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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission file number 1-6948
(Exact Name of Registrant as Specified in Its Charter)
13515 Ballantyne Corporate Place, Charlotte, North Carolina 28277
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, Including Area Code (704) 752-4400
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Common shares outstanding April 27, 2012 50,653,450
PART IFINANCIAL INFORMATION
ITEM 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
(1) BASIS OF PRESENTATION
We prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States (GAAP) can be condensed or omitted. The financial statements represent our accounts after the elimination of intercompany transactions and, in our opinion, include the adjustments (consisting only of normal and recurring items) necessary for their fair presentation.
We account for investments in unconsolidated companies where we exercise significant influence but do not have control using the equity method. In determining whether we are the primary beneficiary of a variable interest entity (VIE), we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties to determine which party has the power to direct the activities of the VIE that most significantly impact the entitys economic performance, and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We do have interests in VIEs, primarily joint ventures, in which we are the primary beneficiary and others in which we are not. Our VIEs are considered immaterial, individually and in aggregate, to our consolidated financial statements.
Our only significant investments reported under the equity method are our 44.5% interest in the EGS Electrical Group, LLC and Subsidiaries (EGS) joint venture and our 45% interest in Shanghai Electric SPX Engineering & Technologies Co., Ltd. (Shanghai Electric JV). We account for our EGS investment on a three-month lag, and its revenues and our equity earnings, as included in our condensed consolidated statements of operations, totaled $133.1 and $9.3 and $119.0 and $8.5 for the three months ended March 31, 2012 and April 2, 2011, respectively. See Note 3 for further details on the Shanghai Electric JV.
Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2011 Annual Report on Form 10-K. Interim results are not necessarily indicative of full year results. We have reclassified certain prior year amounts, including the results of discontinued operations and business segment information, to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. See Note 3 for information on discontinued operations and Note 4 for business segment information.
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 2012 are March 31, June 30 and September 29, compared to the respective April 2, July 2 and October 1, 2011 dates. We had one fewer day in the first quarter of 2012 and will have two more days in the fourth quarter of 2012 than in the respective 2011 periods.
(2) NEW ACCOUNTING PRONOUNCEMENTS
The following is a summary of new accounting pronouncements that apply or may apply to our business.
In May 2011, the Financial Accounting Standards Board (FASB) issued guidance to develop a single, converged fair value framework, amend the requirements of fair value measurement and enhance related disclosure requirements, particularly for recurring Level 3 fair value measurements. This guidance clarifies the concepts of (i) the highest and best use and valuation premise for nonfinancial assets, (ii) application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, (iii) premiums or discounts in fair value measurements and (iv) fair value measurement of an instrument classified in a reporting entitys shareholders equity. The guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and must be applied prospectively. We adopted the guidance on January 1, 2012 with no material impact on our consolidated financial statements.
In June 2011, the FASB issued, and in December 2011 amended, guidance to revise the presentation of comprehensive income by requiring entities to report components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements. In annual periods, the single continuous statement of comprehensive income must include the components of net income, a total for net income, the components of other comprehensive income (OCI), a total for OCI, and a total for comprehensive income. The separate but consecutive statements must report components of net income and total net income in the statement of net income, which must be immediately followed by a statement of OCI that must include the
components of OCI, a total for OCI, and a total for comprehensive income. In condensed financial statements of interim periods, an entity shall report a total for comprehensive income in a single continuous statement or in two consecutive statements. The guidance is effective for the first reporting period beginning after December 15, 2011 and must be applied retrospectively for all periods presented in the financial statements. We adopted the guidance on January 1, 2012 with no material impact on our consolidated financial statements.
In September 2011, the FASB issued an amendment to guidance related to testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test under Topic 350 of the Codification. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this guidance on January 1, 2012 with no material impact on our consolidated financial statements.
In December 2011, the FASB issued an amendment to disclosure requirements related to offsetting, whereby entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. These disclosures assist users of financial statements in evaluating the effect or potential effect of netting arrangements on a companys financial position, including the effect or potential effect of rights of setoff associated with the recognized assets and recognized liabilities within the scope. The amendment applies to a) recognized financial and derivative instruments that are offset in accordance with either ASC 210-20 or ASC 815-10 and b) financial and derivative instruments and other transactions that are subject to an enforceable master netting arrangement or similar agreement that covers similar instruments and transactions. This amendment will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and shall be applied retrospectively for all comparative periods presented. We have not yet adopted this guidance and do not expect the adoption to have a material impact on our consolidated financial statements.
(3) ACQUISITIONS, DISCONTINUED OPERATIONS AND FORMATION OF SHANGHAI ELECTRIC JV
On March 21, 2012, in our Flow Technology segment, we completed the acquisition of Seital S.r.l. (Seital), a supplier of disk centrifuges (separators and clarifiers) to the global food and beverage, biotechnology, pharmaceutical and chemical industries, for a purchase price of $28.8, net of cash acquired of $2.5 and including debt assumed of $0.8. Seital had revenues of approximately $14.0 in the twelve months prior to the date of acquisition.
On August 24, 2011, in our Flow Technology segment, we entered into an agreement to purchase Clyde Union (Holdings) S.A.R.L. (Clyde Union), a global supplier of pump technologies utilized in oil and gas processing, power generation and other industrial applications. On November 1, 2011, and again upon consummation of the acquisition on December 22, 2011, we executed amendments to that agreement. The amended agreement provided for (i) an initial payment of 500.0 British Pounds (GBP), less debt assumed and other adjustments of GBP 11.0. In addition, the purchase price includes a potential earn-out payment (equal to Annual 2012 Group EBITDA (as defined by the related agreement) × 10, less GBP 475.0). In no event shall the earn-out payment be less than zero or more than GBP 250.0. The sellers of Clyde Union also contributed GBP 25.0 of cash to the acquired business at the time of sale.
