SPX Technologies, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in millions, except share data) 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, 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 other comparable terminology. Risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, include the following: cyclical changes and specific industry events in the Company’s markets; changes in anticipated capital investment and maintenance expenditures by customers; availability, limitations or cost increases of raw materials and/or commodities that cannot be recovered in product pricing; the impact of competition on profit margins and the Company’s ability to maintain or increase market share; inadequate performance by third-party suppliers and subcontractors for outsourced products, components and services and other supply-chain risks; the uncertainty of claims resolution with respect to the large power projects in South Africa, as well as claims with respect to, environmental and other contingent liabilities; the impact of climate change and any legal or regulatory actions taken in response there to; cyber-security risks; risks with respect to the protection of intellectual property, including with respect to the Company’s digitalization initiatives; the impact of overruns, inflation and the incurrence of delays with respect to long-term fixed-price contracts; defects or errors in current or planned products; the impact of pandemics and governmental and other actions taken in response; domestic economic, political, legal, accounting and business developments adversely affecting the Company’s business, including regulatory changes; changes in worldwide economic conditions; uncertainties with respect to the Company’s ability to identify acceptable acquisition targets; uncertainties surrounding timing and successful completion of any announced acquisition or disposition transactions, including with respect to integrating acquisitions and achieving cost savings or other benefits from acquisitions; the impact of retained liabilities of disposed businesses; potential labor disputes; and extreme weather conditions and natural and other disasters. These statements are only predictions and actual events or results may differ materially. Accordingly, 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 are qualified in their entirety by reference to the factors discussed under the heading “Risk Factors” in our 2022 Annual Report on Form 10-K, in any subsequent filing with the U.S. Securities and Exchange Commission, as well as in any documents incorporated by reference that describe risks, uncertainties and other 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 disclaim any responsibility to update or publicly revise any forward-looking statements to reflect events or circumstances that arise after the date of this document. SUPPLY CHAIN DISRUPTIONS, LABOR SHORTAGES, AND COST INCREASES The impact of the COVID-19 pandemic on our operating results for the first half of 2023 was minimal. However, during January 2022, there was an increase in pandemic cases at certain of our manufacturing facilities, which resulted in a high-level of absenteeism at such facilities during the month. In addition, certain of our businesses experienced supply chain disruptions, as well as labor shortages, while all of our businesses experienced increases in raw material, component, and transportation costs. The combination of these matters negatively impacted our operating results during the first quarter of 2022, as we experienced lower absorption of manufacturing costs and, in some cases, the negative impact of cost increases on fixed-price customer contracts. During the first half of 2023, we experienced more stable labor and supply chain environments and continue to actively manage these matters. POTENTIAL IMPACTS OF RUSSIA/UKRAINE CONFLICT The Russia/Ukraine conflict, and governmental actions implemented in response to the conflict, did not have a significant adverse impact on our operating results during the three and six months ended July 1, 2023 and July 2, 2022. We are 32 monitoring the availability of certain raw materials that are supplied by businesses in these countries. However, at this time, we do not expect the potential impact to be material to our operating results. The Russia/Ukraine conflict has created additional demand for certain products within our communication technologies business. Any longer-term impact of these global events on our business is currently unknown due to the uncertainty around their duration and broader impact. OTHER SIGNIFICANT MATTERS • Acquisitions ◦ International Tower Lighting, LLC (“ITL”) ▪ Acquired on March 31, 2022 for cash consideration of $40.4, net of (i) cash acquired of $1.1 and (ii) an adjustment to the purchase price received during the third quarter of 2022 related to acquired working capital of $1.4. ▪ Post-acquisition operating results of ITL are included within our Detection and Measurement reportable segment. ◦ T. A. Morrison & Co. Inc. (“TAMCO”) ▪ Acquired on April 3, 2023 for cash consideration of $125.3, net of cash acquired of $1.0. ▪ The purchase price is subject to adjustment based upon the final calculation of working capital and cash as of the date of acquisition. ▪ Post-acquisition operating results of TAMCO are included within our HVAC reportable segment. ◦ ASPEQ Heating Group (“ASPEQ”) ▪ Acquired on June 2, 2023 for cash consideration of $421.8, net of cash acquired of $0.9. ▪ The purchase price is subject to adjustment based upon the final calculation of working capital and cash as of the date of acquisition. ▪ Post-acquisition operating results of ASPEQ are