SPX Corporation (filing metadata: SPX Technologies, Inc.) — Q2 2013 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 29, 2013. SPX reported three operating groups: Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $1,216.6 | $1,241.9 | $2,349.2 | $2,392.9 |
| Gross profit / margin | $343.4 / 28.2% | $333.3 / 26.8% | $645.1 / 27.5% | $633.1 / 26.5% |
| Operating income | $69.1 | $69.0 | $93.0 | $87.1 |
| Continuing-operations income | $38.9 | $37.9 | $50.7 | $46.7 |
| Net income attributable to SPX common shareholders | $38.8 | $47.4 | $41.1 | $60.9 |
| Diluted EPS | $0.84 | $0.93 | $0.88 | $1.19 |
- Q2 revenue declined 2.0%; first-half revenue declined 1.8%. Management attributed the declines to organic weakness and a stronger U.S. dollar. First-half organic revenue declined 0.7%.
- Consolidated operating income was nearly flat in Q2 and increased 6.8% in the first half. Higher segment income and gross margins were offset in part by increased special charges and other costs.
- Q2 continuing-operations income improved, while attributable net income and EPS fell, primarily reflecting lower income from discontinued operations compared with the prior year. First-half discontinued operations produced a $6.3 net loss versus $14.3 net income in 2012.
- Segment income in Q2: Flow Technology $67.0 (down from $69.8); Thermal Equipment and Services $26.2 (up from $16.1); Industrial Products and Services and Other $30.8 (up from $29.1). First-half segment income increased in each group.
Cash flow, liquidity and debt
- First-half cash used in operating activities was $300.8, versus $183.9 used in 2012. This included a $250.0 discretionary domestic pension contribution; total pension contributions were approximately $291 million in management’s discussion. The pension payment more than explains the year-over-year increase in operating cash use.
- Capital expenditures were $36.9. Cash used in investing activities was $38.2 from continuing operations; cash used in financing activities was $279.1, including $249.0 of share repurchases and $12.2 of dividends paid.
- Cash and equivalents fell to $352.9 from $984.1 at December 31, 2012. Total debt was $1,692.2, compared with $1,692.0; implied net debt increased to approximately $1,339 million from $708 million.
- Available borrowing capacity at June 29 included $533.6 under revolving credit facilities, $500.4 under the foreign credit instrument facility, and $34.6 under the trade receivables facility. SPX reported compliance with debt covenants.
- Current assets were $2,436.2 and current liabilities $1,559.2. Current maturities of long-term debt increased to $80.9 from $8.7 at year-end.
Material changes, outlook and management commentary
- Flow Technology revenue declined 3.5% in Q2, mainly from lower Clyde Union original-equipment pump sales and nonrecurrence of large Asia-Pacific food and beverage projects. Management cited project execution challenges, partly offset by improved U.S. and European operations and oil-and-gas component sales.
- Thermal Equipment and Services revenue rose 0.5% in Q2, but declined 2.0% in the first half. Management cited weaker power-generation demand and a stronger U.S. dollar; Q2 profit improved with project execution and revenue mix.
- Industrial Products and Services and Other revenue declined 1.4% in Q2 but rose 2.1% in the first half, with first-half growth led by power transformers.
- 2013 segment outlook: Flow Technology revenue growth of 0%–3% and margins of 11.4%–11.7%; Thermal Equipment and Services revenue decline of 7%–9% and margins of 5.6%–5.9%; Industrial Products and Services and Other revenue growth of 9%–14% and margins of 14.3%–14.6%. These are segment forecasts, not consolidated guidance.
- Backlog at June 29 was $1,319.8 for Flow Technology, $700.3 for Thermal Equipment and Services, and $494.1 for Industrial Products and Services and Other. Management expected to convert approximately 67%, 44%, and 62%, respectively, into revenue during the remainder of 2013. Thermal backlog includes longer-term work expected through 2015.
- Special charges were $18.3 in Q2 and $18.7 in the first half, primarily restructuring at Clyde Union and Balcke Dürr. Expected remaining charges on approved actions were less than $2.0. SPX also recorded a $2.0 first-half impairment of Clyde Union trademarks.
- Management warned that Clyde Union’s goodwill fair-value cushion was only about 2% at its 2012 annual test; failure to meet forecasts for project profitability, orders, and cost structure could lead to a material future impairment. Its goodwill was approximately $377 million.
- Other notable items: SPX closed Kayex after a sharp decline in solar-industry demand and sold Dielectric assets for $4.7 million. Final working-capital settlements and retained liabilities from divestitures could change recorded sale gains or losses. Prior-year first-half results included a $20.5 million gain on deconsolidating the China dry-cooling business.
Risks and contingencies
- SPX cited exposure to international operations and currencies, raw-material costs, pricing pressure, pensions, acquisition integration, economic conditions, and project timing and execution. It stated that market-risk exposure had not significantly changed since year-end.
- Recorded contingencies totaled $548.4, including $501.8 for risk-management matters; associated insurance-recovery assets were $432.8. The company considered accruals adequate but acknowledged actual liabilities could exceed them.
- Environmental remediation liabilities cover sites SPX owns or controls and third-party sites; estimates may change with investigations, regulations, and remediation requirements. Management did not expect currently identified matters to have a material effect.
- Gross unrecognized tax benefits were $73.0. SPX said uncertain tax benefits could decrease by approximately $10–$15 million within 12 months; the timing and ultimate resolution of tax examinations and disputes remain uncertain.
Investor verification points
- Confirm the sustainability of segment margin gains and the assumptions underlying 2013 segment forecasts, particularly the expected recovery in Flow Technology and continued weakness in power generation.
- Track operating cash conversion after the $250 million pension contribution, working-capital movements, and the substantial reduction in cash.
- Review Clyde Union order rates, project profitability, and cost actions against the assumptions supporting its goodwill valuation.
- Verify backlog conversion, project execution, and potential volatility from large contracts, especially in Thermal Equipment and Services.
- Monitor tax examinations, divestiture working-capital settlements and retained liabilities, and the adequacy of risk-management and environmental accruals.