4. As a result of the redemption, we
recorded a charge of $38.9, which related to premiums paid to redeem the senior notes of $36.4, the write-off of unamortized deferred financing fees of $1.9, and other costs
associated with the extinguishment of the senior notes of $0.6.
During 2017, the income tax provision was impacted by an income tax benefit of $71.2 related to revaluation of our net deferred tax liabilities resulting from the change in the
U.S. federal tax rate, including the reduction for earnings that were not indefinitely reinvested, and income tax charges of (i) $50.4 for the deemed repatriation tax and (ii)
$11.6 resulting from losses occurring in certain jurisdictions where the tax benefit of those losses is not expected to be realized.
During 2016, the income tax benefit was impacted by tax benefits of (i) $59.3 resulting from the $426.4 goodwill and intangible assets impairment charge recorded by our
Power and Energy reporting unit during the second quarter (an effective tax rate of 13.9%), as (a) the majority of the goodwill of the Power and Energy reporting unit had no
basis for income tax purposes and (b) the impairment charge resulted in the addition of a valuation allowance for deferred income tax assets in certain jurisdictions, and
(ii) $23.8 resulting from a tax incentive realized in Poland related to the expansion of our manufacturing facility in that country.
During 2015, the income tax provision was impacted by tax charges of $11.7 related to dividends from foreign subsidiaries, partially offset by tax benefits of (i) $5.1 related to
net changes in uncertain tax positions, (ii) $2.8 related to tax rate decreases in Italy and the U.K. and (iii) $2.0 related to foreign exchange losses recognized for income tax
purposes with respect to a foreign branch.
During 2014, the income tax provision was impacted by tax charges of (i) $18.7 related to increases in valuation allowances recorded against certain foreign deferred income
tax assets, and (ii) $18.6 related to the repatriation of certain earnings of our non-U.S. subsidiaries. The impact of these items was partially offset by $3.8 of tax benefits related
to various audit settlements and statute expirations.
18
(7)
(8)
(9)
Included in total assets as of December 31, 2014 and 2013 are related party notes receivable of $707.1 and $763.4, respectively.
Included in total debt as of December 31, 2017, 2016, and 2015 are deferred financing fees of $10.2, $12.8, and $5.2, respectively, incurred in connection with our senior notes
and term loan. Included in total debt as of December 31, 2014 and 2013 are related party notes payable of $1,003.1 and $988.4, respectively.
Mezzanine equity as of December 31, 2017 and 2016 represents the current exercise value of certain put options that independent noncontrolling shareholders in certain
foreign subsidiaries of the Company have under their respective joint venture operating agreements that allow them to sell their common stock to the controlling shareholders
(wholly-owned subsidiaries of SPX Flow, Inc.) upon the satisfaction of certain conditions, including the passage of time. None of the noncontrolling interest put options are
exercisable at this time. The mezzanine balance at December 31, 2017 reflects a reclassification from the paid-in-capital and to the noncontrolling interests balances of $7.8
and $(8.2), respectively, during 2017, as well as an increase during 2017 from foreign currency translation of $2.5. The mezzanine equity balance at December 31, 2016
reflects a reclassification from the noncontrolling interests and accumulated other comprehensive loss balances of $6.9 and $13.2, respectively, during 2016.
19
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(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 and
combined financial statements and the related notes and "Our 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 and combined 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 would have been had we been operated as a separate, independent entity during the historical periods
presented, or what our financial condition, results of operations and cash flows may be in the future.
EXECUTIVE OVERVIEW
Spin-Off Transaction
SPX FLOW, Inc. and its consolidated subsidiaries (“SPX FLOW,” ‘‘the Company,’’ “we,” “us,” or “our”) operate in three business segments and
were wholly-owned by SPX Corporation (the “former Parent”) until September 26, 2015, at which time the former Parent distributed 100% of our
outstanding common stock to its shareholders through a tax-free spin-off transaction (the “Spin-Off”).
Summary of Operating Results
The following summary is intended to provide a few highlights of the discussion and analysis that follows (all comparisons are to the related period
in the prior year):
Revenues
•
•
In 2017, decreased 2.2% to $1,951.5, primarily as a result of reduced customer capital investments, particularly in oil and dairy related
markets, and reflects the lower levels of backlog of each of our segments as of the beginning of 2017 when compared to the beginning of
2016, which were $784.1 and $905.0 on a consolidated basis, respectively.
In 2016, decreased 16.4% to $1,996.0, primarily as a result of the impacts of lower oil and dairy prices on orders and, to a lesser extent, a
strengthening of the U.S. dollar against various foreign currencies.
Income (Loss) before Income Taxes
•
•
In 2017, increased from $(482.0) to $57.9. The pre-tax loss in the 2016 period included charges of (i) $442.2 related to the impairment of
goodwill and intangible assets primarily of our Power and Energy reportable segment and (ii) $38.9 related to the early extinguishment of debt
as a result of our redemption and refinancing in August 2016 of previously outstanding 6.875% senior notes that were due in August 2017.
The increase in pre-tax income compared to 2016 primarily resulted from there being no similar charges in the 2017 period as well as a
reduction in special charges related to our global realignment program during 2017.
In 2016, decreased from $137.2 to $(482.0), primarily as a result of goodwill and intangible assets impairment charges of $442.2 in 2016,
compared to $22.7 in 2015. The reduction in pre-tax income, compared to 2015, resulted primarily from these impairment charges and, to a
lesser extent, a decline in segment profitability, an increase in net interest expense, a loss on early extinguishment of debt in 2016 as noted
above, and an increase in special charges related to our global realignment program during the period. These items were partially offset by
reductions in corporate expense resulting from reduced incentive compensation expense and savings realized from the global realignment
program, as well as a decline in pension and postretirement expense.
20
Cash Flows from (used in) Operations
•
•
In 2017, increased to $205.0 (from $(27.9) in 2016), primarily as a result of (i) improvements in working capital driven by the timing of
project execution and associated milestone payments, (ii) pension benefit payments of $65.9 to certain former officers of the Company during
2016 which did not recur during 2017 and (iii) reduced payments for incentive compensation.
In 2016, decreased to $(27.9) (from $213.6 in 2015), primarily as a result of a decline in segment profitability, pension benefit payments of
$65.9 during 2016 as noted above, an increase in cash spending on restructuring actions, and interest payments related to our senior notes.
RESULTS OF 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. Also, capital spending on original equipment by our customers in the oil and gas industries is heavily influenced by current and
expected oil and gas prices. The significant decline in oil prices from the latter half of 2014 and continuing throughout 2015, as well as sustained lower oil
prices in 2016, directly impacted operational and capital spending by end customers in our Power and Energy reportable segment and indirectly in our
Industrial reportable segment. As such, we entered 2017 with a lower opening backlog than in previous years in these two segments. As oil prices improved
throughout 2017, our order intake within the Power and Energy and Industrial reportable segments also improved.
In our Food and Beverage 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 the China market, can influence the timing of capital spending by many end customers in our Food and Beverage 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 "Our 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. 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 in the
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.
21
Years Ended December 31, 2017, 2016 and 2015
The following table provides selected financial information for the years ended December 31, 2017, 2016 and 2015, including the reconciliation of
organic revenue decline to net revenue decline:
Revenues
Gross profit
% of revenues
Selling, general and administrative
% of revenues
Intangible amortization
Impairment of goodwill and intangible assets
Special charges
Other income (expense), net
Related party interest expense, net
Interest expense, net
Loss on early extinguishment of debt
Income (loss) before income taxes
Income tax benefit (provision)
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Year ended December 31,
2017
2016
$
1,951.5
$
1,996.0
$
616.4
31.6%
460.4
23.6%
17.6
—
19.3
1.3
—
(62.5)
—
57.9
(11.1)
46.8
0.4
624.6
31.3%
465.2
23.3%
20.0
442.2
79.8
(3.4)
—
(57.1)
(38.9)
(482.0)
101.0
(381.0)
0.8
Net income (loss) attributable to SPX FLOW, Inc.
$
46.4
$
(381.8)
$
Components of consolidated and combined revenue decline:
Organic decline
Foreign currency
Net revenue decline
* Not meaningful for comparison purposes.
2015
2,388.5
792.2
2017 vs. 2016 % 2016 vs. 2015 %
(16.4)
(2.2)
(1.3)
(21.2)
33.2%
549.1
23.0%
23.4
22.7
42.6
0.9
(2.2)
(15.9)
—
137.2
(49.8)
87.4
(0.1)
87.5
(1.0)
(15.3)
(12.0)
*
(75.8)
(138.2)
*
9.5
*
(112.0)
(111.0)
(112.3)
(50.0)
(112.2)
(3.0)
0.8
(2.2)
(14.5)
*
87.3
*
(100.0)
*
*
*
*
*
*
*
(14.2)
(2.2)
(16.4)
Revenues - For 2017, the decrease in revenues, compared to 2016, was due primarily to a decrease in organic revenue, partially offset by a weakening
of the U.S. dollar against various foreign currencies. The decrease in organic revenue was due primarily to reduced customer capital investments, particularly
in oil and dairy related markets, and reflects the lower levels of backlog of each of our segments as of the beginning of 2017 when compared to the beginning
of 2016, which were $784.1 and $905.0 on a consolidated basis, respectively. See "Results of Reportable Segments" for additional details.
For 2016, the decrease in revenues, compared to 2015, was due primarily to a decrease in organic revenue and, to a lesser extent, a strengthening of
the U.S. dollar against various foreign currencies. The decrease in organic revenue was due primarily to the impacts of lower oil and dairy prices on customer
order patterns. See "Results of Reportable Segments" for additional details.
Gross Profit - The decrease in gross profit for 2017, compared to 2016, was attributable primarily to the revenue decline noted above. The increase
in gross margin for 2017, compared to 2016, was due primarily to savings from restructuring actions and other cost reduction initiatives and improved
productivity in our Poland facility, partially offset by an increase in incentive compensation based on the Company’s performance relative to certain incentive
targets in 2017 as compared to 2016. See "Results of Reportable Segments" for additional details.
The decrease in gross profit and margin during 2016, compared to 2015, was attributable primarily to the revenue decline noted above. Gross margin
decreased, compared to 2015, due also to competitive pricing pressures, lower utilization rates at certain of our manufacturing locations, transition costs
related to the expansion of our Poland facility, and increased cost estimates related to certain large systems projects, partially offset by savings from
restructuring actions and other cost reduction initiatives. See "Results of Reportable Segments" for additional details.
Selling, General and Administrative (“SG&A”) Expense - For 2017, the decrease in SG&A expense, compared to 2016, was due primarily to savings
from restructuring actions related to our global realignment program and other cost reduction initiatives implemented during 2016 and 2017, partially offset
by an increase in incentive compensation for the reason previously noted.
22
For 2016, the decrease in SG&A expense, compared to 2015, was due primarily to (i) reduced incentive compensation expense due to lower
profitability in 2016 compared to 2015, (ii) savings from restructuring actions resulting from our global realignment program, announced during the first
quarter of 2016, (iii) a reduction in stock-based compensation expense (see “Corporate Expense and Pension and Postretirement Service Costs” for additional
details), and (iv) the effect of a stronger U.S. dollar against various foreign currencies during the period.
Prior to the Spin-Off in September 2015, SG&A expense included allocations of general corporate expenses from our former Parent, including
pension and postretirement expense and stock-based compensation expense. See Note 1 to our consolidated and combined financial statements for further
details on our methodology for allocating corporate-related costs prior to the Spin-Off.
Intangible Amortization - For 2017 and 2016, the decrease in intangible amortization, compared to 2016 and 2015, respectively, was due primarily to
a reduction in intangible assets subject to amortization that resulted primarily from the impairment of certain such assets of our Power and Energy reportable
segment during the second quarter of 2016 and, to a lesser extent, the effect of a stronger U.S. dollar against various foreign currencies in 2016 compared to
2015.
Impairment of Goodwill and Intangible Assets - During 2016, we recorded an impairment charge of $252.8 to reduce the goodwill of our Power and
Energy reporting unit to its implied fair value. We also recorded an additional impairment charge of $183.9 related to certain intangible assets of certain
businesses within our Power and Energy reportable segment, and of $5.5 related to a certain technology asset of a business within our Food and Beverage
reportable segment. These impairment charges resulted primarily from the ongoing impact of lower oil prices on the purchase patterns of our customers in the
oil and gas markets, which continued from 2015.
During 2015, we recorded impairment charges of (i) $15.0 related to the trademarks of a business within our Power and Energy reportable segment
primarily resulting from the impact of lower oil prices on the purchasing patterns of our customers in the oil and gas markets, and (ii) $7.7 related to certain
technology assets and trademarks associated with a business in our Food and Beverage reportable segment due primarily to a decline in order rates and
projected future revenues for products derived from such technology assets and trademarks.
See Note 7 to our consolidated and combined financial statements for further discussion of impairment charges.
Special Charges - Special charges for 2017, 2016 and 2015 related primarily to our global realignment program including restructuring initiatives to
consolidate manufacturing, distribution, sales and administrative facilities, reduce workforce, and rationalize certain product lines, as well as asset impairment
charges. See Note 5 to our consolidated and combined financial statements for the details of restructuring actions taken in 2017, 2016 and 2015. The
components of special charges were as follows:
Employee termination costs
Facility consolidation costs
Other cash costs, net
Non-cash asset write-downs and other
Total(1)
Year ended December 31,
2017
2016
2015
11.5 $
50.5 $
2.9
—
4.9
9.3
0.3
19.7
19.3 $
79.8 $
38.5
2.5
—
1.6
42.6
$
$
(1)
Includes $4.5, $16.5 and $23.0 in 2017, 2016 and 2015, respectively, related to the ongoing consolidation and relocation of two manufacturing facilities, located in Germany
and Denmark, to an existing facility in Poland, as well as $3.3 in 2017 related to the consolidation and relocation of two manufacturing operations, located in Sweden and the
Netherlands, to the facility in Poland and other locations.
Other Income (Expense), net - Other income, net, for 2017 was composed of gains of $3.5 related to the remeasurement of an indemnification
receivable from a third party related to certain of the Company's foreign defined benefit pension obligations, net gains on asset sales and other of $2.9, non-
service-related pension and postretirement benefits of $0.9 and other items of $0.3, partially offset by foreign currency (“FX”) losses of $4.9 and investment-
related losses of $1.4. The investment-related losses represented unrealized losses on our investment in an equity security. See Note 14 to our consolidated
and combined financial statements for additional details.
Other expense, net, for 2016 was composed of non-service related pension and postretirement costs of $2.5, FX losses of $2.2, net settlement costs
related to certain legal and tax-related claims of $0.7 and investment-related losses of $0.5, partially offset by net gains on asset sales and other of $2.5.
23
Other income, net, for 2015 was composed of net gains on asset sales and other of $8.0, FX gains of $1.1 and investment-related earnings of $0.7,
partially offset by non-service related pension and postretirement costs of $8.9.
Related Party Interest Expense, net - Related party interest expense, net, in 2015 was comprised of interest on notes receivable and notes payable
with our former Parent (and certain other of its affiliates that were not part of the Spin-Off) serving as the counterparties. See Note 15 to our consolidated and
combined financial statements for additional details on our related party notes.
Related party interest expense, net, for 2015 was comprised of $28.4 of interest expense, partially offset by $26.2 of interest income. All related
party notes payable were extinguished by way of capital contribution to the Company by our former Parent, and all related party notes receivable were
transferred to our former Parent or canceled by the Company, prior to the Spin-Off.
Interest Expense, net - Interest expense, net, is comprised primarily of interest expense related to (i) our senior notes and senior credit facilities and,
to a lesser extent, interest expense related to our trade receivables financing arrangement, after the Spin-Off, and (ii) capital lease obligations and
miscellaneous lines of credit during all periods presented, partially offset by interest income on cash and equivalents.
Interest expense, net, included interest expense of $67.2, $60.6 and $18.0, and interest income of $4.7, $3.5 and $2.1, respectively, during 2017,
2016 and 2015, respectively. See Note 10 to our consolidated and combined financial statements for additional details on our third-party debt.
Loss on Early Extinguishment of Debt - As previously noted, in August 2016, we completed the redemption of all of our 6.875% senior notes due in
August 2017 for a total redemption price of $636.4. As a result of the redemption, we recorded a charge of $38.9 during 2016, which related to premiums
paid to redeem the senior notes of $36.4, the write-off of unamortized deferred financing fees of $1.9, and other costs associated with the extinguishment of
the senior notes of $0.6.
Income Tax Benefit (Provision) - During 2017, we recorded an income tax provision of $11.1 on $57.9 of income before income taxes, resulting in an
effective tax rate of 19.2%. The effective tax rate for 2017 was impacted by an income tax benefit of $71.2 related to revaluation of our net deferred tax
liabilities resulting from the change in the U.S. federal tax rate, including the reduction for earnings that were not indefinitely reinvested, and income tax
charges of (i) $50.4 for the deemed repatriation tax and (ii) $11.6 resulting from losses occurring in certain jurisdictions where the tax benefit of those losses
is not expected to be realized.
During 2016, we recorded an income tax benefit of $101.0 on $482.0 of loss before income taxes, resulting in an effective tax rate of 21.0%. The
effective tax rate for 2016 was impacted by tax benefits of (i) $59.3 resulting from the $426.4 goodwill and intangible assets impairment charge recorded by
our Power and Energy reporting unit during the second quarter (an effective tax rate of 13.9%), as (a) the majority of the goodwill of the Power and Energy
reporting unit had no basis for income tax purposes and (b) the impairment charge resulted in the addition of a valuation allowance for deferred income tax
assets in certain jurisdictions, and (ii) $23.8 resulting from a tax incentive realized in Poland related to the expansion of our manufacturing facility in that
country.
During 2015, we recorded an income tax provision of $49.8 on $137.2 of income before income taxes, resulting in an effective tax rate of 36.3%.
The effective tax rate for 2015 was impacted by tax charges of $11.7 related to dividends from foreign subsidiaries, partially offset by tax benefits of (i) $5.1
related to net changes in uncertain tax positions, (ii) $2.8 related to tax rate decreases in Italy and the U.K. and (iii) $2.0 related to FX losses recognized for
income tax purposes with respect to a foreign branch.
RESULTS OF REPORTABLE SEGMENTS
The following information should be read in conjunction with our consolidated and combined financial statements and related notes.
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 Operations-Non-
GAAP Measures."
24
Food and Beverage
Revenues
Income
% of revenues
Components of revenue growth (decline):
Organic decline
Foreign currency
Net revenue decline
Year ended December 31,
2017
2016
2015
2017 vs. 2016 %
2016 vs. 2015 %
$
715.9
$
728.3
$
74.9
10.5%
75.1
10.3%
869.8
104.4
12.0%
(1.7)
(0.3)
(2.7)
1.0
(1.7)
(16.3)
(28.1)
(15.2)
(1.1)
(16.3)
Revenues - For 2017, the decrease in revenues, compared to 2016, was due to a decrease in organic revenue, partially offset by the weakening of the
U.S. dollar during the period against various foreign currencies. The decrease in organic revenue was due primarily to the impact on revenues of a lower
backlog as of the beginning of 2017, compared to the beginning of 2016, due to a decline in dairy pricing which began in 2015, and the resulting impact on
the placement of large systems orders throughout 2016 and the first half of 2017. The reduced volume of systems revenue in 2017 was partially offset by
increased revenues of component parts and aftermarket sales.
For 2016, the decrease in revenues, compared to 2015, was due to a decrease in organic revenue and, to a lesser extent, the strengthening of the U.S.
dollar during the period against various foreign currencies. The decrease in organic revenue was due primarily to the impact on revenues of a lower backlog
as of the beginning of 2016, compared to 2015, due to a decline in dairy pricing which began in 2015, as well as the impact of such lower prices on the
placement of large systems orders, particularly for milk powder projects, during 2016.
Income - For 2017, the moderate decrease in income and increase in margin, compared to 2016, was primarily due to the revenue decline noted
above and the effects of an increase in incentive compensation, which were substantially mitigated by improved productivity in our Poland facility, improved
project execution, and savings from restructuring actions and other cost reduction initiatives.
For 2016, income and margin decreased, compared to 2015, primarily due to the revenue decline noted above, as well as transition costs related to
the expansion of our Poland facility and increased cost estimates related to certain large systems projects in 2016. These declines in income and margin were
partially offset by savings from restructuring actions and other cost reduction initiatives during the period.
Backlog - The segment had backlog of $371.7 and $295.7 as of December 31, 2017 and 2016, respectively. Of the $76.0 year-over-year growth in
backlog, $49.9 was attributable to organic growth and $26.1 was attributable to the impact of fluctuations in foreign currencies relative to the U.S. dollar. The
organic growth was due primarily to the impact of two orders in the aggregate amount of $71.5 awarded to the Company during the fourth quarter of 2017,
related to dairy processing systems in the EMEA region. Under existing accounting principles, approximately 76% of the segment's backlog as of
December 31, 2017 is expected to be recognized as revenue during 2018. See Note 3 to our consolidated and combined financial statements for additional
details regarding changes in revenue recognition methods that become effective in the first quarter of 2018.
Power and Energy
Revenues
Income
% of revenues
Components of revenue decline:
Organic decline
Foreign currency
Net revenue decline
Year ended December 31,
2017
2016
2015
2017 vs. 2016 %
2016 vs. 2015 %
$
543.2
$
562.7
$
35.5
6.5%
25.4
4.5%
750.2
83.8
11.2%
(3.5)
39.8
(3.5)
—
(3.5)
(25.0)
(69.7)
(21.0)
(4.0)
(25.0)
25
Revenues - For 2017, the decrease in revenues, compared to 2016, was due to a decrease in organic revenue. The decline in organic revenue reflects
the impact on revenues of a lower backlog as of the beginning of 2017, compared to the beginning of 2016, due primarily to reduced customer spending,
particularly for original equipment used in upstream and midstream oil applications, as well as lower aftermarket revenues.
For 2016, the decrease in revenues, compared to 2015, was due primarily 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, primarily the British Pound. The decrease in organic revenue was due primarily to the
impact on revenues of a lower backlog as of the beginning of 2016, compared to 2015, due to lower oil prices, as well as the impact of such lower prices on
customer order patterns during 2016. In addition, organic revenue declined as a result of revenues realized from a large nuclear project during 2015 which did
not recur in 2016.
Income - For 2017, income and margin increased, compared to 2016, primarily due to savings from restructuring actions and other cost reduction
initiatives, the effects of which were partially offset by the revenue decline noted above and increased incentive compensation.
For 2016, income and margin decreased, compared to 2015, primarily due to the revenue decline mentioned above, including primarily lower
revenue from high margin aftermarket and valve sales as well as low utilization rates at certain manufacturing locations. These declines were partially offset
by savings from restructuring actions and other cost reduction initiatives during the period.
Backlog - The segment had backlog of $409.1 and $323.9 as of December 31, 2017 and 2016, respectively. Of the $85.2 year-over-year growth in
backlog, $58.0 was attributable to organic growth, primarily to the impact of certain orders received for pumps and midstream valves and $27.2 was
attributable to the impact of fluctuations in foreign currencies relative to the U.S. dollar. Under existing accounting principles, approximately 74% of the
segment's backlog as of December 31, 2017 is expected to be recognized as revenue during 2018. See Note 3 to our consolidated and combined financial
statements for additional details regarding changes in revenue recognition methods that become effective in the first quarter of 2018.
Industrial
Revenues
Income
% of revenues
Components of revenue growth (decline):
Organic decline
Foreign currency
Net revenue decline
Year ended December 31,
2017
2016
2015
2017 vs. 2016 %
2016 vs. 2015 %
$
692.4
$
705.0
$
86.1
12.4%
98.8
14.0%
768.5
105.0
13.7%
(1.8)
(12.9)
(2.8)
1.0
(1.8)
(8.3)
(5.9)
(6.6)
(1.7)
(8.3)
Revenues - For 2017, the decrease in revenues, compared to 2016, was due to a decrease in organic revenue, partially offset by the weakening of the
U.S. dollar during the period against various foreign currencies. The decrease in organic revenue was due primarily to lower sales of mixers including, but not
limited to, the result of the revenues realized from the shipment of a large mixer project during the fourth quarter of 2016 which did not recur in 2017.
For 2016, the decrease in revenues, compared to 2015, 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 due primarily to lower sales of hydraulic tools into the oil
and gas market, lower large capital project revenues, and lower sales of heat exchangers, dehydration equipment and mixers.
Income - For 2017, income and margin decreased, compared to 2016, primarily due to the revenue decline noted above as well as to increased
incentive compensation. These reductions in income and margin were partially offset by savings from restructuring actions and other cost reduction initiatives
during the period.
For 2016, income decreased, compared to 2015, primarily due to the revenue decline noted above. For 2016, margin increased, compared to 2015, as
the effect of savings from restructuring actions and other cost reduction initiatives, particularly in the second half of 2016, more than offset the effects of
lower utilization rates at certain of our manufacturing locations as well as a lower mix of higher margin projects during the period.
Backlog - The segment had backlog of $217.3 and $164.5 as of December 31, 2017 and 2016, respectively. Of the $52.8 year-over-year growth in
backlog, $41.7 was attributable to organic growth and $11.1 was attributable to the impact of fluctuations
26
in foreign currencies relative to the U.S. dollar. Under existing accounting principles, approximately 90% of the segment's backlog as of December 31, 2017
is expected to be recognized as revenue during 2018. See Note 3 to our consolidated and combined financial statements for additional details regarding
changes in revenue recognition methods that become effective in the first quarter of 2018.
