Business context and reporting period
This is SPX Corporation’s Form 10-K for the fiscal year ended December 31, 2011, filed February 23, 2012. The filing identifies the registrant as SPX Corporation, not SPX Technologies, Inc.; confirm that this is the intended issuer. Financial figures are in millions of U.S. dollars unless noted. The filing reports annual results, with unaudited quarterly data also included.
SPX was a global engineered-products manufacturer with four reporting segments: Flow Technology, Test and Measurement, Thermal Equipment and Services, and Industrial Products and Services. Approximately 28% of 2011 revenue came from emerging markets; more than 50% was generated outside the United States.
Financial performance and key metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $5,461.9 | $4,886.8 |
| Gross profit / margin | $1,535.3 / 28.1% | $1,432.8 / 29.3% |
| Operating income / margin | $338.9 / 6.2% | $343.2 / 7.0% |
| Continuing income attributable to SPX common shareholders | $180.3 | $194.4 |
| Net income attributable to SPX common shareholders | $180.6 | $205.6 |
| Diluted EPS, continuing operations / total | $3.54 / $3.54 | $3.86 / $4.08 |
| Cash from continuing operating activities | $326.4 | $256.7 |
| Capital expenditures | $154.1 | $75.7 |
Revenue rose 11.8% (7.1% organic, 2.4% currency and 2.3% acquisitions). Gross margin fell 1.2 percentage points, while operating income declined despite higher sales. Continuing pre-tax income was $219.7, down from $244.7; the 2011 effective tax rate was 15.7%, compared with 21.7%.
Cash and equivalents were $551.0 at year-end, versus $455.4 a year earlier. Total debt was $2,001.1, up from $1,197.6, principally reflecting $800.0 in term loans used to fund the Clyde Union acquisition. Management reported $485.3 of available revolving borrowing capacity and $408.6 of additional foreign credit-instrument issuance capacity; reported available liquidity, including cash and committed lines, was $1,036.3. SPX said it was in compliance with debt covenants and had no scheduled 2012 payments under its senior credit facilities or senior notes. Pension and postretirement plans were underfunded by $511.7.
Segment results and changes
| Segment | 2011 revenue | 2011 segment income | Change versus 2010 |
|---|---|---|---|
| Flow Technology | $2,042.0 | $268.4 | Revenue +22.8%; income +24.5% |
| Test and Measurement | $1,067.8 | $110.7 | Revenue +15.6%; income +44.5% |
| Thermal Equipment and Services | $1,644.2 | $141.9 | Revenue +2.6%; income −26.7% |
| Industrial Products and Services | $707.9 | $59.2 | Revenue +1.3%; income −20.4% |
Flow Technology and Test and Measurement benefited from organic growth; the latter’s improvement was supported by automotive recovery and diagnostic-tool demand. Thermal results were pressured by weak power markets, lower-margin product mix and reduced high-margin dry-cooling sales in China. Industrial results were affected by depressed transformer pricing, lower aerospace-component sales and $11.4 of transformer-facility start-up costs.
Outlook, commentary, risks and unusual items
- For 2012, management projected Flow Technology revenue growth of 33%–38%, including acquisitions, with mid- to high-single-digit organic growth and segment margins of 11.5%–12.0%; Clyde Union was expected to dilute margins by about 100 basis points.
- Thermal Equipment and Services revenue was projected to decline 9%–14%, with margins of 8.2%–8.7%. Industrial Products and Services revenue was projected to grow 10%–15%, with margins of 9.7%–10.2%. These forecasts assume improving U.S. transformer trends and continued power-market challenges for Thermal.
- SPX agreed in January 2012 to sell Service Solutions to Bosch for $1.15 billion cash, anticipated to close in the first half of 2012, with an estimated net gain of approximately $450 million. The business generated 2011 revenue of $910.5 and operating profit of $59.0; it remained in continuing operations at year-end 2011. The forecast for the remaining Test and Measurement businesses was revenue below $160 million in 2012.
- Other notable items included a $34.6 foreign-exchange hedging loss tied to the Clyde Union purchase; a $28.3 impairment of SPX Heat Transfer goodwill and indefinite-lived intangibles; a $19.4 charge for amounts considered uncollectible from an insolvent insurer; and $10.3 of adverse contract-estimate changes in South Africa. A $27.8 tax benefit from releasing a foreign-tax-credit valuation allowance and an approximately $20.0 pension-expense reduction increased reported earnings.
- SPX completed the Clyde Union acquisition in December 2011, funded in part with new term loans, and formed a 45%-owned dry-cooling joint venture with Shanghai Electric. The joint-venture gain was expected to be recognized in the first quarter of 2012. Management forecast approximately $130 million of 2012 capital expenditures and $81.7 of 2012 pension contributions and benefit payments.
- Principal risks include cyclical end markets, international and foreign-exchange exposure, raw-material costs and supply continuity, fixed-price contract estimates and execution, acquisition integration, debt and covenant constraints, pension assumptions, goodwill impairment, environmental and other claims, and reliance on insurance recoveries. Revenue recognition on long-term contracts depends on estimates of costs and completion; SPX recorded $1,457.5 of percentage-of-completion revenue in 2011.
- Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. The control assessment excluded Clyde Union, which represented approximately 15% of year-end consolidated assets.
Most important facts for investors to verify
- Confirm issuer identity: the filing is for SPX Corporation, not SPX Technologies, Inc., and covers FY 2011 rather than only Q4.
- Assess the quality and sustainability of earnings, including tax benefits, the pension-accounting change, FX hedging losses, insurer impairment, contract charges and segment impairments.
- Verify completion and proceeds from the Bosch Service Solutions sale, the expected gain, required $325 million term-loan repayment and subsequent use of remaining proceeds.
- Track debt, covenant headroom, available liquidity, planned repurchases and the effect of the Clyde Union acquisition on leverage and cash generation.
- Test management’s 2012 segment revenue and margin outlook against backlog conversion, Thermal market conditions and the continuing performance of transformer operations.
- Monitor pension underfunding and contributions, insurer recovery assets and claims accruals, environmental exposures, and goodwill sensitivity—especially the Cooling reporting unit, whose estimated fair value exceeded carrying value by about 5%.