included within our HVAC reportable segment. • Incremental Term Loan ◦ On April 21, 2023, we amended and restated our senior credit agreement (the “Credit Agreement”). ◦ The amendment provided for an additional senior secured term loan in the aggregate amount of $300.0, which was borrowed during the second quarter of 2023. ◦ The funds from the additional term loan (“Incremental Term Loan”) were used to partially fund the acquisition of ASPEQ. ◦ See Note 12 to our condensed consolidated financial statements for additional details. • Disposition of SPX Transformer Solutions, Inc. (“Transformer Solutions”) ◦ On October 1, 2021, we completed the sale of Transformer Solutions, which is included in discontinued operations for all periods presented. ◦ During the first quarter of 2022, we paid $13.9 to the buyer of Transformer Solutions related primarily to the settlement of the final working capital balances of the business. • Asbestos-Related Matters ◦ On November 1, 2022, we completed the divestiture of three wholly-owned subsidiaries that hold asbestos liabilities and certain assets, including related insurance assets (the “Asbestos Portfolio Sale”). As a result of this transaction, the Company divested all obligations with respect to pending and future asbestos claims relating to these subsidiaries. ◦ During the six months ended July 2, 2022, our payments for asbestos-related claims, net of respective insurance recoveries of $17.0, were $11.2. ◦ During the three and six months ended July 2, 2022, we recorded charges of $2.3 to continuing operations and $0.2 to discontinued operations related to revisions of recorded liabilities for asbestos-related claims. ◦ See Notes 1 and 15 to our condensed consolidated financial statements for additional details. • Transfer of Postretirement Life Insurance Benefit Obligation ◦ On February 17, 2022, we transferred our obligation for life insurance benefits under our postretirement benefit plans to an insurance carrier for total cash consideration of $10.0. ◦ We paid $9.0 at the time of the transfer and an additional $1.0 during the second quarter of 2022. ◦ In connection with the transfer, we recorded a net charge of $0.3 within our first quarter 2022 results. ◦ See Note 11 to our condensed consolidated financial statements for additional details. 33 • Settlement and Actuarial Losses — U.S. Pension Plan (“U.S. Plan”) ◦ In connection with the sale of Transformer Solutions, a significant number of participants of the U.S. Plan who were employees of Transformer Solutions elected to receive lump-sum payments from the U.S. Plan. ◦ The extent of these lump-sum payments, combined with other lump-sum payments during the first half of 2022, required us to record settlement and actuarial losses, totaling $3.8, associated with the U.S. Plan during the second quarter of 2022. ◦ See Note 11 to our condensed consolidated financial statements for additional details. • Repurchases of Common Stock — During the second quarter of 2022, we repurchased approximately 0.7 shares of our common stock for $33.7. • Changes in Estimated Fair Value of an Equity Security ◦ We recorded gains of $3.6 and $4.4 during the six months ended July 1, 2023 and July 2, 2022, respectively. ◦ See Note 17 to our condensed consolidated financial statements for additional details. OVERVIEW OF OPERATING RESULTS Revenues for the three and six months ended July 1, 2023 totaled $423.3 and $823.1, respectively, compared to $354.0 and $661.1 during the respective periods in 2022. The increase in revenues during the three and six months ended July 1, 2023, compared to the respective prior-year periods, was due primarily to the impact of organic revenue growth within the HVAC and Detection and Measurement reportable segments and, to a lesser extent, the impact of the TAMCO and ASPEQ acquisitions. The organic revenue growth within the HVAC reportable segment was due primarily to increased sales of cooling products associated with both price and volume increases. Organic revenue growth within the Detection and Measurement reportable segment was due primarily to the execution of large projects within the communication technologies, transportation and aids to navigation businesses. During the three and six months ended July 1, 2023, we generated operating income of $51.3 and $101.1, respectively, compared to $27.2 and $38.6 for the respective periods in 2022. The increase in operating income during the three and six months ended July 1, 2023, compared to the respective periods in 2022, was due primarily to higher income for both our HVAC and Detection and Measurement reportable segments, partially offset by increased intangible asset amortization primarily resulting from the acquisitions of TAMCO and ASPEQ. The increase in income for our HVAC reportable segment was primarily due to the organic revenue growth mentioned above and greater absorption of manufacturing costs resulting from higher volumes and more stable labor and supply chain environments, as well as the income associated with the TAMCO and ASPEQ acquisitions. The increase in income for our Detection and Measurement reportable segment was due primarily to the organic revenue growth mentioned above. Cash flows from operating activities associated with continuing operations totaled $74.6 for the six months ended July 1, 2023, compared to cash flows used in operating activities of $83.5 during the six months ended July 2, 2022. The increase in cash flows from operating activities was due primarily to (i) the increase in income during the period discussed above, (ii) income tax payments of $17.1 during the first half of 2023 compared to income tax payments of $48.8 during the first half of 