CORPORATE EXPENSE AND PENSION AND POSTRETIREMENT SERVICE COSTS
Total consolidated and combined revenues
$
1,951.5
$
1,996.0
$
2,388.5
Corporate expense
% of revenues
Pension and postretirement service costs
56.6
2.9%
1.5
58.0
2.9%
1.9
71.6
3.0%
1.9
(2.2)
(2.4)
(16.4)
(19.0)
(21.1)
—
Year ended December 31,
2017
2016
2015
2017 vs. 2016 %
2016 vs. 2015 %
Corporate Expense - Corporate expense generally relates to the cost of our Charlotte, NC corporate headquarters and our Asia Pacific center in
Shanghai, China for the period subsequent to the Spin-Off in September 2015. Corporate expense included allocations of general corporate expenses from our
former Parent that largely related to the cost of corporate functions and/or resources provided by our former Parent for the period prior to the Spin-Off. See
Note 1 to our consolidated and combined financial statements for further details on our methodology for allocating corporate-related costs prior to the Spin-
Off. Corporate expense also reflects stock-based compensation costs associated with corporate employees.
The decrease in corporate expense during 2017, compared to 2016, was due primarily to savings from restructuring actions undertaken during 2016
and other cost reduction initiatives, including the effects of restructuring actions on corporate stock-based compensation expense, which was partially offset
by increased incentive compensation based on the Company's performance relative to certain incentive targets in 2017, as compared to 2016.
The decrease in corporate expense during 2016, compared to 2015, was due primarily to a reduction in (i) corporate stock-based compensation
expense and (ii) incentive compensation expense associated with lower profitability in 2016, compared to 2015.
The reduction in corporate stock-based compensation expense during 2016, compared to 2015, reflects primarily (i) changes in the composition of
our management team on a year-over-year basis, as well as (ii) the benefit of forfeitures of certain awards during 2016. In 2015, our corporate stock-based
compensation expense included an allocation of expense related to certain former officers whose awards became fully vested during the first quarter of 2015,
based on early retirement provisions contained within the applicable award agreements. In 2016, a greater portion of corporate stock-based compensation
expense related to our current management team is being recognized ratably over the relevant performance or service period of the applicable awards
(generally three years).
See Note 12 to our consolidated and combined financial statements for further details regarding our stock-based compensation awards.
Pension and Postretirement Service Costs - SPX FLOW sponsors a number of defined benefit pension plans and a postretirement plan. Prior to the
Spin-Off, certain eligible employees associated with SPX FLOW were participants in defined benefit pension and postretirement plans sponsored by our
former Parent. For all of these plans, changes in the fair value of plan assets and actuarial gains and losses are recognized to 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 2017, pension and postretirement service costs decreased, compared to 2016, as a result of cessation of the accrual of future benefits by
participants in a defined benefit pension plan in the Netherlands effective during the first quarter of 2017. The accumulated obligations for future pension
payments to participants in this plan were also transferred to an insurance company at that time. Under the agreement, the insurance company irrevocably
assumed the obligation to make future pension payments to the approximately 60 participants of this plan.
Pension and postretirement service costs for the period subsequent to the Spin-Off in September 2015 represents service costs associated with plans
that SPX FLOW sponsors. For the period prior to the Spin-Off, pension and postretirement service costs represents net periodic service costs associated with
the plans we sponsor as well as an allocation of a portion of the net periodic service costs associated with the plans sponsored by our former Parent. See
Note 1 to our consolidated and combined financial statements for further details on our methodology for allocating corporate-related costs prior to the Spin-
Off.
27
See Note 8 to our consolidated and combined financial statements for further details on our pension and postretirement plans, as well as our allocated
portion of costs related to plans sponsored by our former Parent prior to the Spin-Off.
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 and equivalents, for the
years ended December 31, 2017, 2016 and 2015.
Cash Flow
Cash flows from (used in) operating activities
Cash flows from (used in) investing activities
Cash flows from (used in) financing activities
Change in cash and equivalents due to changes in foreign currency exchange rates
Net change in cash and equivalents
Years Ended December 31, 2017 and 2016
Year ended December 31,
2017
2016
2015
205.0 $
(27.9) $
17.8
(218.6)
44.4
(40.0)
21.1
(34.0)
48.6 $
(80.8) $
213.6
(44.8)
(68.1)
(21.4)
79.3
$
$
Operating Activities—During 2017, the increase in cash flows from operating activities, compared to 2016, was primarily attributable to (i)
improvements in working capital driven by the timing of project execution and associated milestone payments, (ii) pension benefit payments of $65.9 to
certain former officers of the Company during 2016 which did not recur during 2017 and (iii) reduced payments for incentive compensation.
Investing Activities—During 2017, cash flows from investing activities were comprised primarily of proceeds from asset sales and other of $37.4,
partially offset by capital expenditures of $19.4, associated generally with upgrades of manufacturing facilities and information technology. Proceeds from
asset sales and other of $37.4 in 2017 related primarily to the sale of (i) certain corporate assets which were marketed for sale beginning in 2016, (ii) certain
facilities in the EMEA and Asia Pacific regions, and (iii) our former investment in an equity security. See Note 14 to our consolidated and combined financial
statements for additional details regarding our former investment in the equity security. During 2016, cash flows used in investing activities were comprised
of capital expenditures of $44.0 associated generally with upgrades of manufacturing facilities and information technology, partially offset by proceeds from
asset sales and other of $4.0.
Financing Activities —During 2017, cash flows used in financing activities related primarily to net repayments of our senior credit facilities
of $188.0 and of our trade receivables financing arrangement of $21.2. Cash flows from financing activities during 2016 related primarily to proceeds
received from issuance of our 5.625% and 5.875% senior notes of $600.0, net borrowings under our senior credit facilities of $58.0, and net borrowings under
our trade receivables financing arrangement of $21.2, partially offset by repurchases of our 6.875% senior notes of $636.4 (including premiums paid of
$36.4), and payments of deferred financing fees of $15.5.
Change in Cash and Equivalents due to Changes in Foreign Currency Exchange Rates - The increase in cash and equivalents due to foreign
currency exchange rates of $44.4 during 2017, reflected primarily an increase in U.S. dollar equivalent balances of foreign-denominated cash and equivalents
as a result of the weakening of the U.S. dollar against the Euro, British Pound and various other foreign currencies during the period. The decrease in cash and
equivalents due to foreign currency exchange rates of $34.0 in 2016 reflected primarily a reduction in U.S. dollar equivalent balances of foreign-denominated
cash and equivalents as a result of the strengthening of the U.S. dollar against the British Pound and various other foreign currencies.
Years Ended December 31, 2016 and 2015
Operating Activities—During 2016, the decrease in cash flows from operating activities, compared to 2015, was primarily attributable to (i) a decline
in segment profitability, (ii) pension benefit payments of $65.9 to certain former officers of the Company in 2016, (iii) an increase in cash spending on
restructuring actions, and (iv) interest payments of $38.8 related to our senior notes in 2016.
Investing Activities—During 2016, cash flows used in investing activities were comprised of capital expenditures of $44.0 associated generally with
upgrades of manufacturing facilities and information technology, partially offset by proceeds
28
from asset sales and other of $4.0. Cash flows used in investing activities during 2015 were comprised primarily of capital expenditures of $57.0 associated
generally with upgrades of manufacturing facilities and information technology, partially offset by proceeds from asset sales and other of $12.5.
Financing Activities —During 2016, cash flows from financing activities related primarily to proceeds received from issuance of our 5.625% and
5.875% senior notes of $600.0, net borrowings under our senior credit facilities of $58.0, and net borrowings under our trade receivables financing
arrangement of $21.2, partially offset by repurchases of our 6.875% senior notes of $636.4 (including premiums paid of $36.4), and payments of deferred
financing fees of $15.5. Cash flows used in financing activities during 2015 related primarily to net transfers to our former Parent of $453.9, repayments of
related party notes payable of $5.4, and payments of deferred financing fees of $6.2, partially offset by net borrowings under our senior credit facilities of
$400.0.
Change in Cash and Equivalents due to Changes in Foreign Currency Exchange Rates—The decrease in cash and equivalents due to foreign
currency exchange rates of $34.0 and $21.4 in 2016 and 2015, respectively, reflected primarily a reduction in U.S. dollar equivalent balances of foreign-
denominated cash and equivalents as a result of the strengthening of the U.S. dollar against the British Pound during 2016 and against various other foreign
currencies during both periods.
Borrowings and Availability
Borrowings —Debt at December 31, 2017 and 2016 was comprised of the following:
Domestic revolving loan facility
Term loan(1)
5.625% senior notes, due in August 2024
5.875% senior notes, due in August 2026
Trade receivables financing arrangement
Other indebtedness(2)
Less: deferred financing fees(3)
Total debt
Less: short-term debt
Less: current maturities of long-term debt
Total long-term debt
December 31,
2017
2016
$
— $
270.0
300.0
300.0
—
35.8
(10.2)
895.6
24.2
20.5
$
850.9 $
68.0
390.0
300.0
300.0
21.2
42.4
(12.8)
1,108.8
27.7
20.2
1,060.9
(1)
(2)
The term loan, which had an initial principal balance of $400.0, is repayable in quarterly installments of 5.0% annually which began with our third quarter of 2016, with the
remaining balance repayable in full on September 24, 2020. In October and December 2017, we made voluntary principal prepayments in the amounts of $80.0 and $20.0,
respectively, under the term loan facility. On January 31, 2018, we made an additional voluntary principal prepayment of $30.0 under this facility. As a result of the January 2018
prepayment, the outstanding principal amount on the term loan decreased to $240.0. The payment was funded by cash on hand. There was no penalty associated with these prepayments.
Primarily includes capital lease obligations of $11.6 and $14.7 and balances under a purchase card program of $21.9 and $17.9 as of December 31, 2017 and 2016,
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.
(3)
Deferred financing fees were comprised of fees related to the term loan and senior notes.
Senior Credit Facilities
On September 1, 2015, we entered into senior credit facilities with a syndicate of lenders that provide for committed senior secured financing in the
aggregate initial principal amount of $1.35 billion, consisting of the following, each with a final maturity of September 24, 2020:
•
•
A term loan facility in an aggregate initial principal amount of $400.0;
A domestic revolving credit facility, available for loans and letters of credit, in an aggregate principal amount up to $250.0;
29
A global revolving credit facility, available for loans (and performance letters of credit and guarantees up to the equivalent of $100.0) in
Euro, British Pound and other currencies, in an aggregate principal amount up to the equivalent of $200.0;
A participation multi-currency foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate
principal amount up to the equivalent of $250.0; and
A bilateral multi-currency foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate
principal amount up to the equivalent of $250.0.
•
•
•
Senior Notes
In August 2016, the Company completed its issuance of $600.0 in aggregate principal amount of senior unsecured notes comprised of one tranche of
$300.0 aggregate principal amount of 5.625% senior notes due in August 2024 (the “2024 Notes”) and one tranche of $300.0 aggregate principal amount of
5.875% senior notes due in August 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”). The interest payment dates for the Notes are
February 15 and August 15 of each year, with interest payable in arrears. The proceeds of the Notes, together with borrowings under our domestic revolving
loan facility, were used to complete the tender offer and repurchase/redemption of the $600.0 outstanding aggregate principal amount of our 6.875% senior
notes due in August 2017, including $36.4 of premiums paid.
Availability
At December 31, 2017, we had $443.0 of borrowing capacity under our revolving credit facilities after giving effect to $7.0 reserved for outstanding
letters of credit. At December 31, 2017, we had $33.8 of available borrowing capacity under our trade receivables financing arrangement. Our trade
receivables financing arrangement provides for a total commitment of $50.0 from associated lenders, depending upon our trade receivables balance and other
factors. In addition, at December 31, 2017, we had $313.1 of available issuance capacity under our foreign credit instrument facilities after giving effect to
$186.9 reserved for outstanding letters of credit.
Refer to Note 10 to our consolidated and combined financial statements for further information on our borrowings as of December 31, 2017.
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 of December 31, 2017, 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 (including the sale of a business). 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 11 to our consolidated and combined financial statements). Our principal currency exposures relate to the Euro, Chinese Yuan and
British Pound.
30
We had FX forward contracts with an aggregate notional amount of $44.6 and $28.0 outstanding as of December 31, 2017 and 2016, respectively,
with all such contracts scheduled to mature within one year. We also had FX embedded derivatives with an aggregate notional amount of $16.9 and $21.4 at
December 31, 2017 and 2016, respectively, with all such derivatives scheduled to mature within one year. There were no unrealized gains or losses recorded
in accumulated other comprehensive loss related to FX forward contracts as of December 31, 2017 and 2016, respectively. The net gains (losses) recorded in
"Other income (expense), net" related to foreign currency gains (losses) totaled $(4.9), $(2.2), and $1.1 for the years ended December 31, 2017, 2016 and
2015, respectively.
The net fair values of our FX forward contracts and FX embedded derivatives were $2.3 (asset) and $2.8 (asset) at December 31, 2017 and 2016,
respectively.
Other Fair Value Financial Assets and Liabilities
The carrying amounts of cash and equivalents and receivables 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 capital leases and deferred financing fees), based on borrowing rates available to us at
December 31, 2017 for similar debt, was $929.5, compared to our carrying value of $894.2.
As of December 31, 2016, the fair value of our debt instruments (excluding capital leases and deferred financing fees), based on borrowing rates
available to us at December 31, 2016 for similar debt, was $1,103.2, compared to our carrying value of $1,106.9.
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 FX 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, 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 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.
Cash and Other Commitments
We use operating leases to finance certain equipment, vehicles and properties. At December 31, 2017, we had $84.3 of future minimum rental
payments under operating leases with remaining non-cancelable terms in excess of one year.
Capital expenditures for 2017 totaled $19.4, compared to $44.0 and $57.0 in 2016 and 2015, respectively. Capital expenditures in 2017 related
primarily to upgrades of manufacturing facilities and information technology. We expect 2018 capital expenditures to approximate $30, with a significant
portion related to additional upgrades of manufacturing facilities and information technology. 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.
In 2017, we made contributions and direct benefit payments of $2.8 to our defined benefit pension and postretirement plans. We expect to make $2.6
of minimum required funding contributions and direct benefit payments in 2018. Our pension plans have not experienced any liquidity difficulties or
counterparty defaults due to the volatility in the credit markets. See Note 8 to our consolidated and combined financial statements for further disclosure of
expected future contributions and benefit payments.
On a net basis, we paid $12.2, $43.4 and $35.9 in income taxes in 2017, 2016 and 2015, respectively. The amount of income taxes we pay annually
is dependent on various factors, including the timing of certain deductions. Deductions and the
31
amount of income taxes can and do vary from year to year. See Note 9 to our consolidated and combined 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, 2017, except as discussed in Note 13 to our consolidated and combined financial statements and in the contractual obligations
table below, we did not have any material guarantees, off-balance sheet arrangements or purchase commitments.
We continually 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
"Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" for an understanding of the risks, uncertainties
and trends facing our businesses.
Contractual Obligations
The following is a summary of our primary contractual obligations as of December 31, 2017:
Total
Due Within 1
Year
Due in 1-3 Years
Due in 3-5
Years
Due After 5
Years
Short-term debt obligations
$
24.2 $
24.2 $
Long-term debt obligations (excluding deferred financing fees)
Pension and postretirement benefit plan contributions and payments(1)
Purchase and other contractual obligations(2)
Future minimum operating lease payments(3)
Interest payments
Total contractual cash obligations(4)
881.6
90.3
133.3
84.3
291.8
20.5
2.7
121.1
22.1
44.6
— $
252.6
12.2
11.3
33.0
84.4
— $
2.7
5.6
0.6
17.6
69.6
—
605.8
69.8
0.3
11.6
93.2
$
1,505.5 $
235.2 $
393.5 $
96.1 $
780.7
(1)
(2)
(3)
(4)
Estimated minimum required pension contributions and pension and postretirement benefit payments are based on actuarial estimates using current assumptions for, among
other things, discount rates, expected long-term rates of return on plan assets (where applicable), rates of compensation increases, and health care cost trend rates. See Note 8
to our consolidated and combined financial statements for additional information on expected future contributions and benefit payments.
Represents contractual commitments to purchase goods and services at specified dates.
Represents rental payments under operating leases with remaining non-cancelable terms in excess of one year.
Contingent obligations, such as environmental accruals and those relating to uncertain tax positions, generally do not have specific payment dates and accordingly have been
excluded from the above table. 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 $0.0 to $1.5. In addition, the above table does not include
potential payments under our derivative financial instruments.
We believe that our cash flows, together with cash and equivalents on hand, and availability under revolving credit facilities and our trade
receivables financing arrangement, 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
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.
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 Notes 1 and 2 to our consolidated and combined financial statements,
which include a detailed discussion of these and other accounting policies.
32
Long-Term Contract Accounting
Certain of our businesses recognize revenues and profits from long-term construction/installation contracts under the percentage-of-completion
method of accounting. The percentage-of-completion method requires estimates of future revenues and costs over the full term of product delivery. We
measure the 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 the percentage-of-completion method, we recognized revenues of $267.0, $339.7 and $490.7 during the years ended December 31, 2017,
2016 and 2015, respectively.
We record any provision for estimated losses on uncompleted long-term contracts in the period in which the losses are determined. In the case of
customer change orders for uncompleted long-term 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 under the percentage-of-completion method 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 our long-term contracts. Each long-term contract is unique,
but typically similar enough to other contracts that we can effectively leverage our experience. As our long-term 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 under the Revenue
Recognition Topic of the Codification.
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 long-term contracts 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 11 to our
consolidated and combined financial statements for additional details on our FX forward contracts.
33
Unbilled receivables on uncompleted contracts 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.
We periodically make claims against customers, suppliers and sub-contractors associated with alleged non-performance and other disputes over
contractual terms. Claims related to long-term contracts 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 3 to our consolidated and combined financial statements for discussion regarding the expected impact of our adoption of new guidance for
revenue recognition effective in the first quarter of 2018.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
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 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 2017, 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. During 2016 and 2015, we recorded impairment charges of $37.1 and $15.6,
respectively, related to trademarks of certain of our businesses. In addition, during 2016, we recorded impairment charges of $115.9 and $36.4 related to
certain customer relationship and technology assets of our businesses, respectively. We determined the impairment for customer relationships and technology
assets by comparing the future expected cash flows associated with the customer relationships and technology assets, discounted at a rate of return that
reflects current market conditions, to their respective carrying values. Other changes in the gross values of trademarks and other identifiable intangible assets
related primarily to foreign currency translation.
Refer to Note 7 to our consolidated and combined financial statements for further information regarding our goodwill and indefinite-lived intangible
assets as of and during the year ended December 31, 2017.
34
Income Taxes
For purposes of our consolidated and combined financial statements, our income tax provision has been determined as if we filed income tax returns
on a stand-alone basis for the period prior to the Spin-Off. Our tax results from the period prior to the Spin-Off as presented in the consolidated and combined
financial statements may not be reflective of the results that we will generate in the future. In jurisdictions where we were included in the tax returns filed by
our former Parent or its subsidiaries that were not part of the Spin-Off, any income taxes payable resulting from the related income tax provision were
reflected in our combined balance sheet through the Spin-Off date within "Former parent company investment."
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 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 9 to our consolidated and combined financial statements for additional details regarding our uncertain tax positions and potential future
effects on our income tax positions and effective tax rate as a result of the recent passage of the Tax Cuts and Jobs Act (the “Act”).
Contingent Liabilities and Other Matters
We are subject to litigation 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.
Refer to Note 13 for discussion regarding amounts reported in “Mezzanine equity” on the consolidated balance sheet as of December 31, 2017 and
2016. Subsequent changes, if any, in amounts reported are not expected to have a material adverse effect 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.
New Accounting Pronouncements
See Note 3 to our consolidated and combined financial statements for a discussion of recent accounting pronouncements.
35
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity raw material prices, and we
selectively use financial instruments to manage certain of these risks. We do not enter into financial instruments for speculative or trading purposes; however,
these instruments may be deemed speculative if the future cash flows originally hedged are no longer probable of occurring as anticipated. Our currency
exposures vary, but are primarily concentrated in the Euro, Chinese Yuan and British Pound. We generally do not hedge currency translation exposures. Our
exposures for commodity raw materials vary, with the highest concentration relating to steel. See Note 11 to our consolidated and combined financial
statements for further details.
The following table provides information, as of December 31, 2017, about our primary outstanding debt obligations and presents principal cash
flows by expected maturity dates, weighted-average interest rates and fair values.
Term loan
Average interest rate
5.625% senior notes
Average interest rate
5.875% senior notes
Average interest rate
Expected Maturity Date Through December 31,
2018
2019
20.0
20.0
2020
230.0
2021
2022
Thereafter
—
—
—
Total
270.0
4.069%
—
—
—
—
—
300.0
300.0
5.625%
—
—
—
—
—
300.0
300.0
5.875%
Fair Value
270.0
315.0
320.3
We believe that cash and equivalents, cash flows from operations, and availability under revolving credit facilities and our trade receivables
financing arrangement will be sufficient to fund working capital needs, planned capital expenditures, dividend payments (if declared), other operational cash
requirements and required debt service obligations for at least the next 12 months.
We had FX forward contracts with an aggregate notional amount of $44.6 outstanding as of December 31, 2017, with all such contracts scheduled to
mature within one year. We had FX embedded derivatives with an aggregate notional amount of $16.9 outstanding as of December 31, 2017, with all such
derivatives scheduled to mature within one year. The gross fair values of our FX forward contracts and FX embedded derivatives, in aggregate, were $2.3
(gross assets) and $0.0 (gross liabilities) as of December 31, 2017.
36
ITEM 8. Consolidated and Combined Financial Statements And Supplementary Data
SPX FLOW, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm - Deloitte & Touche LLP
Consolidated and Combined Statements of Operations for the Years Ended December 31, 2017, 2016 and
2015
Consolidated and Combined Statements of Comprehensive Income (Loss) for the Years Ended December
31, 2017, 2016 and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated and Combined Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and
2015
Notes to Consolidated and Combined Financial Statements
38
40
41
42
43
45
46
All schedules are omitted because they are not applicable, not required or because the required information is included in our consolidated and combined
financial statements or notes thereto.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of SPX FLOW, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SPX FLOW, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and
2016, the related consolidated and combined statements of operations, comprehensive income (loss), equity, and cash flows, for each of the three years in the
period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 6, 2018, expressed an unqualified opinion
on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 6, 2018
We have served as the Company's auditor since 2015.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of SPX FLOW, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of SPX FLOW, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 6, 2018, expressed an
unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 6, 2018
39
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Revenues
Costs and expenses:
Cost of products sold
Selling, general and administrative
Intangible amortization
Impairment of goodwill and intangible assets
Special charges
Operating income (loss)
Other income (expense), net
Related party interest expense, net
Interest expense, net
Loss on early extinguishment of debt
Income (loss) before income taxes
Income tax benefit (provision)
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to SPX FLOW, Inc.
Basic income (loss) per share of common stock
Diluted income (loss) per share of common stock
Year ended December 31,
2017
2016
2015
$
1,951.5 $
1,996.0 $
2,388.5
1,335.1
460.4
17.6
—
19.3
119.1
1.3
—
(62.5)
—
57.9
(11.1)
46.8
0.4
1,371.4
465.2
20.0
442.2
79.8
(382.6)
(3.4)
—
(57.1)
(38.9)
(482.0)
101.0
(381.0)
0.8
$
$
$
46.4 $
(381.8) $
1.11 $
1.10 $
(9.23) $
(9.23) $
1,596.3
549.1
23.4
22.7
42.6
154.4
0.9
(2.2)
(15.9)
—
137.2
(49.8)
87.4
(0.1)
87.5
2.14
2.14
Weighted-average number of common shares outstanding — basic
Weighted-average number of common shares outstanding — diluted
41.799
42.183
41.345
41.345
40.863
40.960
The accompanying notes are an integral part of these statements.
40
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Net income (loss)
Other comprehensive income (loss), net:
Pension liability adjustment, net of tax provision of $0.0 in 2015
Foreign currency translation adjustments
Other comprehensive income (loss), net
Total comprehensive income (loss)
Less: Total comprehensive income (loss) attributable to noncontrolling interests
Year ended December 31,
2017
2016
2015
$
46.8 $
(381.0) $
87.4
—
149.3
149.3
196.1
1.1
—
(139.8)
(139.8)
(520.8)
(0.3)
(0.1)
(165.0)
(165.1)
(77.7)
(1.7)
(76.0)
Total comprehensive income (loss) attributable to SPX FLOW, Inc.
$
195.0 $
(520.5) $
The accompanying notes are an integral part of these statements.
