Business context and reporting period
SPX Corporation’s Form 10-K covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone fourth-quarter filing. The issuer named in the filing is SPX Corporation (NYSE: SPW), which differs from the requested company name, SPX Technologies, Inc. SPX reported four segments: Flow Technology, Test and Measurement, Thermal Equipment and Services, and Industrial Products and Services. It described its markets as infrastructure, process equipment, and vehicle-service diagnostics, with approximately 55% of 2010 revenue generated outside the United States.
Financial performance and position
Amounts are in millions of dollars except per-share data. Continuing operations unless otherwise stated.
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $4,886.8 | $4,845.6 |
| Gross profit / margin | $1,432.8 / 29.3% | $1,419.6 / 29.3% |
| Operating income / margin | $343.2 / 7.0% | $171.0 / 3.5% |
| Continuing-operations income | $191.6 | $49.0 |
| Net income attributable to SPX shareholders | $205.6 | $31.7 |
| Diluted EPS | $4.08 | $0.64 |
| Continuing-operations operating cash flow | $256.7 | $463.2 |
| Capital expenditures | $75.7 | $92.8 |
| Cash and equivalents at year-end | $455.4 | $522.9 |
| Total debt at year-end | $1,197.6 | $1,279.0 |
Reported revenue rose 0.9%, but organic revenue declined 2.4%; acquisitions contributed 3.8 percentage points and foreign currency reduced growth by 0.5 points. Segment income was $560.3, down from $587.8. Operating income improved substantially, in part because 2009 included $194.8 of goodwill and intangible-asset impairments; 2010 included $36.4 of special charges and $1.7 of impairment charges. The 2010 tax rate was 21.7%, versus 49.0% in 2009, with tax benefits from audit developments and uncertain-tax-position adjustments contributing to the lower rate.
Cash from continuing operations fell by $206.5, principally reflecting working-capital investment, especially receivables, and $100.0 of voluntary domestic pension contributions. Year-end liquidity, including cash and committed credit lines, was reported at $1,010.8. Available revolving borrowing capacity was $503.6 after letters of credit; additional foreign trade facility issuance capacity was $179.8. Cash less total debt was approximately $742.2 of net debt, a simple calculation from reported balances.
Segment results
| Segment | 2010 revenue | 2010 segment income | Change versus 2009 |
|---|---|---|---|
| Flow Technology | $1,662.2 | $215.6 | Revenue +1.7%; income +2.2% |
| Test and Measurement | $924.0 | $76.6 | Revenue +14.0%; income +49.0% |
| Thermal Equipment and Services | $1,602.1 | $193.7 | Revenue +0.4%; income +12.7% |
| Industrial Products and Services | $698.5 | $74.4 | Revenue −13.3%; income −51.6% |
Test and Measurement benefited from recovery in vehicle diagnostic tools. Thermal results reflected improved project execution and mix, while transformer pricing and volume weakened Industrial Products and Services. Flow revenue growth included acquisitions despite organic declines in oil and gas and large food-and-beverage systems.
Material changes versus prior period
- After the 2009 recession-driven downturn, management reported improvement in three of four segments; consolidated organic revenue nevertheless remained lower year over year.
- Operating income rose to $343.2 from $171.0, while 2009 had been burdened by the Service Solutions impairment. SG&A increased 6.8%, including acquisition-related costs, higher pension expense, branding costs, and stock compensation.
- Operating cash flow declined from $463.2 to $256.7, and cash decreased $67.5 during 2010.
- Total debt declined to $1,197.6 from $1,279.0. In August 2010, SPX issued $600.0 of 6.875% notes due 2017 and used proceeds largely to repay its term loan; terminating related interest-rate swaps and financing costs resulted in a $25.6 charge.
- SPX acquired Gerstenberg, Anhydro, and Torque Tension Systems during 2010. It sold Cooling Spain and completed the sale of PSD; discontinued operations contributed $11.2 of net income in 2010, versus a $32.8 loss in 2009.