2022, with a significant portion of the 2022 payments related to the gain on sale of Transformer Solutions, (iii) net payments for asbestos-related matters made prior to the Asbestos Portfolio Sale, of $11.2, (iv) cash payments of $10.0 during the first half of 2022 in connection with the transfer of our postretirement life insurance benefit obligation to an insurance carrier (see Note 11 to our condensed consolidated financial statements for additional details), (v) working capital improvements at certain of our project-related businesses, as cash flows for these businesses are often subject to contract milestones that can impact the timing of cash flows from period to period, and (vi) a reduction in the level of elevated purchases of raw materials and components, primarily within our HVAC reportable segment, during the first half of 2023, due to a more stable supply chain environment. RESULTS OF CONTINUING OPERATIONS 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 2022 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year. 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 first, 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 2023 are April 1, July 1, and September 30, compared to the respective April 2, July 2, and October 1, 2022 dates. We had one less day in the first quarter of 2023 and will have one more day in the fourth quarter of 2023 than in the respective 2022 periods. It is not practicable to estimate the impact of the one less day on our consolidated operating results for the six months ended July 1, 2023, when compared to the consolidated operating results for the 2022 respective period. 34 Cyclicality of End Markets, Seasonality and Competition — The financial results of our businesses closely follow changes in the industries in which they operate and end markets in which they serve. In addition, certain of our businesses have seasonal fluctuations. For example, our heating businesses tend to be stronger in the third and fourth quarters, as customer buying habits are driven largely by seasonal weather patterns. In aggregate, our businesses tend to be stronger in the second half of the year. Although our businesses operate in highly competitive markets, our competitive position cannot be determined accurately in the aggregate or by segment since none of our competitors offer all the same product lines or serve all the same markets as we do. 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. Non-GAAP Measures — Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations and acquisitions/divestitures. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented as, when considered in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool 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. The following table provides selected financial information for the three and six months ended July 1, 2023 and July 2, 2022, including the reconciliation of organic revenue increase to the net revenue increase: Three months ended Six months ended July 1, 2023 July 2, 2022 % Change July 1, 2023 July 2, 2022 % Change Revenues $ 423.3 $ 354.0 19.6 $ 823.1 $ 661.1 24.5 Gross profit 163.6 124.6 31.3 313.5 228.6 37.1 % of revenues 38.6 % 35.2 % 38.1 % 34.6 % Selling, general and administrative expense 100.8 88.3 14.2 194.6 172.5 12.8 % of revenues 23.8 % 24.9 % 23.6 % 26.1 % Intangible amortization 11.5 7.1 62.0 17.8 16.4 8.5 Special charges, net — 0.1 * — 0.1 * Other operating expense, net — 1.9 * — 1.0 * Other income (expense), net — (1.7) (100.0) 2.5 4.8 (47.9) Interest expense, net (5.2) (2.0) 160.0 (7.1) (4.3) 65.1 Income from continuing operations before income taxes 46.1 23.5 96.2 96.5 39.1 146.8 Income tax provision (7.8) (4.4) 77.3 (19.1) (7.0) 172.9 Income from continuing operations 38.3 19.1 100.5 77.4 32.1 141.1 Components of revenue increase: Organic 14.6 22.0 Foreign currency (0.3) (0.7) Acquisitions 5.3 3.2 Net revenue increase 19.6 24.5 _________________________________ * Not meaningful for comparison purposes. Revenues — For the three and six months ended July 1, 2023, the increase in revenues, compared to the respective periods in 2022, was due to the impact of organic revenue growth within the HVAC and Detection and Measurement reportable segments and, to a lesser extent, the impact of the TAMCO and ASPEQ acquisitions. The organic revenue growth within the HVAC reportable segment was due primarily to increased sales of cooling products associated with both price and volume increases. Organic revenue growth within the Detection and Measurement reportable segment was due primarily to higher volumes from large projects within the communication technologies, transportation and aids to navigation businesses. 35 See “Results of Reportable Segments” for additional details. Gross Profit — For the three and six months ended July 1, 2023, the increase in gross profit and gross profit as a percentage of revenues, compared to the respective periods in 2022, was due primarily to the increase in revenues noted above and greater absorption of manufacturing costs as a result of higher volumes. The higher volumes were aided by improved operational execution resulting from investments in plant automation and more stable labor and supply chain environments, particularly within our HVAC reportable segment. This impact on gross profit as a percentage of revenue was partially offset by less favorable sales mix within our Detection and Measurement reportable segment. S elling, General and Administrative (“SG&A”) Expense — For the three and six months ended July 1, 2023, the increase in SG&A expense, compared to the respective periods in 2022 , was due primarily to (i) increases in sales incentive plan expense