41
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
ASSETS
Current assets:
Cash and equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment:
Land
Buildings and leasehold improvements
Machinery and equipment
Accumulated depreciation
Property, plant and equipment, net
Goodwill
Intangibles, net
Other assets
TOTAL ASSETS
LIABILITIES, MEZZANINE EQUITY AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Short-term debt
Current maturities of long-term debt
Total current liabilities
Long-term debt
Deferred and other income taxes
Other long-term liabilities
Total long-term liabilities
Commitments and contingent liabilities (Note 13)
Mezzanine equity
Equity:
SPX FLOW, Inc. shareholders’ equity:
Preferred stock, no par value, 3,000,000 shares authorized, and no shares issued and outstanding
Common stock, $0.01 par value, 300,000,000 shares authorized, 42,690,342 issued and 42,405,222 outstanding at December 31,
2017, and 42,092,393 issued and 41,920,477 outstanding at December 31, 2016
Paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Common stock in treasury (285,120 shares at December 31, 2017, and 171,916 shares at December 31, 2016)
Total SPX FLOW, Inc. shareholders' equity
Noncontrolling interests
Total equity
December 31,
2017
December 31, 2016
$
263.7 $
439.1
293.9
50.0
1,046.7
35.1
238.3
461.6
735.0
(374.1)
360.9
771.3
350.3
159.8
215.1
446.9
272.4
72.8
1,007.2
36.1
242.4
420.8
699.3
(322.0)
377.3
722.5
344.3
151.9
$
$
2,689.0 $
2,603.2
219.4 $
389.6
21.6
24.2
20.5
675.3
850.9
63.3
125.5
1,039.7
203.8
329.9
10.8
27.7
20.2
592.4
1,060.9
62.2
125.5
1,248.6
22.2
20.1
—
0.4
1,650.9
(327.5)
(372.8)
(8.9)
942.1
9.7
951.8
—
0.4
1,640.4
(373.9)
(521.4)
(4.9)
740.6
1.5
742.1
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY
$
2,689.0 $
2,603.2
The accompanying notes are an integral part of these statements.
42
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(in millions)
Common Stock
Shares
Outstanding
Par
Paid-In
Capital
Retained Earnings
(Accumulated
Deficit)
Accumulated Other
Comprehensive
Loss
Common
Stock in
Treasury
Former Parent
Company
Investment
Total SPX
FLOW, Inc.
Shareholders'
Equity
Noncontrolling
Interests
Total Equity
— $ — $
— —
— $
—
— $
21.1
(219.2) $
—
— $
—
2,144.6 $
66.4
1,925.4 $
87.5
13.4 $ 1,938.8
(0.1)
87.4
— —
— —
—
—
41.3
0.4
1,618.3
0.1 —
1.7
— —
5.4
—
—
—
—
—
(163.5)
—
—
—
—
(592.3)
(163.5)
(592.3)
(1.6)
—
(165.1)
(592.3)
—
—
—
—
—
—
(1,618.7)
—
—
—
1.7
5.4
—
—
—
—
1.7
5.4
— —
(3.7)
—
—
(1.4)
—
(5.1)
—
(5.1)
— —
—
41.4
0.4
— —
1,621.7
—
— —
0.3 —
—
6.5
— —
18.7
—
21.1
(381.8)
—
—
—
—
(382.7)
—
(138.7)
—
—
—
(1.4)
—
—
—
—
—
—
—
—
—
—
—
1,259.1
(381.8)
(138.7)
6.5
(0.2)
11.5
0.8
(1.1)
—
(0.2)
1,270.6
(381.0)
(139.8)
6.5
18.7
—
18.7
0.2 —
(6.5)
—
—
(3.5)
—
(10.0)
—
(10.0)
— —
—
(13.2)
—
—
—
(13.2)
(6.9)
(20.1)
— —
—
41.9
0.4
1,640.4
—
(373.9)
—
(521.4)
—
(4.9)
—
—
—
740.6
(2.8)
1.5
(2.8)
742.1
43
Balance at
December 31, 2014
Net income (loss)
Other
comprehensive
loss, net
Net transfers to
parent
Reclassification
of former parent
company
investment to
common stock
and paid-in
capital
Incentive plan
activity
Stock-based
compensation
expense
Restricted stock
and restricted
stock unit vesting,
including related
tax benefit of $3.6
and net of tax
withholdings
Dividends
attributable to
noncontrolling
interests
Balance at
December 31, 2015
Net income (loss)
Other
comprehensive
loss, net
Incentive plan
activity
Stock-based
compensation
expense
Restricted stock
and restricted
stock unit vesting,
including related
tax provision of
$5.6 and net of
tax withholdings
Adjustment to
mezzanine equity
and
reclassification
from
noncontrolling
interests
Dividends
attributable to
noncontrolling
interests
Balance at
December 31, 2016
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(in millions)
Net income
Other
comprehensive
income, net
Incentive plan
activity
Stock-based
compensation
expense
Restricted stock
and restricted
stock unit vesting,
net of tax
withholdings
Adjustment to
mezzanine equity
and
reclassification to
noncontrolling
interests
Dividends
attributable to
noncontrolling
interests and other
Balance at
December 31, 2017
Common Stock
Shares
Outstanding
Par
Paid-In
Capital
Retained Earnings
(Accumulated
Deficit)
Accumulated Other
Comprehensive
Loss
Common
Stock in
Treasury
Former Parent
Company
Investment
Total SPX
FLOW, Inc.
Shareholders'
Equity
— —
—
46.4
—
— —
0.2 —
—
5.7
— —
15.9
—
—
—
148.6
—
—
—
—
—
—
—
—
—
—
46.4
148.6
5.7
15.9
Noncontrolling
Interests
Total Equity
0.4
46.8
0.7
—
149.3
5.7
—
15.9
0.3 —
(3.3)
—
—
(4.0)
—
(7.3)
—
(7.3)
— —
(7.8)
— —
—
—
—
—
—
—
(7.8)
8.2
0.4
—
—
—
—
(1.1)
(1.1)
42.4 $ 0.4 $ 1,650.9 $
(327.5) $
(372.8) $
(8.9) $
— $
942.1 $
9.7 $
951.8
The accompanying notes are an integral part of these statements.
44
SPX FLOW, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from (used in) operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities:
Year ended December 31,
2017
2016
2015
$
46.8 $
(381.0) $
87.4
Special charges
Impairment of goodwill and intangible assets
Deferred income taxes
Depreciation and amortization
Pension and other employee benefits
Stock-based compensation
Gain on asset sales and other, net
Loss on early extinguishment of debt
Changes in operating assets and liabilities:
Accounts receivable and other assets
Inventories
Accounts payable, accrued expenses and other
Domestic pension payments
Cash spending on restructuring actions
Net cash from (used in) operating activities
Cash flows from (used in) investing activities:
Proceeds from asset sales and other, net
Increase in restricted cash
Capital expenditures
Net cash from (used in) investing activities
Cash flows from (used in) financing activities:
Proceeds from issuance of senior notes
Repurchases of senior notes (includes premiums paid of $36.4)
Borrowings under senior credit facilities
Repayments of senior credit facilities
Borrowings under trade receivables financing arrangement
Repayments of trade receivables financing arrangement
Repayments of related party notes payable
Borrowings under other financing arrangements
Repayments of other financing arrangements
Minimum withholdings paid on behalf of employees for net share settlements, net
Payments for deferred financing fees
Dividends paid to noncontrolling interests in subsidiary
Change in former parent company investment
Net cash from (used in) financing activities
Change in cash and equivalents due to changes in foreign currency exchange rates
Net change in cash and equivalents
Consolidated and combined cash and equivalents, beginning of period
Consolidated cash and equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid, net of refunds of $13.7, $7.8 and $3.2 in 2017, 2016 and 2015, respectively
Non-cash investing and financing activity:
Debt assumed
$
$
$
$
The accompanying notes are an integral part of these statements.
45
19.3
—
(31.9)
61.2
6.3
15.9
(2.9)
—
48.6
1.1
78.1
—
(37.5)
205.0
37.4
(0.2)
(19.4)
17.8
—
—
125.5
(313.5)
124.1
(145.3)
—
9.9
(13.8)
(4.0)
—
(1.5)
—
(218.6)
44.4
48.6
215.1
79.8
442.2
(102.0)
64.7
10.9
18.9
(2.5)
38.9
22.9
18.4
(114.3)
(65.9)
(58.9)
(27.9)
4.0
—
(44.0)
(40.0)
600.0
(636.4)
423.0
(365.0)
93.4
(72.2)
—
13.5
(14.6)
(3.9)
(15.5)
(1.2)
—
21.1
(34.0)
(80.8)
295.9
263.7 $
215.1 $
42.6
22.7
(25.4)
61.9
11.3
5.4
(8.0)
—
47.4
(2.5)
(14.9)
—
(14.3)
213.6
12.5
(0.3)
(57.0)
(44.8)
—
—
534.0
(134.0)
34.0
(34.0)
(5.4)
6.1
(7.0)
(1.5)
(6.2)
(0.2)
(453.9)
(68.1)
(21.4)
79.3
216.6
295.9
62.6 $
12.2 $
57.4 $
43.4 $
5.8
35.9
— $
7.7 $
622.4
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(in millions, except per share data)
(1)
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SPX FLOW, Inc. and its consolidated subsidiaries (“SPX FLOW,” ‘‘the Company,’’ “we,” “us,” or “our”) operate in three business segments and
were wholly-owned by SPX Corporation (the “former Parent”) until September 26, 2015, at which time the former Parent distributed 100% of our
outstanding common stock to its shareholders through a tax-free spin-off transaction (the “Spin-Off”).
The Company engineers, designs, manufactures and markets products and solutions used to process, blend, filter, dry, meter and transport fluids with
a focus on original equipment installation, including turn-key systems, modular systems and components, as well as comprehensive aftermarket components
and support services. Primary component offerings include engineered pumps, valves, mixers, plate heat exchangers, dehydration and filtration technologies,
and industrial tools and hydraulic units. The Company primarily serves customers in the food and beverage, power and energy and industrial end markets.
Basis of Presentation
Our consolidated balance sheets as of December 31, 2017 and 2016, and financial activity presented in the consolidated statements of operations,
comprehensive income (loss), equity, and cash flows for the years ended December 31, 2017 and 2016, consist of the consolidated balances of SPX FLOW as
an independent, publicly traded company as of and during the periods then ended. Our consolidated and combined statements of operations, comprehensive
loss, equity, and cash flows for the year ended December 31, 2015, were prepared on a “carve out” basis for the period prior to the Spin-Off and included
adjustments for certain transactions that occurred concurrently upon completion of the Spin-Off (see Notes 8 and 12) as well as stand-alone results for the
period subsequent to the date of the Spin-Off. These consolidated and combined financial statements were derived from the consolidated financial statements
and accounting records of the former Parent and SPX FLOW and prepared in conformity with accounting principles generally accepted in the United States
("GAAP"). Consequently, the financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in
the future or what our financial condition, results of operations and cash flows would have been had we been an independent, publicly-traded company during
the historical periods presented.
The combined statement of operations prior to the Spin-Off included costs for certain centralized functions and programs provided and/or
administered by the former Parent that were charged directly to the former Parent’s business units, including business units of SPX FLOW. These centralized
functions and programs included, but were not limited to, information technology, payroll services, shared services for accounting, supply chain and
manufacturing operations, and business and health insurance coverage. Prior to the Spin-Off and during the year ended December 31, 2015, $81.0 of such
costs were directly charged to the Company's business units and were included in selling, general and administrative expenses in the accompanying
consolidated and combined statement of operations.
For purposes of preparing these combined financial statements prior to the Spin-Off on a “carve out” basis, a portion of the former Parent’s total
corporate expenses were allocated to SPX FLOW. These expense allocations included the cost of corporate functions and/or resources provided by the former
Parent which included, but were not limited to, executive management, finance and accounting, legal, and human resources support, and the cost of our
Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai, China, as well as related benefit costs associated with such functions, such as
pension and postretirement benefits and stock-based compensation. Prior to the Spin-Off and in the year ended December 31, 2015, the Company was
allocated $50.7 of such general corporate and related benefit costs, which were primarily included within selling, general and administrative expenses in the
accompanying consolidated and combined statement of operations. In addition to pre-Spin-Off allocation of costs associated with the former Parent's
corporate functions, including the related benefit costs, the consolidated and combined financial statements include an allocation of corporate-related special
charges. Costs were allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional revenues
of the Company to the former Parent's consolidated revenues from continuing operations. Management considers the basis on which the expenses have been
allocated to reasonably reflect the utilization of services provided to or the benefit received by the Company during the periods presented. The allocations
may not, however, reflect the expenses the Company would have incurred if the Company had been a stand-alone company for the period presented.
Pre-Spin-Off cash and equivalents held by the former Parent at the corporate level that were not specifically identifiable to the Company were not
reflected in the Company's combined financial statements prior to the date of the Spin-Off. Cash transfers between the Company and the former Parent (other
than related to notes receivable and payable, as discussed further
46
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
below) were accounted for through former parent company investment. Cash and equivalents in the combined financial statements prior to the date of the
Spin-Off represented cash and equivalents held locally by the Company's entities. The former Parent’s third-party debt and the related interest expense were
not allocated to us for any of the periods presented as we were not the legal obligor of such debt.
All intercompany transactions have been eliminated. All transactions between the Company and the former Parent (including its affiliates that were
not part of the Spin-Off) were included in these combined financial statements prior to the date of the Spin-Off. The aggregate net effect of transactions not
historically settled in cash between the Company and the former Parent was reflected in the combined statement of cash flows prior to the date of the Spin-
Off as "Change in former parent company investment." In addition, prior to the Spin-Off, the Company had amounts due from and due to the former Parent
(and its affiliates that were not part of the Spin-Off) supported by promissory notes. The respective interest income and interest expense amounts recognized
prior to the Spin-Off were reflected in "Related party interest expense, net" within the Company's consolidated and combined statements of operations.
The Company operates on a calendar year-end.
Agreements with the former Parent - Post-Spin-Off
In connection with the Spin-Off, we entered into a transition services agreement and other definitive agreements with the former Parent that, among
other matters, set forth the terms and conditions of the Spin-Off and provided a framework for our relationship with the former Parent after the Spin-Off. A
summary of the material terms of these agreements can be found in the "Certain Relationships and Related Party Transactions" section of the Information
Statement of the Company, attached as Exhibit 99.1 to our registration statement on Form 10 (as filed by SPX FLOW with the U.S. Securities and Exchange
Commission (the "SEC") and declared effective on September 11, 2015). Amounts recorded under the transition services agreement were not significant in
2017 or 2016.
Summary of Significant Accounting Policies
Our significant accounting policies are described below, as well as in other Notes that follow.
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" or "ASC"). Balance sheet accounts are
translated at the current rate at the end of each period and income statement accounts are translated at the average rate for each period. Gains and losses on
foreign currency translations are reflected as a separate component of equity and other comprehensive income (loss). Foreign currency transaction gains and
losses, as well as gains and losses related to foreign currency forward contracts and currency forward embedded derivatives, are included in "Other income
(expense), net," with the related net gains (losses) totaling $(4.9), $(2.2) and $1.1 in 2017, 2016 and 2015, 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 revenues from product sales upon shipment to the customer or, to a lesser extent, upon receipt by the customer,
in accordance with agreed-upon customer terms. Revenues from long-term service contracts and maintenance arrangements are recognized on a straight-line
basis over the agreement period.
Amounts billed for shipping and handling are included in revenues. Costs incurred for shipping and handling are recorded in "Cost of products sold."
Taxes assessed by governmental authorities that are directly imposed on a revenue-producing transaction between a seller and a customer are presented on a
net basis (excluded from revenues) in our consolidated and combined statements of operations.
We recognize revenue from long-term construction/installation contracts under the percentage-of-completion method of accounting. The percentage-
of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion.
We recognize revenues for similar short-term contracts using the completed-contract method of accounting.
Provisions for any estimated losses on uncompleted long-term contracts are made in the period in which such losses are determined. In the case of
customer change orders for uncompleted long-term contracts, estimated recoveries are included for work performed in forecasting ultimate profitability on
certain contracts. Due to uncertainties inherent in the estimation
47
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
process, it is reasonably possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised
in the near-term. Such revisions to costs and income are recognized in the period in which the revisions are determined.
Unbilled receivables 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. Claims related to long-term contracts are recognized as revenue only after we have determined that collection is probable and the
amount can be reliably estimated. Claims made by us 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, such 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.
We recognized $267.0, $339.7 and $490.7 in revenues under the percentage-of-completion method for the years ended December 31, 2017, 2016 and
2015, respectively. Costs and estimated earnings on uncompleted contracts, from their inception, and related amounts billed as of December 31, 2017 and
2016 were as follows:
Costs incurred on uncompleted contracts
Estimated earnings to date
Less: Billings to date
Net (billings in excess of revenues) unbilled receivables
December 31,
2017
2016
1,114.4 $
205.9
1,320.3
(1,345.9)
(25.6) $
1,170.5
272.1
1,442.6
(1,433.7)
8.9
$
$
These amounts are included in the accompanying consolidated balance sheets at December 31, 2017 and 2016 as shown below. Amounts for billed
retainages and receivables to be collected in excess of one year are not significant for the periods presented.
Unbilled receivables(1)
Billings in excess of revenues on uncompleted contracts(2)
Net (billings in excess of revenues) unbilled receivables
(1)
Reported as a component of "Accounts receivable, net."
(2) Reported as a component of "Accrued expenses."
December 31,
2017
2016
$
$
48.7 $
(74.3)
(25.6) $
66.1
(57.2)
8.9
Research and Development Costs—The Company conducts research and development activities for the purpose of developing and improving new
products. The related expenditures are expensed as incurred and totaled $17.4, $19.4 and $19.1 in 2017, 2016 and 2015, respectively, and are classified within
selling, general and administrative expense within the consolidated and combined statements of operations.
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 capital leases, was $43.6, $44.7 and $38.5 for the years ended December 31,
2017, 2016 and 2015, respectively. Leasehold improvements are amortized over the life of the related asset or the life of the lease, whichever is shorter.
Impairments of PP&E, 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, if impaired, and the 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
48
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
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. In addition, the asset is written down to its fair value less any selling costs, if impaired.
Income Taxes—For purposes of our combined financial statements prior to the date of the Spin-Off, our income tax provision was determined as if
we filed income tax returns on a stand-alone basis. The Company's tax results as presented in the consolidated and combined financial statements for the
period prior to the Spin-Off may not be reflective of the results that the Company will generate in the future. In jurisdictions where the Company was
included in the tax returns filed by the former Parent or its subsidiaries that were not part of the Spin-Off, any income taxes payable resulting from the related
income tax provision were reflected through the date of the Spin-Off within "Former parent company investment." Deferred income tax assets and liabilities,
as presented in the consolidated balance sheets, 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 local, state, federal or foreign statutory tax audits or estimates and judgments used.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017 and significantly changes existing U.S. tax law, including numerous
provisions that affect businesses. The Act introduced changes that impacted U.S. corporate tax rates, certain deductions, credits and imposed a tax on the
“deemed repatriation” (the “Transition Tax”) of all post-1986 earnings of foreign subsidiaries on which U.S. tax had previously been deferred.
Given the widespread applicability of these changes to most U.S. companies, the Securities and Exchange Commission issued Staff Accounting
Bulletin 118 (“SAB 118”) to assist registrants in addressing any uncertainty or diversity of views in applying ASC Topic 740 in the reporting period in which
the Act was enacted. SAB 118 provides registrants with the option of reporting a reasonable estimate for certain income tax effects of the Act in situations in
which a company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting required under
ASC Topic 740. The reasonable estimate is reported as a provisional amount in a company’s financial statements during a “measurement period”.
The measurement period begins in the reporting period that includes the Act’s enactment date (the Company’s fourth quarter of 2017) and ends when
a company has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740.
During the measurement period, companies are to act in good faith to complete the accounting required under ASC Topic 740. SAB 118 provides that the
measurement period should not, under any circumstances, extend for a period beyond one year from the enactment date. Appropriate disclosures will be made
to address the Company’s progress toward completing the accounting required under the Act during the measurement period, as well as when the accounting
is complete. Refer to Note 9 for additional discussion regarding the Company’s application of SAB 118.
Derivative Financial Instruments—We use foreign currency forward contracts to manage our exposures to fluctuating currency exchange rates.
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
effective portion of the changes in fair value of the derivatives is recorded in accumulated other comprehensive loss ("AOCL") and subsequently recognized
in earnings when the hedged items impact earnings. Changes in the fair value of derivatives not designated as hedges, and the ineffective portion of cash flow
hedges, are recorded in current 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 11 and 14 for further information.
Cash flows from hedging activities are included in the same category as the items being hedged, which are primarily operating activities.
Goodwill and Other Intangible Assets—Consistent with the requirements of the Intangible—Goodwill and Other Topic of the Codification, the fair
values of our reporting units generally are estimated using discounted cash flow projections that we
49
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
believe to be reasonable under current and forecasted circumstances, the results of which form the basis for making judgments about the recoverability of
carrying values of the net assets of our reporting units. Other considerations are also incorporated, including comparable industry price multiples. The
financial results of many of our businesses closely follow changes in the industries and end markets that they serve. Accordingly, we consider estimates and
judgments that affect the future cash flow projections, including principal methods of competition such as volume, price, service, product performance and
technical innovations and estimates associated with cost improvement initiatives, capacity utilization and assumptions for inflation and blended effective tax
rates. Any significant change in market conditions and estimates or judgments used to determine expected future cash flows that indicate a reduction in
carrying value may give rise to impairment in the period that the change becomes known.
We perform our annual goodwill impairment testing during the fourth quarter in conjunction with our annual financial planning process, with such
testing based primarily on events and circumstances existing as of the end of the third quarter. In addition, we test goodwill for impairment on a more frequent
basis if there are indications of potential impairment.
We perform our annual trademarks impairment testing during the fourth quarter in conjunction with our annual financial planning process, 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. The basis for these projected revenues
is the annual operating plan for each of the related businesses.
Investments in Unconsolidated Companies—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 that could potentially be significant to the VIE. We have interests in VIEs, primarily joint ventures, in which we
are the primary beneficiary. The financial position, results of operations and cash flows of our VIEs are not material, individually or in the aggregate, in
relation to our consolidated and combined financial statements.
(2) USE OF ESTIMATES
The preparation of our consolidated and combined 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
financial statements, and the reported amounts of revenues (e.g., our percentage-of-completion estimates described above) 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 and combined financial statements
and related notes.
Listed below are certain significant estimates and assumptions used in the preparation of our consolidated and combined 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 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.
Balance at beginning of year
Allowances provided
Write-offs, net of recoveries, credits issued and other
Balance at end of year
Year ended December 31,
2017
2016
2015
$
$
22.0 $
20.7
(17.5)
25.2 $
23.6 $
17.4
(19.0)
22.0 $
22.0
15.6
(14.0)
23.6
50
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
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, or 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 test 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. 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. The financial results of 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 blended effective tax rates. Actual results may differ from these estimates under different
assumptions or conditions. See Note 7 for further information, including discussion of impairment charges recorded in 2016 and 2015, and our annual
impairment test performed in the fourth quarter of 2017.
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, 2017 and 2016.
Unearned revenue(1)
Employee benefits(2)
Warranty
Other(3)
Total
December 31,
2017
2016
182.3 $
96.2
13.3
97.8
389.6 $
140.6
62.1
10.2
117.0
329.9
$
$
(1)
(2)
(3)
Unearned revenue includes billings in excess of revenue on uncompleted contracts accounted for under the percentage-of-completion method of revenue recognition, customer
deposits and unearned amounts on service contracts.
Employee benefits consist of various employee-related items including, among other items, accrued bonus, vacation, payroll and payroll-related taxes.
Other consists of various items including, among other items, accrued commissions, accrued sales and value-added taxes, and accruals for restructuring, interest and freight
costs.
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.
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
51
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
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.
Self-Insurance—We are self-insured for certain of our workers' compensation, automobile, product, general liability and health costs and, thus,
record an accrual for our retained liability. Our businesses were charged directly for their estimated share of the cost of the former Parent's equivalent self-
insured programs prior to the Spin-Off, with the Company's share of the cost included in our consolidated and combined statements of operations for such
period. The liability for these programs is reflected in our consolidated balance sheets as of December 31, 2017 and 2016 within "Accrued expenses."
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, actual 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:
Balance at beginning of year
Provisions
Usage
Currency translation adjustment
Balance at end of year
Less: Current portion of warranty
Non-current portion of warranty
Year ended December 31,
2017
2016
2015
10.8 $
14.8 $
14.4
(13.1)
2.1
14.2
13.3
8.9
(12.2)
(0.7)
10.8
10.2
0.9 $
0.6 $
18.4
10.3
(12.6)
(1.3)
14.8
14.0
0.8
$
$
Income Taxes—We review 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 are classified as "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. We establish
a valuation allowance against deferred tax assets when, based on all available evidence, we believe that it is more likely than not that we will not realize a
benefit associated with such assets. See Note 9 for further discussion of our accounting for income taxes and potential uncertain tax positions.
In accounting for the effects of U.S. tax law changes pursuant to the Act, certain amounts recorded include reasonable estimates of the income tax
effects of the Act for which the accounting is not yet complete. These estimates are in accordance with the guidance provided under SAB 118 that allows for
the reporting of reasonable estimates during a measurement period. Additional details on SAB 118 and these estimates are provided in Notes 1 and 9.
