SPX Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparative period ended March 30, 2013. Unaudited. Amounts are in U.S. dollars, millions, except per-share data. SPX supplies engineered products and services globally through Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other.
Financial performance and liquidity
- Revenue: $1,069.4, down 1.9% year over year; organic revenue declined 2.0%. Gross profit rose 1.9% to $298.7, and gross margin improved to 27.9% from 26.9%.
- Operating results: Operating income was $15.1 versus $30.0, a 1.4% operating margin versus 2.8%. Segment income increased 23% to $97.8, while corporate costs, pension expense, stock compensation and special charges weighed on consolidated operating income.
- Net income: $317.8; income attributable to SPX common shareholders was $318.2, or $7.19 basic and $7.06 diluted per share. Continuing-operations income was $296.4. These results were dominated by the $491.2 pre-tax gain on the EGS joint-venture sale; the quarter also included a $32.5 debt-extinguishment loss. Discontinued operations contributed $21.4 after tax.
- Cash flow: Continuing operating cash use was $59.3 versus $51.3 used in the prior-year quarter. Investing activities generated $564.3, mainly from EGS sale proceeds, and financing activities used $742.4, including debt redemption and share repurchases. Cash fell to $486.0 from $691.8 at year-end 2013.
- Balance sheet and liquidity: Total debt was $1,126.6, versus $1,675.6 at year-end; cash was $486.0. Current assets were $2,599.6 and current liabilities $1,733.1. Available capacity was $446.4 under revolving credit facilities and $55.2 under the receivables facility; SPX reported compliance with debt covenants.
- Capital returns: SPX repurchased $134.3 of shares during the quarter and raised its annual dividend to $1.50 per share from $1.00.
Material changes and management commentary
- Flow Technology revenue increased 0.6% to $616.7; segment income rose to $66.2 from $55.0, reflecting restructuring savings and stronger aftermarket/service sales.
- Thermal Equipment and Services revenue declined 8.4% to $279.6, primarily from expected lower revenue on large South African power projects and currency weakness. Segment income improved to $9.2 from $1.7 due to restructuring and improved execution.
- Industrial Products and Services and Other revenue was nearly flat at $173.1; severe winter weather delayed shipments of four large transformers, representing about $10.0 of revenue.
- Management attributed improved gross margin to completed restructuring and higher-margin aftermarket/service revenue. It noted that businesses generally tend to be stronger in the second half, with seasonal demand and large-project timing capable of causing quarterly variability.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management anticipated completing divestitures of three businesses remaining in discontinued operations during 2014.
- SPX sold its 44.5% EGS interest for $574.1 cash on January 7, 2014, recognizing a $491.2 gain. It redeemed $500.0 principal of 7.625% notes due December 2014 for $530.6, recording the $32.5 extinguishment charge. The company also sold Thermal Product Solutions for $38.5 cash and a $4.0 note, recognizing a $21.5 after-tax gain.
- A U.S. pension lump-sum offer settled approximately 38% ($165.2) of plan obligations and contributed settlement and remeasurement charges. SPX recorded $9.7 of special charges, primarily restructuring-related; approximately $2.0 of additional charges remained under actions approved at quarter-end.
- Potential exposures include litigation, environmental remediation, self-insured risk-management claims, consortium joint-and-several obligations, and uncertain tax positions. Recorded contingency accruals were $611.4, including $566.6 for risk-management matters; related insurance recovery assets were $496.7. SPX stated these matters were not expected to materially affect results, while acknowledging ultimate liabilities could exceed accruals.
- Gross unrecognized tax benefits were $119.3. The company said $60–$70 of payments relating to uncertain tax positions, including estimated interest and penalties, could be due within 12 months; resolution of examinations could adversely affect results or cash flow.
- SPX noted that divestiture proceeds and gains may be adjusted for working-capital settlements or retained liabilities. It also cited exposure to economic conditions, raw-material costs, pricing pressure, pension funding, acquisition integration and legal/regulatory developments.
Investor verification priorities
- Separate recurring operating performance from the EGS disposal gain, discontinued-operation gains and debt-redemption charge; assess the sustainability of segment margin improvements.
- Review cash conversion, working-capital movements, and the effect of the EGS proceeds, debt redemption, headquarters purchase, repurchases and dividends on liquidity.
- Confirm the remaining debt maturities, borrowing availability and covenant headroom, including letters of credit and receivables-facility capacity.
- Track South African project execution, backlog conversion and inflation-related price adjustments, as well as the delayed transformer shipments.
- Monitor remaining divestitures and possible post-sale working-capital, tax or retained-liability adjustments; assess pension obligations and tax audit outcomes.