driven by the higher revenues mentioned above, (ii) higher employee compensation, inclusive of increases in short-term incentive compensation expense, (iii) acquisition-related costs and SG&A expenses associated with the TAMCO and ASPEQ acquisitions, and (iv) higher travel expense. These increases were partially offset during the three and six months ended July 1, 2023, compared to the respective periods in 2022, by (i) lower costs related to various strategic and transformational initiatives during 2023 and (ii) expenses in connection with asbestos-related matters incurred during 2022 prior to the Asbestos Portfolio Sale. Intangible Amortiz ation — For the three an d six months ended July 1, 2023, the increase in intangible amortization, compared to the respective periods in 2022, was primarily due to incremental intangible amortization related to backlog and other intangible assets associated with the TAMCO and ASPEQ acquisitions. In addition, the six months ended July 1, 2023 included six months of intangible amortization related to the ITL acquisition when compared to three months in the 2022 period. Special Charges, net — Special charges, net, for the three and six months ended July 2, 2022 related primarily to severance costs associated with a restructuring action at one of our HVAC reportable segment’s cooling businesses. See Note 7 to our condensed consolidated financial statements for the details of actions taken in the first six months of 2022. Other Operating Expense, net — Other operating expense, net for the three and six months ended July 2, 2022 related to asbestos-related charges of $2.3, partially offset by a reduction in the fair value/liability associated with the contingent consideration related to the Enterprise Control Systems Ltd acquisition ($0.4 and $1.3 during the three and six months ended July 2, 2022, respectively). Other Income (Expense), net — Other income, net, for the three months ended July 1, 2023 was composed primarily of a gain of $0.4 related to income derived from company-owned life insurance policies, offset by pension and postretirement expense of $0.2, foreign currency transaction losses of $0.1, and environmental remediation charges of $0.1. Other expense, net, for the three months ended July 2, 2022 was comprised primarily of pension and postretirement expense of $2.7 (inclusive of settlement and actuarial losses of $2.3 and $1.5, respectively), partially offset by income of $0.9 associated with a transition services agreement. Other income, net, for the six months ended July 1, 2023 was composed primarily of a gain of $3.6 related to a change in the estimated fair value of an equity security that we hold and a gain of $0.4 related to income derived from company-owned life insurance policies, partially offset by foreign currency transaction losses of $0.7, pension and postretirement expense of $0.4, and environmental remediation charges of $0.2. Other income, net, for the six months ended July 2, 2022 was composed primarily of a gain of $4.4 related to a change in the estimated fair value of an equity security that we hold, income associated with a transition services agreement of $1.8, and income derived from company-owned life insurance policies of $0.7, partially offset by pension and postretirement expense (inclusive of the losses mentioned above) of $1.9. Interest Expense, net — Interest expense, net, includes both interest e xpense and interest income. The increase in interest expense, net, during the three and six months ended July 1, 2023, compared to the respective periods in 2022, was the result of a higher average effective interest rate and higher average debt balances during the 2023 periods, primarily resulting from borrowings in connection with the TAMCO and ASPEQ acquisitions. 36 Income Tax Provision — For the three months ended July 1, 2023, we recorded an income tax provision of $7.8 on $46.1 of pre-tax income from continuing operations, resulting in an effective rate of 16.9%. This compares to an income tax provision for the three months ended July 2, 2022 of $4.4 on $23.5 of pre-tax income from continuing operations, resulting in an effective rate of 18.7%. The most significant items impacting the income tax provision for the second quarters of 2023 and 2022 were (i) $1.2 and $0.7 of tax benefits, respectively, related to revisions to liabilities for uncertain tax positions and (ii) $0.5 and $0.0, respectively, of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the period. In addition, the rate for the three months ended July 1, 2023 was favorably impacted by a tax benefit of $1.8 related to the release of valuation allowances recognized against certain deferred tax assets, as we now expect these deferred tax assets to be realized. For the six months ended July 1, 2023, we recorded an income tax provision of $19.1 on $96.5 of pre-tax income from continuing operations, resulting in effective rate of 19.8%. This compares to an income tax provision for the six months ended July 2, 2022 of $7.0 on $39.1 of pre-tax income from continuing operations, resulting in an effective rate of 17.9%. The most significant items impacting the income tax provision for the first half of 2023 and 2022 were (i) $1.4 and $0.7, respectively, of excess tax benefits associated with stock-based compensation awards that vested and/or were exercised during the periods and (ii) the $1.2 and $0.7, respectively, of the tax benefits related to revisions to liabilities for uncertain tax positions. In addition, the current year's rate was favorably impacted by a tax benefit of $1.8 related to the release of valuation allowances recognized against certain deferred tax assets, as we