Employee Benefit Plans—Certain of our employees participate in defined benefit pension and other postretirement plans we sponsor and, prior to the
date of the Spin-Off, participated in plans sponsored by the former Parent. The expense for these plans is derived from an actuarial calculation based on the
plans' provisions and assumptions regarding discount rates and rates of increase in compensation levels. Discount rates for most of the plans are based on
representative bond indices. Rates of increase in compensation levels are established based on expectations of current and foreseeable future increases in
compensation. Independent actuaries are consulted in determining these assumptions. See Note 8 for further discussion of our accounting for pension and
postretirement benefits.
52
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
(3) NEW ACCOUNTING PRONOUNCEMENTS
The following is a summary of new accounting pronouncements that apply or may apply to our business.
New Revenue Recognition Pronouncement
In May 2014, and as subsequently amended, the Financial Accounting Standards Board (the "FASB") issued a new standard on revenue recognition
that outlines a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers
in accordance with the transfer of control over those goods and services. The new standard also requires a number of disclosures intended to enable users of
financial statements to understand the nature, amount, timing and uncertainty of revenue, and the related cash flows. The standard is effective for interim and
annual reporting periods beginning after December 15, 2017. We will adopt the new revenue standard in the first quarter of 2018 using the modified
retrospective adoption method.
Beginning in 2016 and continuing throughout 2017, our team responsible for implementing the new standard has reviewed each product line and
related business strategy. The team has assessed the various changes in the criteria for revenue recognition required under the new standard, and concluded
that our assessment of alternative use of sub-products within each product line as well as our enforceable rights to payment for performance completed to date
in the event of customer cancellation or default, will have the most significant impact to our current revenue recognition practices.
Our progress towards assessing and quantifying the impacts of the new guidance to our reportable segments is as follows:
•
•
•
Food and Beverage - Under existing accounting principles, we recognize revenue on certain long-term systems projects, most of which are
constructed on customer sites, over time using the cost-to-cost method, and revenue on long-term service contracts on a straight-line basis over the
life of the related agreements. All other revenues are recognized at a point in time when the risks and rewards of ownership transfer to the customer.
Under the new guidance, we expect primarily that revenue for (1) all systems projects constructed on customer sites and service contracts will be
recognized over time on a cost-to-cost basis, and (2) skids assembled in our factories, as well as customer contracts for the sale of component and
aftermarket parts, will be recognized at a point in time upon transfer of control to the customer. Revenue recognition for skidded systems will,
however, be project specific and dependent on contractual customer terms.
Power and Energy - Under existing accounting principles, we recognize revenue on certain long-term contracts for large pumps over time using the
cost-to-cost method. We recognize all other product revenues in this segment, including revenues for most service contracts, at a point in time. In
assessing the new guidance, we have determined our large pumps manufactured for use in certain customer applications generally have limited
alternative use. Likewise, our larger and more complex valve products and metering systems have limited alternative use. Our contractual
enforceable rights to payment for performance completed to date in the event of customer cancellation or default is contract specific for substantially
all product lines in the segment. Under the new guidance, we expect to recognize revenues over time, if a contract explicitly provides an enforceable
right to payment, for large pumps, large and/or complex valve products and metering systems. Revenue for service contracts will be recognized over
time. Revenue for all other products will be recognized at a point in time, upon transfer of control of the product to the customer (i.e., effectively no
change). Revenue for certain large pumps previously recognized over time using the cost-to-cost method will, under the new guidance, be
recognized at a point in time upon transfer of control, to the extent either enforceable right to payment is not included in the contract or the pumps
are determined to have alternative use.
Industrial - Under existing accounting principles, substantially all of this segment’s 2017 revenue was recognized at a point in time when the risks
and rewards of ownership transferred to the customer. In assessing the new guidance, we have determined that certain large mixers constructed with
unique metals, custom-enclosed heat exchangers, and certain dehydration systems have little to no alternative use. Our contractual enforceable rights
to payment for performance completed to date in the event of customer cancellation or default is contract specific for substantially all product lines
in this segment. Under the new guidance, we expect to recognize revenue over time, if a contract explicitly provides for enforceable right to
payment, for certain mixer types, custom-enclosed heat exchanger units, unique dehydration systems and service contracts. Revenue for all other
products within this segment will be recognized at a point in time, upon transfer of control of the product to the customer (i.e., effectively no
change).
53
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Upon adoption, using the modified retrospective method, we expect our December 31, 2017 undelivered performance obligations (“backlog”) of
$998.1 to decrease by a minor amount, representing the net revenues which would have been recognized under the new standard on executed customer
contracts (“orders”) in effect on or prior to December 31, 2017. This expected minor decline in the backlog of orders as of December 31, 2017, reflects the
effects of (1) an increase in the amount of revenue expected to be recognized over time, as described above for certain product lines that were previously
recognized at a point in time under existing guidance, partially offset by (2) a decrease in the amount of revenue previously recognized over time under
existing guidance for certain contracts in our backlog which do not contain a contractual enforceable right to payment in the event of customer cancellation or
default, which will be recognized at a point in time under the new guidance.
Prospectively, however, we expect the new revenue standard to increase the percentage of revenue we recognize over time, within future reporting
periods, by approximately 10%, which varies by product line and which could vary in the future depending on the mix of our future orders as well as
contractual terms negotiated with customers. These projected impacts, underlying contracts and accounting models are still under review by our
implementation team.
Other New Accounting Pronouncements
In January 2016, the FASB issued an amendment to guidance which revises entities’ accounting related to: (i) the classification and measurement of
investments in equity securities, and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. The amendment also
changes certain disclosure requirements associated with the fair value of financial instruments. The amended guidance is effective for interim and annual
reporting periods beginning after December 15, 2017 and requires a modified retrospective approach to adoption. We will adopt this amendment in the first
quarter of 2018 and do not expect a material impact to our consolidated financial statements.
In February 2016, the FASB issued a new standard which requires a lessee to recognize on its balance sheet the assets and liabilities associated with
the rights and obligations created by leases with terms that exceed twelve months. Leases will continue to be classified as either financing or operating, with
classification affecting the recognition, measurement and presentation of costs and cash flows arising from a lease. The new guidance is effective for interim
and annual reporting periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related to capital and
operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients
available. Early adoption is permitted. We are currently evaluating the effect that this new standard will have on our consolidated financial statements.
In March 2016, the FASB issued an amendment which simplifies several aspects of the accounting for employee share-based payment transactions,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, classification of awards as either equity or liabilities, as
well as classification in the statement of cash flows. This amendment was effective for interim and annual reporting periods beginning after December 15,
2016. We adopted this amendment during the first quarter of 2017. We recognized a tax charge of $1.3 in our income tax provision during 2017 related to the
vesting of certain restricted stock shares and restricted stock units during the period which, under previous guidance, would have been recognized as a
reduction of paid-in capital. Consistent with our previous policy, we have elected to continue to accrue share-based compensation cost based on the number of
awards that are expected to vest (i.e., by assuming a forfeiture rate in our accrual of such cost).
In October 2016, the FASB issued an amendment that requires recognition of the income tax consequences of an intra-entity transfer of assets other
than inventory. Under current authoritative guidance, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset
is sold to a third party or otherwise recovered through use. This amendment requires tax expense and deferred tax asset recognition from the intra-entity sale
of the asset in the seller’s tax jurisdiction when the asset transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation.
This update is effective for interim and annual reporting periods beginning after December 15, 2017. We will adopt this amendment in the first quarter of
2018 using modified retrospective application, and expect to record a cumulative charge of $3.9 to accumulated deficit in our consolidated financial
statements.
In November 2016, the FASB issued an amendment to guidance for statement of cash flow presentation, which requires that entities explain the
change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the
statement of cash flows. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. This
amendment is effective for interim and annual reporting periods beginning after December 15, 2017, with retrospective application permitted. We will adopt
this amendment in the first quarter of 2018 and do not expect a material impact to our consolidated financial statements.
54
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
In January 2017, the FASB issued an amendment to post-acquisition accounting for goodwill which eliminates the requirement to perform a Step 2
impairment analysis to determine the implied fair value of goodwill. Rather, goodwill impairment charges will be calculated as the amount by which a
reporting unit's carrying amount exceeds its fair value. This amendment is effective for any annual or interim goodwill impairment tests performed in fiscal
years beginning after December 15, 2019, with early adoption permitted. We adopted this amendment in the first quarter of 2017 and performed our 2017
annual goodwill impairment test in accordance with the amended guidance. Refer to Note 7 for discussion of our annual goodwill impairment test.
In March 2017, the FASB issued an amendment to guidance on the presentation of net periodic pension and other postretirement benefit costs. Under
the new rules, entities that sponsor defined benefit plans will present service costs with other employee compensation costs within operating income (or
capitalize on the balance sheet, when applicable), while other components of net benefit cost will be presented separately (in one or more line items) outside
of operating income and will not be eligible for capitalization. This update is effective for interim and annual reporting periods beginning after December 15,
2017, with early adoption permitted if adopted in the first interim period of the early-adopt fiscal year. We adopted this amendment in the first quarter of 2017
and have accordingly reclassified non-service pension and postretirement costs from “Selling, general and administrative” expense to “Other income
(expense), net” in our consolidated and combined statements of operations for the years ended December 31, 2016 and 2015, respectively, as we believe this
classification provides investors a more comparative presentation of our selling, general and administrative expense and operating results from period to
period. As permitted by the amended guidance, we used amounts disclosed in our employee benefit plans footnote for the years ended December 31, 2016
and 2015, respectively, as the estimation basis for applying the retrospective presentation requirements. See Note 8 for additional information related to our
adoption of the amendment.
In May 2017, the FASB issued an amendment to guidance to clarify when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the amended guidance, modification accounting is required only if the fair value, the vesting conditions, or the
classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all
companies for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. Our adoption of this amendment in the
second quarter of 2017 did not have a material impact to our consolidated financial statements.
(4) INFORMATION ON REPORTABLE SEGMENTS, CORPORATE EXPENSE AND OTHER
We are a global supplier of highly specialized, engineered solutions with operations in over 30 countries and sales in over 150 countries around the
world. Many of our solutions play a role in helping to meet global demand for processed foods and beverages and power and energy, particularly in emerging
markets. In 2017, an estimated 24% of our revenues were from sales into emerging markets.
We have three reportable segments: Food and Beverage, Power and Energy, and Industrial. In determining our segments, we apply the threshold
criteria of the Segment Reporting Topic of the Codification to operating income or loss of each segment before considering impairment and special charges,
pension and postretirement service costs and other indirect corporate expenses (including corporate stock-based compensation). This is consistent with the
way our chief operating decision maker evaluates the results of each segment.
Revenues by reportable segment and geographic area represent sales to unaffiliated customers, and no one customer or group of customers that, to
our knowledge, are under common control accounted for more than 10% of our consolidated and combined revenues for any period presented. Intercompany
revenues among our reportable segments are not significant. Identifiable assets by reportable segment are those used in the respective operations of each.
Food and Beverage
The Food and Beverage reportable segment operates in a regulated, global industry with customers who demand highly engineered, turn-key
solutions. Key demand drivers include dairy consumption, emerging market capacity expansion, sustainability and productivity initiatives, customer product
innovation and food safety. Key products for the segment include mixing, drying, evaporation and separation systems and components, heat exchangers, and
reciprocating and centrifugal pump technologies. We also design and construct turn-key systems that integrate many of these products for our customers. Our
core brands include Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell.
55
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Power and Energy
The Power and Energy reportable segment primarily serves customers in the oil and gas industry and, to a lesser extent, the nuclear and other
conventional power industries. A large portion of the segment's revenues are concentrated in oil extraction, production and transportation at existing wells,
and in pipeline applications. The underlying driver of this segment includes demand for power and energy. Key products for the segment include pumps,
valves and related accessories, while the core brands include APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J
Valve, Plenty, and Vokes.
Industrial
The Industrial reportable segment primarily serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding,
infrastructure construction, general industrial and water treatment industries. Key demand drivers of this segment are tied to macroeconomic conditions and
growth in the respective end markets we serve. Key products for the segment are air dryers, filtration equipment, mixers, pumps, hydraulic technologies and
heat exchangers. Core brands include Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and
Stone.
Corporate Expense
Corporate expense generally relates to the cost of our Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai, China for the
period subsequent to the Spin-Off, and includes allocations of the cost of corporate functions and/or resources provided by the former Parent prior to the Spin-
Off. See Note 1 for a discussion of the methodology used to allocate corporate-related costs prior to the Spin-Off.
Financial data for our reportable segments as of or for the years ended December 31, 2017, 2016 and 2015 were as follows:
Revenues:
Food and Beverage
Power and Energy
Industrial
Total revenues
Income:
Food and Beverage
Power and Energy
Industrial
Total income for reportable segments
Corporate expense
Pension and postretirement service costs
Impairment of goodwill and intangible assets
Special charges
Consolidated and combined operating income (loss)
Capital expenditures:
Food and Beverage
Power and Energy
Industrial
Other(1)
Total capital expenditures
As of or for the Year Ended December 31,
2017
2016
2015
715.9 $
728.3 $
543.2
692.4
562.7
705.0
869.8
750.2
768.5
1,951.5 $
1,996.0 $
2,388.5
74.9 $
35.5
86.1
75.1 $
25.4
98.8
196.5 $
199.3 $
56.6
1.5
—
19.3
58.0
1.9
442.2
79.8
119.1 $
(382.6) $
5.8 $
25.0 $
4.3
4.2
5.1
6.3
5.4
7.3
19.4 $
44.0 $
104.4
83.8
105.0
293.2
71.6
1.9
22.7
42.6
154.4
24.5
19.1
5.1
8.3
57.0
$
$
$
$
$
$
$
56
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Depreciation and amortization:
Food and Beverage
Power and Energy
Industrial
Other(1)
Total depreciation and amortization
Identifiable assets:
Food and Beverage
Power and Energy
Industrial
Other(2)
Total identifiable assets
Geographic areas:
Revenues(3):
United States
United Kingdom
China
France
Denmark
Germany
Other
Total revenues
Long-lived assets:
United States
Other
Total long-lived assets
As of or for the Year Ended December 31,
2017
2016
2015
17.0 $
14.1 $
20.1
14.5
9.6
21.4
16.7
12.5
61.2 $
64.7 $
924.3 $
896.4 $
928.6
629.3
206.8
873.8
603.8
229.2
2,689.0 $
2,603.2 $
693.0 $
697.2 $
211.8
128.0
123.4
98.0
96.2
601.1
203.6
137.3
125.2
96.7
98.6
637.4
16.8
28.2
14.2
2.7
61.9
925.0
1,455.0
638.7
285.5
3,304.2
836.5
316.5
140.1
136.3
116.0
119.0
724.1
1,951.5 $
1,996.0 $
2,388.5
254.4 $
266.3
520.7 $
285.3 $
243.9
529.2 $
312.7
236.5
549.2
$
$
$
$
$
$
$
$
(1)
Relates to corporate PP&E or PP&E that is utilized by all of our reportable segments along with related depreciation expense. Depreciation reflects the cost of our Charlotte, NC
corporate headquarters, amongst other corporate PP&E, which became assets of the Company in connection with the Spin-Off.
(2)
(3)
Relates primarily to assets (e.g., cash and PP&E) of various corporate subsidiaries.
Revenues are included in the above geographic areas based on the country that recorded the customer revenue.
(5) SPECIAL CHARGES
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.
We have executed a multi-year plan to transition our enterprise to an operating company. As part of this plan, we announced our intent to further
optimize our global footprint, streamline business processes and reduce selling, general and administrative expense through a global realignment program.
The realignment program was intended to reduce costs across operating sites and corporate and global functions, in part by making structural changes and
process enhancements which allow us to operate more efficiently. Special charges of $19.3 for 2017 were substantially associated with this program and
included costs associated primarily with employee termination and facility consolidation, as well as certain non-cash charges associated with fixed asset
impairments. In connection with the global realignment program, we recorded special charges of $79.8 and $42.6 in 2016 and 2015, respectively. These
special charges were primarily related to restructuring initiatives to consolidate manufacturing and sales facilities, reduce workforce, and rationalize certain
product lines, as well as tangible asset impairment charges.
57
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
The components of the charges have been computed based on expected 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 and intangible assets.
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.
With the exception of certain multi-year operating lease obligations and other contractual obligations, which are not material to our consolidated and
combined financial statements, we anticipate that liabilities related to restructuring actions as of December 31, 2017 will be paid within one year from the
period in which the action was initiated.
Special charges for the years ended December 31, 2017, 2016 and 2015 are described in more detail below and in the applicable sections that follow:
Employee termination costs
Facility consolidation costs
Other cash costs, net
Non-cash asset write-downs and other
Total
Special Charges by Reportable Segment
Year ended December 31,
2017
2016
2015
11.5 $
50.5 $
2.9
—
4.9
9.3
0.3
19.7
19.3 $
79.8 $
38.5
2.5
—
1.6
42.6
$
$
Unless otherwise noted below, charges for 2017, 2016 and 2015 relate to our global realignment program.
2017 Charges:
Food and Beverage
Power and Energy
Industrial
Other
Total
Employee Termination
Costs
Facility Consolidation
Costs
Other Cash Costs
(Recoveries), Net
Non-Cash Asset Write-
downs and Other
$
$
6.6 $
(0.1)
5.2
(0.2)
11.5 $
1.6 $
0.5
0.8
—
2.9 $
— $
—
—
—
— $
Total Special Charges
8.7
0.5 $
—
—
4.4
4.9 $
0.4
6.0
4.2
19.3
Food and Beverage—Charges for 2017 related primarily to (i) charges associated with the consolidation and relocation of a manufacturing facility in
Germany to an existing facility in Poland and (ii) severance and other costs associated with the reorganization and consolidation of certain commercial,
engineering, operational and administrative functions across all regions in which the segment operates.
Once completed, these restructuring activities are expected to result in the termination of approximately 90 employees. Charges for 2017 also
included an asset impairment charge of $0.5 related to certain long-lived assets of a product line which was exited and formerly based primarily in the EMEA
region and $0.6 related to lease cancellation costs for a portion of the leased space of a facility in the APAC region.
Power and Energy—Charges for 2017 related primarily to severance and other costs associated with (i) various locations in North America, (ii) the
reorganization and consolidation of certain commercial, operational and administrative functions primarily in the EMEA and North American regions, and
(iii) charges related to the consolidation of the operations of two manufacturing facilities in the U.K, offset by (iv) reversals of certain accruals previously
recorded as of December 31, 2016 as improved customer order patterns and profitability of the segment during 2017 negated the need for those restructuring
initiatives.
Industrial—Charges for 2017 related primarily to severance and other costs associated with (i) the consolidation and relocation of the manufacturing
operations of facilities in Sweden and the Netherlands to existing facilities in Poland and other locations and (ii) the reorganization and consolidation of
certain commercial, engineering, operational and administrative functions across all regions in which the segment operates, partially offset by (iii) revisions of
estimates for severance and other
58
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
costs related to the previously planned consolidation and relocation of a manufacturing facility in the U.S. Once completed, these restructuring activities are
expected to result in the termination of approximately 120 employees.
Other—Charges for 2017 reflected primarily asset impairment and other related charges of $3.6 in connection with the sale of certain corporate
assets during the year and of $0.8 related to certain information technology assets (the latter unrelated to the global realignment program).
Expected charges still to be incurred under actions approved as of December 31, 2017 are approximately $0.5.
2016 Charges:
Food and Beverage
Power and Energy
Industrial
Other
Total
Employee Termination
Costs
Facility Consolidation
Costs
Other Cash Costs, Net
Non-Cash Asset Write-
downs and Other
$
$
16.8 $
18.3
5.2
10.2
50.5 $
5.2 $
0.2
3.9
—
9.3 $
— $
0.3
—
—
0.3 $
Total Special Charges
22.7
0.7 $
1.5
0.1
17.4
19.7 $
20.3
9.2
27.6
79.8
Food and Beverage—Charges for 2016 related primarily to severance and other costs, including (i) the consolidation and relocation of a
manufacturing facility in Germany to an existing facility in Poland and of other facilities in Europe, (ii) various other restructuring initiatives in Europe, the
U.S., China and Brazil and, to a lesser extent, (iii) a reorganization of the segment’s management structure. These restructuring activities resulted in the
termination of 225 employees. Charges for 2016 also included asset impairment charges of $0.7 related to certain tangible long-lived assets (unrelated to the
global realignment program).
Power and Energy—Charges for 2016 related primarily to severance and other costs in Germany, the U.K., France and, to a lesser extent, North
America, including actions taken to (i) reduce the cost base of the segment in response to oil price declines that began in the latter half of 2014 and continued
into 2016, which resulted in a reduction in capital spending by our customers in the oil and gas industries, (ii) realign certain sites around core service markets
and, to a lesser extent, (iii) reorganize the segment's management structure. These restructuring activities resulted in the termination of 320 employees.
Charges for 2016 also included asset impairment charges of $1.5 related to certain tangible long-lived assets (unrelated to the global realignment program).
Industrial—Charges for 2016 related primarily to severance and other costs, including (i) the consolidation and relocation of a manufacturing facility
in Denmark to an existing facility in Poland and of certain other facilities in North America and Asia Pacific, (ii) various other global restructuring initiatives
and, to a lesser extent, (iii) a reorganization of the segment’s management structure. These restructuring activities resulted in the termination of 69 employees.
Charges for 2016 also included asset impairment charges of $0.1 related to certain tangible long-lived assets.
Other—Charges for 2016 related primarily to corporate asset impairment charges of $17.4, as well as severance and other related costs across
various corporate support functions. These restructuring activities resulted in the termination of 130 employees. Asset impairment charges resulted primarily
from management’s decision during the first quarter of 2016 to market certain corporate assets for sale. Those assets were marketed for sale beginning in the
second quarter and, accordingly, were considered held for sale and reported as a component of "Other current assets" in the consolidated balance sheet as of
December 31, 2016. Those assets were sold during 2017, as noted above.
59
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Employee Termination
Costs
Facility Consolidation
Costs
Other Cash Costs
(Recoveries), Net
Non-Cash Asset Write-
downs and Other
$
$
25.1 $
7.8
3.4
2.2
38.5 $
0.3 $
0.3
1.9
—
2.5 $
0.1 $
(0.1)
—
—
— $
Total Special Charges
25.8
0.3 $
0.1
0.7
0.5
1.6 $
8.1
6.0
2.7
42.6
2015 Charges:
Food and Beverage
Power and Energy
Industrial
Other
Total
Food and Beverage—Charges for 2015 related primarily to severance and other costs associated with (i) the ongoing consolidation and relocation of
a manufacturing facility in Germany to an existing facility in Poland and, to a lesser extent, (ii) restructuring initiatives in South America and the U.S. These
restructuring activities resulted in the termination of 245 employees. Charges for 2015 also included asset impairment charges of $0.3 related to certain
tangible long-lived assets (unrelated to the global realignment program).
Power and Energy—Charges for 2015 related primarily to severance and other costs associated with actions taken to (i) reduce the cost base of the
segment in response to oil price declines that began in the latter half of 2014 and continued throughout 2015, which resulted in a reduction in capital spending
by our customers in the oil and gas industries, and (ii) realign certain sites around core service markets. These restructuring activities resulted in the
termination of 155 employees. Charges for 2015 also included asset impairment charges of $0.1 related to certain tangible long-lived assets (unrelated to the
global realignment program).
Industrial—Charges for 2015 related primarily to severance and other costs associated with (i) the ongoing consolidation and relocation of a
manufacturing facility in Denmark to an existing facility in Poland and (ii) a reorganization of the commercial and operational structure of certain of the
segment's businesses in Europe and the U.S. These restructuring activities resulted in the termination of 176 employees. Charges for 2015 also included asset
impairment charges of $0.7 related to certain tangible long-lived assets (unrelated to the global realignment program).
Other—Charges for 2015 related primarily to (i) a restructuring of the Company's corporate development function subsequent to the Spin-Off and
(ii) an allocation of special charges associated with the former Parent's corporate functions and activities prior to the Spin-Off (unrelated to the global
realignment program). Charges for 2015 also included asset impairment charges of $0.5 related to certain information technology assets (unrelated to the
global realignment program). See Note 1 for a discussion of the methodology used to allocate corporate-related costs prior to the Spin-Off.
The following is an analysis of our restructuring liabilities for the years ended December 31, 2017, 2016 and 2015:
Balance at beginning of year
Special charges (1)
Utilization — cash
Currency translation adjustment and other
Balance at end of year
December 31,
2017
2016
2015
33.6 $
32.9 $
14.4
(37.5)
1.9
60.1
(58.9)
(0.5)
12.4 $
33.6 $
9.2
41.0
(14.3)
(3.0)
32.9
$
$
(1)
The years ended December 31, 2017, 2016 and 2015 excluded $4.9, $19.7 and $1.6, respectively, of asset impairment and certain other charges that impacted special charges
but not the restructuring liabilities.