We financed the acquisition with available cash and committed senior secured financing. See Note 10 to the condensed consolidated financial statements for further details on the senior secured financing. The estimated fair value of the contingent consideration (earn-out payment) was less than $1.0 at March 31, 2012 and at December 31, 2011.
The assets acquired and liabilities assumed were recorded at preliminary estimates of fair values as determined by management, based on information currently available and on current assumptions as to future operations, and are subject to change upon the completion of acquisition accounting, including the finalization of asset valuations. During the three months ended March 31, 2012, we recorded our revised estimates of fair value for certain assets and liabilities, resulting in a net increase to goodwill of $31.1.
The following is a summary of the recorded preliminary fair values of the assets acquired and liabilities assumed for Clyde Union at the date of acquisition, and reflects acquisition accounting adjustments recorded during the first quarter of 2012:
The identifiable intangible assets acquired consist of trademarks, customer lists, customer relationships and technology of $76.8, $2.8, $233.5 and $60.1, respectively, with such amounts based on a preliminary assessment of the related fair values. The customer lists, customer relationships and technology assets are being amortized over 1.5, 30.0 and 27.0 years, respectively.
The qualitative factors that comprise the recorded goodwill include expected synergies from combining our existing and Clyde Unions operations, expected market growth for existing Clyde Union operations as well as other factors. We expect none of this goodwill to be deductible for income tax purposes.
We acquired gross receivables of $195.8, which had a fair value on acquisition date of $192.4 based on our estimates of cash flows expected to be recovered.
The following unaudited pro forma information presents our results of operations for the three months ended April 2, 2011, as if the acquisition of Clyde Union had taken place on January 1, 2011. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the acquisition been completed as of the date presented, and should not be taken as representative of our future consolidated results of operations. The pro forma results include estimates and assumptions that management believes are reasonable. However, these results do not include any anticipated cost savings or expenses of the planned integration of Clyde Union. These pro forma results of operations have been prepared for comparative purposes only and include the following adjustments to the April 2, 2011 historical results for the periods presented:
· Additional depreciation and amortization expense associated with the fair value adjustments to the acquired Clyde Union property, plant and equipment and intangible assets of $1.0.
· The elimination of interest expense related to the portion of Clyde Unions long-term debt that was paid off at the time of the acquisition of $3.3.
· The addition of interest expense associated with the term loans that were drawn down in order to finance the Clyde Union acquisition of $5.0.
· The elimination of rent expense associated with a facility in Scotland that had been leased by Clyde Union and which we purchased on December 23, 2011 of $0.5.
· A reduction in bonding costs for Clyde Union due to more favorable rates under our senior credit facilities of $1.0.
· The above modifications were adjusted for the applicable income tax impact.
On October 31, 2011, in our Flow Technology segment, we completed the acquisition of e&e Verfahrenstechnik GmbH (e&e), a supplier of extraction, evaporation, vacuum and freeze drying technologies to the global food and beverage, pharmaceutical and bioenergy industries for a purchase price of approximately 11.7 Euros, net of cash assumed of 3.8 Euros, with an additional potential earn-out of 3.5 Euros. e&e had revenues of approximately 15.3 Euros in the twelve months prior to the date of acquisition.
In March 2011, in our Flow Technology segment, we completed the acquisition of B.W. Murdoch Ltd. (Murdoch), an engineering company supplying processing solutions for the food and beverage industry, for a purchase price of $8.1, after payment of a working capital settlement of $0.7 during the third quarter of 2011. Murdoch had revenues of approximately $13.0 in the twelve months prior to the date of acquisition.
The pro forma effects of the Seital, e&e and Murdoch acquisitions were not material, individually or in the aggregate, to our results of operations.
As part of our operating strategy, we regularly review and negotiate potential divestitures, some of which are or may be material. As a result of this continuous review, we determined that certain of our businesses would be better strategic fits with other companies or investors.
We report businesses or asset groups as discontinued operations when, among other things, we commit to a plan to divest the business or asset group, actively begin marketing the business or asset group, and when the sale of the business or asset group is deemed probable within the next twelve months.
On January 23, 2012, we entered into an agreement to sell our Service Solutions business to Robert Bosch GmbH for cash proceeds of $1,150.0. We expect the sale to close during the second or third quarter of 2012, resulting in a net gain of approximately $450.0. We have reported, for all periods presented, the financial condition, results of operations, and cash flows of this business as a discontinued operation in our condensed consolidated financial statements.
In addition to the business discussed above, we recognized net losses of $0.3 and $1.9 during the first quarter of 2012 and 2011, respectively, resulting from adjustments to gains/losses on sales from previously discontinued businesses. Refer to the consolidated financial statements contained in our 2011 Annual Report on Form 10-K for the disclosure of all discontinued businesses during the 2009 through 2011 period.
The final sales price for certain of the divested businesses is subject to adjustment based on working capital existing at the respective closing dates. The working capital figures are subject to agreement with the buyers or, if we cannot come to agreement, an arbitration or other dispute-resolution process. Final agreement of the working capital figures for certain of these transactions has yet to occur. In addition, changes in estimates associated with liabilities retained in connection with a business divestiture (e.g., income taxes) may occur. It is possible that the sales price and resulting gains/losses on these, and other previous divestitures, may be materially adjusted in subsequent periods.