Outlook, risks, contingencies, and unusual items
Management projected 2011 revenue growth of 10%–15% for Flow Technology, low-to-mid-single-digit growth for Test and Measurement and Industrial Products and Services, and low-single-digit growth for Thermal Equipment and Services. It expected transformer revenue to be flat. These are management projections, not guarantees. Flow backlog was $789.2, Thermal backlog $1,625.1, and Industrial backlog $359.4 at year-end; management expected to convert approximately 84%, 59%, and 81%, respectively, into 2011 revenue. Thermal backlog included long-term projects extending through 2014 and was subject to large contract timing fluctuations. The filing says Test and Measurement backlog was not material.
Management cited encouraging order and backlog trends, while noting that mid-to-late-cycle businesses, including power transformers and large Flow systems, had not shown noticeable improvement. Its 2011 outlook assumed a generally improving economy. It expected capital expenditures of approximately $150.0 in 2011 and pension contributions and direct benefit payments of approximately $48.2. Management also expected pension accounting changes to reduce 2011 pension expense by approximately $20.0.
- Debt and funding: Total debt was $1,197.6; the $600.0 6.875% notes mature in 2017, and the $500.0 7.625% notes mature in 2014. The revolving facilities mature in September 2012. SPX reported compliance with debt covenants at year-end; covenant limits, refinancing needs, interest rates, and lender availability remain relevant risks.
- Pensions and obligations: Pension and postretirement plans were underfunded by $463.5. The filing identifies sensitivity to discount rates, asset returns, and health-cost assumptions. Contractual obligations totaled $3,383.4, including debt, benefit payments, purchases, leases, and interest.
- Contracts and contingencies: Percentage-of-completion accounting covered $1,319.0 of 2010 revenue and depends on estimates of remaining project costs and timing. SPX disclosed litigation, environmental and self-insurance exposures; related accruals were $436.2, including $366.1 for risk-management matters. It reported remediation liabilities at 96 owned or controlled sites and potential responsibility at 28 third-party sites.
- Taxes and unusual items: SPX disclosed gross unrecognized tax benefits of $95.5 and said $15.0–$20.0 of payments relating to uncertain tax positions could reasonably be possible within 12 months. Federal, state, and foreign tax examinations and appeals remained ongoing. The 2010 effective tax rate included material audit and tax-position benefits, partially offset by charges related to Medicare Part D prescription drug benefits and repatriated foreign earnings.
- Other risks: Global exposure, currency movements, raw-material prices, cyclical markets, acquisition integration, goodwill impairment, competition, labor matters, and supplier disruption could affect results. SPX stated that goodwill for its recently acquired SPX Heat Transfer and Anhydro reporting units was close to carrying value.
- Subsequent event: In February 2011, SPX agreed to acquire Teradyne’s Diagnostic Solutions business, with approximately $40.0 of 2010 revenue; completion was expected in the first half of 2011.
The auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2010.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for SPX Corporation, not an entity named SPX Technologies, Inc.
- Separate underlying performance from acquisitions and one-time items: organic revenue fell 2.4%, while reported revenue increased 0.9%; 2009 impairment charges and 2010 tax benefits materially affect comparisons.
- Assess whether 2011 segment growth and backlog-conversion expectations were achieved, especially for Flow and Thermal projects and the weak transformer business.
- Monitor cash conversion and working capital, given the operating-cash-flow decline and increase in receivables, alongside the planned rise in capital spending.
- Review debt maturities, the 2012 credit-facility refinancing horizon, covenant headroom, and liquidity after the 2011 note redemption.
- Test pension funding and expense assumptions, uncertain-tax-position exposures, fixed-price contract estimates, and legal, environmental, and self-insurance accruals.
- Verify the completion and financial impact of the Teradyne acquisition and integration of the 2010 acquisitions.