60
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
(6) INVENTORIES, NET
Inventories at December 31, 2017 and 2016 comprised the following:
Finished goods
Work in process
Raw materials and purchased parts
Total FIFO cost
Excess of FIFO cost over LIFO inventory value
Total inventories
December 31,
2017
2016
92.3 $
99.2
108.9
300.4
(6.5)
293.9 $
86.2
74.6
117.8
278.6
(6.2)
272.4
$
$
Inventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated net realizable values. Certain domestic
inventories are valued using the last-in, first-out (“LIFO”) method. These inventories were approximately 7% and 6% of total inventory at December 31,
2017 and 2016, respectively. Other inventories are valued using the first-in, first-out (“FIFO”) method.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill, by reportable segment for the year ended December 31, 2017, were as follows:
December 31, 2016
Impairments
Foreign Currency Translation
and Other
December 31, 2017
Food and Beverage
Power and Energy(1)
Industrial(2)
Total
$
$
250.3 $
256.0
216.2
722.5 $
— $
—
—
— $
21.5 $
16.4
10.9
48.8 $
271.8
272.4
227.1
771.3
(1)
(2)
The carrying amount of goodwill included $256.5 and $241.1 of accumulated impairments as of December 31, 2017 and 2016, respectively.
The carrying amount of goodwill included $67.7 of accumulated impairments as of December 31, 2017 and 2016.
The changes in the carrying amount of goodwill, by reportable segment for the year ended December 31, 2016, were as follows:
Food and Beverage
Power and Energy(2)
Industrial(3)
Total
December 31, 2015
Impairments
Foreign Currency Translation
and Other(1)
December 31, 2016
$
$
269.9 $
538.9
214.6
1,023.4 $
— $
(252.8)
—
(252.8) $
(19.6) $
(30.1)
1.6
(48.1) $
250.3
256.0
216.2
722.5
(1)
(2)
(3)
Beginning January 2016, we changed our internal reporting structure to more precisely present reportable segment revenue and income in certain countries where we conduct
business across multiple end markets. As a result of these structural enhancements, certain product line results were reclassified between reportable segments. Segment results
and corporate expense were recast for all historical periods presented to reflect these changes. In connection with these reclassifications, we performed a re-allocation of
reportable segment goodwill during the first quarter of 2016. This re-allocation resulted in the following changes in goodwill compared to amounts previously reported
at December 31, 2015 by reportable segment: Food and Beverage goodwill reduction of $5.6, Power and Energy goodwill reduction of $4.0, and Industrial goodwill increase
of $9.6.
The carrying amount of goodwill included $241.1 and $0.0 of accumulated impairments as of December 31, 2016 and 2015, respectively.
The carrying amount of goodwill included $67.7 of accumulated impairments as of December 31, 2016 and 2015.
61
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Goodwill Impairment Test - 2017
Consistent with our accounting policy stated in Note 1, we performed our annual goodwill impairment testing as of the first day of our fiscal fourth
quarter of 2017. Based on improved customer order patterns and profitability of our Power and Energy reporting unit during 2017, relative to assumptions
utilized in our 2016 annual goodwill impairment testing (see further discussion below), the estimated fair value of the reporting unit exceeded its carrying
value by greater than 30%. The estimated fair value of each of our other reporting units also significantly exceeded its respective carrying value.
Goodwill Impairment Tests and Charge - 2016
During the second quarter of 2016, our Power and Energy reporting unit experienced sustained quarterly order rates below order intake levels in the
fourth quarter of 2015 and operating results which were below our internal estimates. As a result of the lower order patterns and lower year-to-date earnings
of the reporting unit, we revised our 2016 projections below the bottom end of the range utilized in our fourth quarter 2015 interim impairment test, leading
us to conclude that an interim impairment test as of the end of our second quarter of 2016 (July 2, 2016) was necessary.
Using revised cash flow projections as of July 2, 2016, market participant discount rates, and EBITDA multiples observed of peer companies and in
recent transactions in the oil and gas industry, we determined the “step one” fair value of our Power and Energy reporting unit was below the carrying value
of its net assets. In “step two” of the goodwill impairment test, we estimated the implied fair value of Power and Energy’s goodwill as of July 2, 2016, which
resulted in an impairment charge related to such goodwill of $252.8. The non-recurring fair value measurement is a "Level 3" measurement under the fair
value hierarchy as further defined in Note 14.
Consistent with our accounting policy stated in Note 1, we performed our annual goodwill impairment testing as of the first day of our fiscal fourth
quarter of 2016 which indicated the estimated fair value of our Power and Energy reporting unit exceeded its carrying value by approximately 4%. The
estimated fair value of each of our other reporting units significantly exceeded its respective carrying value.
Other Intangibles, Net
Identifiable intangible assets were as follows:
December 31, 2017
December 31, 2016
Gross
Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Intangible assets with determinable lives:
Customer relationships
$
226.1 $
(121.9) $
104.2 $
209.6 $
(101.6) $
Technology
Patents
Other
Trademarks with indefinite lives
Total
94.1
6.8
13.8
340.8
198.5
(50.9)
(5.1)
(11.1)
(189.0)
—
43.2
1.7
2.7
151.8
198.5
84.6
6.5
12.3
313.0
188.4
(40.8)
(5.1)
(9.6)
(157.1)
—
$
539.3 $
(189.0) $
350.3 $
501.4 $
(157.1) $
108.0
43.8
1.4
2.7
155.9
188.4
344.3
Amortization expense was $17.6, $20.0 and $23.4 for the years ended December 31, 2017, 2016 and 2015, respectively. Estimated amortization
expense related to these intangible assets is $17.4 annually in 2018 and 2019, $17.2 in 2020, $16.9 in 2021 and $13.7 in 2022.
At December 31, 2017, the net carrying value of intangible assets with determinable lives consisted of the following by reportable segment: $75.6 in
Power and Energy, $52.5 in Food and Beverage, and $23.7 in Industrial. Trademarks with indefinite lives consisted of the following by reportable segment:
$101.4 in Food and Beverage, $61.3 in Industrial, and $35.8 in Power and Energy.
Intangible Impairment Test - 2017
Management performed its annual indefinite-lived intangible asset impairment test, performed as of the first day of our fiscal fourth quarter of 2017.
Based on the results of our annual indefinite-lived intangible asset impairment testing in 2017,
62
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
we determined that the estimated fair value of each of our indefinite-lived intangible assets exceeded its respective carrying value by at least 9%. Changes in
the gross carrying values of trademarks and other identifiable intangible assets during 2017 related primarily to foreign currency translation.
Intangible Impairment Tests and Charges - 2016 and 2015
During 2016, we recorded impairment charges of $115.9 related to customer relationships, $37.1 related to trademarks and $30.9 related to
technology assets of certain businesses within our Power and Energy reportable segment. We also recorded an impairment charge of $5.5 related to a certain
technology asset of a business within our Food and Beverage reportable segment. Other changes in the gross carrying values of trademarks and other
identifiable intangible assets during 2016 related primarily to foreign currency translation.
During 2015, we recorded an impairment charge of $15.0 related to the trademarks of a business within our Power and Energy reportable segment.
We also recorded an impairment charge of $7.7 related to certain technology assets and trademarks associated with a business in our Food and Beverage
reportable segment. Other changes in the gross carrying values of trademarks and other identifiable intangible assets during 2015 related to foreign currency
translation.
For each of the above impairment tests, we determined the fair values of the identifiable intangible asset by discounting the expected cash flows
from each respective asset at a rate of return that reflected current market conditions (level 3 inputs). Cash flows from customer relationships were based on
projected revenues and margin driven by customer relationships, reduced by an estimated retention rate. Cash flows from trademarks were determined by
applying estimated royalty rates to projected revenues of the respective products lines of the reporting unit. Cash flows from technology assets were based on
projected cash flows associated with the relevant technology assets.
(8) EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
Overview—SPX FLOW sponsors a number of defined benefit pension plans and a postretirement plan. In addition, the former Parent sponsors
defined benefit pension and postretirement plans. For all of these plans, changes in the fair value of plan assets and actuarial gains and losses are recognized
to earnings in the fourth quarter of each year, 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.
Pension and postretirement expense includes net periodic benefit expense associated with defined benefit pension and postretirement plans we
sponsor, as well as an allocation of a portion of the net periodic benefit expense associated with the plans sponsored by the former Parent in the period prior to
the Spin-Off.
Plans Sponsored by SPX FLOW—We sponsor defined benefit pension plans that cover certain employees in foreign countries, principally in Europe,
and we assumed certain domestic nonqualified pension and postretirement obligations from the former Parent and formed a new domestic nonqualified
pension plan in connection with the Spin-Off. The formation of the new domestic nonqualified pension plan resulted in the remeasurement of such obligations
as of September 26, 2015 which resulted in recognition of an actuarial loss of $7.4 during 2015, recorded as a component of “Other income (expense), net” in
the accompanying consolidated and combined statements of operations.
Plans Sponsored by the former Parent—Certain of the Company’s U.S. and U.K. salaried and hourly paid employees participate in defined benefit
pension plans and certain U.S. salaried and hourly paid employees participate in other postretirement benefit plans, such as health and life insurance plans,
that are sponsored by the former Parent. Subsequent to the Spin-Off, the former Parent remained the sponsor of these plans. As such, liabilities associated
with these plans are not reflected in our consolidated balance sheets. Our consolidated and combined statement of operations for the year ended December 31,
2015 includes expense allocations related to these plans for participants who are, or were, employees of the Company, as well as an allocation of expenses for
the former Parent's corporate personnel. The amount of net periodic benefit cost allocated to the Company related to the plans sponsored by the former Parent
was $1.2 for the year ended December 31, 2015, and is reflected within "Other income (expense), net" in the consolidated and combined statement of
operations. See Note 1 for a discussion of the methodology used to allocate corporate-related costs prior to the Spin-Off.
63
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Clyde Union—Upon the acquisition of Clyde Union in December 2011, we assumed participation in a multiemployer benefit plan under the terms of
a collective-bargaining agreement that covers Clyde Union’s domestic union-represented employees. The risks of participating in these multiemployer plans
are different from single-employer plans in the following respects:
• Assets contributed to the multiemployer plan by us may be used to provide benefits to employees of other participating employers;
•
•
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating
employers; and
If we choose to stop participating in the multiemployer plan, we may be required to pay an amount based on the underfunded status of the plan,
referred to as a withdrawal liability.
We participate in the following multiemployer benefit plan:
Pension
Fund
IAM
EIN Pension Plan
Number
51-6031295-002
Pension
Protection Act
Zone Status -
2017
Green
Financial
Improvement
Plan/Rehabilitation
Plan Status Pending 2017 Contributions 2016 Contributions
$—
$—
No
Surcharge
Imposed
No
Expiration Date of
Collective Bargaining
Agreement
August 10, 2018
The contributions made by Clyde Union during 2017 and 2016, which were less than $0.1 in each year, were not more than 5% of the total
contributions made to the IAM National Pension Fund, National Pension Plan (‘‘IAM’’). In 2011, the IAM began applying an election for funding relief
which allows the IAM to amortize the investment losses incurred for the plan year ended December 31, 2008 over a period of up to 29 years (as opposed to
15 years that would otherwise have been required). Furthermore, in accordance with the election, the current asset valuation method has been updated to
recognize the investment losses incurred during the 2008 plan year over a ten-year period as opposed to the previous period of five years.
The plan year-end date for all our plans is December 31. Below is further discussion regarding our plans, including information on plan assets,
employer contributions and benefit payments, obligations and funded status, and periodic pension and postretirement benefit expense (income).
Plan assets—Our investment strategy is based on the protection and long-term growth of principal while mitigating overall investment risk. Our
foreign defined benefit pension plans’ assets, with fair values of $0.7 and $3.9 at December 31, 2017 and 2016, respectively, are invested in insurance
contracts and classified as Level 3 assets in the fair value hierarchy. During 2017 and 2016, there were no transfers between levels of the fair value hierarchy
for any of our plans, and no shares of SPX FLOW or former Parent common stock were held by our defined benefit pension plans as of December 31, 2017
and 2016. Our domestic nonqualified pension and postretirement benefit plans are unfunded and have no plan assets.
Employer Contributions—Many of our foreign plan obligations are unfunded in accordance with local laws. These plans have no assets and instead
are funded by us on a pay as you go basis in the form of direct benefit payments. In 2017, we made contributions of $0.2 to our foreign plans that are funded.
In addition, we made direct benefit payments of $2.6 related to our foreign plans that are unfunded. Our domestic nonqualified pension and postretirement
plans are funded by us on a pay as you go basis. We made no direct benefit payments related to these plans in 2017.
In 2018, we expect to make minimum required funding contributions of $0.1 and direct benefit payments of $2.4 related to our foreign pension plans
and direct benefit payments of $0.1 related to our domestic nonqualified pension and postretirement benefit plans.
64
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Estimated Future Benefit Payments—Following is a summary, as of December 31, 2017, of the estimated future benefit payments for our foreign and
domestic pension plans and our domestic postretirement plan 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 unfunded plans.
Foreign Pension Benefits
Domestic Pension Benefits
2018
2019
2020
2021
2022
Subsequent five years
$
2.6 $
2.4
2.5
2.5
2.4
14.2
Domestic Postretirement Benefits
0.1
— $
—
6.8
—
—
—
0.1
0.1
0.2
0.1
0.7
The expected future benefit payments for our plans are estimated based on the same assumptions used at December 31, 2017 to measure our
obligations and include benefits attributable to estimated future employee service, to the extent applicable.
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. The following tables show the foreign and domestic pension plans’ funded status and amounts recognized in our
consolidated balance sheets:
Change in projected benefit obligation:
Projected benefit obligation - beginning of year
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid
Plan settlements
Curtailment gains
Foreign exchange and other
Projected benefit obligation - end of year
Change in plan assets:
Fair value of plan assets - beginning of year
Actual return on plan assets
Contributions (employer and employee)
Benefits paid
Plan settlement
Foreign exchange and other
Fair value of plan assets - end of year
Funded status at year-end
Amounts recognized in the consolidated balance sheets consist of:
Accrued expenses
Other long-term liabilities
Net amount recognized
Amount recognized in accumulated other comprehensive loss (pre-tax) consists of net prior service costs
Foreign Pension Plans
Domestic Pension Plan
2017
2016
2017
2016
$
50.1 $
51.6 $
8.3 $
0.7
0.8
(1.6)
(2.9)
(4.2)
(1.1)
6.5
1.1
1.1
1.7
(2.1)
—
(1.0)
(2.3)
0.7
0.3
0.5
—
—
—
—
$
48.3 $
50.1 $
9.8 $
73.9
0.7
0.8
(1.2)
(65.9)
—
—
—
8.3
Foreign Pension Plans
Domestic Pension Plan
2017
2016
2017
2016
$
3.9 $
4.2 $
— $
(0.1)
0.2
(0.3)
(3.2)
0.2
(0.4)
0.3
(0.1)
—
(0.1)
$
$
$
0.7 $
3.9 $
(47.6)
(46.2)
(2.2)
(45.4)
(2.0)
(44.2)
(47.6) $
(46.2) $
0.1 $
— $
—
—
—
—
—
— $
(9.8)
—
(9.8)
(9.8) $
— $
—
—
—
—
—
—
—
(8.3)
—
(8.3)
(8.3)
—
The funded status and accumulated benefit obligation of our domestic postretirement benefit plan was $(4.3) and $(3.9) at December 31, 2017 and
2016, respectively, with $0.1 recognized in "Accrued expenses" and $4.2 and $3.8, respectively, recognized in "Other long-term liabilities" in the
accompanying consolidated balance sheets at those dates.
65
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
The accumulated benefit obligation for each foreign pension plan exceeded the fair value of its plan assets at December 31, 2017 and 2016. The
accumulated benefit obligation for all foreign pension plans was $46.5 and $47.6 at December 31, 2017 and 2016, respectively. The accumulated benefit
obligation for the domestic nonqualified pension plan was $8.7 and $7.3 at December 31, 2017 and 2016, respectively.
Components of Net Periodic Pension and Postretirement Benefit Expense (Income)—Net periodic pension benefit expense (income) for our foreign
and domestic pension plans included the following components:
Year ended December 31, (1)
Foreign Pension Plans
Domestic Pension Plan
2017
2016
2015
2017
2016
2015 (2)
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service credits
Curtailment gains(3)
Recognized net actuarial losses (gains)(4)
$
0.7 $
1.1 $
1.2 $
0.7 $
0.7 $
0.8
(0.1)
—
(1.1)
(1.6)
1.1
(0.1)
—
(1.0)
2.2
1.3
(0.1)
(0.1)
—
(2.0)
0.3
—
—
—
0.5
0.8
—
—
—
(1.2)
Total net periodic pension benefit expense (income)
$
(1.3) $
3.3 $
0.3 $
1.5 $
0.3 $
0.8
0.5
—
—
(0.5)
8.3
9.1
(1)
(2)
(3)
(4)
As discussed in Note 3 and in accordance with amended guidance issued in March 2017, we have reclassified non-service pension costs from “Selling, general and
administrative” expense to “Other income (expense), net” in our consolidated and combined statements of operations for the years ended December 31, 2016 and 2015,
respectively, as we believe this classification provides investors a more comparative presentation of our selling, general and administrative expense and operating results from
period to period.
We assumed this domestic nonqualified pension plan's obligations from the former Parent and formed a new plan in connection with the Spin-Off. We were allocated a portion
of the costs related to this plan prior to the Spin-Off, based on an allocation methodology discussed further in Note 1. Accordingly, pension benefit expense of this plan for
2015 reflects a remeasurement of the plan’s obligations as of the Spin-Off and activity of the plan from the date of the Spin-Off through December 31, 2015.
Curtailment gain in 2017 is related to the cessation of accrual of future benefits by participants in a defined benefit pension plan in the Netherlands during the first quarter. The
accumulated obligations for future pension payments to participants in this plan were also transferred to an insurance company at that time. Under the agreement, the insurance
company irrevocably assumed the obligation to make future pension payments to the approximately 60 participants of the plan. Curtailment gains in 2016 resulted from
restructuring actions that impacted a facility in France and the curtailment gain in 2015 related to the termination of a former participant in our domestic nonqualified pension
plan during the fourth quarter of 2015.
Consists of reported actuarial losses (gains) and the difference between actual and expected returns on plan assets.
Net periodic postretirement benefit expense for our domestic postretirement plans was $0.4, $0.8 and $0.2 for the years ended December 31, 2017,
2016 and 2015, respectively. The postretirement benefit expense of $0.4 in 2017 was comprised of service cost of $0.1, interest cost of $0.1, and recognized
net actuarial losses of $0.2. The postretirement benefit expense of $0.8 in 2016 was comprised of service cost of $0.1, interest cost of $0.2, and recognized net
actuarial losses of $0.5. As noted above with respect to non-service pension costs, we also reclassified non-service postretirement costs from “Selling, general
and administrative” expense to “Other income (expense), net” in our consolidated and combined statements of operations for the years ended December 31,
2016 and 2015, respectively.
Assumptions—Actuarial assumptions used in accounting for our foreign pension plans and, for the domestic nonqualified pension plan we assumed
from the former Parent for the period since the Spin-Off, were as follows:
Weighted-average actuarial assumptions used in determining
net periodic pension expense:
Discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
Weighted-average actuarial assumptions used in determining
year-end benefit obligations:
Discount rate
Rate of increase in compensation levels
Year ended December 31,
Foreign Pension Plans
Domestic Pension Plan
2017
2016
2015
2017
2016
2015
2.09%
2.85%
1.97%
1.54%
2.68%
2.20%
2.88%
2.29%
2.09%
2.85%
3.82%
2.50%
N/A
3.49%
2.50%
3.04%
2.50%
N/A
3.82%
2.50%
2.86%
3.75%
N/A
3.01%
2.50%
1.54%
2.68%
1.82%
1.51%
2.50%
66
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
We review pension assumptions annually. Pension expense or income 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; (ii) the discount rate is 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; and (iii) the rate of increase in compensation levels is established based on our expectations of
current and foreseeable future increases in compensation. In addition, we consider advice from independent actuaries.
Actuarial assumptions used in accounting for our domestic postretirement plans were as follows:
Assumed health care cost trend rates:
Health care cost trend rate for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Discount rate used in determining net periodic postretirement benefit expense
Discount rate used in determining year-end postretirement benefit obligation
Year ended December 31,
2017
2016
2015
7.25%
5.00%
2027
4.32%
3.79%
7.50%
5.00%
2027
4.66%
4.32%
6.60%
5.00%
2024
3.53%
4.66%
The accumulated postretirement benefit obligation was determined using the terms and conditions of our 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 rates will decline. In addition, we consider advice from independent actuaries.
Defined Contribution Retirement Plan
In connection with the Spin-Off, we established a defined contribution retirement plan (the ‘‘DC Plan’’) pursuant to Section 401(k) of the U.S.
Internal Revenue Code to which eligible U.S. employees of the Company may voluntarily contribute. Under the DC Plan, such employees may contribute up
to 50% of their compensation into the DC Plan and the Company matches a portion of participating employees’ contributions. The Company’s matching
contributions are primarily made in newly issued shares of SPX FLOW 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 FLOW common stock held by
employees. Amounts contributed under the DC Plan for the years ended December 31, 2017 and 2016 and the period subsequent to the Spin-Off in 2015 were
$5.7, $6.5 and $1.7, respectively.
Prior to the Spin-Off, eligible employees could participate in the former Parent's defined contribution retirement plan pursuant to the above
guidelines. The amount of cost directly charged to the Company related to matching contributions under the DC Plan was $4.7 for the year ended
December 31, 2015. In addition, the Company was allocated $1.1 of cost for matching contributions for former Parent corporate personnel for the year ended
December 31, 2015.
(9) INCOME TAXES
For purposes of our consolidated and combined financial statements, income taxes have been calculated as if we filed income tax returns on a stand-
alone basis for the period prior to the Spin-Off. The Company’s U.S. operations and certain of its non-U.S. operations historically were included in the tax
returns of the former Parent or its subsidiaries that were not part of the Spin-Off. Therefore, the Company’s tax results for the period prior to the Spin-Off, as
presented in the consolidated and combined financial statements, may not be reflective of the results that the Company will generate in the future. In
jurisdictions where the Company was included in the tax returns filed by the former Parent or its subsidiaries that were not part of the Spin-Off, any income
taxes payable resulting from the related income tax provision were reflected in combined balance sheets prior to and through the date of the Spin-Off within
‘‘Former parent company investment.’’
67
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Income (loss) before income taxes and the provision for (benefit from) income taxes consisted of the following:
Income (loss) before income taxes:
United States
Foreign
Provision for (benefit from) income taxes:
Current:
United States
Foreign
Total current
Deferred and other:
United States
Foreign
Total deferred and other
Total provision (benefit)
Year ended December 31,
2017
2016
2015
$
$
$
$
100.6 $
(42.7)
57.9 $
(65.5) $
(416.5)
(482.0) $
26.6 $
16.4
43.0
(30.2)
(1.7)
(31.9)
(3.9) $
4.9
1.0
(47.4)
(54.6)
(102.0)
11.1 $
(101.0) $
110.0
27.2
137.2
55.5
19.7
75.2
(13.1)
(12.3)
(25.4)
49.8
The reconciliation of income tax computed at the U.S. federal statutory tax rate to our effective income tax rate was as follows:
Tax at U.S. federal statutory rate
State and local taxes, net of U.S. federal benefit
U.S. credits and exemptions
Tax rate differential on foreign earnings
Adjustments to uncertain tax positions
Changes in valuation allowance
Tax on repatriation of foreign earnings
U.S. federal rate change
Stock compensation vestings
Non-deductible goodwill impairment
Poland economic development incentive
Other
Year ended December 31,
2017
2016
2015
35.0 %
35.0 %
35.0 %
1.8
(9.0)
9.6
(7.4)
17.5
93.9
(123.0)
2.2
—
—
(1.4)
19.2 %
0.8
0.2
(3.8)
0.2
(1.4)
0.2
—
—
(15.7)
4.9
0.6
21.0 %
1.7
(1.6)
(5.5)
(1.7)
3.8
7.3
—
—
—
—
(2.7)
36.3 %
68
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Significant components of our deferred tax assets and liabilities were as follows:
Deferred tax assets:
Net operating loss and credit carryforwards
Pension, other postretirement and postemployment benefits
Payroll and compensation
Working capital accruals
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Intangible assets recorded in acquisitions
Basis difference in affiliates
Other
Total deferred tax liabilities
Enactment of the Tax Cuts and Jobs Act
As of December 31,
2017
2016
$
406.6 $
10.0
12.3
13.9
49.7
492.5
(83.6)
408.9
2.4
74.1
308.0
7.2
391.7
$
17.2 $
230.8
12.4
19.1
20.6
43.0
325.9
(74.9)
251.0
17.7
87.7
138.3
5.2
248.9
2.1
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes numerous
changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction is effective for the
Company as of January 1, 2018. As a result of the reduction in the federal corporate income tax rate, the Company has revalued its net U.S. federal deferred
tax liability. The Company has substantially completed its accounting for the revaluation of its net U.S. federal deferred tax liabilities and recorded a tax
benefit of approximately $17.8 in the fourth quarter of 2017, excluding the impact for rate change on earnings which were not considered indefinitely
reinvested. There are certain deferred tax balances that can only be estimated at this time, so the rate change on these balances is a provisional estimate as of
December 31, 2017.