For the first three months of 2012 and 2011, income from discontinued operations and the related income taxes were as follows:
For the first three months of 2012 and 2011, results of operations for our businesses reported as discontinued operations were as follows:
The major classes of assets and liabilities, excluding intercompany balances, of the businesses reported as discontinued operations included in the accompanying condensed consolidated balance sheets are shown below:
Formation of Shanghai Electric JV
On December 30, 2011, we and Shanghai Electric Group Co., Ltd. (Shanghai Electric) established the Shanghai Electric JV, a joint venture to supply dry cooling and moisture separator reheater products and services to the power sector in China and other selected regions of the world. We contributed and sold certain assets of our dry cooling products business in China to the joint venture in consideration for a 45% ownership interest in the joint venture and cash payments of RMB 96.7, with RMB 51.5 received on January 18, 2012, RMB 25.8 to be received no later than December 31, 2012, and the remaining RMB payment contingent upon the joint venture achieving defined sales order volumes. In addition, we are licensing our dry cooling and moisture separator reheater technologies to the joint venture, for which we will receive a royalty. We also will continue to manufacture dry cooling components in our China factories and have entered into an exclusive supply agreement with the joint venture for these products. Final approval for the transaction was not received until January 13, 2012. We have accounted for the transaction under the deconsolidation criteria of the Codification and thus recorded a pre-tax gain during the first quarter of 2012 of $20.5, with such gain included in Other income, net. The amount of the pre-tax gain is equal to the difference between (i) the fair value of the consideration received and to be received plus the fair value of our retained non-controlling investment in the dry cooling products business in China and (ii) the carrying value of the assets contributed and sold to the joint venture. We are accounting for our investment in the Shanghai Electric JV under the equity method of accounting, as we can exercise significant influence but do not have control over the joint venture. The carrying amount of our investment in the Shanghai Electric JV was $34.1 at March 31, 2012 and is reported in Other assets within our condensed consolidated balance sheet. The initial fair value of our investment in the Shanghai Electric JV was based on a discounted cash flow projection for the dry cooling products business in China.
(4) BUSINESS SEGMENT INFORMATION
We are a global, multi-industry manufacturer of highly specialized, engineered solutions with operations in over 35 countries. We offer a diverse collection of products, such as pumps, valves, fluid handling equipment, metering and mixing solutions, cooling, heating and ventilation products, power transformers, and TV and radio broadcast antennas. Our products are used by a broad array of customers in various industries, including food and beverage processing, power generation, chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications and transportation.
Prior to 2012, we aggregated our operating segments into four reportable segments; however, because of the impending sale of our Service Solutions business (previously reported within the Test and Measurement segment) and its current classification as a discontinued operation, we no longer will report the remaining two businesses of the Test and Measurement segment as a separate reportable segment, as the aggregate operating results of these two businesses have not been, and are not expected to be, material to our consolidated operating results.
Certain of our operating segments are aggregated into our reportable segments, Flow Technology and Thermal Equipment and Services, while the remaining operating segments, including the two remaining businesses previously reported in the Test and Measurement segment, are combined within Industrial Products and Services. The factors considered in determining our aggregated segments are the economic similarity of the businesses, the nature of products sold or services provided, production processes, types of customers and distribution methods. In determining our segments, we apply the threshold criteria of the Segment Reporting Topic of the Codification to operating income or loss of each segment before considering impairment and special charges, pensions and postretirement expense, stock-based compensation and other indirect corporate expenses (Segment income). This is consistent with the way our chief operating decision maker evaluates the results of each segment.
Our Flow Technology segment designs, manufactures and markets products and solutions to process, blend, filter, dry, meter and transport fluids with a focus on creating innovative new products and systems, and also provides comprehensive aftermarket support services. Primary offerings include engineered pumps, mixers, process systems, heat exchangers, valves, and dehydration and drying technologies. The segment continues to focus on optimizing its global footprint while taking advantage of cross-product integration opportunities and increasing its competitive position in global end markets. Flow Technologys solutions focus on key business drivers, such as product flexibility, process optimization, sustainability and safety.
Thermal Equipment and Services
Our Thermal Equipment and Services segment engineers, manufactures and services cooling, heating and ventilation products for markets throughout the world. Primary offerings include dry, wet and hybrid cooling systems for the power generation, refrigeration, HVAC and industrial markets, as well as boilers, heating and ventilation products for the commercial and residential markets. This segment also provides thermal components for power generation plants and engineered services to maintain, refurbish, upgrade and modernize power stations. The segment continues to focus on expanding its global reach, as well as its thermal components and service offerings. The segments South African subsidiary has a Black Economic Empowerment shareholder, which holds a noncontrolling 25.1% interest.
Industrial Products and Services
Our Industrial Products and Services segment comprises businesses that design, manufacture and market power systems, industrial tools and hydraulic units, precision machine components for the aerospace industry, crystal growing machines for the solar power generation market, television, radio and cell phone and data transmission broadcast antenna systems, communications and signal monitoring systems, fare collection systems, portable cable and pipe locators, and precision controlled industrial ovens and chambers. The segment continues to focus on global expansion opportunities.
Corporate expense generally relates to the cost of our Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai, China.
Financial data for our business segments, including the results of acquisitions from the dates of the respective acquisitions, were as follows:
(1) Under the percentage of completion method, we recognized revenues of $375.3 and $287.6 in the three months ended March 31, 2012 and April 2, 2011, respectively. Costs and estimated earnings in excess of billings on contracts accounted for under the percentage of completion method were $386.0 and $355.9 as of March 31, 2012 and December 31, 2011, respectively, and are reported as a component of Accounts receivable, net in the condensed consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted contracts accounted for under the percentage of completion method were $320.9 and $279.0 as of March 31, 2012 and December 31, 2011, respectively. The March 31, 2012 balance includes $317.8 reported as a component of Accrued expenses and $3.1 as a component of Other long-term liabilities in the related condensed consolidated balance sheet. The December 31, 2011 balance includes $275.4 reported as a component of Accrued expenses and $3.6 as a component of Other long-term liabilities in the related condensed consolidated balance sheet.