now expect these deferred tax assets to be realized. RESULTS OF REPORTABLE SEGMENTS The following information should be read in conjunction with our condensed consolidated financial statements and related notes. These results exclude the operating results of discontinued operations for all periods presented. See Note 6 to our condensed consolidated financial statements for a description of our reportable segments. Non-GAAP Measures — Throughout the following discussion of segment results, we use “organic revenue” growth (decline) to facilitate explanation of the operating performance of our segments. Organic revenue growth (decline) is a non-GAAP financial measure and is not a substitute for revenue growth (decline). Refer to the explanation of this measure and purpose of use by management under “Results of Continuing Operations—Non-GAAP Measures.” Presentation of Segment Income — During 2022, we concluded that, although the assessment of our reportable segments was performed using the appropriate measures as defined by the Segment Reporting Topic of the Accounting Standards Codification (“Codification”), the disclosure of operating income for each of our reportable segments (“Segment Income”) was not consistent with these measures or the measures used by our Chief Operating Decision Maker (“CODM”) when evaluating the results of, or allocating resources to, our reportable segments. We previously disclosed that Segment Income was determined before considering impairment and special charges, long-term incentive compensation, certain other operating income/expense, and other indirect corporate expenses. Our CODM also excludes the impact of intangible asset amortization, inventory step-up charges, and other acquisition-related costs from Segment Income. Accordingly, these amounts have now been excluded, for all periods presented, from Segment Income and presented separately in our reconciliation of Segment Income to consolidated operating income within this quarterly report on Form 10-Q. Refer to Notes 1 and 6 to our condensed consolidated financial statements for additional details. HVAC Reportable Segment Three months ended Six months ended July 1, 2023 July 2, 2022 % Change July 1, 2023 July 2, 2022 % Change Revenues $ 269.0 $ 218.7 23.0 $ 520.6 $ 411.8 26.4 Income 55.2 28.3 95.1 102.9 48.9 110.4 % of revenues 20.5 % 12.9 % 19.8 % 11.9 % Components of revenue increase: Organic 15.0 22.5 Foreign currency (0.6) (0.6) Acquisition 8.6 4.5 Net revenue increase 23.0 26.4 Revenues — For the three and six months ended July 1, 2023, the increase in revenues, compared to the respective periods in 2022, was due primarily to (i) the organic revenue growth driven by increased sales, primarily of cooling products and (ii) the impact of the TAMCO and ASPEQ acquisitions. The increase in organic revenue was associated with price increases implemented across our businesses, as well as volume increases resulting from greater plant throughput and more stable labor and supply chain environments. 37 Income — For the three and six months ended July 1, 2023, the increase in income, compared to the respective periods in 2022, was due primarily to the impact of the revenue growth mentioned above. For the three and six months ended July 1, 2023, the increase in margin, compared to the respective periods in 2022, was primarily due to price increases and greater absorption of manufacturing costs as a result of higher volumes. The higher volumes were aided by improved operational execution resulting from investments in plant automation and more stable labor and supply chain environments. Backlog — The segment had backlog of $337.2 and $321.6 as of July 1, 2023 and July 2, 2022, respectively. Backlog associated with TAMCO and ASPEQ totaled $31.4 as of July 1, 2023. Detection and Measurement Reportable Segment Three months ended Six months ended July 1, 2023 July 2, 2022 % Change July 1, 2023 July 2, 2022 % Change Revenues $ 154.3 $ 135.3 14.0 $ 302.5 $ 249.3 21.3 Income 29.2 27.8 5.0 55.9 46.8 19.4 % of revenues 18.9 % 20.5 % 18.5 % 18.8 % Components of revenue increase: Organic 14.0 21.5 Foreign currency — (1.0) Acquisitions — 0.8 Net revenue increase 14.0 21.3 Revenues — For the three and six months ended July 1, 2023, the increase in revenues, compared to the respective periods in 2022, was due primarily to organic revenue growth and, for the six month period, the impact of the ITL acquisition. The organic revenue growth was driven primarily by higher volumes from large projects within the communication technologies, transportation and aids to navigation businesses. Income — For the three and six months ended July 1, 2023, the increase in income, compared to the respective periods in 2022, was due primarily to the revenue growth mentioned above. For the three and six months ended July 1, 2023, the decrease in margin, compared to the respective periods in 2022, was due primarily to a less favorable sales mix resulting primarily from the higher volume of large project revenues mentioned above. Backlog — The segment had bac klog of $233.9 and $195.6 as of July 1, 2023 and July 2, 2022, respectively. CORPORATE AND OTHER EXPENSES Three months ended Six months ended July 1, 2023 July 2, 2022 % Change July 1, 2023 July 2, 2022 % Change Total consolidated revenues $ 423.3 $ 354.0 19.6 $ 823.1 $ 661.1 24.5 Corporate expense 16.6 16.4 1.2 31.2 33.0 (5.5) % of revenues 3.9 % 4.6 % 3.8 % 5.0 % Long-term incentive compensation expense 3.5 2.5 40.0 6.6 5.6 17.9 Corporate Expense — Corporate expense generally relates to the cost of our Charlotte, North Carolina corporate headquarters. The increase in corporate expense during the three months ended July 1, 2023, compared