The Act provides a full dividends received deduction for any future dividends from non-U.S. subsidiaries to their U.S. parent company. Generally,
this will allow the Company to repatriate cash more freely than under the historical U.S. tax system. To transition to this new tax regime, the Act also
provided for a mandatory one-time "deemed repatriation" of accumulated post-1986 foreign earnings which have not been previously taxed. The Company
recorded a provisional estimate for this transition tax of $50.4 in the fourth quarter of 2017. Previously, the Company had recorded taxes of $59.8 on earnings
not indefinitely reinvested. In the fourth quarter, the Company recorded a benefit of $53.4 for the reduced tax rate on such earnings. The Company expects to
pay U.S. federal tax of approximately $20.8 on the deemed repatriation after utilization of tax loss and foreign tax credit carryforwards. The Company will
pay this amount over a period of up to the next nine years as a result of fiscal year-ends of certain foreign subsidiaries ending after December 31, 2017. The
accounting for the transition tax as required by the Act is provisional at December 31, 2017 due to (1) anticipated guidance from the U.S. Treasury
department on interpreting various provisions of the Act, (2) foreign subsidiaries with differing U.S. tax year-ends where final cash balances will not be
known until November 2018 and (3) final foreign tax credit amounts from foreign subsidiaries that have not yet filed tax returns.
The Act is comprehensive containing several other provisions, some of which will not materially impact the Company. Other provisions, such as the
taxation of Global Intangible Low-Taxed Income (“GILTI”) and the limitation of deductions for interest expense, could have significant impact to the
Company’s future tax position and cash taxes. The Company has not yet adopted an accounting policy related to the provision of deferred taxes related to
GILTI. As such, the Company has not recorded any deferred taxes for GILTI. The Company anticipates future issuance of U.S. Treasury department
regulations and notices that will clarify significant issues dealing with the application and computation of taxes due under the GILTI provisions.
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
69
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
assets to determine if they will likely 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, 2017, we had the following tax loss carryforwards available: tax loss carryforwards of various foreign jurisdictions of
approximately $1,607.1 and state tax loss carryforwards of approximately $152.7. Of these amounts, $1.8 expire in 2018 and $185.5 expires at various times
between 2019 and 2037. The remaining carryforwards have no expiration date. Of the respective increases during 2017 in “net operating loss and credit
carryforwards” deferred tax assets and “basis difference in affiliates” deferred tax liabilities reflected in the summary of components of deferred taxes above,
$177.0 related to certain of our Luxembourg subsidiaries which reported net operating losses for statutory and tax purposes resulting from impairments of the
carrying values of certain of their subsidiaries. These impairments created an outside basis difference that required the recording of a deferred tax liability,
and which resulted in a corresponding and offsetting increase in the Company’s net operating loss carryforwards. These increases in the components of our
deferred tax positions had no impact on our results of operations in 2017 or the presentation of deferred tax assets and liabilities in our consolidated balance
sheet at December 31, 2017.
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 certain of 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. The valuation allowance increased by $8.7 in 2017 and increased by $4.6 in 2016. Of the net changes in 2017 and
2016, $10.2 and $6.8 were recognized as an increase in tax expense. The increase in the valuation allowance during 2017 was primarily due to current year
losses carried forward and the impact of a weaker U.S. dollar on foreign currency-denominated balances, offset by previously carried forward losses which
were written off during the year as a result of entity rationalization. The increase in the valuation allowance during 2016 was primarily due to current year
losses carried forward, offset by the impact of a stronger U.S. dollar on foreign currency-denominated balances.
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
Generally, it has been our practice and intention to reinvest the earnings of most of our non-U.S. subsidiaries in those operations with a few limited
exceptions. As previously noted, the Act made significant changes to the taxation of undistributed foreign earnings, requiring that all previously untaxed
earnings and profits of our controlled foreign corporations be subjected to a one-time mandatory repatriation tax. The transition tax will substantially
eliminate the basis difference that existed previously for purposes of ASC 740. However, there are limited other taxes that could continue to apply such as
foreign withholding and certain state taxes.
As of December 31, 2017, we have recorded a provision of $2.3 for foreign withholding and state taxes on the earnings we expect to repatriate.
However, the Company is still evaluating the full impact of the Act on our assertion to indefinitely reinvest the earnings of our other foreign operations. Since
these earnings have already been subjected to U.S. federal tax they would only be potentially subject to limited other taxes, including foreign withholding and
certain state taxes.
During the fourth quarter of 2015, we repatriated sufficient foreign source income for U.S. tax purposes to allow us to utilize our 2015 foreign tax
credit capacity and provided U.S. taxes of $4.2 related to the dividend.
Unrecognized Tax Benefits
As of December 31, 2017, we had gross unrecognized tax benefits of $5.6 (net unrecognized tax benefits of $2.2), of which $2.2, if recognized,
would impact our effective tax rate. Similarly, at December 31, 2016, we had gross unrecognized tax benefits of $13.9 (net unrecognized tax benefits of $5.3).
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of December 31, 2017, gross
accrued interest totaled $0.2 (net accrued interest of $0.2), while the related amount as of December 31, 2016 was $1.8 (net accrued interest of $1.7). Our
income tax provision for the years ended December 31, 2017,
70
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
2016 and 2015 included gross interest expense (income) of $(1.5), $0.3 and $(0.1), respectively. There were no significant penalties recorded during any year
presented.
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 $0.0 to $1.5. The previously unrecognized tax
benefits relate to transfer pricing matters.
The aggregate changes in the balance of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 were as follows:
Unrecognized tax benefit - beginning of year
Gross increases - tax positions in prior period
Gross decreases - tax positions in prior period
Gross increases - tax positions in current period
Settlements
Lapse of statute of limitations
Change due to foreign currency exchange rates
Unrecognized tax benefit - end of year
Year ended December 31,
2017
2016
2015
$
13.9 $
25.4 $
—
(2.3)
0.4
—
(6.4)
—
0.1
(3.8)
2.5
(8.5)
(1.9)
0.1
$
5.6 $
13.9 $
27.3
3.6
(5.9)
5.3
—
(4.3)
(0.6)
25.4
The unrecognized tax benefits described above represent amounts that were included in tax returns filed by the Company. Historically, a portion of
the Company's operations were included in tax returns filed by the former Parent or its subsidiaries that were not part of the Spin-Off. As a result, some
uncertain tax positions related to the Company's operations resulted in unrecognized tax benefits that are now potential obligations of the former Parent or its
subsidiaries that were part of the Spin-Off. Because activities that gave rise to these unrecognized tax benefits related to the Company's operations, the impact
of these items was recorded to "Income tax provision" within our combined statements of operations prior to the Spin-Off date, with the offset recorded to
"Former parent company investment" within our combined balance sheets prior to the Spin-Off date, which were reclassified to "Paid-in capital" as of
December 31, 2015.
In addition, some of the Company's tax returns included the operations of the former Parent's subsidiaries that were not part of the Spin-Off. In
certain of these cases, these subsidiaries' activities gave rise to unrecognized tax benefits for which the Company could be potentially liable. When required
under the Income Taxes Topic of the Codification, we have recorded a liability for these uncertain tax positions within our consolidated balance sheets.
However, since the potential obligations were the result of activities associated with operations that were not part of the Spin-Off, we have not reflected any
related amounts within our "Income tax provision," but instead recorded the amounts directly to "Former parent company investment" within our combined
balance sheets prior to the Spin-Off date, which were reclassified to "Paid-in capital" as of December 31, 2015.
Other Tax Matters
During 2017, we recorded an income tax provision of $11.1 on $57.9 of income before income taxes, resulting in an effective tax rate of 19.2%. The
effective tax rate for 2017 was impacted by an income tax benefit of $71.2 related to revaluation of our net deferred tax liabilities resulting from the change in
the U.S. federal tax rate, including the reduction for earnings that were not indefinitely reinvested, and income tax charges of (i) $50.4 for the deemed
repatriation tax and (ii) $11.6 resulting from losses occurring in certain jurisdictions where the tax benefit of those losses is not expected to be realized.
During 2016, our effective tax rate of 21.0% was impacted by tax benefits of (i) $59.3 resulting from the $426.4 goodwill and intangible assets
impairment charge recorded by our Power and Energy reporting unit during the second quarter (an effective tax rate of 13.9%), as (a) the majority of the
goodwill for the Power and Energy reporting unit had no basis for income tax purposes and (b) the impairment charge resulted in the addition of a valuation
allowance for deferred income tax assets in certain jurisdictions, and (ii) $23.8 resulting from a tax incentive realized in Poland related to the expansion of our
manufacturing facility in that country.
During 2015, our effective tax rate of 36.3% was impacted by tax charges of $11.7 related to dividends from foreign subsidiaries, partially offset by
tax benefits of (i) $5.1 related to net changes in uncertain tax positions, (ii) $2.8 related to tax rate decreases in Italy and the U.K. and (iii) $2.0 related to
foreign exchange losses recognized for income tax purposes with respect to a foreign branch.
71
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
We review our income tax positions on a continuous basis and record unrecognized tax benefits for potential uncertain positions when we determine
that an uncertain position meets the criteria of the Income Taxes Topic of the Codification. As events change and resolutions occur, adjustments are made to
amounts previously provided, such as in the case of audit settlements with taxing authorities.
In connection with the Spin-Off, we and the former Parent entered into a Tax Matters Agreement which, among other matters, addresses the
allocation of certain tax adjustments that might arise upon examination of the 2013, 2014 and the pre-Spin-Off portion of the 2015 federal income tax returns
of the former Parent. None of those returns are currently under examination, and we believe any contingencies have been adequately provided for.
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
appropriately reflected as unrecognized tax benefits.
We have various non-U.S. income tax returns under examination. The most significant of these is the examination in Germany for the 2010 through
2014 tax years. We expect this examination will conclude in 2018. We believe that any uncertain tax positions related to these examinations have been
appropriately reflected as unrecognized tax benefits.
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 or we have not yet reached the
final stages of the appeals process, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at
this time.
(10) INDEBTEDNESS
Debt at December 31, 2017 and 2016 was comprised of the following:
Domestic revolving loan facility
Term loan(1)
5.625% senior notes, due in August 2024
5.875% senior notes, due in August 2026
Trade receivables financing arrangement
Other indebtedness(2)
Less: deferred financing fees(3)
Total debt
Less: short-term debt
Less: current maturities of long-term debt
Total long-term debt
December 31,
2017
2016
$
— $
270.0
300.0
300.0
—
35.8
(10.2)
895.6
24.2
20.5
$
850.9 $
68.0
390.0
300.0
300.0
21.2
42.4
(12.8)
1,108.8
27.7
20.2
1,060.9
(1)
(2)
The term loan, which had an initial principal balance of $400.0, is repayable in quarterly installments of 5.0% annually which began with our third quarter of 2016, with the remaining
balance repayable in full on September 24, 2020. In October and December 2017, we made voluntary principal prepayments in the amounts of $80.0 and $20.0, respectively, under the
term loan facility. On January 31, 2018, we made an additional voluntary principal prepayment of $30.0 under this facility. As a result of the January 2018 prepayment, the outstanding
principal amount on the term loan decreased to $240.0. The payment was funded by cash on hand. There was no penalty associated with these prepayments.
Primarily includes capital lease obligations of $11.6 and $14.7 and balances under a purchase card program of $21.9 and $17.9 as of December 31, 2017 and 2016, 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.
(3)
Deferred financing fees were comprised of fees related to the term loan and senior notes.
Debt payable during each of the five years subsequent to December 31, 2017 is $44.7, $21.3, $231.3, $1.3 and $1.4, respectively.
72
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Senior Credit Facilities
On September 1, 2015, we entered into senior credit facilities with a syndicate of lenders that provide for committed senior secured financing in the
aggregate initial principal amount of $1.35 billion, consisting of the following, each with a final maturity of September 24, 2020:
•
•
•
•
•
A term loan facility in an aggregate initial principal amount of $400.0;
A domestic revolving credit facility, available for loans and letters of credit, in an aggregate principal amount up to $250.0;
A global revolving credit facility, available for loans (and performance letters of credit and guarantees up to the equivalent of $100.0) in Euro,
British Pound and other currencies, in an aggregate principal amount up to the equivalent of $200.0;
A participation multi-currency foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate
principal amount up to the equivalent of $250.0; and
A bilateral multi-currency foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate principal
amount up to the equivalent of $250.0.
We also may seek additional commitments, without consent from the existing lenders, to add an incremental term loan facility and/or increase the
commitments in respect of the domestic revolving credit facility, the global revolving credit facility, the participation foreign credit instrument facility, and/or
the bilateral foreign credit instrument facility by an aggregate principal amount not to exceed (x) $500.0 plus (y) an unlimited amount so long as, immediately
after giving effect thereto, our Consolidated Senior Secured Leverage Ratio (as 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 cash and cash equivalents in excess of $50.0)
at the date of determination secured by liens to consolidated adjusted EBITDA, as defined in the credit agreement, for the four fiscal quarters ended most
recently before such date) does not exceed 2.75 to 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 facilities and foreign credit instrument facilities.
We are the borrower under all of the senior credit facilities, and certain of our foreign subsidiaries are (and we may designate other foreign
subsidiaries to be) borrowers under the global revolving credit facility and the foreign credit instrument facilities. All borrowings and other extensions of
credit under our senior credit facilities are subject to the satisfaction of customary conditions, including absence of defaults and accuracy in material respects
of representations and warranties.
The interest rates applicable to loans under our senior credit facilities are, at our option, equal to either (x) an alternate base rate (the highest of (a)
the federal funds effective rate plus 0.5%, (b) the prime rate of Bank of America, N.A., and (c) the one-month LIBOR rate plus 1.0%) or (y) a reserve-
adjusted LIBOR rate for dollars (Eurodollar) plus, in each case, an applicable margin percentage, which varies based on our Consolidated Leverage Ratio (as
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 cash and cash equivalents in excess of $50.0) at the date of determination to consolidated adjusted EBITDA, as defined in
the credit agreement, for the four fiscal quarters ended most recently before such date). We may elect interest periods of one, two, three or six months (and, if
consented to by all relevant lenders, nine or twelve months) for Eurodollar borrowings. The per annum fees charged and the interest rate margins applicable to
Eurodollar and alternate base rate loans are discussed under “Amendment of Senior Credit Facilities” further below.
The fees for bilateral foreign credit commitments are as specified under "Amendment of Senior Credit Facilities" 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 rates of 0.125% per annum and 0.250% per annum, respectively.
Our senior credit facilities require 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 the Company or its subsidiary guarantors. Mandatory prepayments are applied to repay, first, amounts outstanding under any term loans and,
then, amounts outstanding under the global revolving credit facility and the domestic revolving credit facility (without reducing the commitments thereunder).
No prepayment is required generally to the extent the net proceeds are reinvested (or committed to be reinvested) in permitted acquisitions,
73
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
permitted investments or assets to be used in our business 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 our senior credit facilities, in whole or in part, without
premium or penalty. Any voluntary prepayment of loans is subject to reimbursement of the lenders’ breakage costs in the case of a prepayment of Eurodollar
rate borrowings other than on the last day of the relevant interest period.
Indebtedness under our senior credit facilities is guaranteed by:
•
•
Each existing and subsequently acquired or organized domestic material subsidiary with specified exceptions; and
The Company with respect to the obligations of our foreign borrower subsidiaries under the global revolving credit facility, the participation
foreign credit instrument facility and the bilateral foreign credit instrument facility.
Indebtedness under our senior credit facilities is secured by a first priority pledge and security interest in 100% of the capital stock of our domestic
subsidiaries (with certain exceptions) held by the Company or its domestic subsidiary guarantors and 65% of the capital stock of our material first-tier foreign
subsidiaries (with certain exceptions). Effective with an amendment to our senior credit facilities in July 2016 (“the First Amendment”), the Company and the
domestic subsidiary guarantors granted valid and perfected first priority security interests in substantially all personal property assets of the Company and the
domestic subsidiary guarantors (subject to certain exceptions) and valid first priority mortgages on all domestic real property owned by the Company and the
domestic subsidiary guarantors having a fair market value in excess of $10.0. If the Company’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 will be released and the indebtedness under our senior credit facilities will
be unsecured.
Our senior credit facilities require that we maintain a consolidated interest coverage ratio, a consolidated leverage ratio, and a consolidated secured
leverage ratio (all as defined in the credit agreement). See further discussion under "Amendment of Senior Credit Facilities" section below.
Our senior credit facilities also 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, enter into sale and leaseback transactions, 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.
We are permitted under the senior credit facilities to repurchase our capital stock and pay cash dividends in an unlimited amount if our Consolidated
Leverage Ratio, as defined in the credit agreement, is (after giving pro forma effect to such payments) less than 2.50 to 1.00. If our Consolidated Leverage
Ratio is (after giving pro forma effect to such payments) greater than or equal to 2.50 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 Available Amount (as defined in the credit agreement as the sum of (i) $300.0 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 or minus (iii) certain other amounts specified in the credit agreement).
Amendment of Senior Credit Facilities
In December 2016, the Company and certain of its subsidiaries entered into an amendment (the “Second Amendment”) to the Company’s existing
senior credit facilities, dated as of September 1, 2015 and amended as of July 11, 2016 (the “Existing Senior Credit Facilities” and, as amended by the Second
Amendment, the “Senior Credit Facilities”), by and among the Company, the foreign subsidiary borrowers party thereto, and the lenders party thereto. The
Second Amendment amended the Existing Senior Credit Facilities to, among other things:
•
provide for a period of covenant relief through December 31, 2018 (the “Covenant Relief Period”) with the option for the Company to earlier
terminate the Covenant Relief Period if the consolidated leverage ratio is less than or equal to 3.25:1.00 and the interest coverage ratio is greater than
or equal to 3.50:1.00;
74
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
•
•
•
•
•
during the Covenant Relief Period, lower the additional commitments and principal available to be sought without consent from the existing lenders,
to add an incremental term loan facility and/or increase the commitments in respect of the domestic revolving credit facility, the global revolving
credit facility, the participation foreign credit instrument facility, and/or the bilateral foreign credit instrument facility, from $500.0 to $300.0;
during the Covenant Relief Period, increase the maximum consolidated leverage ratio that must be maintained by the Company from 4.00:1.00 to (i)
4.50:1.00 for the quarter ended December 31, 2017 and ending March 31, 2018, (ii) 4.25:1.00 for the quarters ending June 30, 2018 and September
30, 2018 and (iii) 4.00:1.00 for the quarter ending December 31, 2018;
during the Covenant Relief Period, decrease the minimum interest coverage ratio that must be maintained by the Company from 3.50:1.00 to
3.00:1.00 through the quarter ending March 31, 2018 and thereafter stepping up to (i) 3.25:1.00 for the quarters ending June 30, 2018 and September
30, 2018 and (ii) 3.50:1.00 for the quarter ending December 31, 2018;
during the Covenant Relief Period, require that the Company maintain a maximum consolidated secured leverage ratio of 2.50:1.00; and
amend the per annum fees charged and the interest rate margins applicable to Eurodollar and alternate base rate loans as follows:
Consolidated Leverage Ratio
Greater than or equal to 3.50 to 1.0
Between 3.00 to 1.0 and 3.50 to 1.0
Between 2.00 to 1.0 and 3.00 to 1.0
Between 1.50 to 1.0 and 2.00 to 1.0
Between 1.00 to 1.0 and 1.50 to 1.0
Less than 1.00 to 1.0
Consolidated Leverage Ratio
Greater than or equal to 3.50 to 1.0
Between 3.00 to 1.0 and 3.50 to 1.0
Between 2.00 to 1.0 and 3.00 to 1.0
Between 1.50 to 1.0 and 2.00 to 1.0
Between 1.00 to 1.0 and 1.50 to 1.0
Less than 1.00 to 1.0
At Any Time Other Than During the Covenant Relief Period
Domestic
Revolving
Commitment Fee
Global
Revolving
Commitment
Fee
Letter of
Credit Fee
Foreign Credit
Commitment Fee
Foreign Credit
Instrument Fee
LIBOR Rate
Loans
ABR Loans
0.400%
0.350%
0.300%
0.275%
0.250%
0.225%
0.400%
0.350%
0.300%
0.275%
0.250%
0.225%
2.250%
2.000%
1.750%
1.500%
1.375%
1.250%
0.400%
0.350%
0.300%
0.275%
0.250%
0.225%
1.375%
1.250%
1.000%
0.875%
0.800%
0.750%
2.250%
1.250%
2.000%
1.000%
1.750%
0.750%
1.500%
0.500%
1.375%
0.375%
1.250%
0.250%
During the Covenant Relief Period
Domestic
Revolving
Commitment Fee
Global
Revolving
Commitment
Fee
Letter of
Credit Fee
Foreign Credit
Commitment Fee
Foreign Credit
Instrument Fee
LIBOR Rate
Loans
ABR Loans
0.500%
0.450%
0.400%
0.375%
0.350%
0.325%
0.500%
0.450%
0.400%
0.375%
0.350%
0.325%
2.750%
2.500%
2.250%
2.000%
1.875%
1.750%
0.500%
0.450%
0.400%
0.375%
0.350%
0.325%
1.675%
1.550%
1.300%
1.175%
1.100%
1.050%
2.750%
1.750%
2.500%
1.500%
2.250%
1.250%
2.000%
1.000%
1.875%
0.875%
1.750%
0.750%
At December 31, 2017, we had $443.0 of borrowing capacity under our revolving credit facilities after giving effect to $7.0 reserved for outstanding
letters of credit. In addition, at December 31, 2017, we had $313.1 of available issuance capacity under our foreign credit instrument facilities after giving
effect to $186.9 reserved for outstanding bank guarantees and standby letters of credit.
The weighted-average interest rate of outstanding borrowings under our senior credit facilities was approximately 4.1% and 2.8% at December 31,
2017 and 2016, respectively.
75
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Senior Notes
In August 2016, the Company completed its issuance of $600.0 in aggregate principal amount of senior unsecured notes comprised of one tranche of
$300.0 aggregate principal amount of 5.625% senior notes due in August 2024 (the “2024 Notes”) and one tranche of $300.0 aggregate principal amount of
5.875% senior notes due in August 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”). The proceeds of the Notes, together with
borrowings under our domestic revolving loan facility, were used to complete the tender offer and repurchase/redemption of the $600.0 outstanding principal
amount of our 6.875% senior notes due in August 2017, including $36.4 of premiums paid. The Notes were issued pursuant to indentures, each dated August
10, 2016, among the Company, the subsidiary guarantors named therein, and the trustee of the Notes (the “Indentures”). The interest payment dates for the
Notes are February 15 and August 15 of each year, with interest payable in arrears. The Notes were offered in a private placement to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and to certain non-U.S. persons in transactions outside of the United States in
reliance on Regulation S under the Securities Act.
The Notes are redeemable, in whole or in part, at any time prior to maturity at a price equal to 100% of the principal amount thereof plus an
applicable premium, plus accrued and unpaid interest. If we experience certain types of change of control transactions, we must offer to repurchase the Notes
at 101% of the aggregate principal amount of the Notes repurchased, plus accrued and unpaid interest.
The Notes are unsecured and rank equally with all our existing and future unsubordinated unsecured senior indebtedness, and are effectively junior
to our senior credit facilities and trade receivables financing arrangement. The Notes are guaranteed by all of our existing and future domestic subsidiaries
that guarantee our senior credit facilities, subject to certain exceptions. The likelihood of our domestic subsidiaries having to make payments under the
guarantee is considered remote.
Each of the Indentures contains covenants that limit the Company’s (and its subsidiaries’) ability to, among other things: (i) grant liens on its assets;
(ii) enter into sale and leaseback transactions; and (iii) consummate mergers or transfer certain of its assets.
Other
In September 2015, we entered into a trade receivables financing arrangement under which we can borrow, on a continuous basis, up to $50.0,
depending on our trade receivables balance and other factors. 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. This arrangement
has a final maturity of September 21, 2018. At December 31, 2017, we had $33.8 of available borrowing capacity under our trade receivables financing
arrangement.
At December 31, 2017, in addition to the revolving lines of credit described above, we had approximately $6.3 of letters of credit outstanding under
separate arrangements in China and India.
At December 31, 2017, we were in compliance with all covenants of our senior credit facilities and our senior notes.
(11) DERIVATIVE FINANCIAL INSTRUMENTS
We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency ("FX") exchange
rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result
of currency fluctuations. Our principal currency exposures relate to the Euro, Chinese Yuan and British Pound.
From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional
currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency
of certain subsidiaries ("FX forward contracts"). In addition, some of our contracts contain currency forward embedded derivatives ("FX embedded
derivatives"), because the currency of exchange is not "clearly and closely" related to the functional currency of either party to the transaction. Certain of our
FX forward contracts are designated as cash flow hedges. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows,
changes in the derivatives' fair value are not included in current earnings, but are included in AOCL. These changes in fair value are reclassified into earnings
as a component of revenues or cost of products sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction
is no longer probable, the cumulative change in the derivatives' fair value is recorded as a component of "Other income (expense), net" in the period in which
the transaction is no
76
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
longer considered probable of occurring. To the extent a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness
measured in the hedging relationship is recorded in earnings in the period in which it occurs.
We had FX forward contracts with an aggregate notional amount of $44.6 and $28.0 outstanding as of December 31, 2017 and 2016, respectively,
with all such contracts scheduled to mature within one year. We also had FX embedded derivatives with an aggregate notional amount of $16.9 and $21.4 at
December 31, 2017 and 2016, respectively, with all such derivatives scheduled to mature within one year. There were no unrealized gains or losses recorded
in AOCL related to FX forward contracts as of December 31, 2017 and 2016, respectively. The net gains (losses) recorded in "Other income (expense), net"
related to FX gains (losses) totaled $(4.9), $(2.2) and $1.1 for the years ended December 31, 2017, 2016 and 2015, respectively.