(5) SPECIAL CHARGES, NET
Special charges, net, for the three months ended March 31, 2012 and April 2, 2011 are summarized and described in more detail below:
Flow Technology segment Charges for the three months ended March 31, 2012 related primarily to costs associated with the initial integration of Clyde Union, costs related to the reorganization of the segments systems business, and asset impairment charges of $0.3. The charges for the three months ended April 2, 2011 related primarily to costs associated with the integration of the Anhydro business, acquired in July 2010, and Gerstenberg Schröder A/S, which we acquired in February 2010, and with restructuring activities initiated in 2010.
Thermal Equipment and Services segment Charges for the three months ended March 31, 2012 related primarily to severance costs associated with transferring certain functions of our boiler and heating products business to a location in Chicago, IL. Charges for the three months ended April 2, 2011 related primarily to lease exit costs associated with two facilities in Germany.
Industrial Products and Services segment Charges for the three months ended March 31, 2012 related primarily to costs associated with the finalization of an expense reduction initiative originally implemented by our broadcast antenna systems business during 2011.
Corporate Charges for the three months ended March 31, 2012 related primarily to costs associated with consolidating certain corporate functions, our legal entity reduction initiative, and an asset impairment charge of $0.2.
As relates to plans approved as of March 31, 2012, expected charges still to be incurred are approximately $1.0.
The following is an analysis of our restructuring and integration liabilities for the three months ended March 31, 2012 and April 2, 2011:
(1) The three months ended March 31, 2012 excludes $0.5 of non-cash special charges that impact special charges on our condensed consolidated statement of operations, but do not impact the restructuring and integration related liabilities included within our condensed consolidated balance sheet.
Inventories comprised the following amounts:
Inventories include material, labor, and factory overhead costs and are reduced, when necessary, to estimated realizable values. Certain domestic inventories are valued using the last-in, first-out (LIFO) method. These inventories were approximately 17% and 15% of the total inventory at March 31, 2012 and December 31, 2011, respectively. Other inventories are valued using the first-in, first-out (FIFO) method. Progress payments, which are netted against work in process, were $3.7 at both March 31, 2012 and December 31, 2011.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment, were as follows:
(1) Includes adjustments resulting from revisions to estimates of fair value of certain assets and liabilities associated with the Clyde Union and e&e acquisitions of $36.1, the allocation of goodwill of $24.3 related to the deconsolidation of our dry cooling products business in China (see Note 3) and foreign currency translation adjustments totaling $23.1.
Identifiable intangible assets comprised the following:
Estimated amortization expense related to these intangible assets is $34.2 for the remainder of 2012, $35.9 in 2013, $31.4 in 2014, $30.5 in 2015 and $29.5 in 2016.
At March 31, 2012, the net carrying value of intangible assets with determinable lives consisted of $460.5 in the Flow Technology segment, $56.6 in the Thermal Equipment and Services segment, and $10.8 in the Industrial Products and Services
segment. Trademarks with indefinite lives consisted of $286.9 in the Flow Technology segment, $130.5 in the Thermal Equipment and Services segment, and $24.1 in the Industrial Products and Services segment.
We annually test the recoverability of our goodwill and indefinite-lived intangible assets during the fourth quarter based on a measurement date as of the end of the third quarter and continually monitor impairment indicators across all our reporting units. Any significant change in market conditions and estimates or judgments used to determine expected future cash flows that indicate a reduction in fair value may give rise to impairment in the period that the change becomes known.
The following is an analysis of our product warranty accrual for the first three months of 2012 and 2011:
(9) EMPLOYEE BENEFIT PLANS
Net periodic benefit expense for our pension and postretirement plans included the following components:
Domestic Pension Plans
Foreign Pension Plans
During the first three months of 2012, we made contributions of approximately $14.1 to our foreign and qualified domestic pension plans, of which $0.5 related to businesses classified as discontinued operations.
The following summarizes our debt activity (both current and non-current) for the three months ended March 31, 2012:
(1) On February 8, 2012, the lenders agreed, with respect to the proceeds from the pending sale of our Service Solutions business, to waive the mandatory prepayments required by the senior credit facilities. The waiver requires that a portion of the proceeds from the pending sale be used to repay $325.0 of the term loans ($300.0 for Term Loan 1 and $25.0 for Term Loan 2). As we expect the sale to close in the second or third quarter of 2012 and to make these debt repayments at the time of the closing, we have classified $325.0 of the term loans as Current maturities of long-term debt within our condensed consolidated balance sheet as of March 31, 2012. In addition, we have allocated approximately $2.5 of interest expense for the first quarter of 2012 associated with the $325.0 of expected term loan repayments to discontinued operations within our condensed consolidated statement of operations for the three months ended March 31, 2012.
(2) Under this arrangement, we can borrow, on a continuous basis, up to $130.0, as available.
(3) Includes balances under a purchase card program of $37.7 and $40.4 at March 31, 2012 and December 31, 2011, respectively.
(4) Other includes debt assumed and foreign currency translation on any debt instruments denominated in currencies other than the U.S. dollar.
Senior Credit Facilities
We have senior credit facilities with a syndicate of lenders that provide for committed senior secured financing in the initial amount of $2,600.0, consisting of the following (each with a final maturity of June 30, 2016 except for the $325.0 relating to the term loans as described above):
· An incremental term loan (Term Loan 1), in an aggregate principal amount of $300.0;
· An incremental term loan (Term Loan 2), in an aggregate principal amount of $500.0;
· A domestic revolving credit facility, available for loans and letters of credit, in an aggregate principal amount up to $300.0;
· A global revolving credit facility, available for loans in U.S. Dollars, Euros, British Pounds and other currencies in an aggregate principal amount up to the equivalent of $300.0;
· A participation foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate principal amount in various currencies up to the equivalent of $1,000.0; and
· A bilateral foreign credit instrument facility, available for performance letters of credit and guarantees, in an aggregate principal amount in various currencies up to the equivalent of $200.0.
