SPX Corporation (SPX Technologies) — Form 10-Q Summary
Reporting period: Third quarter ended October 1, 2011; comparisons are with the quarter ended October 2, 2010. Unless otherwise noted, amounts are in millions of U.S. dollars. The filing was made by SPX Corporation.
Business context and results
SPX is a global industrial company operating in Flow Technology, Test and Measurement, Thermal Equipment and Services, and Industrial Products and Services. Third-quarter revenue growth was led by Flow Technology and Test and Measurement; weaker results in the other two segments reflected lower volumes, pricing pressure, and unfavorable project mix.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,387.2 | $1,288.4 | $3,970.2 | $3,561.8 |
| Gross profit / margin | $391.1 / 28.2% | $378.0 / 29.3% | $1,123.7 / 28.3% | $1,044.2 / 29.3% |
| Operating income | $107.1 | $108.6 | $217.4 | $248.2 |
| Income from continuing operations | $61.9 | $39.7 | $120.9 | $127.2 |
| Net income attributable to SPX shareholders | $60.7 | $39.4 | $118.1 | $140.3 |
| Diluted EPS attributable to SPX shareholders | $1.20 | $0.78 | $2.31 | $2.79 |
| Cash flow from continuing operations | Not separately stated | Not separately stated | $124.0 | $43.7 |
Quarterly revenue increased 7.7%, including organic growth of 4.1%; nine-month revenue increased 11.5%, including organic growth of 5.6%. Nine-month consolidated operating margin was approximately 5.5%, versus 7.0% in 2010. Quarterly operating income was slightly lower despite higher sales. Quarterly continuing-operations income benefited from a $27.8 tax benefit, partly offset by $6.9 of tax expense related to planned foreign earnings repatriation. Nine-month continuing-operations income declined 5.0%.
Segment performance
| Segment | Q3 revenue / segment income | Q3 year-over-year highlights |
|---|---|---|
| Flow Technology | $527.9 / $70.1 | Revenue +20.4%; organic growth 16.3%. Income +20.4%; margin held at 13.3%. |
| Test and Measurement | $255.6 / $29.4 | Revenue +12.3%; organic growth 4.8%. Income +65.2%; margin rose to 11.5% from 7.8%. |
| Thermal Equipment and Services | $433.9 / $40.8 | Revenue -1.1%; segment income -32.1%; margin fell to 9.4% from 13.7%, with unfavorable project mix and weaker China and SPX Heat Transfer performance. |
| Industrial Products and Services | $169.8 / $16.1 | Revenue -7.5%; segment income -25.5%; lower power-transformer volume and pricing, plus facility expansion start-up costs, weighed on results. |
Cash, debt, and liquidity
- Cash and equivalents were $396.2 at October 1, 2011, down from $455.4 at year-end 2010. Current assets were $2,561.2 and current liabilities $1,792.4.
- Total debt was $1,201.6, compared with $1,197.6 at year-end 2010; cash less total debt was approximately $805.4 net debt. Debt included $600.0 of 6.875% senior notes, $500.0 of 7.625% senior notes, and $46.0 under the trade-receivables facility. Short-term debt was $85.5 and long-term debt was $1,114.8.
- Nine-month operating cash flow was $121.2 including discontinued operations, versus $40.5 in 2010. Continuing-operations cash flow improved to $124.0, principally from lower working-capital investment. Investing cash outflow was $133.5 and financing cash outflow was $54.4; capital expenditures were $77.9.
- At October 1, the company reported $516.2 of available revolving borrowing capacity after letters of credit and $545.5 of foreign-trade issuance capacity. Only $0.8 remained available under the $130.0 trade-receivables program after $46.0 of borrowings.
- New senior credit facilities entered in June provided $1.8 billion of committed financing, maturing June 30, 2016. The company reported compliance with its debt covenants for the quarter. The fair value of debt was $1,246.4 versus carrying value of $1,201.6.