We enter into arrangements designed to provide the right of setoff in the event of counterparty default or insolvency, and have elected to offset the
fair values of our FX forward contracts in our consolidated balance sheets. The gross fair values of our FX forward contracts and FX embedded derivatives, in
aggregate, were $2.3 and $2.9 (gross assets) and $0.0 and $0.1 (gross liabilities) at December 31, 2017 and 2016, respectively.
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
FX 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, 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 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.
77
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
(12) EQUITY AND STOCK-BASED COMPENSATION
Income (Loss) Per Share
Prior to the Spin-Off, SPX FLOW had no common shares outstanding. On September 26, 2015, 41.322 SPX FLOW common shares were
distributed to our former Parent's shareholders in conjunction with the Spin-Off. For comparative purposes, basic shares outstanding reflect this amount in all
periods presented prior to the Spin-Off. For purposes of computing dilutive shares, unvested SPX FLOW awards at the Spin-Off date were assumed to have
been issued and outstanding from January 1, 2015. The resulting number of weighted-average dilutive shares has been used in the period presented prior to
the Spin-Off. The following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income (loss) per
share:
Weighted-average shares outstanding, basic
Dilutive effect of share-based awards
Weighted-average shares outstanding, dilutive(1)
Year ended December 31,
2017
2016
2015
41.799
0.384
42.183
41.345
—
41.345
40.863
0.097
40.960
(1)
For the year ended December 31, 2017, 0.202 of unvested restricted stock shares/units were not included in the computation of diluted income per share because required
internal performance thresholds for vesting (as discussed below) were not met. For the year ended December 31, 2016, an aggregate of 0.802 of unvested restricted stock
shares, restricted stock units, and stock options outstanding were excluded from the computation of diluted loss per share as we incurred a net loss during the period. For the
year ended December 31, 2016, the number of anti-dilutive unvested restricted stock shares and restricted stock units outstanding excluded from the computation of diluted
loss per share was 0.236. For the year ended December 31, 2015, 0.474 of unvested restricted stock shares/units were not included in the computation of diluted income per
share because required market thresholds for vesting (as discussed below) were not met. For the years ended December 31, 2017 and 2015, 0.358 and 0.389, respectively, of
stock options were not included in the computation of diluted income per share because their exercise price was greater than the average market price of common shares.
Stock-Based Compensation - Awards Granted Prior to the Spin-Off
Prior to the Spin-Off, eligible employees of the Company participated in our former Parent’s share-based compensation plan pursuant to which they
were granted share-based awards of its stock. Our former Parent’s share-based compensation plan included awards for restricted stock shares, restricted stock
units and stock options. Compensation expense for share-based awards recorded by the Company prior to the Spin-Off includes the expense associated with
the employees historically attributable to the Company’s operations, as well as an allocation of stock-based compensation expense for our former Parent’s
corporate employees who provided certain centralized support functions.
Our former Parent's restricted stock shares, restricted stock units, and stock options were granted to eligible employees 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. A substantial portion of such former Parent's restricted stock shares and restricted stock unit
awards granted in 2014 generally vested based on performance thresholds.
Eligible employees received target performance awards in 2014 in which the employee could earn between 25% and 125% of the target performance
award in the event the award met the required vesting criteria. Vesting for the 2014 target performance awards was based on our former Parent's shareholder
return versus the S&P Composite 1500 Industrials Index over the three-year period ended December 31, 2016. Awards granted in 2015 did not contain such
target performance conditions.
Each eligible non-officer employee also received awards in 2015 and 2014 that generally vested ratably over three years, subject only to the passage
of time and a participant's continued employment during the vesting period. Officers of our former Parent received awards in 2015 and 2014 that generally
vested ratably over three years, subject to an internal performance metric and a participant's continued employment during the vesting period.
Our former Parent's restricted stock shares and restricted stock units that did not vest within the applicable vesting period were forfeited.
In connection with the Spin-Off, outstanding equity-based awards granted to SPX FLOW employees under our former Parent's plan were converted
into awards of the Company using a formula designed to preserve the intrinsic value of the awards
78
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
immediately prior to the Spin-Off. This conversion did not result in additional compensation expense. Additionally, certain restricted stock units granted to
employees in 2014 and 2013, none of whom were named executive officers at the time, were modified at the Spin-Off date to provide a minimum vesting
equivalent to 50% of the underlying units at the end of the applicable remaining service periods. Compensation expense related to the modification was $4.0,
of which $1.2 and $2.8 was recognized in the years ended December 31, 2016 and 2015, respectively.
Stock-Based Compensation - Awards Granted Subsequent to the Spin-Off
Since the Spin-Off, SPX FLOW stock-based compensation awards may be granted to certain eligible employees or non-employee directors under the
SPX FLOW Stock Compensation Plan (the “Stock Plan”). Under the Stock Plan, up to 1.355 unissued shares of our common stock were available for future
grant as of December 31, 2017. The Stock Plan permits the issuance of authorized but unissued shares or shares from treasury upon the vesting of restricted
stock units, granting of restricted stock shares, or exercise of stock options. Each restricted stock share, restricted stock unit and stock option granted reduces
share availability under the Stock Plan by one share.
Restricted stock shares or restricted stock units may be granted to certain eligible employees or non-employee directors in accordance with the Stock
Plan and applicable award agreements. Subject to participants' continued service and other award terms and conditions, the restrictions lapse and awards
generally vest over a period of time, generally three years (or one year for awards to non-employee directors). In some instances, such as death, disability, or
retirement, awards may vest concurrently with or following an employee's termination. Approximately half of such restricted stock shares and restricted stock
unit awards vest based on performance thresholds, while the remaining portion vest based on the passage of time since grant date.
Eligible employees, including officers, were granted target performance awards during 2017 and 2016 in which the employee can earn between 50%
and 150% of the target performance award in the event, and to the extent, the award meets the required performance vesting criteria. Such awards are
generally subject to the employees’ continued employment during the three-year vesting periods, and may be completely forfeited if the threshold
performance criteria are not met. Vesting for the 2017 and 2016 target performance awards is based on SPX FLOW shareholder return versus the performance
of a composite group of companies, as established under the awards (the "Composite Group"), over the three-year periods from January 1, 2017 and 2016,
respectively, through December 31, 2019 and 2018, respectively. In addition, certain eligible employees, including officers, were granted awards during 2017
that vest subject to attainment of stated improvements in a three-year average annual return on invested capital (as defined) measured at the conclusion of the
measurement period ending December 31, 2019 (including eligible employees’ continued employment during the measurement period). These target
performance and internal performance metric awards were issued as restricted stock units to eligible non-officer employees and restricted stock shares to
eligible officers.
Eligible non-officer employees also were granted restricted stock unit awards during 2017 and 2016 that vest ratably over three years, subject to the
passage of time and the employees’ continued employment during such periods. In some instances, such as death, disability, or retirement, awards may vest
concurrently with or following an employee's termination. Eligible officers were granted restricted stock share awards during 2017 and 2016 that vest subject
to an internal performance metric during the first year of the award and that also contain a three-year holding period from the grant of the award whereby the
holding period is generally released ratably over the three years (subject to a participant's continued employment during that period). In addition, certain
eligible employees, including officers, received restricted stock unit awards during 2016 that vest subject to attainment of an annual internal performance
metric measured at the conclusion of the measurement period ending December 31, 2018 (including eligible employees’ continued employment during the
measurement period).
Non-employee directors were granted restricted stock share awards during 2017 and 2016 that vest or vested at the close of business on the day
before the date of the Company's next regular annual meeting of shareholders held after the date of the grant, subject to the passage of time and the directors'
continued service during such periods.
Restricted stock share and unit awards granted to eligible employees during 2017 and 2016 include early retirement provisions which permit
recipients to be eligible for vesting generally upon reaching the ages of 60 and 55, respectively, and completing ten and five years of service, respectively,
(and, if applicable, subject to the attainment of performance measures).
Restricted stock shares and restricted stock units that do not vest within the applicable vesting periods are forfeited.
Stock options may be granted to eligible employees in the form of incentive stock options or nonqualified 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 on the date
79
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
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.
Stock-Based Compensation Expense - All Awards
The recognition of compensation expense for share-based awards 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 as noted above. For the years ended December 31, 2017,
2016 and 2015, we recognized compensation expense related to share-based programs in “Selling, general and administrative” expense in the accompanying
consolidated and combined statements of operations as follows:
Expense associated with individuals attributable to SPX FLOW's operations
Allocation of expense historically associated with the former Parent's corporate employees(1)
Expense related to modification as of Spin-Off date
Stock-based compensation expense
Income tax benefit
Stock-based compensation expense, net of income tax benefit
(1)
See Note 1 for a discussion of the methodology used to allocate corporate-related costs prior to the Spin-Off.
Restricted Stock Share and Restricted Stock Unit Awards
Year ended December 31,
2017
2016
2015
15.9 $
17.7 $
—
—
15.9
(5.7)
—
1.2
18.9
(6.9)
10.2 $
12.0 $
9.6
13.4
2.8
25.8
(9.5)
16.3
$
$
The Monte Carlo simulation model valuation technique was used to determine the fair value of restricted stock shares and restricted stock units that
contain a "market condition." 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 restricted stock share and restricted stock unit award. The following assumptions were
used in determining the fair value of the awards granted on the dates indicated below (awards granted during 2015 did not contain a market condition):
January 13, 2017
SPX FLOW
Composite Group
January 4, 2016:
SPX FLOW
Composite Group
Annual Expected
Stock Price
Volatility
Annual Expected
Dividend Yield
Risk-free Interest
Rate
Correlations Between Total Shareholder Return for
SPX FLOW and Individual Companies in the
Composite Group
Minimum
Average
Maximum
39.4%
28.6%
27.5%
25.5%
—%
n/a
—%
n/a
1.50%
1.50%
1.31%
1.31%
0.1848
0.3830
0.5057
0.2986
0.4563
0.5776
As SPX FLOW shares have been traded only since the Spin-Off in September 2015 (i.e., with less historical performance than the generally three-
year vesting period of the related awards), annual expected stock price volatility was based on the weighted average of SPX FLOW’s historical volatility
(since the Spin-Off) and the average historical volatility of the Composite Group, as of the grant dates. An expected annual dividend yield was not assumed as
dividends are not currently granted on common shares by SPX FLOW. The average risk-free interest rate was based on an interpolation of the two-year and
three-year daily treasury yield curve rate as of the grant dates.
Annual Expected
Stock Price
Volatility
Annual Expected
Dividend Yield
Risk-free Interest
Rate
Correlation Between Total Shareholder Return for
SPX Corporation and the S&P Index
January 2, 2014:
SPX Corporation
S&P Composite 1500 Industrials Index
33.7%
19.9%
1.02%
n/a
0.76%
0.76%
0.7631
80
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Annual expected stock price volatility was based on the three-year SPX Corporation historical volatility. The annual expected dividend yield was
based on annual expected SPX Corporation dividend payments and the stock price on the date of grant. The average risk-free interest rate was based on the
one-year through three-year daily treasury yield curve rate as of the grant date.
In connection with the Spin-Off, certain corporate employees of our former Parent became employees of the Company. The following table
summarizes the unvested restricted stock share and restricted stock unit activity (i) from December 31, 2014 through September 26, 2015, for such
Company's employees with former Parent awards before the Spin-Off, and (ii) the resulting, converted SPX FLOW awards after the Spin-Off and activity
from September 26, 2015 through December 31, 2017:
Former Parent - Prior to Spin-Off:
Outstanding at December 31, 2014
Granted
Vested
Forfeited and other
Outstanding at September 26, 2015, immediately prior to Spin-Off
SPX FLOW - Post Spin-Off:
Conversion of SPX Plan awards to SPX FLOW Stock Plan awards on September 26, 2015
Granted
Vested
Forfeited and other
Outstanding at December 31, 2015
Granted
Vested
Forfeited and other
Outstanding at December 31, 2016
Granted
Vested
Forfeited and other
Outstanding at December 31, 2017
Unvested Restricted
Stock Shares and
Restricted Stock Units
Weighted-Average
Grant-Date Fair Value
Per Share
0.149
0.075
(0.035)
(0.019)
0.170
1.154
0.069
(0.091)
(0.004)
1.128
0.930
(0.361)
(0.422)
1.275
0.486
(0.358)
(0.271)
1.132
$72.93
85.47
79.92
63.45
$79.65
$53.32
26.05
61.34
59.93
$51.13
27.94
51.13
40.27
$37.89
35.18
42.05
49.35
$32.65
As of December 31, 2017, there was $13.9 of unrecognized compensation cost related to restricted stock share and restricted stock unit
compensation arrangements. We expect this cost to be recognized over a weighted-average period of 1.5 years.
Stock Options
On January 2, 2015, eligible employees of the Company were granted 0.034 options in SPX Corporation stock, all of which were outstanding (but
not exercisable) from that date up to the Spin-Off. The weighted-average exercise price per share of these options was $85.87 and the maximum term of these
options is 10 years.
The weighted-average grant-date fair value per share of the former Parent stock options granted on January 2, 2015 was $27.06. The fair value of
each former Parent option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
Annual expected SPX Corporation stock price volatility
Annual expected SPX Corporation dividend yield
Risk-free interest rate
Expected life of SPX Corporation stock option (in years)
36.53%
1.75%
1.97%
6.0
Annual expected stock price volatility was based on the six-year historical volatility of SPX Corporation stock. The annual expected dividend yield
was based on annual expected SPX Corporation dividend payments and SPX Corporation's stock
81
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
price on the date of grant. The average risk-free interest rate was based on the seven-year treasury constant maturity rate. The expected SPX Corporation
option life was based on a three-year pro-rata vesting schedule and represents the period of time that awards are expected to be outstanding.
In connection with the Spin-Off, certain corporate employees of the former Parent became employees of the Company. The number of outstanding
SPX FLOW stock options, after reflecting (i) the former Parent stock options that had been granted to such corporate employees of the former Parent on
January 2, 2015, and (ii) the conversion of the former Parent stock options to SPX FLOW stock options, was 0.396. After reflecting 0.025 of forfeitures
during the fourth quarter of 2015 and 0.029 of forfeitures and expirations during 2017, there were 0.342 and 0.371, respectively, of SPX FLOW stock options
outstanding as of December 31, 2017 and 2016, of which 0.310 were exercisable as of December 31, 2017. As a result of the conversion of the stock options,
the weighted-average exercise price per share of the SPX FLOW stock options is $61.29 and the weighted-average grant-date fair value per share of the SPX
FLOW stock options is $19.33. Other terms of the SPX FLOW stock options are the same as those discussed above.
As of December 31, 2017, there was no unrecognized compensation cost related to stock options.
Accumulated Other Comprehensive Loss
The primary component of AOCL as of December 31, 2017 and 2016, was foreign currency translation adjustment. There were no unrealized gains
or losses recorded in AOCL related to FX forward contracts as of December 31, 2017 and 2016. Changes in AOCL for the years ended December 31, 2017
and 2016, related solely to foreign currency translation adjustment. See the consolidated and combined statement of comprehensive income (loss) for other
changes in AOCL for the year ended December 31, 2015.
Common Stock in Treasury
During the years ended December 31, 2017 and 2016, "Common stock in treasury" was increased by $4.0 and $3.5, respectively, for common stock
that was surrendered by recipients of restricted stock as a means of funding the related minimum income tax withholding requirements.
(13) COMMITMENTS, CONTINGENT LIABILITIES AND OTHER MATTERS
Leases
We lease certain manufacturing facilities, offices, sales and service locations, machinery and equipment, vehicles and office equipment under various
leasing programs accounted for as operating and capital leases, some of which include scheduled rent increases stated in the lease agreement. We do not have
any significant leases that require rental payments based on contingent events nor have we received any significant lease incentive payments.
Operating Leases
The future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year are:
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total minimum payments
$
$
22.1
17.8
15.2
10.0
7.6
11.6
84.3
Total operating lease expense, inclusive of rent based on scheduled rent increases and rent holidays recognized on a straight-line basis, was $30.6 in
2017, $31.6 in 2016 and $31.9 in 2015.
82
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
Capital Leases
Future minimum lease payments under capital lease obligations are:
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total minimum payments
Less: interest
Capital lease obligations as of December 31, 2017
Less: current maturities as of December 31, 2017
Long-term portion as of December 31, 2017
$
$
Our current and long-term capital lease obligations as of December 31, 2016 were $0.2 and $14.5, respectively.
Assets held through capital lease agreements at December 31, 2017 and 2016 comprise the following:
Buildings
Machinery and equipment
Total
Less: accumulated depreciation
Net book value
Litigation and Contingent Liabilities
December 31,
2017
2016
$
$
12.8 $
0.2
13.0
(2.5)
10.5 $
0.9
1.7
1.6
1.6
1.7
6.2
13.7
(2.1)
11.6
0.5
11.1
19.7
0.2
19.9
(5.7)
14.2
We are subject to litigation 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.
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. We believe our compliance obligations with
environmental protection laws and regulations should not have a material effect, individually or in the aggregate, on our financial position, results of
operations or cash flows.
Mezzanine Equity
Independent noncontrolling shareholders in certain foreign subsidiaries of the Company have put options under their respective joint venture
operating agreements that allow them to sell their common stock to the controlling shareholders (wholly-owned subsidiaries of SPX FLOW) upon the
satisfaction of certain conditions, including the passage of time. The respective carrying values presented in "Mezzanine equity" of our consolidated balance
sheets as of December 31, 2017 and 2016 are stated at the current exercise value of the put options, irrespective of whether the options are currently
exercisable. To the extent the noncontrolling interests' put option price is correlated with the estimated fair value of the subsidiary, we have used the market
method to estimate such fair values. This represents a level 3 fair value measurement. None of the noncontrolling interest put options are exercisable at this
time. If and when such options are exercised, we expect to settle the option value in cash.
83
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
(14) 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 during the periods presented.
The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.
Derivative Financial Instruments
Our derivative financial assets and liabilities include FX forward contracts and FX embedded derivatives, valued using valuation 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, 2017 and 2016, the gross fair values of our derivative financial assets and liabilities, in aggregate, were $2.3 and $2.9 (gross
assets) and $0.0 and $0.1 (gross liabilities), respectively. As of December 31, 2017, 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 Investment
Until June 2017, we had an investment in an equity security that was accounted for under the fair value option, but not readily marketable, and
therefore which was classified as a Level 3 asset in the fair value hierarchy. In April 2017, we entered into an agreement to sell our investment in the equity
security to a third party, and we received proceeds from the sale of the equity security during the second quarter of 2017. In prior periods, we based the
security’s fair value on a variety of inputs, including reported trades, non-binding broker/dealer quotes, and historical trade prices of the same securities.
Market indicators and industry and economic events were also considered. At December 31, 2016, this asset had a fair value of $7.6.
84
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
The table below presents a reconciliation of our investment in the equity security measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2017 and 2016, including net unrealized losses recorded to “Other income (expense), net."
Balance at beginning of year
Unrealized losses recorded to earnings
Proceeds received from sale of investment
Balance at end of year
Mezzanine Equity
Year ended December 31,
2017
2016
7.6 $
(1.4)
(6.2)
— $
8.1
(0.5)
—
7.6
$
$
To the extent the noncontrolling interests' put option price is correlated with the estimated fair value of the subsidiary, we use the market method to
estimate the fair values of noncontrolling interest put options reported in "Mezzanine equity" using unobservable inputs (Level 3) on a recurring basis.
Changes to the noncontrolling interest put option values are reflected as adjustments to "Mezzanine equity" and "Accumulated deficit." Refer to Note 13 for
further discussion.
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 impairment would require that the asset be recorded at its fair value. At December
31, 2017, we did not have any significant non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring
basis. Refer to Note 7 for further discussion pertaining to our annual evaluation of goodwill and other intangible assets for impairment.
During 2016 and 2015, we recorded impairment charges of $189.4 and $22.7, respectively, related to trademarks, customer relationships, and
technology assets in 2016 and trademarks and technology assets in 2015 of certain businesses within our Power and Energy and Food and Beverage
reportable segments as we determined that the fair values of such intangible assets were less than the carrying values. See Note 7 for additional information
regarding such impairment charges.
Indebtedness and Other
The estimated fair values of other financial liabilities (excluding capital leases and deferred financing fees) not measured at fair value on a recurring
basis as of December 31, 2017 and 2016 were as follows:
Domestic revolving loan facility
Term loan(1)
5.625% Senior notes(1)
5.875% Senior notes(1)
Trade receivables financing arrangement
Other indebtedness
(1) Carrying amount reflected herein excludes related deferred financing fees.
85
December 31, 2017
December 31, 2016
Carrying Amount
$
— $
270.0
300.0
300.0
—
24.2
Fair Value
Carrying Amount
Fair Value
— $
68.0 $
270.0
315.0
320.3
—
24.2
390.0
300.0
300.0
21.2
27.7
68.0
390.0
300.0
296.3
21.2
27.7
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
The following methods and assumptions were used in estimating the fair value of these financial instruments:
•
•
The fair values of the senior notes were determined using Level 2 inputs within the fair value hierarchy and were based on quoted market prices
for the same or similar instruments or on current rates offered to us for debt with similar maturities, subordination and credit default
expectations.
The fair values of amounts outstanding under our domestic revolving loan facility, term loan, and trade receivables financing arrangement
approximated carrying value due primarily to the variable-rate nature and credit spreads of these instruments, when compared to other similar
instruments.
•
The fair values of other indebtedness approximated carrying value due primarily to the short-term nature of these instruments.
The carrying amounts of cash and equivalents and receivables reported in our consolidated balance sheets approximate fair value due to the short-
term nature of those instruments.
(15) RELATED PARTY TRANSACTIONS
Allocation of General Corporate Expenses
The consolidated and combined statement of operations in 2015 includes expenses for certain centralized functions and other programs provided
and/or administered by the former Parent charged directly to business units of the Company. In addition, for purposes of preparing the combined statement of
operations for the period prior to the Spin-Off on a "carve-out" basis, a portion of the former Parent's total corporate expenses were allocated to the Company.
A detailed description of the methodology used to allocate corporate-related costs is included in Note 1.
Related Party Interest
We recorded interest income of $26.2 for the year ended December 31, 2015, associated with related party notes receivable outstanding during the
period, with the former Parent serving as the counterparty. These related party notes were transferred to the former Parent or canceled by the Company with a
corresponding decrease to "Former parent company investment" of $669.7 during the third quarter of 2015. The related party notes receivable had a
weighted-average interest rate of approximately 5.0% prior to their transfer to the former Parent or cancellation by the Company.
We recorded interest expense of $28.4 for the year ended December 31, 2015, associated with related party notes payable outstanding during the
period, with the former Parent (and certain other of its affiliates that were not part of the Spin-Off) serving as counterparties. Related party notes payable were
reduced by $991.3 with a corresponding increase to "Former parent company investment" during the nine months ended September 26, 2015 as a result of
their extinguishment by way of capital contribution to the Company by the former Parent. The related party notes payable had a weighted-average interest
rate of approximately 7.0% prior to their extinguishment.
86
SPX FLOW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(in millions, except per share data)
(16) QUARTERLY RESULTS (UNAUDITED)
First(2)
Second
Third
Fourth(2)
2017
2016
2017
2016
2017
2016
2017
2016
Revenues
Gross profit
Net income (loss)(1)
Less: Net income (loss) attributable to
noncontrolling interests
$
433.2 $
505.0 $
498.0 $
528.8 $
491.1 $
466.8 $
529.2 $
139.1
(7.3)
159.2
(32.1)
153.0
10.2
166.8
(352.3)
159.1
13.0
146.1
(4.2)
165.2
30.9
0.1
(1.0)
(0.1)
0.5
0.2
0.5
0.2
Net income (loss) attributable to SPX FLOW, Inc. $
(7.4) $
(31.1) $
10.3 $
(352.8) $
12.8 $
(4.7) $
30.7 $
495.4
152.5
7.6
0.8
6.8
Basic income (loss) per share of common stock
$
Diluted income (loss) per share of common stock $
(0.18) $
(0.18) $
(0.75) $
(0.75) $
0.25 $
0.24 $
(8.52) $
(8.52) $
0.31 $
0.30 $
(0.11) $
(0.11) $
0.73 $
0.72 $
0.16
0.16
(1)
During the fourth quarter of 2017, the income tax provision was impacted by (i) an income tax benefit of $71.2 for reduction in the U.S. tax rate, including the reduction for
earnings that were not indefinitely reinvested, and income tax charges of (ii) $50.4 for the deemed repatriation tax and (iii) $6.1 resulting from losses occurring in certain
jurisdictions where the tax benefit of those losses is not expected to be realized.
During the fourth quarter of 2016, we recorded impairment charges, net of taxes, of $10.6, related to the trademarks of a business within our Power and Energy reportable
segment and a technology asset of a business within our Food and Beverage reportable segment.
During the third quarter of 2016, we recognized in Special Charges an asset impairment charge, net of taxes, of $3.3 related to certain corporate assets being marketed for sale. In
addition, during the third quarter of 2016, we recorded a loss on early extinguishment of debt, net of taxes, of $24.3, related to the redemption of all of our 6.875% senior notes due in
August 2017.