The remaining balance on Term Loan 2 (i.e., the remaining balance after payment of the $25.0 noted above in connection with the sale of our Service Solutions business) is repayable in quarterly installments (with annual aggregate repayments, as a percentage of the initial principal amount, adjusted for prepayments, of 0% for 2012, 5% for 2013, 15% for 2014 and 20% for 2015, together with a single quarterly payment of 5% at the end of the first fiscal quarter of 2016), with the remaining balance repayable in full on June 30, 2016.
Our senior credit facilities require that we maintain:
· A Consolidated Interest Coverage Ratio (as defined in the credit agreement generally as the ratio of consolidated adjusted EBITDA for the four fiscal quarters ended on such date to consolidated interest expense for such period) as of the last day of any fiscal quarter of at least 3.50 to 1.00; and
· A Consolidated Leverage Ratio as of the last day of any fiscal quarter of not more than 3.25 to 1.00 (or 3.50 to 1.00 for the four fiscal quarters after certain permitted acquisitions by us).
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. We do not expect these covenants to restrict our liquidity, financial condition or access to capital resources in the foreseeable future. Our senior credit facilities also contain customary representations, warranties, affirmative covenants, and events of default.
We are permitted under our senior credit facilities to repurchase our capital stock and pay cash dividends in an unlimited amount if our Consolidated Leverage Ratio is (after giving pro forma effect to such payments) less than 2.50 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 June 30, 2011 equal to the sum of (i) $300.0 and (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 July 1, 2011 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).
At March 31, 2012, we had $81.6 and $805.7 of outstanding letters of credit issued under our revolving credit and our foreign credit instrument facilities of our senior credit agreement, respectively. In addition, we had $2.0 of letters of credit outstanding under separate arrangements in China, India and South Africa.
The weighted-average interest rate of our outstanding borrowings under our senior credit facilities was approximately 2.44% at March 31, 2012.
At March 31, 2012, we were in compliance with all covenant provisions of our senior credit facilities, and the senior credit facilities did not impose any restrictions on our ability to repurchase shares or pay dividends, other than those inherent in the credit agreement. In addition, we were in compliance with all covenant provisions of our senior notes as of March 31, 2012.
(11) DERIVATIVE FINANCIAL INSTRUMENTS
Currency Forward Contracts
We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency denominated cash flows and to minimize their impact. Our principal currency exposures relate to the Euro, Chinese Yuan, South African Rand and British Pound.
From time to time, we enter into currency protection agreements (FX 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. In addition, some of our contracts contain currency forward embedded derivatives (FX embedded derivatives), as 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, as deemed appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives fair value are not included in current earnings, but are included in accumulated other comprehensive income (AOCI). These changes in fair value will subsequently be 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 will be recorded as a component of Other income, net in the period it occurs. To the extent that 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 it occurs. We had FX forward contracts with an aggregate notional amount of $136.3 and $66.1 outstanding as of March 31, 2012 and December 31, 2011, respectively. We had FX embedded derivatives with an aggregate notional amount outstanding of $138.0 and $73.2 at March 31, 2012 and December 31, 2011, respectively. The unrealized loss, net of taxes, recorded in AOCI related to FX forward contracts was $4.1 and $3.7 as of March 31, 2012 and December 31, 2011, respectively. We anticipate reclassifying approximately $3.3 of the unrealized loss to income over the next 12 months.
From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials (commodity contracts). At March 31, 2012 and December 31, 2011, the outstanding notional amount of commodity contracts was 3.0 million and 2.9 million pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify the AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. The unrealized gain (loss), net of taxes, recorded in AOCI was $0.3 and $(0.7) as of March 31, 2012 and December 31, 2011, respectively. We anticipate reclassifying the unrealized gain to income over the next 12 months. The amount of gain/loss recognized during the periods ended March 31, 2012 and April 2, 2011 related to the ineffectiveness of the hedges was not material.
The following summarizes the fair value of our derivative financial instruments:
The following summarizes the effect of derivative financial instruments in cash flow hedging relationships on AOCI and the condensed consolidated statements of operations for the three months ended March 31, 2012 and April 2, 2011:
(1) Losses of $0.1 relating to derivative ineffectiveness and amounts excluded from effectiveness testing were recognized during the first quarters of 2012 and 2011 in Other income, net.
The following summarizes the effect of derivative financial instruments not designated as cash flow hedging relationships on the condensed consolidated statements of operations for the three months ended March 31, 2012 and April 2, 2011:
(12) EQUITY AND STOCK-BASED COMPENSATION
Earnings Per Share
The following table sets forth the number of weighted-average shares outstanding used in the computation of basic and diluted income per share:
The total number of stock options that 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 was 0.005 and 0.112 for the three months ended March 31, 2012 and April 2, 2011, respectively. For the three months ended March 31, 2012, 0.247 unvested restricted stock units were excluded from the computation of diluted income per share, compared to none for the three months ended April 2, 2011, because required market thresholds for vesting (as discussed below) were not met.
Under the 2002 Stock Compensation Plan, as amended in 2006 and 2011, the successor plan to the 1992 Stock Compensation Plan, up to 3.428 shares of our common stock were available for grant at March 31, 2012. The 2002 Stock Compensation Plan permits the issuance of new shares or shares from treasury upon the exercise of options, vesting of restricted stock units or granting of restricted stock. Each share of restricted stock and restricted stock unit granted reduces availability by two and a half shares.
