SPX Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015; comparative period ended March 29, 2014. The filing registrant is SPX Corporation. Amounts are in millions of dollars, except per-share data.
Business context and results
SPX is a global supplier of engineered products and services, reporting Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other. The quarter had one fewer day than Q1 2014. Management attributed weaker results chiefly to a stronger U.S. dollar and lower organic sales, particularly in power and energy markets.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $946.9 | $1,077.1 |
| Gross profit / margin | $261.9 / 27.7% | $301.5 / 28.0% |
| Operating income | $14.8 | $15.7 |
| Continuing-operations income (loss), attributable to SPX shareholders | $(6.7) | $297.1 |
| Net income (loss), attributable to SPX shareholders | $(7.1); $(0.18) per diluted share | $318.2; $7.06 per diluted share |
| Operating cash flow | $(108.8), including $(0.5) discontinued operations | $(60.6), including $(2.0) discontinued operations |
| Capital expenditures | $14.4 | $11.3 |
Consolidated revenue declined 12.1%: organic decline was 5.7 percentage points and foreign currency impact was 6.4 points. Q1 2014 earnings were unusually elevated by a $491.2 gain on the sale of SPX’s EGS joint-venture interest; that quarter also included a $32.5 debt-extinguishment loss. Q1 2015 included a $0.4 loss from adjustments to previously discontinued businesses.
Segments and material changes
- Flow Technology: Revenue $530.8, down 13.9%; segment income $59.3, down 10.4%. Organic weakness in power and energy pumps, associated largely with lower oil prices, was partly offset by food and beverage growth and improved execution. Margin rose to 11.2% from 10.7%. Backlog was $1,162.4 versus $1,393.2 a year earlier, including a $143.5 currency effect on the decline.
- Thermal Equipment and Services: Revenue $247.2, down 11.6%; segment loss $2.8 versus income of $9.2. Lower power-generation sales and weaker South African project activity contributed; management cited about $8.0 less income from those projects year over year. Backlog was $645.1 versus $673.7.
- Industrial Products and Services and Other: Revenue $168.9, down 6.6%; income $19.0, down 18.5%, primarily reflecting lower sales in several product lines and currency effects.
Consolidated operating income was also affected by corporate expense of $29.2, stock-based compensation of $23.6, pension and postretirement expense of $1.3, and $6.6 of special charges. Special charges were primarily restructuring costs; approximately $3.0 of additional charges remained for approved actions.
Cash, debt, and liquidity
- Cash and equivalents were $363.1 at March 28, 2015, down from $427.6 at year-end 2014. Cash decreased $64.5 during the quarter, including a $38.1 adverse foreign-exchange effect.
- Total debt was $1,486.1, up from $1,369.7 at year-end. This included $600.0 of 6.875% senior notes due August 2017, a $575.0 term loan, $210.0 drawn on the domestic revolving facility, and $55.0 under the trade-receivables arrangement. The weighted-average rate on senior-credit-facility borrowings was approximately 1.7%.
- Reported available capacity was $236.2 under revolving credit facilities and $19.4 under the trade-receivables arrangement; foreign trade facilities had $326.2 of remaining issuance capacity. SPX reported compliance with debt covenants.
- Operating cash use increased from the prior year, which management attributed to lower segment profitability and timing of receipts on large projects. Investing cash use was $14.5; financing provided $96.9, primarily from net borrowings, partly offset by dividends.
Outlook, risks, and unusual items
- SPX continued to expect a tax-free spin-off of Flow Technology and its Hydraulic Technologies business in Q3 2015. Q1 included $5.0 of spin-off professional fees and other costs in SG&A and $5.1 of related tax expense, primarily foreign taxes tied to reorganization actions. No earnings-per-share or full-year financial guidance is provided in the supplied filing text.
- Management said businesses generally tend to be stronger in the second half, but noted seasonality and revenue variability tied to large construction projects. It also cautioned that interim results are not necessarily indicative of full-year results.
- South African large power projects faced delays, difficult business conditions, and disputes with prime contractors and subcontractors over delay, cost, and performance matters. Management said recorded provisions were adequate, while acknowledging possible additional liability.
- Contingency accruals totaled $619.1, including $576.9 for risk-management matters; related insurance-recovery assets were $503.7. The filing says ultimate liabilities could exceed accruals, though management did not expect a material overall effect.
- SPX recorded a $9.5 tax provision despite a $0.1 pretax loss from continuing operations. Management cited $5.1 of spin-off-related taxes and about $14.0 of losses in jurisdictions where no tax benefit was recognized. Gross unrecognized tax benefits were $66.3; approximately $10–$15 could decrease within 12 months, and a similar amount of uncertain tax positions could require payment.
- Foreign-currency exposure was significant: foreign-currency translation reduced other comprehensive income by $131.1. SPX also reported a $5.6 net loss related to non-designated FX derivatives in other income.
Most important facts for investors to verify
- Whether the planned spin-off closed as expected in Q3 2015, and its final costs, tax effects, and separation terms.
- Whether Flow Technology demand, backlog, and South African project execution stabilized, and how much of backlog converts to revenue and cash.
- Whether operating cash generation improved and whether the increase in debt and reliance on revolving and receivables financing persisted.
- Potential exposure from project disputes, self-insured risk-management claims, environmental matters, and uncertain tax positions, including the adequacy and recoverability of accruals and insurance assets.
- How much of reported revenue and earnings changes reflected currency, underlying demand, and unusual prior-year items such as the EGS gain.