SPX Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; amounts are in millions of U.S. dollars unless stated otherwise. This is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as SPX Corporation; the request metadata names SPX Technologies, Inc.
Business context
SPX was a global engineered-products supplier operating in more than 35 countries, with sales in more than 150. Its businesses covered Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other. Flow Technology represented about 56% of 2013 revenue. Around 30% of revenue came from emerging markets, and more than half was generated outside the United States.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $4,717.2 | $4,831.0 |
| Gross profit / gross margin | $1,357.6 / 28.8% | $1,313.6 / 27.2% |
| Operating income (loss) | $329.6 | $(142.4) |
| Continuing operations income (loss), net | $201.3 | $(176.6) |
| Net income attributable to SPX common shareholders | $210.2 | $180.4 |
| Diluted EPS, continuing / total | $4.33 / $4.57 | $(3.59) / $3.61 |
| Cash from continuing operating activities | $98.6 | $49.3 |
| Cash and equivalents at year-end | $691.8 | $984.1 |
| Total debt at year-end | $1,675.6 | $1,692.0 |
| Capital expenditures | $54.9 | $81.4 |
Revenue declined 2.4% year over year: organic revenue fell 1.7% and foreign currency reduced growth by 0.8%. Gross margin improved 160 basis points. Operating cash flow from continuing operations increased, despite $319.2 of pension and postretirement contributions and benefit payments, including a discretionary $250.0 pension contribution. Management attributed cash improvement primarily to working-capital performance.
Year-end liquidity included $445.5 of available revolving-credit capacity, after letters of credit, and $61.7 available under the receivables financing arrangement. A further $328.4 of foreign credit-instrument issuance capacity remained. Current maturities of long-term debt were $558.7 at year-end, including $500.0 of 7.625% notes; those notes were redeemed on February 11, 2014 for $530.6 plus about $2.0 in transaction costs.
Material changes and unusual items
- Segment trends: Flow Technology revenue decreased 1.6% to $2,638.0, while segment income increased 8.1% to $308.3 and margin rose to 11.7%. Thermal Equipment and Services revenue fell 9.8% to $1,344.2 and income fell 23.2% to $81.9. Industrial Products and Services and Other revenue rose 11.7% to $735.0 and income rose 29.2% to $104.3.
- Prior-year impairment: 2012 operating results included $285.9 of impairment charges, principally a $270.4 goodwill impairment and $11.0 of other long-lived asset impairment in the Cooling reporting unit. FY2013 impairment charges were $6.7, related to Flow Technology trademarks.
- Pension accounting change: SPX retrospectively changed its pension and postretirement accounting to recognize plan-asset fair-value changes and actuarial gains and losses in earnings in the fourth quarter, rather than deferring some amounts. The filing says this change raised fourth-quarter 2013 continuing-operations income by $254.4 versus the former method; it also materially changed reported prior-period results. FY2013 pension/postretirement income was $17.7, compared with expense of $158.0 in 2012.
- Tax correction: The company corrected previously unrecorded tax liabilities related to intercompany loans treated as deemed distributions. It stated that prior years were not materially misstated, but revised prior-period figures; the correction reduced equity by $53.8 as of December 31, 2010 and adjusted 2012 and 2011 tax results. No correction was required for the first three quarters of 2013.
- Discontinued operations and portfolio actions: Net income from discontinued operations was $11.3 in 2013, versus $359.8 in 2012, which included a $313.4 after-tax gain on the Service Solutions sale. SPX committed to sell additional non-strategic businesses, with sales expected during 2014. It sold its 44.5% EGS joint-venture interest on January 7, 2014 for $574.1; management expected an approximately $300.0 after-tax gain in first-quarter 2014.
- Capital allocation: SPX repurchased $260.2 of shares and paid $34.7 of dividends in 2013. In February 2014, it raised the annual dividend from $1.00 to $1.50 per share and stated a plan to reduce debt by approximately $300.0 during 2014.
Outlook, risks and contingencies
Management’s 2014 segment targets were: Flow Technology revenue growth of 3%–6% and margin improvement of about 100 basis points; Thermal Equipment and Services revenue approximately flat and margin improvement of about 40 basis points; and Industrial Products and Services and Other revenue growth of 6%–10% and margin improvement of about 80 basis points. These are segment targets, not consolidated guidance. Management expected improving economic conditions and cited sequential order improvement in certain Flow and power markets during the second half of 2013.
Key risks include cyclical and seasonal end markets, project timing and execution on fixed-price contracts, foreign currency and international exposure, raw-material prices, supplier interruptions, pension funding and actuarial assumptions, debt and covenant constraints, tax uncertainty, environmental matters, litigation and insurance recoveries. Pension plans were reported as underfunded by $265.5. Contingency accruals totaled $610.1, including $565.0 for risk-management matters, alongside $496.7 of related insurance recovery assets. SPX said it believed its accruals were adequate, while noting that claims and environmental estimates could change. It estimated that $65.0–$75.0 of uncertain-tax-position liabilities could be paid within 12 months.
The company reported compliance with debt covenants and sufficient liquidity for at least the next 12 months. The senior credit facilities require minimum interest coverage of 3.50-to-1.00 and maximum leverage of 3.25-to-1.00, subject to stated provisions. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- How the retrospective pension-accounting change affects comparability of quarterly and annual earnings, especially fourth-quarter 2013.
- Execution of 2014 segment revenue and margin targets, particularly recovery in Flow and stabilization in Thermal.
- Use of EGS sale proceeds, completion and economics of planned divestitures, and progress toward the stated debt-reduction plan.
- Funding, settlement, and actuarial sensitivity of pension obligations, including the reported $265.5 underfunding and the retiree-obligation transfer.
- Resolution of the corrected tax matters, uncertain tax positions, and remaining tax exposures.
- Cash conversion and working-capital performance, alongside debt maturities, covenant headroom, and ongoing share repurchases and dividends.