During the three months ended March 31, 2012 and April 2, 2011, we classified excess tax benefits from stock-based compensation of $2.9 and $6.2, respectively, as financing cash flows and included such amounts in Proceeds from the exercise of employee stock options and other, net of minimum withholdings paid on behalf of employees for net share settlements within our condensed consolidated statements of cash flows.
Restricted stock or restricted stock units may be granted to certain eligible employees or non-employee directors in accordance with applicable equity compensation plan documents and agreements. Subject to participants continued employment and other plan terms and conditions, the restrictions lapse and awards generally vest over three years. Market (company performance) thresholds have been instituted for vesting of substantially all restricted stock and restricted stock unit awards. This vesting is based on SPX shareholder return versus the S&P 500 composite index. On each vesting date, we compare the SPX shareholder return to the performance of the S&P 500 composite index for the prior year and for the cumulative period since the date of the grant. If SPX outperforms the S&P 500 composite index for the prior year, the one-third portion of the grant associated with that year will vest. If SPX outperforms the S&P composite index for the cumulative period, any unvested portion of the grant that was subject to vesting on or prior to the vesting date will vest. Restricted stock and restricted stock units that do not vest within the three-year vesting period are forfeited.
We grant restricted stock to non-employee directors under the 2006 Non-Employee Directors Stock Incentive Plan (the Directors Plan). Under the Directors Plan, up to 0.013 shares of our common stock were available for grant at March 31, 2012. Restricted stock grants have a three-year vesting period based on SPX shareholder return versus the S&P 500 composite index and are subject to the same company performance thresholds for employee awards described in the preceding paragraph. Restricted stock that does not vest within the three-year vesting period in accordance with these performance requirements is forfeited.
Stock options may be granted to key employees in the form of incentive stock options or nonqualified stock options, generally vest ratably over three years, which vesting may be subject to performance criteria, and expire no later than 10 years from the date of grant. 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 day prior to the date of grant. Upon exercise, the employee has the option to surrender previously owned shares at current value in payment of the exercise price and/or for withholding tax obligations, and, subject to certain restrictions, may receive a reload option having an exercise price equal to the current market value for the number of shares so surrendered. The reload option expires at the same time that the exercised option would have expired. Any future issuances of options under the plan will not have a reload feature, pursuant to the terms of the plan. We have not granted options to any of our employees since 2004.
The recognition of compensation expense for share-based awards, including stock options, is based on their grant date fair values. The fair value of each award is amortized over the lesser of the awards requisite or derived service period, which is generally up to three years. Compensation expense within income from continuing operations related to restricted stock and restricted stock units totaled $21.8 and $19.2 for the three months ended March 31, 2012 and April 2, 2011, respectively, with the related tax benefit being $8.2 and $6.8 for the periods ended March 31, 2012 and April 2, 2011, respectively.
We use the Monte Carlo simulation model valuation technique to determine fair value of our restricted stock and restricted stock units as they 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 and restricted stock unit award. We used the following assumptions in determining the fair value of the awards granted on January 2, 2012 and March 1, 2011:
Annual expected stock price volatility is based on the three-year historical volatility. The annual expected dividend yield is based on annual expected dividend payments and the stock price on the date of grant. The average risk-free interest rate is based on the one-year through three-year daily treasury yield curve rate as of the grant date.
The following table summarizes the restricted stock and restricted stock unit activity from December 31, 2011 through March 31, 2012:
As of March 31, 2012, there was $35.4 of unrecognized compensation cost related to restricted stock and restricted stock unit compensation arrangements. We expect this cost to be recognized over a weighted-average period of 1.8 years.
The following table shows stock option activity from December 31, 2011 through March 31, 2012:
The weighted-average remaining term, in years, of stock options outstanding and exercisable at March 31, 2012 was 0.9. The total number of in-the-money options exercisable on March 31, 2012 was 0.045. Aggregate intrinsic value (market value of stock less the option exercise price) represents the total pre-tax intrinsic value, based on our closing stock price on March 31, 2012, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date. The aggregate intrinsic value of the options outstanding and exercisable at March 31, 2012 was $1.6. The aggregate intrinsic value of options exercised during the first three months of 2012 was $4.9, while the related amount for the first three months of 2011 was $1.8.
Accumulated Other Comprehensive Loss
The components of the balance sheet caption Accumulated other comprehensive loss were as follows:
(1) As of March 31, 2012 and December 31, 2011, our available-for-sale securities were recorded in Assets of discontinued operations within our condensed consolidated balance sheets.
(2) At both March 31, 2012 and December 31, 2011, includes $3.8 related to our share of the pension liability adjustment for EGS.
Common Stock in Treasury
During the three months ended March 31, 2012, we repurchased 0.575 shares of our common stock for cash consideration of $43.2, associated with a written trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended. We entered into this plan on February 16, 2012, to facilitate the repurchase of up to $350.0 of shares of our common stock on or before February 14, 2013, in accordance with a share repurchase program authorized by our Board of Directors. Of the amount under the plan, $75.0 could be repurchased prior to the completion of the sale of our Service Solutions business, with the remainder permitted to be repurchased following the consummation of the sale of our Service Solutions business. The $75.0 of shares authorized for repurchase prior to the completion of the sale of our Service Solutions business were purchased in full during March and April 2012. There were no common stock repurchases during the three months ended April 2, 2011.
During the three months ended March 31, 2012, Common Stock in Treasury was decreased by the settlement of restricted stock units issued from treasury stock of $3.8 and increased by $1.8 for common stock that was surrendered by recipients of restricted stock as a means of funding the related minimum income tax withholding requirements.
During the three months ended April 2, 2011, Common Stock in Treasury was decreased by the settlement of restricted stock units issued from treasury stock of $12.7 and increased by $7.0 for common stock that was surrendered by recipients of restricted stock as a means of funding the related minimum income tax withholding requirements.
