SPX Corporation (filed as SPX Corporation; now identified in request as SPX Technologies) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013; comparisons are to periods ended September 29, 2012. Unless noted otherwise, amounts are in millions of dollars. Interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,145.8 | $1,176.7 | $3,398.2 | $3,465.0 |
| Gross profit / margin | $335.0 / 29.2% | $317.8 / 27.0% | $954.6 / 28.1% | $922.6 / 26.6% |
| Operating income | $86.5 | $76.6 | $166.6 | $146.7 |
| Continuing-operations income | $57.0 | $48.5 | $98.6 | $83.2 |
| Net income attributable to SPX common shareholders | $62.9 | $57.8 | $104.0 | $118.7 |
| Diluted EPS | $1.40 | $1.16 | $2.25 | $2.34 |
- Revenue declined 2.6% in Q3 and 1.9% year to date. Management attributed the declines principally to lower organic revenue and a stronger U.S. dollar. Operating income rose despite lower revenue; segment income increased to $129.5 in Q3 from $124.2 and to $323.8 year to date from $306.0.
- Q3 continuing-operations pretax income was $69.3; the $12.3 tax provision represented a 17.7% effective rate. The nine-month rate was 14.9%, versus 24.5% in 2012, aided by tax benefits including valuation-allowance reductions and audit/statute settlements. These benefits increased reported earnings.
- Cash and equivalents were $490.7 at September 28, down from $984.1 at year-end 2012. Nine-month operating cash flow was a use of $157.5, including $150.1 for continuing operations; investing used $31.3 and financing used $296.8. Operating cash flow included a $250.0 discretionary pension contribution, which management said more than offset improved underlying cash generation.
- Total debt was $1,686.8, comprising $29.7 short-term debt, $98.4 current maturities and $1,558.7 long-term debt. Debt was $1,692.0 at year-end 2012. The company reported $538.7 of available revolving-credit capacity after letters of credit, $524.8 of foreign credit-instrument issuance capacity, and $42.6 available under its receivables facility. It was in compliance with debt covenants.
Segments and changes versus prior periods
- Flow Technology: Q3 revenue increased 0.5% to $651.6 and segment income rose 6.4% to $83.1; nine-month revenue fell 1.8%, while income rose 5.6%. Management cited oil-and-gas growth, improved execution and restructuring savings, partly offset by weaker food-and-beverage projects and some project execution challenges.
- Thermal Equipment and Services: Q3 revenue fell 13.7% to $324.1 and income fell 25.4% to $21.7; nine-month revenue declined 6.2% and income 11.1%. The decline reflected the winding down of South African power projects and weaker power-generation and retrofit activity.
- Industrial Products and Services and Other: Q3 revenue rose 11.5% to $170.1 and income rose 45.3% to $24.7; nine-month revenue increased 7.3% and income 23.6%, supported by transformer and fare-collection-system sales and improved execution.
- Discontinued operations contributed $5.1 after tax in Q3 and $7.9 year to date, versus $11.7 and $38.0 in 2012. In Q3, SPX committed to divest certain non-strategic businesses and expected to complete sales within 12 months. Related discontinued-operation revenue was $50.7 in Q3 and $154.2 year to date.
- Special charges were $6.9 in Q3 and $25.1 year to date, mainly restructuring costs; approximately $4.0 of additional charges remained expected for approved actions. A $2.0 intangible impairment was recorded in the first quarter for Clyde Union trademarks.
Outlook, risks and unusual items
- Management’s 2013 segment outlook: Flow Technology revenue down 1% to flat, with margins of 11.4%–11.6%; Thermal revenue down 9%–11%, with margins of 6.0%–6.2%; Industrial Products and Services and Other revenue up 11%–12%, with margins of 14.8%–15.0%. These are management estimates, not guarantees.
- Backlog at September 28: Flow Technology $1,392.0, Thermal $672.1 and Industrial Products and Services and Other $327.7. Expected Q4 conversion was approximately 41%, 30% and 53%, respectively; Thermal projects can extend through 2015 and may cause period-to-period volatility.
- Clyde Union goodwill was approximately $387.0; its estimated fair value exceeded carrying value by only about 2% in the 2012 annual test. Management considered forecasts achievable, but recovery depends on orders and sustained profitability improvement, leaving impairment sensitivity.
- Contingencies include litigation, environmental and self-insured risk-management claims. Recorded accruals totaled $548.8, including $502.5 for risk-management matters, with $432.8 of related insurance-recovery assets. The filing says ultimate liabilities could exceed accruals, though management did not expect a material impact.
- Gross unrecognized tax benefits were $72.9; management considered a $10–$15 decrease reasonably possible within 12 months. The IRS was auditing 2010–2011 returns, and foreign and state examinations were also ongoing. Divestiture working-capital settlements and retained liabilities could alter sale gains or losses.
- SPX repurchased $249.0 of shares in the first nine months and paid $34.3 in dividends. Other notable factors include foreign-exchange exposure, restructuring, pension funding, project execution, end-market demand and seasonality. The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the entity and share-class context: the filing registrant is SPX Corporation, and its share count and repurchases materially affected per-share comparisons.
- Assess cash generation excluding the unusually large $250.0 discretionary pension contribution, while accounting for other working-capital and pension requirements.
- Track Thermal segment recovery, backlog conversion, project execution and the stated 2013 revenue and margin outlook.
- Evaluate tax-benefit sustainability and potential tax payments or examination outcomes; reported nine-month earnings benefited from discrete tax items.
- Monitor Clyde Union goodwill assumptions, divestiture proceeds and settlement adjustments, and whether contingent liabilities or insurance recoveries change.