to the respective period in 2022, was due primarily to higher short-term incentive compensation and acquisition-related costs associated with the ASPEQ acquisition, partially offset by (i) a reduction in costs related to various strategic and transformational initiatives and (ii) expenses in connection with asbestos-related matters incurred during 2022 prior to the Asbestos Portfolio Sale. The decline in corporate expense during the six months ended July 1, 2023, compared to the respective period in 2022, was driven primarily by (i) lower costs related to various strategic and transformational initiatives during 2023 and (ii) expenses in connection with asbestos-related matters incurred during 2022 prior to the Asbestos Portfolio Sale, partially offset by higher short-term incentive compensation and acquisition-related costs associated with the TAMCO and ASPEQ acquisitions. Long-Term Incentive Compensation Expense — Long-term incentive compensation expense represents our consolidated expense, which we do not allocate for segment reporting purposes. For the three and six months ended July 1, 2023, the increase in long-term incentive compensation expense, compared to the respective periods in 2022, was due primarily to the impact of forfeitures resulting from various participant resignations during the second quarter of 2022. 38 LIQUIDITY AND FINANCIAL CONDITION Listed below are the cash flows from (used in) operating, investing, and financing activities and discontinued operations, as well as the net change in cash and equivalents for the six months ended July 1, 2023 and July 2, 2022. Six months ended July 1, 2023 July 2, 2022 Continuing operations: Cash flows from (used in) operating activities $ 74.6 $ (83.5) Cash flows used in investing activities (554.8) (45.8) Cash flows from (used in) financing activities 426.2 (46.7) Cash flows used in discontinued operations (7.0) (26.6) Change in cash and equivalents due to changes in foreign currency exchange rates (0.5) 1.8 Net change in cash and equivalents $ (61.5) $ (200.8) Operating Activities — Th e increase in cash flows from operating activities of continuing operations during the six months ended July 1, 2023, compared to the respective period in 2022, was due primar ily to (i) the increase in income during the period discussed above, (ii) income tax payments of $17.1 during the first half of 2023 compared to income tax payments of $48.8 during the first half of 2022, with a significant portion of the 2022 payments related to the gain on sale of Transformer Solutions, (iii) net payments for asbestos-related matters made prior to the Asbestos Portfolio Sale, of $11.2, (iv) a cash payment of $10.0 during the first half of 2022 in connection with the transfer of our postretirement life insurance benefit obligation to an insurance carrier (see Note 11 to our condensed consolidated financial statements for additional details), (v) working capital improvements at certain of our project-related businesses, as cash flows for these businesses are often subject to contract milestones that can impact the timing of cash flows from period to period, and (vi) a reduction in the level of elevated purchases of raw materials and components, primarily within our HVAC reportable segment, during the first half of 2023, due to a more stable supply chain environment. Investing Activities — Cash fl ows used in investing activities of continuing operations for the six months ended July 1, 2023 were comprised of net cash utilized in the acquisitions of TAMCO and ASPEQ of $547.1 and capital expenditures of $8.7, partially offset by proceeds from company-owned life insurance policies of $1.0. Cash flows used in investing activities of continuing operations for the six months ended July 2, 2022 were comprised of net cash utilized in the acquisition of ITL of $41.8 and capital expenditures of $6.0, partially offset by proceeds from company-owned life insurance policies of $1.6, and $0.4 received upon agreement with the seller on acquired working capital balances associated with Cincinnati Fan. Financing Activities — Cash flows from financing activities of continuing operations for the six months ended July 1, 2023 were comprised of net borrowings under the Credit Agreement and trade receivables financing arrangement of $400.0 and $30.0, respectively, primarily in connection with the TAMCO and ASPEQ acquisitions, minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised, of $2.4, and fees paid in connection with the Incremental Term Loan of $1.3. Cash flows used in financing activities of continuing operations for the six months ended July 2, 2022 were comprised of repurchases of common stock of $33.7, net repayments under our various debt instruments of $6.5, minimum withholdings paid on behalf of employees on long-term incentive awards, net of proceeds from options exercised of $5.2, and contingent consideration paid of $1.3 related to a prior acquisition. Discontinued Operations — Cash flows used in discontinued operations for the six months ended July 1, 2023 relate primarily to disbursements for professional fees incurred in connection with the claims activities related to the large power projects in South Africa (see Note 15 for additional details). Cash flows used in discontinued operations for the six months ended July 2, 2022 relate primarily to (i) disbursements for professional fees incurred in connection with the claims activities related to the large power projects in South Africa (see Note 15 for additional details), (ii) disbursements for liabilities retained in connection with dispositions, and (iii) a payment of $13.9 to the buyer of Transformer Solutions related to the settlement of the final working capital balances for the business. Change in Cash and Equivalents due to Changes in Foreign Currency Exchange Rate s — Changes in foreign currency exchange rates did not have a significant impact on our cash and equivalents during the first six months of 2023 and 2022. 