SPX Corporation — FY2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. Unless stated otherwise, financial amounts are in millions of U.S. dollars.
Business context and reporting period
SPX was a global engineered-products and services manufacturer operating in more than 35 countries, with four reportable segments: Flow Technology; Test and Measurement; Thermal Equipment and Services; and Industrial Products and Services. About 55% of 2009 revenue was tied to infrastructure development, and approximately 53% was generated outside the United States.
Financial performance
| Metric | FY2009 | FY2008 |
|---|---|---|
| Revenue | $4,850.8 | $5,837.6 |
| Gross profit / gross margin | $1,421.0 / 29.3% | $1,768.3 / 30.3% |
| Operating income | $170.3 | $472.1 |
| Income from continuing operations | $48.2 | $258.9 |
| Net income attributable to SPX common shareholders | $31.7 | $247.9 |
| Diluted earnings per share | $0.64 | $4.56 |
| Cash from continuing operating activities | $461.6 | $407.0 |
| Capital expenditures | $92.8 | $116.4 |
| Cash and equivalents at year-end | $522.9 | $475.9 |
| Total debt at year-end | $1,279.0 | $1,344.7 |
Operating income included $194.8 of goodwill and intangible-asset impairment charges and $73.1 of special charges in 2009. Reported operating margin was approximately 3.5%, versus 8.1% in 2008. The 2009 effective tax rate was 49.5%, affected substantially by impairment charges that generated a comparatively limited tax benefit. Discontinued operations produced a $32.0 net loss; total net income was $16.2.
Cash from continuing operations rose 13.4% despite lower earnings, aided by working-capital reductions and lower tax payments. The company spent $113.2 repurchasing 2.625 million shares and declared dividends of $1.00 per share. Net debt, calculated as total debt less cash, was approximately $756.1.
Material changes versus FY2008
- Revenue declined 16.9%; organic revenue declined 14.5%, with a further 2.6 percentage-point effect from foreign currency. Management attributed the downturn to the recession and weaker automotive, food and beverage, general industrial, power transformer and solar markets.
- Operating income fell 63.9%. Segment income declined in all four segments; Test and Measurement and Industrial Products and Services had the steepest revenue declines.
- Gross margin decreased by 1.0 percentage point. Lower fixed-cost absorption, unfavorable thermal project mix, lower transformer pricing and product-liability settlements weighed on margins.
- Fourth-quarter continuing operations recorded an $80.0 loss, including a $187.7 goodwill impairment at Service Solutions, a $1.0 related intangible impairment, and a $6.1 trademark impairment in Thermal Equipment and Services.
- Special charges rose to $73.1 from $17.2, primarily workforce reductions, facility consolidation and restructuring. The filing reports approximately 1,877 employee terminations associated with 2009 restructuring actions.
- SPX acquired Yuba Heat Transfer assets for $129.2 in December 2009. It sold Dezurik and Filtran during 2009 and completed the sale of P.S.D., Inc. in February 2010. The results of businesses meeting the filing’s criteria are reported as discontinued operations.
Segments and outlook
| Segment | FY2009 revenue | FY2009 segment income | Management’s 2010 revenue outlook |
|---|---|---|---|
| Flow Technology | $1,634.1 | $210.9 | Relatively flat; organic declines expected to offset modest acquisition and currency growth. |
| Test and Measurement | $810.4 | $51.4 | Mid-single-digit increase, based on expected aftermarket recovery and modest later-year OEM program growth. |
| Thermal Equipment and Services | $1,600.7 | $171.1 | Mid-single-digit increase; South Africa, China and Yuba expected to help, partly offset by U.S. and European declines. |
| Industrial Products and Services | $805.6 | $153.7 | Decline of more than 10%, driven mainly by transformer volume and price declines. |
Management said it was cautious about 2010 and did not expect an improvement in overall financial performance, particularly in the first half, despite the segment-level revenue projections. It expected capital expenditures of approximately $90.0 and scheduled 2010 debt payments of $75.0. Year-end backlog was $578.9 for Flow Technology, $1,973.4 for Thermal Equipment and Services, and $393.3 for Industrial Products and Services; Test and Measurement backlog was described as not material.
Liquidity, debt and risks
At year-end, SPX reported $411.0 of available borrowing capacity under revolving credit facilities and $216.3 of available issuance capacity under its foreign credit instrument facility, after outstanding borrowings and letters of credit. It also had $10.8 available under its receivables financing arrangement. Management said cash, operating cash flow and available facilities should cover expected operating needs, capital spending, dividends and debt service. The company was in compliance with its credit-facility and senior-note covenants at December 31, 2009.
Key risks include continued recession or delayed recovery in cyclical end markets; project execution, cost overruns and estimation risk on long-term fixed-price contracts; debt and covenant constraints; foreign-currency and raw-material exposure; acquisition integration; further goodwill impairment; and litigation, environmental and self-insurance claims. Defined-benefit pension and postretirement plans were underfunded by $594.0 at year-end. Accruals for legal, environmental and risk-management matters totaled $308.5, including $231.8 for risk-management matters. SPX identified environmental liabilities at 99 owned or controlled sites and potential responsibility at 27 third-party sites; it said the probable remaining liability at those third-party sites was immaterial.
Other notable exposures include $952.8 of estimated pension and postretirement contributions and payments in the contractual-obligations schedule, $175.4 of future minimum operating lease payments, and approximately $20.0–$25.0 that could be paid within 12 months relating to uncertain tax positions. Management’s estimates for long-term contracts, pensions, taxes, claims and goodwill impairment are subject to uncertainty. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2010 revenue and margin expectations were achieved, especially the forecast transformer contraction and the assumed recovery in automotive aftermarket demand.
- Whether the $461.6 of continuing operating cash flow was repeatable, given working-capital releases and lower tax payments, and how much cash remained after capital spending, dividends and repurchases.
- Whether restructuring charges and expected cost savings were realized, and whether further impairment charges followed the Service Solutions write-down.
- The company’s covenant headroom, refinancing needs and ability to meet scheduled debt payments, particularly as the senior credit facilities matured in September 2012.
- Actual funding requirements and sensitivity of the $594.0 pension/postretirement underfunding to discount rates, asset returns and other assumptions.
- Final purchase-price or liability adjustments from divestitures, Yuba acquisition accounting, uncertain tax positions and outstanding legal or environmental matters.