The dividends declared during the first quarters of 2012 and 2011 were $0.25 per share and totaled $12.8 and $12.7, respectively. First quarter dividends were paid on April 3, 2012 and April 5, 2011.
Changes in Equity
A summary of the changes in equity for the three months ended March 31, 2012 and April 2, 2011 is provided below:
(13) CONTINGENCIES AND OTHER MATTERS
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, automobile, and workers compensation claims), have been filed or are pending against us and certain of our subsidiaries. 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 us incurring a significantly greater liability than we anticipate. This may also be true in connection with past or future acquisitions. While we maintain property, cargo, auto, product, general liability, environmental, and directors and officers liability insurance and have acquired rights under similar policies in connection with acquisitions that we believe cover a portion of these claims, this insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against potential loss exposures. In addition, we have increased our self-insurance limits over the past several years. While we believe we are entitled to indemnification from third parties for some of these claims, these rights may be insufficient or unavailable to protect us against potential loss exposures. However, we believe that our accruals related to these items
are sufficient and that these items and our rights to available insurance and indemnity will be resolved without material effect, individually or in the aggregate, on our financial position, results of operations and cash flows. These accruals totaled $547.9 (including $497.9 for risk management matters) and $558.3 (including $495.6 for risk management matters) at March 31, 2012 and December 31, 2011, respectively. Of these amounts, $494.5 and $491.8 were included in Other long-term liabilities within our condensed consolidated balance sheets at March 31, 2012 and December 31, 2011, respectively, with the remainder included in Accrued expenses.
We had insurance recovery assets related to risk management matters of $428.5 and $428.9 at March 31, 2012 and December 31, 2011, respectively, included in Other assets within our condensed consolidated balance sheets.
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.
Our operations and properties are subject to federal, state, local and foreign regulatory requirements relating to environmental protection. It is our policy to comply fully with all applicable requirements. As part of our effort to comply, we have a comprehensive environmental compliance program that includes environmental audits conducted by internal and external independent professionals, as well as regular communications with our operating units regarding environmental compliance requirements and anticipated regulations. Based on current information, we believe that our operations are in substantial compliance with applicable environmental laws and regulations, and we are not aware of any violations that could have a material effect on our business, financial condition, results of operations or cash flows. We have liabilities for site investigation and/or remediation at 98 sites that we own or control. In addition, while we believe that we maintain adequate accruals to cover the costs of site investigation and/or remediation, we cannot provide assurance that new matters, developments, laws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future.
Our environmental accruals cover anticipated costs, including investigation, remediation, and operation and maintenance of clean-up sites. Our estimates are based primarily on investigations and remediation plans established by independent consultants, regulatory agencies and potentially responsible third parties. Accordingly, our estimates may change based on future developments, including new or changes in existing environmental laws or policies, differences in costs required to complete anticipated actions from estimates provided, future findings of investigation or remediation actions, or alteration to the expected remediation plans. It is our policy to realize a change in estimate once it becomes probable and can be reasonably estimated. We generally do not discount our environmental accruals and do not reduce them by anticipated insurance recoveries. We do take into account third-party indemnification from financially viable parties in determining our accruals where there is no dispute regarding the right to indemnification.
In the case of contamination at offsite, third-party disposal sites, we have been notified that we are potentially responsible and have received other notices of potential liability pursuant to various environmental laws at 28 sites at which the liability has not been settled, and only 12 of which have been active in the past few years. These laws may impose liability on certain persons that are considered jointly and severally liable for the costs of investigation and remediation of hazardous substances present at these sites, regardless of fault or legality of the original disposal. These persons include the present or former owners or operators of the site and companies that generated, disposed of or arranged for the disposal of hazardous substances at the site. We are considered a de minimis potentially responsible party at most of the sites, and we estimate that the aggregate probable remaining liability at these sites is immaterial.
We conduct extensive environmental due diligence with respect to potential acquisitions, including environmental site assessments and such further testing as we may deem warranted. If an environmental matter is identified, we estimate the cost and either establish a liability, purchase insurance or obtain an indemnity from a financially sound seller. However, in connection with our acquisitions or dispositions, we may assume or retain significant environmental liabilities, some of which we may be unaware. The potential costs related to these environmental matters and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of various clean-up technologies, the uncertain level of insurance or other types of recovery, and the questionable level of our responsibility. We record a liability when it is both probable and the amount can be reasonably estimated. Due to the uncertainties previously described, we are unable to reasonably estimate the amount of possible additional losses associated with the resolution of these matters beyond what has been recorded.
In our opinion, after considering accruals established for such purposes, remedial actions for compliance with the present laws and regulations governing the protection of the environment are not expected to have a material adverse impact on our business, financial condition, results of operations or cash flows.
Risk Management Matters
We are self-insured for certain of our workers compensation, automobile, product and general liability, disability and health costs, and we believe that we maintain adequate accruals to cover our retained liability. Our accruals for risk management matters are determined by us, are based on claims filed and estimates of claims incurred but not yet reported, and generally are not discounted. We consider a number of factors, including third-party actuarial valuations, when making these determinations. We maintain third-party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts. This insurance may be insufficient or unavailable (e.g., because of insurer insolvency) to protect us against loss exposure.
Collaborative arrangements are defined as a contractual arrangement in which the parties are (1) active participants to the arrangements and (2) exposed to significant risks and rewards that depend on the commercial success of the endeavor. Costs incurred and revenues generated from transactions with third parties are required to be reported by the collaborators on the appropriate line item in their respective income statements.