39 Borrowings and Availability Borrowings — The following summarizes our debt activity (both current and non-current) for the six months ended July 1, 2023. December 31, 2022 Borrowings Repayments Other (6) July 1, 2023 Revolving loans (1) $ — $ 520.0 $ (420.0) $ — $ 100.0 Term loan (2)(3) 244.3 300.0 — (1.2) 543.1 Trade receivables financing arrangement (4) — 61.0 (31.0) — 30.0 Other indebtedness (5) 2.5 0.2 (0.3) 0.1 2.5 Total debt 246.8 $ 881.2 $ (451.3) $ (1.1) 675.6 Less: short-term debt 1.8 132.0 Less: current maturities of long-term debt 2.0 10.5 Total long-term debt $ 243.0 $ 533.1 ___________________________ (1) While not due for repayment until August 2027 under the terms of the Credit Agreement, we classify within current liabilities the portion of the outstanding balance that we believe will be repaid over the next year, with such amount based on an estimate of cash that is expected to be generated over such period. The revolving loan facility was utilized as the initial funding mechanism for the TAMCO and ASPEQ acquisitions and was partially repaid with the funds borrowed on the Incremental Term Loan (see additional discussion below). (2) As noted below, we amended our senior credit agreement on April 21, 2023, with the amendment making available an incremental term loan facility (“Incremental Term Loan”) in the amount of $300.0. The proceeds from the Incremental Term Loan were primarily used to fund the acquisition of ASPEQ. (3) The term loans are repayable in quarterly installments equal to 0.625% of the balance of $545.0, beginning in December 2023 and in each of the first three quarters of 2024, and 1.25% during the fourth quarter of 2024, all quarters of 2025 and 2026, and the first two quarters of 2027. The remaining balances are payable in full on August 12, 2027. Balances are net of unamortized debt issuance costs of $1.9 and $0.7 at July 1, 2023 and December 31, 2022, respectively. (4) Under this arrangement, we can borrow, on a continuous basis, up to $50.0, as available. Borrowings under this arrangement are collateralized by eligible trade receivables of certain of our businesses. At July 1, 2023, we had $12.3 of available borrowing capacity under this facility after giving effect to outstanding borrowings of $30.0. (5) Primarily includes balances under a purchase card program of $2.0 and $1.8 and finance lease obligations of $0.5 and $0.7 at July 1, 2023 and December 31, 2022, 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. (6) “Other” includes the capitalization and amortization of debt issuance costs. During the three months ended July 1, 2023, we capitalized $1.3 of debt issuance costs associated with the Incremental Term Loan. Senior Credit Facilities On April 21, 2023 (the “Incremental Amendment Effective Date”), we entered into an Incremental Facility Activation Notice (the “Incremental Amendment”) with Bank of America, N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto, which amends the Amended and Restated Credit Agreement, dated as of August 12, 2022 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Deutsche Bank AG, as foreign trade facility agent, and the Administrative Agent. The Incremental Amendment provides for an Incremental Term Loan in the aggregate amount of $300.0, which was available in up to three drawings (subject to customary conditions) from the Incremental Amendment Effective Date to October 18, 2023. The proceeds of the Incremental Term Loan were available to be used to finance, in part, permitted acquisitions, to pay related fees, costs and expenses and for other lawful corporate purposes. The Incremental Term Loan will mature on August 12, 2027. We may voluntarily prepay the Incremental Term Loan, in whole or in part, without premium or penalty. In June 2023, we borrowed $300.0 under the Incremental Term Loan in connection with the ASPEQ acquisition. The interest rate applicable to the Incremental Term Loan is, at our option, equal to either (x) an alternate base rate (the highest of (a) the federal funds effective rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) the one-month Term SOFR rate plus 1.00%) or (y) the Term SOFR rate for the applicable interest period plus 0.10%, plus, in each case, an applicable margin percentage, which varies based on the Company’s Consolidated Leverage Ratio (defined in the Credit Agreement generally as the ratio of consolidated total debt (excluding the face amount of undrawn letters of credit, bank undertakings or analogous instruments and net of unrestricted cash and cash equivalents) at the date of determination to Consolidated EBITDA for the four fiscal quarters ended most recently before such date). SPX may elect interest periods of one, three or six months (and, if consented to by all relevant lenders, any other period not greater than twelve months) for Term 40 SOFR borrowings. SPX will also pay a commitment fee to the incremental lenders on the daily unused amount of the commitments for the Incremental Term Loan, payable quarterly at a per annum rate which also varies based on the Company’s Consolidated Leverage Ratio. The commitment fee rate and interest rate margins for the Incremental Term Loan are as follows: Consolidated Leverage Ratio Commitment Fee Term SOFR Loans ABR Loans Less than 2.00 to 1.0 0.225 % 1.500 % 0.500 % Greater than or equal to 2.00 to 1.0 but less than 3.00 to 1.0 0.250 % 1.625 % 0.625 % Greater than or equal to 3.00 to 1.0 0.275 % 1.875 % 0.875 % The Incremental Term Loan is guaranteed by certain domestic material subsidiaries of the Company and secured by a first priority pledge and security interest in 100% of the capital stock of our domestic subsidiaries or the domestic subsidiary guarantors and 65% of the voting capital stock (and 100% of the non-voting capital stock) of material first-tier foreign subsidiaries, all subject to certain exceptions and on a pari passu basis with the other credit facilities under the Credit Agreement. A detailed description of our remaining senior credit facilities under the Credit Agreement is included in our 2022 Annual Report on Form 10-K. Availability — At July 1, 2023, we h ad $389.2 of available borrowing capacity under our revolving credit facilities, after giving effect to borrowings under the domestic revolving loan facility of $100.0 and $10.8 reserved for outstanding letters of credit. In addition, at July 1, 2023, we had $9.6 of available issuance capacity under our foreign credit instrument facilities after giving effect to $15.4 reserved for outstanding letters of credit. The weighted-average interest rate of outstanding borrowings under the Credit Agreement was approximately 6.8% at July 1, 2023. At July 1, 2023, we were in compliance with all covenants of the Credit Agreement. Financing instruments may be used from time to time including, but not limited to, public and private debt and equity offerings, operating leases, finance leases and securitizations. We expect that we will continue to access these markets as appropriate to maintain liquidity and to provide sources of funds for general corporate purposes, acquisitions or to refinance existing debt. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and equivalents, trade accounts receivable, and interest rate swap and foreign currency forwards contracts. These financial instruments, other than trade accounts receivable, are placed with high-quality financial institutions. 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, however, that counterparties will be able to fully satisfy their obligations under the contracts. We do not obtain collateral or other security to support financial instruments subject to credit risk, but we do monitor the credit standing of counterparties. Concentrations of credit risk arising from trade accounts receivable are due to selling to customers in a particular industry. Credit risks are mitigated by performing ongoing credit evaluations of our customers’ financial conditions and obtaining collateral, advance payments, or other security when appropriate. No one customer, or group of customers that to our knowledge are under common control, accounted for more than 10 % of our revenues for any period presented. Other Matters Contractual Obligations — Except for the Incremental Term Loan, there have been no material changes in the amounts of our contractual obligations from those disclosed in our 2022 Annual Report on Form 10-K. Our total net liabilities for unrecognized tax benefits including interest were $3.6 as of July 1, 2023. Based on the outcome of certain examinations or as a result of the expiration of statutes of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by up to $0.6. 41 Contingencies and Other Matters — Numerous claims, complaints and proceedings arising in the ordinary course of business have been asserted or are pending against us or certain of our subsidiaries (collectively, “claims”). These claims relate to litigation matters (e.g., contracts, intellectual property, and competitive claims), environmental matters, claims with respect to the large power projects in South Africa, product liability matters, and other risk management matters (e.g., general liability, automobile, and workers’ compensation claims). Additionally, we may become subject to other claims of which we are currently unaware, which may be significant, or the claims of which we are aware may result in our incurring significantly greater loss than we anticipate. We accrue for these contingencies when we believe a liability is probable and can be reasonably estimated. As events change and resolutions occur, these accruals may be adjusted and could differ materially from amounts originally estimated. See Note 15 to the condensed consolidated financial statements for a further discussion of contingencies and other matters. Our Certificate of Incorporation provides that we shall indemnify our officers and directors to the fullest extent permitted by the Delaware General Corporation Law for any personal liability in connection with their employment or service with us. While we maintain insurance for this type of liability, the liability could exceed the amount of the insurance coverage. In addition, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters” herein, and “Risk Factors” in our 2022 Annual Report on Form 10-K, as well as similar sections in any future filings for an understanding of the risks, uncertainties, and trends facing our businesses. 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 discussed in our 2022 Annual Report on Form 10-K , the discussion within which is incorporated herein by reference . We have affected no material change in either our critical accounting policies or use of estimates since the filing of our 2022 Annual Report on Form 10-K. 42 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Management does not believe our exposure to market risk has significantly changed since December 31, 2022 and does not believe that such risks will result in significant adverse impacts to our financial condition, results of operations or cash flows.