Business context and reporting period
SPX Corporation (NYSE: SPXC) filed this Form 10-K for the fiscal year ended December 31, 2021. The filing reports annual results, not a standalone fourth-quarter filing; fourth-quarter figures are noted below where relevant. SPX is a global supplier of infrastructure equipment, reporting two continuing-operation segments: HVAC and Detection and Measurement. Unless stated otherwise, amounts are in millions of dollars.
During 2021, SPX acquired Sealite, Enterprise Control Systems (ECS), and Cincinnati Fan, and sold Transformer Solutions. Transformer Solutions, DBT, and Heat Transfer are presented as discontinued operations.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Revenue, continuing operations | $1,219.5 | $1,128.1 | Up 8.1%; organic growth was 2.6% |
| Gross profit / margin | $431.8 / 35.4% | $395.5 / 35.1% | Margin up 0.3 percentage points |
| Operating income | $73.7 | $96.9 | Down 23.2% |
| Income from continuing operations | $59.0 | $73.8 | Down 20.1% |
| Net income | $425.4 | $99.0 | Includes substantial discontinued-operation and sale gains |
| Continuing-operation operating cash flow | $131.2 | $105.2 | Up $26.0 |
Fourth-quarter 2021 revenue was $350.0, continuing-operation income after tax was $4.4, and net income was $6.4. For full-year 2021, basic and diluted EPS were $9.39 and $9.15; continuing-operation diluted EPS was $1.27.
Segment results: HVAC revenue was $752.1 (up 1.5%) and segment income was $104.2 (13.9% margin). Detection and Measurement revenue was $467.4 (up 20.7%), while segment income was $69.7 (14.9% margin), down from $81.7 and a 21.2% margin in 2020. Year-end backlog increased to $226.9 for HVAC and $153.6 for Detection and Measurement; management expected approximately 97% and 71%, respectively, to convert to revenue during 2022.
At year-end, total debt was $246.0, cash and equivalents were $396.0 on a consolidated basis (including discontinued-operation cash), and revolving-credit availability was $437.8 after letters of credit. The company reported compliance with credit-agreement covenants. Continuing-operation investing cash outflow was $306.0, mainly reflecting $264.9 for acquisitions; financing cash outflow was $167.8, primarily net debt repayments. Capital expenditures were $9.6.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions and 2.6% organic growth, with higher heating and underground locator sales partly offset by lower cooling sales. Acquisitions contributed 5.2 percentage points to consolidated revenue growth.
- Operating income fell despite revenue growth, principally due to higher asbestos-related charges and corporate expense. Asbestos charges were $51.2 in 2021 versus $21.3 in 2020; corporate expense increased to $60.5 from $49.7.
- Detection and Measurement segment margin declined amid acquisition-related amortization and $2.3 of inventory step-up charges; HVAC segment income was broadly stable.
- SPX sold Transformer Solutions on October 1, receiving $620.6 net cash proceeds. Discontinued operations reported a $360.7 after-tax gain on disposition and total income of $366.4 for 2021. The disposal materially affects comparisons of reported net income.
- SPX completed the DBT wind-down and recorded a $19.9 discontinued-operation charge for accumulated currency translation amounts. The company also changed certain inventories from LIFO to FIFO, retrospectively restating prior periods. For 2021, FIFO increased continuing-operation income after tax by $8.7 and net income by $6.6 versus LIFO; cash flows were unchanged.
Outlook, commentary, risks and unusual items
- No full-year revenue or earnings guidance is provided in the filing. Management estimated 2022 capital expenditures of $15–$20 and pension contributions and direct benefit payments of $12.5.
- Management reported that supply-chain disruptions and labor shortages in the second half of 2021 constrained production, reduced manufacturing-cost absorption, and delayed some shipments. COVID-19 effects had diminished but could continue into 2022.
- Material exposures include asbestos litigation and insurance recoverability; unresolved DBT claims and parent guarantees tied to South African power projects; inflation and availability of materials and labor; fixed-price project cost overruns; acquisition integration and goodwill impairment; cyclical end markets; cybersecurity; pension assumptions; and foreign-exchange, regulatory, and environmental risks.
- Asbestos liabilities were $616.5 and related insurance recovery assets were $526.2 at year-end. The company recorded $51.2 of asbestos-related charges in 2021. Recovery depends on insurer solvency and the company’s interpretation of coverage rights.
- ULC goodwill and trademark impairment charges totaled $28.2 in 2021. Management also noted that ULC, Sealite, ECS, and Cincinnati Fan had estimated fair values near carrying value, leaving potential for future impairment if forecasts are not achieved.
- DBT has asserted claims against MHI of approximately $62.6, while MHI has made claims against DBT. SPX recorded no loss for MHI’s claims, but stated that some loss is reasonably possible and that it cannot estimate a potential loss range. SPX had funded $26.2 in bond demands and recorded a non-current recovery asset; reimbursement timing and outcome remain uncertain.
- The financial-statement audit opinion was unqualified, but management and the auditor concluded internal control over financial reporting was ineffective because of a material weakness concerning controls over asbestos insurance recovery assets. Management’s remediation work was in process; the acquired businesses’ controls were excluded from the year-end assessment.
Important facts for investors to verify
- Separate continuing-operation performance from discontinued operations and the Transformer Solutions sale gain when assessing earnings and EPS.
- Review the FIFO inventory-accounting restatement and its effect on comparability, particularly the $8.7 increase in 2021 continuing income after tax versus LIFO.
- Track asbestos claim assumptions, insurance asset recoverability, and progress in remediating the identified internal-control material weakness.
- Monitor the resolution of DBT/MHI disputes, potential bond calls, parent guarantees, and the recoverability of the $26.2 recorded asset.
- Assess acquisition performance and impairment risk, especially for ULC and the 2021 acquisitions, alongside backlog conversion and continuing supply and labor constraints.