We enter into consortium arrangements for certain projects within our Thermal Equipment and Services segment. Under such arrangements, each consortium member is responsible for performing certain discrete items of work within the total scope of the contracted work and the consortium expires when all contractual obligations are completed. The revenues for these discrete items of work are defined in the contract with the project owner and each consortium member bearing the profitability risk associated with its own work. Our consortium arrangements typically provide that each consortium member assumes its responsible share of any damages or losses associated with the project; however, the use of a consortium arrangement typically results in joint and several liability for the consortium members. If responsibility cannot be determined or a consortium member defaults, then the consortium members are responsible according to their share of the contract value. Within our condensed consolidated financial statements, we account for our share of the revenues and profits under the consortium arrangements. As of March 31, 2012, our share of the aggregate contract value on open consortium arrangements was $281.9 (of which approximately 53% had been recognized as revenue), and the aggregate contract value on open consortium arrangements was $746.0. As of December 31, 2011, our share of the aggregate contract value on open consortium arrangements was $324.0 (of which approximately 56% had been recognized as revenue), and the aggregate contract value on open consortium arrangements was $801.1. At March 31, 2012 and December 31, 2011, we recorded liabilities of $2.0 and $1.9, respectively, representing the estimated fair value of our potential obligation under the joint and several liability provisions associated with the consortium arrangements.
U.S. Health Care Reform Legislation
In the first quarter of 2010, the Patient Protection and Affordable Care Act of 2010 (the PPAC Act) was enacted. The PPAC Act eliminated a portion of the federal income tax deduction available to companies that provide prescription drug benefits to retirees under Medicare Part D. We currently are evaluating other prospective effects of the PPAC Act and the related effects on our business.
(14) INCOME TAXES
Unrecognized Tax Benefits
As of March 31, 2012, we had gross unrecognized tax benefits of $85.9 (net unrecognized tax benefits of $67.8), of which $65.8, if recognized, would impact our effective tax rate from continuing operations.
We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of March 31, 2012, gross accrued interest excluded from the amounts above totaled $14.0 (net accrued interest of $11.0). There were no significant penalties recorded during the three months ended March 31, 2012 or April 2, 2011.
Based on the outcome of certain examinations or as a result of the expiration of statute 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 approximately $30.0 to $40.0. The previously unrecognized tax benefits relate to a variety of tax issues including transfer pricing matters, deductibility of interest expense in certain jurisdictions, and other, primarily foreign, tax matters.
Other Tax Matters
The effective income tax rate for the quarter ended March 31, 2012 was 62.2%, compared with 34.3% for the quarter ended April 2, 2011. The current quarters rate was impacted unfavorably by an incremental tax charge of $6.1 associated with the deconsolidation of the dry cooling products business in China, as the goodwill allocated to the transaction is not deductible for tax purposes.
We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain positions when we determine that an uncertain position meets the criteria of the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions are recorded in Income taxes payable and Deferred and other income taxes in the accompanying condensed consolidated balance sheets based on the expectation as to the timing of when the matters will be resolved. As events change and resolution occurs, these accruals are adjusted, such as in the case of audit settlements with taxing authorities.
The IRS currently is performing an audit of our 2008 and 2009 federal income tax returns. At this stage, the outcome of the audit is uncertain; however, we believe that any contingencies are adequately provided for. We reasonably expect to conclude this examination within the next twelve months.
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, administrative appeal or litigation. We believe that any uncertain tax positions related to these examinations have been adequately provided for.
We have various foreign income tax returns under examination. Significant jurisdictions with tax examinations underway include Canada for the 2000 to 2002 and 2006 tax returns, Germany for the 2005 to 2009 tax returns, Denmark for the 2006 to 2010 tax returns, and the United Kingdom for the 2009 tax return. We believe that any uncertain tax positions related to these examinations have been adequately provided for.
An unfavorable resolution of one or more of the above matters could have a material adverse effect on our results of operations or cash flows in the quarter and year in which an adjustment is recorded or the tax is due or paid. As audits and examinations are still in process or we have not yet reached the final stages of the appeals process for the above matters, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.
Upon the conclusion of our disposition activities discussed in Note 3, we may recognize an additional income tax provision or benefit, generally, as part of discontinued operations.
(15) 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 that is 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 in the three months ended March 31, 2012 and April 2, 2011 to the Companys valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers between the three levels of the fair value hierarchy for the three months ended March 31, 2012 and April 2, 2011.
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 financial derivative assets and liabilities include FX forward contracts, FX embedded derivatives and commodity contracts, which are valued using valuation models that measure 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. 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 March 31, 2012, 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 has been no significant impact to the fair value of our derivative assets based on our evaluation of our counterparties credit risk.
Investments in Equity Securities
Our available-for-sale securities include equity investments that are traded in active international markets. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. These assets had a fair market value of $8.0 and $5.2 at March 31, 2012 and December 31, 2011, respectively, and were recorded in Assets of discontinued operations within our condensed consolidated balance sheets.
Certain of our investments in equity securities that are not readily marketable are accounted for under the fair value option, with such values determined by multidimensional pricing models. These models consider market activity based on modeling of securities with similar credit quality, duration, yield and structure. A variety of inputs are used, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spread and reference data including market research publications. Market indicators, industry and economic events are also considered. We have not made any adjustments to the inputs obtained from the independent sources. At March 31, 2012 and December 31, 2011, these assets had a fair value of $8.2 and $7.8, respectively, which are estimated using various valuation models, including the Monte-Carlo simulation model, and were recorded in Assets of discontinued operations within our condensed consolidated balance sheets.
Assets and liabilities measured at fair value on a recurring basis include the following as of March 31, 2012:
Assets and liabilities measured at fair value on a recurring basis include the following as of December 31, 2011:
The table below presents a reconciliation of our investment in equity securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and April 2, 2011, including net unrealized gains (losses) included in earnings.
The estimated fair values of other financial liabilities (excluding capital leases) not measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 are as follows: