SPX Corporation — Form 10-Q summary
Reporting period: First quarter ended April 3, 2010; comparable quarter ended March 28, 2009. The 2010 quarter included six additional days. The filing identifies the registrant as SPX Corporation.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $1,085.6 million | $1,159.6 million |
| Gross profit / margin | $313.5 million / 28.9% | $332.0 million / 28.6% |
| Operating income / margin | $51.7 million / 4.8% | $72.9 million / 6.3% |
| Continuing income | $17.7 million | $38.3 million |
| Net income attributable to SPX common shareholders | $22.1 million; diluted EPS $0.44 | $24.4 million; diluted EPS $0.48 |
| Cash used in operating activities | $26.7 million, including $25.1 million from continuing operations | $39.2 million, including $35.0 million from continuing operations |
Consolidated revenue declined 6.4%; organic revenue declined 11.6%, partly offset by currency effects and acquisitions. Continuing-operations pretax income fell 41.9%. Gross margin improved modestly, while operating margin contracted. Q1 2010 net income included a $3.6 million after-tax gain on the sale of PSD; Q1 2009 included a $14.0 million discontinued-operations loss.
Segments and key changes
- Flow Technology: Revenue declined 10.2% to $354.0 million; segment income fell 17.6% to $41.3 million. Weak oil and gas demand and lower large-system sales were partly offset by currency and Gerstenberg.
- Test and Measurement: Revenue grew 4.3% to $204.4 million; segment income rose to $13.4 million from $5.8 million, aided by restructuring savings and stronger aftermarket and locator sales.
- Thermal Equipment and Services: Revenue increased 3.3% to $353.4 million, including SPX Heat Transfer acquisition revenue; segment income rose 47.2% to $31.5 million on favorable project mix and acquisition contribution. Organic revenue declined.
- Industrial Products and Services: Revenue fell 23.6% to $173.8 million and segment income declined 58.9% to $20.1 million, mainly due to lower transformer volumes and pricing, and weaker crystal-growing machine and broadcast equipment demand.
Management attributed continuing pressure to the sluggish global economy, particularly reduced power-transformer volume and pricing and softness in Flow Technology’s oil and gas markets. Cost reductions from 2009 restructuring helped cushion the decline. SG&A increased 2.8%, while special charges declined to $6.8 million from $11.9 million.
Cash, debt and liquidity
- Cash and equivalents were $464.1 million at April 3, 2010, down from $522.9 million at year-end. Net cash change was negative $58.8 million; investing used $44.1 million in continuing operations, including the Gerstenberg acquisition.
- Total debt was $1,313.0 million, versus $1,279.0 million at December 31, 2009. Long-term debt was $1,135.1 million; short-term debt was $101.9 million, with $76.0 million of current maturities.
- SPX reported $380.9 million of available revolving-credit capacity after borrowings and letters of credit, plus $273.1 million of available foreign trade-facility issuance capacity. The trade-receivables facility had $9.5 million available.
- Management said cash, operating cash flows and available facilities were expected to fund working capital, planned capital expenditures, dividends, potential repurchases, operations and debt service for the foreseeable future. SPX was in compliance with credit-facility covenants; the facilities mature in September 2012.
Outlook, risks and unusual items
- Management remained cautious for the full year: early-cycle businesses showed signs of recovery or stabilization, but mid-to-late-cycle businesses were expected to lag. Full-year segment revenue expectations were Flow Technology flat to up 4%; Test and Measurement growth comparable to Q1; Thermal Equipment and Services flat to up 4%; and Industrial Products and Services down 9% to 13% versus 2009.
- Backlog at April 3 was $619.8 million in Flow Technology, $1,785.1 million in Thermal Equipment and Services and $357.8 million in Industrial Products and Services. Management cited possible delays on large thermal projects; it expected to convert about 70%, 45% and 80%, respectively, of those segment backlogs into revenue over the remainder of 2010. Test and Measurement backlog was not material.
- The effective tax rate on continuing operations was 39.8%, compared with 24.3% a year earlier. A $6.2 million charge related to the Medicare Part D prescription-drug tax deduction was partly offset by $5.4 million of discrete tax benefits.
- SPX corrected a $20.0 million overstatement of a 2006 tax benefit by reducing opening retained earnings/equity and increasing income taxes payable. Management concluded no pre-2010 period was materially misstated.
- Unrecognized tax benefits were $121.0 million gross ($104.6 million net); management said these could decrease by approximately $40–$50 million within 12 months and estimated $15–$20 million of uncertain-tax-position payments, including interest and penalties, may be due in that period. Tax examinations and litigation outcomes remain uncertain.
- Contingency accruals totaled $305.2 million, including $231.1 million for risk-management matters. Environmental liabilities relate to 99 owned or controlled sites; SPX stated additional losses could not be reasonably estimated. The filing also describes ordinary-course litigation, insurance limitations and joint-and-several exposure under consortium projects.
- Foreign-currency derivatives produced $12.4 million of losses in other expense in Q1 2010; some embedded derivatives were reclassified after forecast transactions were no longer considered probable. SPX also disclosed pension-cost sensitivity, competitive and pricing pressures, raw-material, acquisition-integration and broader economic risks.
Most important facts for investors to verify
- Whether the projected stabilization and segment revenue outlook materialized, especially in power transformers, oil and gas, and large thermal projects.
- Backlog quality, conversion timing and exposure to construction delays, cancellations or project cost overruns.
- Debt, covenant headroom and available borrowing capacity, including the maturity profile and the limits of the trade-receivables facility.
- Resolution and cash consequences of tax audits, uncertain tax positions, divestiture adjustments, environmental matters and other contingencies.
- Whether restructuring savings, pension expense, derivative losses and acquisition contributions continue to affect margins and cash generation.