Business context and reporting period
This filing is SPX Corporation’s Form 10-K for the fiscal year ended December 31, 2019, filed February 13, 2020. Although the request identifies SPX Technologies, the registrant in the filing is SPX Corporation (NYSE: SPXC). The 10-K reports full-year results and unaudited quarterly data, including the fourth quarter; it is not a standalone Q4 filing. Amounts are in millions of U.S. dollars, except per-share data.
SPX supplies engineered infrastructure products through HVAC, Detection and Measurement, and Engineered Solutions segments. Its strategy emphasizes HVAC and detection and measurement growth, power transformers, and process cooling, while reducing exposure to power generation. The Heat Transfer wind-down was generally completed during 2019, with completion anticipated in 2020.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,525.4 | $1,538.6 |
| Gross profit / gross margin | $441.1 / 28.9% | $410.7 / 26.7% |
| Operating income | $107.9 | $107.6 |
| Continuing-operations income | $69.7 | $78.2 |
| Net income | $65.3 | $81.2 |
| Diluted EPS | $1.58 | $1.82 |
| Continuing-operations diluted EPS | $1.67 | $1.75 |
| Operating cash flow from continuing operations | $152.9 | $112.9 |
| Capital expenditures | $17.8 | $12.4 |
Fourth-quarter 2019 revenue was $444.6 versus $445.0 in Q4 2018; gross profit was $143.5 versus $135.2. Income from continuing operations was $28.5 versus $39.3. Q4 net income attributable to common shareholders after the redeemable noncontrolling-interest adjustment was $31.0 versus $39.2.
- Segments: HVAC revenue was $593.2 and segment income was $95.4; Detection and Measurement revenue was $384.9 and segment income was $81.7; Engineered Solutions revenue was $548.9 and segment income was $43.0. Segment income is a company-defined measure, not consolidated GAAP operating income.
- Balance sheet and debt: Cash and equivalents were $54.7; total debt was $393.5, including $142.6 short-term debt and $249.9 long-term debt. Total assets were $2,134.5 and equity was $502.4.
- Borrowing capacity: $292.7 was available under revolving credit facilities, and $36.8 under the trade-receivables financing arrangement. The company reported compliance with its credit agreement covenants at year-end.
- Other obligations: Recorded liabilities for claims and related matters were $592.4, including $552.2 for asbestos matters; associated asbestos insurance recovery assets were $509.6. The filing also reports a $145.1 net liability for pension and postretirement plans.
Material changes versus the prior comparable period
- Revenue declined 0.9% year over year. Organic revenue declined 3.5 percentage points, and South African project revenue adjustments and currency effects were additional drags; acquisitions contributed 4.7 percentage points.
- Gross margin improved to 28.9% from 26.7%, attributed primarily to better mix and operational improvements. Operating income was nearly flat despite higher gross profit, reflecting increased SG&A and amortization, among other costs.
- Continuing-operations operating cash flow increased to $152.9 from $112.9, primarily from working-capital reductions and lower cash outflows on South African projects. Lower tax refunds partially offset the improvement: 2019 net tax payments were $7.0 versus 2018 net refunds of $44.3.
- Detection and Measurement growth included acquisitions and organic growth; HVAC revenue and segment income also increased. Engineered Solutions revenue rose modestly and segment income improved, while the All Other group’s revenue fell to negative $1.6 and its loss widened to $46.1, largely amid South African project revisions and the Heat Transfer wind-down.
- 2019 net income included a $5.6 adjustment related to settlement of the DBT minority shareholder put option and related claims. Other notable items included a $7.9 gain from an equity security’s fair-value increase, $10.0 of pension and postretirement actuarial losses, and $4.5 of asbestos-related charges in continuing operations.
Outlook, commentary, risks and unusual items
- Management forecast 2020 capital expenditures of approximately $20–$25 and expected $13.9 of minimum pension contributions and direct benefit payments. The filing provides no consolidated revenue or earnings guidance.
- Year-end backlog was $77.8 for HVAC, $76.4 for Detection and Measurement, and $373.4 for Engineered Solutions; management expected approximately 89%, 76%, and 91%, respectively, to convert to revenue during 2020. These are backlog estimates, not revenue guidance.
- DBT’s work on the Kusile and Medupi projects in South Africa was substantially complete, but claims and disputes remained. DBT had asserted claims of approximately $80.8 against a prime contractor; the contractor’s claims included approximately $67.6 in direct damages and $29.0 in proposed liquidated damages. SPX recorded no loss for these claims, citing its defenses, but said some loss was reasonably possible and the amount could not be estimated. SPX had also issued $65.1 of bonds in favor of the contractor and guaranteed DBT’s performance.
- On January 16, 2020, an arbitration tribunal ruled that a subcontractor was entitled to $1.4, rather than the previously asserted $18.2; the filing says the $1.4 liability was reflected at year-end.
- Other principal risks include cyclical customer capital spending, fixed-price project cost overruns, raw-material price and availability, acquisition integration, currency and interest-rate exposure, cybersecurity, tax uncertainty, and asbestos, environmental, product-liability and other claims. Management cautioned that asbestos liabilities and insurance recoveries depend on estimates and insurer solvency.
- SPX acquired Sabik, SGS, and Patterson-Kelley in 2019 for reported purchase prices of $77.2, $10.0 plus a contingent deferred payment, and $59.9, respectively. Cash used for 2019 acquisitions was $147.1. The annual goodwill test found Cues’ estimated fair value only about 10% above carrying value, versus more than 100% headroom for other reporting units; a shortfall against Cues’ forecasts could trigger impairment.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded the three 2019 acquisitions from the year-end internal-control assessment; together they represented approximately 7% of assets and 3% of revenue.
Important facts for investors to verify
- Track the timing, outcomes, and cash consequences of DBT’s unresolved South African claims, counterclaims, bonds, and guarantees; no recovery on DBT’s asserted claims was recognized.
- Assess the collectability and continuing coverage behind the $509.6 asbestos insurance recovery asset relative to $552.2 of recorded asbestos liabilities, as well as future claim and payment experience.
- Review Cues’ performance against the forecasts underlying its relatively limited goodwill headroom and monitor acquisition integration and returns on invested capital.
- Reconcile cash generation with working-capital movements, acquisition spending, debt maturities, and the $54.7 year-end cash balance; confirm continued covenant compliance and available liquidity.
- Separate recurring operating performance from South African project adjustments, acquisition effects, the put-option settlement, fair-value gains, pension remeasurement, and discontinued-operation adjustments when evaluating earnings.