During the third quarter of 2016, we recorded an income tax benefit of $23.8 resulting from a tax incentive realized in Poland related to the expansion of our manufacturing facility in that
country.
During the second quarter of 2016, we recorded impairment charges, net of taxes, of $358.4, related to the goodwill and various intangible assets of our Power and Energy reportable
segment.
During the first quarter of 2016, we recognized in Special Charges an asset impairment charge, net of taxes, of $7.5 resulting primarily from management’s decision during that quarter to
market certain corporate assets for sale.
(2)
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 2017 were April 1, July 1
and September 30, compared to the respective April 2, July 2 and October 1, 2016 dates. This practice only affects the quarterly reporting periods and not the annual reporting period. We
had two less days in the first quarter of 2017 and one more day in the fourth quarter of 2017 than in the respective 2016 periods.
(17) SUBSEQUENT EVENT
On January 31, 2018, we made a voluntary principal prepayment in the amount of $30.0 under our term loan facility, as described in Note 10. As a
result of the prepayment, the outstanding principal amount on the term loan decreased to $240.0. The payment was funded by cash on hand.
87
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
SPX FLOW management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), as of December 31, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of
December 31, 2017, that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act has been recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms, and that such information has been accumulated and communicated to the Company's management including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control framework and
processes were designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the
preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America. Our internal control over financial reporting includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and Directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent
or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. Management
assessed the effectiveness of our internal control over financial reporting and concluded that, as of December 31, 2017, such internal control was effective at
the reasonable assurance level described above. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control — Integrated Framework (2013). The effectiveness of our internal control over
financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their
report included in this Form 10-K.
Changes in Internal Control Over Financial Reporting
Before the Spin-Off, the Company relied on certain financial information and resources of the former Parent to manage aspects of the Company’s
business and to report financial results. These resources included executive management, investor relations, finance and accounting, legal, and human
resources support, benefit plan administration and reporting, general management, treasury, insurance and risk management, and oversight functions, such as
the Board of Directors and internal audit, including those functions required for Sarbanes-Oxley compliance. In conjunction with the Spin-Off, the Company
enhanced its own financial, administrative, and other support systems. The Company formed its accounting, reporting, legal, and internal audit departments
and reformed its policies and systems, as needed, to meet all regulatory requirements on a stand-alone basis.
While these changes in staffing, policies and systems were accomplished in connection with the Spin-Off, we continue to review, document and test
our internal controls over financial reporting, and may from time to time make changes aimed at
88
enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to changes in our internal control over financial
reporting.
In connection with the evaluation by SPX FLOW management, including the Chief Executive Officer and Chief Financial Officer, of our internal
control over financial reporting, pursuant to Exchange Act Rule 13a-15(d), no changes during the quarter ended December 31, 2017 were identified that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
89
ITEM 10. Directors, Executive Officers and Corporate Governance
a) Directors of the Company.
PART III
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the heading "Election of
Directors" and is incorporated herein by reference.
b) Executive Officers of the Company.
Marcus G. Michael, 54, is President and Chief Executive Officer, and a director of the Company, since January 2016. He was previously President
of our Food and Beverage segment. Prior to the Spin-Off, he was President, Flow Technology—Food and Beverage of SPX Corporation, and was appointed
an officer of SPX in December 2014. He joined SPX Corporation in 2003 and prior to his most recent position held various senior positions within the
company, including President of the company’s global evaporative and dry cooling businesses and President of Flow Technology’s EMEA region. Prior to
joining SPX Corporation, Mr. Michael held positions at General Electric and TDK Corporation.
Jeremy W. Smeltser, 43, is Vice President and Chief Financial Officer. He was previously Vice President and Chief Financial Officer of SPX
Corporation, where he served in various roles, most recently as Vice President and Chief Financial Officer, Flow Technology, and became an officer of SPX
Corporation in April 2009. He joined SPX Corporation in 2002 from Ernst & Young LLP, where he was an audit manager in Tampa, Florida. Prior to that, he
held various positions with Arthur Andersen LLP, in Tampa, Florida, and Chicago, Illinois, focused primarily on assurance services for global manufacturing
clients.
Stephen A. Tsoris, 60, is Vice President, Secretary and General Counsel. He was previously Vice President, Secretary and General Counsel of SPX
Corporation since April 2015. Mr. Tsoris joined SPX Corporation in 2008 as the assistant general counsel, corporate development, where he played a major
role in many significant acquisitions, divestitures and strategic ventures. Prior to joining SPX Corporation, he was a partner at Gardner Carton & Douglas
LLP where in addition to working with a wide spectrum of clients across many industries, he supported SPX Corporation on over fifty M&A transactions.
David A. Kowalski, 59, is President, Global Manufacturing Operations. He was previously President, Global Manufacturing Operations of SPX
Corporation since August 2013. Since August 2011, he also has served as President of the SPX Industrial Products group of businesses. He joined SPX
Corporation in 1999 as the Vice President and General Manager of Tools and Equipment at Service Solutions and was named President of Service Solutions
in 2004. He became the segment President, Test and Measurement, and an officer of the company in August 2005. Before joining SPX Corporation, he held
positions with American National Can Company, J.I. Case, Picker International and Warner Swasey.
Dwight A. K. Gibson, 43, is President, Food and Beverage segment. Prior to joining the Company in June 2016, he served as President of Strategic
Initiatives for Ingersoll Rand's Climate segment. He joined Ingersoll Rand in 2004 and served in a variety of general management, business development and
product management roles. From October 2011 to June 2015, he served as Vice President and General Manager for the Thermo King Europe, Middle
East and Africa truck and trailer business. Prior to joining Ingersoll Rand in 2004, he was a consultant with McKinsey and Company.
José Larios, 43, is President, Power and Energy and Industrial segments. Mr. Larios joined SPX Corporation in July 2015 as Vice President of
Global Original Equipment Sales for Power and Energy prior to becoming President of the Power and Energy segment in August 2016 and President of the
Industrial segment in January 2017. Prior to joining SPX Corporation, he served fifteen years at General Electric in progressive roles in sales, product
management, marketing, operations and global commercial leadership, where he last served as Global Vice President of Sales for O&G Surface Products.
Belinda G. Hyde, 47, is Vice President and Chief Human Resources Officer. She was previously Vice President and Chief Human Resources Officer
of SPX Corporation since July 2015. Ms. Hyde served as the Senior Vice President and Chief Human Resources Officer of Schnitzer Steel Industries, Inc.
from October 2011 until joining SPX Corporation. Prior to joining Schnitzer, Ms. Hyde was Vice President of Human Resources with Celanese Corporation
from 2008 to 2011. Previously, she led the talent management, development, and communications functions for biotech Life Technologies from 2005 to 2008.
Ms. Hyde also worked at Dell Computer from 2000 to 2005 in a variety of human resources leadership positions.
Kevin J. Eamigh, 47, is the Chief Information Officer and Vice President, Global Business Services, with overall strategic and operational
responsibility of the global Information Technologies and Shared Services organizations, the role he previously held at SPX Corporation. Mr. Eamigh joined
SPX Corporation in 2000 and held various positions within information
90
technology services and business management. He was named Chief Information Officer of SPX Corporation in 2009 and accepted the additional
responsibility of the Shared Services organization in June 2012. He was appointed an officer of SPX Corporation in July 2015. Mr. Eamigh began his career
with IBM prior to co-founding PrimeSource Technologies, a business technology consulting firm.
c) Section 16(a) Beneficial Ownership Reporting Compliance.
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.
d) Code of Ethics.
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the heading "Corporate
Governance" and is incorporated herein by reference.
e) Other Matters.
Information regarding our Audit Committee and Nominating and Governance Committee is set forth in our definitive proxy statement for the 2018
Annual Meeting of Stockholders under the headings "Corporate Governance" and "Board Committees" and is incorporated herein by reference.
ITEM 11. Executive Compensation
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the headings "Executive
Compensation" and "Director Compensation" and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the headings "Ownership of
Common Stock" and "Equity Compensation Plan Information" and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the heading "Corporate
Governance" and is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
This information is included in our definitive proxy statement for the 2018 Annual Meeting of Stockholders under the heading "Ratification of the
Appointment of Independent Public Accountants" and is incorporated herein by reference.
91
ITEM 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Form 10-K:
PART IV
1. All financial statements. See Index to Consolidated and Combined Financial Statements on page 37 of this Form 10-K.
2. Financial Statement Schedules. None required. See page 37 of this Form 10-K.
3. Exhibits. See Index to Exhibits.
ITEM 16. Form 10-K Summary
None.
92
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 6th day of February, 2018.
SIGNATURES
SPX FLOW, Inc.
(Registrant)
By
/s/ Jeremy W. Smeltser
Jeremy W. Smeltser
Vice President and Chief Financial Officer
93
Item No.
INDEX TO EXHIBITS
Description
2.1
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
Separation and Distribution Agreement, dated as of September 22, 2015, by and between SPX FLOW, Inc. and
SPX Corporation, incorporated by reference from the Company’s Current Report on Form 8-K filed on
September 28, 2015 (file no. 1-37393).
Amended and Restated Certificate of Incorporation of SPX FLOW, Inc., incorporated by reference from the
Company’s Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Certificate of Change of Registered Agent and/or Registered Office, incorporated by reference from the
Company’s Current Report on Form 8-K filed on October 26, 2015 (file no. 1-37393).
Amended and Restated Bylaws of SPX FLOW, Inc., incorporated by reference from the Company’s Current
Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
2024 Notes Indenture, dated as of August 10, 2016, by and among SPX FLOW, Inc., the subsidiary guarantors
named therein and U.S. Bank National Association, as trustee (including form of 2024 Note), incorporated by
reference from the Company’s Current Report on Form 8-K filed on August 11, 2016 (file no. 1-37393).
2026 Notes Indenture, dated as of August 10, 2016, by and among SPX FLOW, Inc., the subsidiary guarantors
named therein and U.S. Bank National Association, as trustee (including form of 2026 Note), incorporated by
reference from the Company’s Current Report on Form 8-K filed on August 11, 2016 (file no. 1-37393).
Transition Services Agreement, dated as of September 26, 2015, by and between SPX FLOW, Inc. and SPX
Corporation, incorporated by reference from the Company’s Current Report on Form 8-K filed on September
28, 2015 (file no. 1-37393).
Tax Matters Agreement, dated as of September 26, 2015, by and between SPX FLOW, Inc. and SPX
Corporation, incorporated by reference from the Company’s Current Report on Form 8-K filed on September
28, 2015 (file no. 1-37393).
Employee Matters Agreement, dated as of September 26, 2015, by and between SPX FLOW, Inc. and SPX
Corporation, incorporated by reference from the Company’s Current Report on Form 8-K filed on September
28, 2015 (file no. 1-37393).
Trademark License Agreement, dated as of September 26, 2015, by and between SPX FLOW, Inc. and SPX
Corporation, incorporated by reference from the Company’s Current Report on Form 8-K filed on September
28, 2015 (file no. 1-37393).
SPX FLOW Stock Compensation Plan, incorporated by reference from the Company’s Current Report on Form
8-K filed on September 28, 2015 (file no. 1-37393).
Form of SPX FLOW Stock Option Award Agreement, incorporated by reference from the Company’s Current
Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Form of SPX FLOW Restricted Stock Unit Award Agreement, incorporated by reference from the Company’s
Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Form of SPX FLOW Restricted Stock Award Agreement, incorporated by reference from the Company’s
Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
SPX FLOW Executive Annual Bonus Plan, incorporated by reference from the Company’s Current Report on
Form 8-K filed on September 28, 2015 (file no. 1-37393).
SPX FLOW Supplemental Retirement Plan for Top Management, incorporated by reference from the
Company’s Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
SPX FLOW Life Insurance Plan for Key Managers, incorporated by reference from the Company’s Current
Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
SPX FLOW Supplemental Retirement Savings Plan, incorporated by reference from the Company’s Current
Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
SPX FLOW Executive Long-Term Disability Plan, incorporated by reference from the Company’s Current
Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Form of Assignment and Assumption of and Amendment to Employment Agreement, incorporated by reference
from the Company’s Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Form of Assignment and Assumption of and Amendment to Change of Control Agreement, incorporated by
reference from the Company’s Current Report on Form 8-K filed on September 28, 2015 (file no. 1-37393).
Form of SPX FLOW Confidentiality and Non-Competition Agreement, incorporated by reference from the
Company’s Quarterly Report on Form 10-Q for the period ended September 26, 2015 (file no. 1-37393).
94
Item No.
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28
10.29
10.30
10.31
11.1
21.1
23.1
31.1
31.2
32.1
Description
Amendment to the SPX FLOW Supplemental Retirement Savings Plan, incorporated by reference from the
Company’s Quarterly Report on Form 10-Q for the period ended September 26, 2015 (file no. 1-37393).
Employment Agreement between Marcus G. Michael and SPX FLOW, Inc., incorporated herein by reference
from the Company’s Form 8-K/A filed on January 8, 2016 (file no. 1-37393).
Change of Control Agreement between Marcus G. Michael and SPX FLOW, Inc., incorporated herein by
reference from the Company’s Form 8-K/A filed on January 8, 2016 (file no. 1-37393).
Amended and Restated Employment Agreement between SPX Corporation and David A. Kowalski,
incorporated herein by reference from the SPX Corporation Annual Report on Form 10-K for the year ended
December 31, 2008 (file no. 1-6948).
Employment Agreement between SPX Corporation and Jeremy W. Smeltser, incorporated herein by reference to
the SPX Corporation Quarterly Report on Form 10-Q for the period ended June 27, 2009 (file no. 1-6948).
Change of Control Agreement between Jeremy W. Smeltser and SPX Corporation, as amended and restated
December 2, 2013, incorporated herein by reference from SPX Corporation's Current Report on Form 8-K filed
on December 5, 2013 (file no. 1-6948).
Change of Control Agreement between David A. Kowalski and SPX Corporation, as amended and restated
December 2, 2013, incorporated herein by reference from SPX Corporation's Current Report on Form 8-K filed
on December 5, 2013 (file no. 1-6948).
Form of Waiver of Certain Employment Agreement Provisions by each of Jeremy W. Smeltser and David A.
Kowalski, dated December 2, 2013, incorporated herein by reference from SPX Corporation's Current Report on
Form 8-K filed on December 5, 2013 (file no. 1-6948).
Form of Change of Control Agreement between each of Stephen A. Tsoris, Belinda G. Hyde and Kevin J.
Eamigh, and SPX Corporation, incorporated herein by reference from the SPX Corporation Annual Report on
Form 10-K for the year ended December 31, 2014 (file no. 1-6948).
Form of Change of Control Agreement between each of Dwight Gibson and Jose Larios and SPX FLOW, Inc.,
incorporated herein by reference from the SPX FLOW, Inc. Annual Report on Form 10-K for the year ended
December 31, 2016 (file no. 1-37393).
Separation Agreement between David J. Wilson and SPX FLOW, Inc. incorporated by reference from SPX
FLOW's Current Report on Form 8-K/A filed on February 22, 2017.
Credit Agreement, dated as of September 1, 2015, among SPX FLOW, Inc., the Foreign Subsidiary Borrowers
party thereto, Bank of America, N.A., as Administrative Agent, Deutsche Bank AG Deutschlandgeschäft
Branch, as Foreign Trade Facility Agent, and the other agents and lenders party thereto, incorporated by
reference from SPX Corporation’s Current Report on Form 8-K filed on September 1, 2015 (file no. 1-6948).
First Amendment to Credit Agreement, dated as of July 11, 2016, among SPX FLOW, Inc., the Foreign
Subsidiary Borrowers party thereto, the Subsidiary Guarantors party thereto, the Lenders party thereto, Deutsche
Bank AG Deutschlandgeschäft Branch, as Foreign Trade Facility Agent, and Bank of America, N.A., as
Administrative Agent, incorporated by reference from SPX FLOW’s Current Report on Form 8-K filed on July
12, 2016 (file no. 1-37393).
Security Agreement, dated as of July 11, 2016, among SPX FLOW, Inc., the Grantors party thereto, and Bank of
America, N.A., as Administrative Agent, incorporated by reference from SPX FLOW’s Current Report on Form
8-K filed on July 12, 2016 (file no. 1-37393).
Second Amendment to Credit Agreement, dated as of December 16, 2016, among SPX FLOW, Inc., the Foreign
Subsidiary Borrowers party thereto, the Subsidiary Guarantors party thereto, the Lenders party thereto, Deutsche
Bank AG Deutschlandgeschäft Branch, as Foreign Trade Facility Agent, and Bank of America, N.A., as
Administrative Agent, incorporated by reference from SPX FLOW’s Current Report on Form 8-K filed on
December 16, 2016 (file no. 1-37393).
Statement regarding computation of earnings (loss) per share. See consolidated and combined statements of
operations on page 40 of this Form 10-K.
Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95
Item No.
101.1
Description
SPX FLOW, Inc. financial information from its Form 10-K for the annual period ended December 31, 2017,
formatted in XBRL, including: (i) Consolidated and Combined Statements of Operations for the years ended
December 31, 2017, 2016, and 2015; (ii) Consolidated and Combined Statements of Comprehensive Income
(Loss) for the years ended December 31, 2017, 2016, and 2015; (iii) Consolidated Balance Sheets as of
December 31, 2017 and 2016; (iv) Consolidated and Combined Statements of Equity for the years ended
December 31, 2017, 2016, and 2015; (v) Consolidated and Combined Statements of Cash Flows for the years
ended December 31, 2017, 2016, and 2015; and (vi) Notes to Consolidated and Combined Financial Statements.
__________________________________________________________________
* Denotes management contract or compensatory plan or arrangement.
96
SUBSIDIARIES
Entity Name
Anhydro (Hong Kong) Limited
APV (China) Co., Ltd.
APV Benelux B.V.
APV Benelux NV
APV Middle East Limited
APV Overseas Holdings Limited
Ballantyne Company
Ballantyne Holding Company
Ballantyne Holding Mauritius Ltd.
Clyde Pumps India Pvt Limited
Clyde Union (France) S.A.S.
Clyde Union (Holdings) Limited
Clyde Union (Holdings) S.á.r.l.
Clyde Union (Indonesia) (Holdings) Limited
Clyde Union (US), Inc.
Clyde Union Canada Limited
Clyde Union China Holdings Limited
Clyde Union DB Limited
Clyde Union Inc.
Clyde Union Limited
Clyde Union Pumps Middle East FZE
Clyde Union S.á.r.l.
Clyde Union S.A.S.
Clyde Union Technology (Beijing) Co., Ltd.
Corporate Place, LLC
Delaney Holdings, Co.
Girdlestone Pumps Limited
Invensys Philippines, Inc.
Johnston Ballantyne Holdings Limited
Launch Tech Company Limited
Marley Engineered Products (Shanghai) Co. Ltd.
Mather & Platt Machinery Limited
Medinah Holding Company
Medinah Holding GmbH
Muirfield Finance Company Limited
PT Barata David Brown Gear Industries
PT. Clyde Union Pumps Indonesia
Rathi Lightnin Mixers Private Limited
S & N International, L.L.C.
S & N Pump Company
S & N Pump Middle East, LLC
S&N Pump (Africa) Ltda.
EXHIBIT 21.1
Domestic Jurisdiction
Hong Kong
China
Netherlands
Belgium
Saudi Arabia
United Kingdom
Cayman Islands
Cayman Islands
Mauritius
India
France
Scotland
Luxembourg
Scotland
Delaware
Canada
Scotland
United Kingdom
Michigan
Scotland
United Arab Emirates
Luxembourg
France
China
Delaware
Delaware
Scotland
Philippines
United Kingdom
China
China
Scotland
Cayman Islands
Germany
United Kingdom
Indonesia
Indonesia
India
Delaware
Texas
Texas
Angola
Entity Name
SPX (Shanghai) Flow Technology Co., Ltd.
SPX (Shanghai) Mechanical & Electrical Equipment Co., Ltd.
SPX Canada Co.
SPX Chile Limitada
SPX Clyde Luxembourg S.á.r.l.
SPX Clyde UK Limited
SPX Corporation (China) Co., Ltd.
SPX Denmark Holdings ApS
SPX Flow Europe Ltd.
SPX FLOW Germany Holding GmbH
SPX Flow Holdings, Inc.
SPX Flow Middle East L.L.C.
SPX Flow Oil & Gas Equipments Trading Services LLC
SPX Flow Receivables LLC
SPX Flow Saudi Arabia LLC
SPX Flow Technology (India) Private Limited
SPX Flow Technology (Pty) Limited
SPX Flow Technology (Thailand) Limited
SPX Flow Technology Argentina S.A.
SPX Flow Technology Assen B.V.
SPX Flow Technology Australia Pty Ltd.
SPX Flow Technology Belgium NV
SPX Flow Technology Canada Inc.
SPX Flow Technology Crawley Limited
SPX Flow Technology Danmark A/S
SPX Flow Technology do Brasil Indústria e Comércio Ltda.
SPX Flow Technology Dublin Limited
SPX Flow Technology Etten-Leur B.V.
SPX Flow Technology Finland Oy
SPX Flow Technology Germany GmbH
SPX Flow Technology Hong Kong Limited
SPX Flow Technology Hungary Kft. (SPX Flow Technology Hungary Mérnöki és Képviseleti Kft.)
SPX Flow Technology Ibérica S.A.
SPX Flow Technology Italia S.p.A.
SPX Flow Technology Japan, Inc.
SPX Flow Technology Kerry Limited
SPX Flow Technology Korea Co., Ltd.
SPX Flow Technology Limited
SPX Flow Technology London Limited
SPX Flow Technology Mexico, S. A. de C.V.
SPX Flow Technology New Zealand Limited
SPX Flow Technology Poland sp. z.o.o.
SPX Flow Technology s.r.o.
SPX Flow Technology Santorso S.r.l.
SPX Flow Technology SAS
Domestic Jurisdiction
China
China
Canada
Chile
Luxembourg
United Kingdom
China
Denmark
United Kingdom
Germany
Delaware
United Arab Emirates
United Arab Emirates
Delaware
Saudi Arabia
India
South Africa
Thailand
Argentina
Netherlands
Australia
Belgium
Canada
United Kingdom
Denmark
Brazil
Ireland
Netherlands
Finland
Germany
Hong Kong
Hungary
Spain
Italy
Japan
Ireland
South Korea
United Kingdom
United Kingdom
Mexico
New Zealand
Poland
Czech Republic
Italy
France
Entity Name
SPX Flow Technology Singapore Pte. Ltd.
SPX Flow Technology Sweden AB
SPX Flow Technology USA, Inc.
SPX Flow Technology Warendorf GmbH
SPX Flow US, LLC
SPX FLOW, Inc.
SPX France Holdings SAS
SPX Industrial Equipment Manufacturing (Suzhou) Co., Ltd.
SPX International GmbH
SPX International Holding GmbH
SPX International Limited
SPX International Management LLC
SPX Korea Co., Ltd.
SPX Latin America Corporation
SPX Luxembourg Acquisition Company S.a.r.l.
SPX Luxembourg Holding Company S.á.r.l.
SPX Middle East FZE
SPX Process Equipment Pty Ltd.
SPX Russia Limited
SPX Serviços Industriais Ltda.
SPX U.L.M. GmbH
SPX UK Holding Limited
Torque Tension Systems Limited
Turnberry Rubicon Limited
Turnberry Rubicon Limited Partnership
UD-RD Holding Company Limited
United Dominion Industries Corporation
Domestic Jurisdiction
Singapore
Sweden
Delaware
Germany
Delaware
Delaware
France
China
Germany
Germany
United Kingdom
Delaware
South Korea
Delaware
Luxembourg
Luxembourg
United Arab Emirates
Australia
Russia
Brazil
Germany
United Kingdom
United Kingdom
Scotland
Scotland
United Kingdom
Canada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-207128 and 333-207129, both on Form S-8, of our reports dated
February 6, 2018, relating to the consolidated and combined financial statements of SPX FLOW, Inc. and subsidiaries (the “Company”), and the effectiveness
of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31,
2017.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 6, 2018
EXHIBIT 31.1
I, Marcus G. Michael, certify that:
1. I have reviewed this annual report on Form 10-K of SPX FLOW, Inc.;
Certification
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)), for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 6, 2018
/s/ MARCUS G. MICHAEL
President, Chief Executive Officer and Director
EXHIBIT 31.2
I, Jeremy W. Smeltser, certify that:
1. I have reviewed this annual report on Form 10-K of SPX FLOW, Inc.;
Certification
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)), for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 6, 2018
/s/ JEREMY W. SMELTSER
Vice President and Chief Financial Officer
The following statement is being made to the U.S. Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-
Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.
EXHIBIT 32.1
U.S. Securities and Exchange Commission
100 F. Street N.E.
Washington, DC 20549
Re: SPX FLOW, Inc.
Ladies and Gentlemen:
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the undersigned hereby certifies that,
to the best of his knowledge:
(i) this Annual Report on Form 10-K, for the year ended December 31, 2017, fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of SPX FLOW, Inc.
Date: February 6, 2018
/s/ MARCUS G. MICHAEL
/s/ JEREMY W. SMELTSER
Marcus G. Michael
Jeremy W. Smeltser
President, Chief Executive Officer and Director
Vice President and Chief Financial Officer