Material changes, unusual items, and outlook
- Foreign-exchange loss: Other expense was $34.6 in Q3 versus $6.8 in the prior-year quarter. The 2011 amount included a $30.6 non-cash loss on currency forwards hedging the proposed Clyde Union purchase price in British pounds. The dollar strengthened about 5% against the pound during the period. Nine-month FX-forward and embedded-derivative losses were also a significant factor in other expense.
- Goodwill and intangible impairment: SPX recorded a $24.7 charge in Q2 2011 for SPX Heat Transfer, comprising $17.2 of goodwill and $7.5 of indefinite-lived intangible assets, following weaker performance and a lower estimated reporting-unit fair value.
- Tax and pension items: The Q3 tax benefit included reversal of a valuation allowance on foreign tax credit carryforwards; the company also cited a $2.5 Canadian tax benefit and $4.5 of power-transformer expansion tax credits in the nine-month period. A change in pension amortization methodology reduced pension expense by about $5.0 in Q3 and $15.0 for nine months.
- Acquisitions and financing after quarter-end: SPX agreed to acquire Clyde Union for an initial £565.0 million plus contingent earn-outs capped at £185.0 million, subject to closing conditions and targeted to close by December 22, 2011. On October 5, it arranged $800.0 of delayed-draw term loans intended to help fund the transaction; the loans must be repaid if the acquisition is not completed. SPX also completed the acquisition of e&e Verfahrenstechnik on October 31 for approximately €12.3 million, with a possible €3.5 million earn-out.
- 2011 segment outlook: Management projected full-year revenue growth of 21%–22% for Flow Technology, 16%–17% for Test and Measurement, 2%–3% for Thermal Equipment and Services, and 4%–5% for Industrial Products and Services. Projected segment margins were 13.0%–13.2%, 10.1%–10.3%, 9.5%–9.7%, and 8.5%–8.7%, respectively. Management expected stronger trends in Q4 for Thermal Equipment and Services and Industrial Products and Services, while Flow Technology and Test and Measurement growth was expected to continue at roughly nine-month rates.
- Backlog and market exposure: October 1 backlog was $899.4 for Flow Technology, $1,191.8 for Thermal Equipment and Services, and $490.4 for Industrial Products and Services; Test and Measurement backlog was not material. Management noted that large thermal projects can cause period-to-period volatility. Nuclear power orders in backlog totaled about $118.5, expected to be delivered in 2011–2012; future nuclear orders could face funding and approval challenges.
- Contingencies and risks: SPX reported ordinary-course litigation, environmental and self-insurance exposures, and liabilities at 91 owned or controlled remediation sites. It stated that accruals were adequate and expected no material impact, while noting estimates and recoveries may change. Gross unrecognized tax benefits were $84.6; SPX said benefits might decrease by $30–$40 million within 12 months and estimated possible tax-position payments of $35–$45 million, including interest and penalties. Foreign-exchange movements, raw-material costs, pricing, pension funding, acquisition integration, and economic conditions were identified as risks.
Most important facts for investors to verify
- Whether the Clyde Union transaction closed on the expected terms and how the earn-outs and $800.0 million term-loan financing affect debt, interest costs, and leverage.
- Whether the Q4 and full-year segment revenue and margin outlook was achieved, particularly the expected recovery in Thermal Equipment and Services and Industrial Products and Services.
- How much of the Q3 tax benefit is recurring or cash-realizable, and the timing and outcome of tax examinations, uncertain tax positions, and repatriation costs.
- Whether the Clyde Union currency hedge loss reverses or is offset by the purchase-price translation at closing, and the resulting effect on reported earnings and cash flows.
- Whether SPX Heat Transfer stabilizes after the impairment, and whether working capital, capital spending, and cash conversion remain consistent with the improved nine-month operating cash flow.
- Debt-covenant headroom and available liquidity after acquisition funding, including the effect of outstanding letters of credit and the nearly utilized trade-receivables facility.