SPX Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 27, 2014. The filing is by SPX Corporation, the registrant identified in the source document. Unless noted otherwise, amounts are in millions of dollars.
Business context and results
SPX is a global engineered-products and services company. Its reportable segments are Flow Technology and Thermal Equipment and Services; Industrial Products and Services and Other includes businesses such as power transformers, industrial tools, communications systems, and fare collection systems.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,158.1 | $1,145.8 | $3,407.2 | $3,398.2 |
| Gross profit | $342.1 | $336.8 | $980.9 | $960.0 |
| Gross margin | 29.5% | 29.4% | 28.8% | 28.3% |
| Operating income | $103.5 | $96.9 | $203.7 | $197.9 |
| Income from continuing operations | $64.8 | $63.1 | $414.7 | $116.9 |
| Net income attributable to SPX common shareholders | $63.5 | $69.3 | $432.9 | $123.2 |
| Diluted EPS | $1.50 | $1.54 | $9.89 | $2.67 |
Q3 revenue rose 1.1%; nine-month revenue rose 0.3%. Organic revenue grew 1.5% in Q3 and declined 0.1% for the nine-month period. Q3 operating margin was approximately 8.9%, compared with 8.5% a year earlier; nine-month operating margin was approximately 6.0%, compared with 5.8%.
Material changes and segment performance
- Flow Technology: Q3 revenue declined 2.0% to $638.5, while segment income increased 17.3% to $97.5. Nine-month revenue was nearly unchanged at $1,916.6, and income rose 22.9% to $252.0. Management cited restructuring savings, improved execution, and favorable mix.
- Thermal Equipment and Services: Q3 revenue rose 4.5% to $338.8 and income rose 6.9% to $23.2. Nine-month revenue declined 3.5% to $945.7 and income fell 15.5% to $41.9, including $8.3 of second-quarter cost-estimate charges on South African power projects.
- Industrial Products and Services and Other: Q3 revenue increased 6.3% to $180.8, but income fell 23.1% to $19.0; nine-month revenue rose 8.8% to $544.9, while income fell 3.6% to $66.6. Higher transformer shipments supported revenue, but lower-margin sales mix and weaker fare-collection results weighed on profitability.
- Q3 net income attributable to common shareholders declined despite higher continuing-operations income, reflecting discontinued-operations losses and other period-specific effects. Nine-month earnings included a $491.2 gain from selling SPX’s 44.5% interest in EGS; that gain makes the year-over-year increase in reported income unusually large and is not indicative of recurring operating performance.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was a use of $63.0, including a $66.2 use from continuing operations. Continuing-operations cash use improved from $150.1 in the prior-year period. The 2014 period included approximately $167.0 of taxes related to asset and business sales; 2013 included a $250.0 discretionary pension contribution.
- Investing activities provided $646.9, principally from $574.1 of EGS sale proceeds. Financing activities used $729.7, including $530.6 to redeem senior notes, $414.3 of share repurchases, and $44.7 of dividends paid.
- Cash and equivalents were $501.9 at September 27, 2014, down from $691.8 at December 31, 2013. Total debt was $1,453.7, versus $1,675.6 at year-end 2013. Debt included $600.0 of 6.875% senior notes, a $575.0 term loan, $160.0 in revolving borrowings, and $69.0 under a trade-receivables facility.
- SPX reported $285.8 of available revolving-credit capacity and $0.9 available under its trade-receivables facility. It was in compliance with debt covenants at quarter-end. Short-term debt was $264.2, and current maturities of long-term debt were $16.5.
Outlook, commentary, and notable items
- The filing provides no specific consolidated earnings or revenue guidance. Management said businesses generally tend to be stronger in the second half, while noting seasonality and variability tied to weather, aftermarket demand, and large construction projects. Interim results may not indicate full-year results.
- On October 29, 2014, after quarter-end, SPX announced a proposed tax-free spin-off of Flow Technology and its Hydraulic Technologies business. The prospective standalone company was projected to have annual revenue of approximately $3.0 billion. SPX estimated one-time after-tax costs of $60–$80 million and expected completion within 12 months, subject to conditions and approvals; completion, timing, form, and cost were not assured.
- Special charges were $4.1 in Q3 and $18.3 for the first nine months, primarily related to restructuring. Approximately $1.0 of charges remained expected for actions approved by quarter-end.
- Other unusual items included the $32.5 early-extinguishment charge on the 7.625% notes redeemed in February 2014 and pension charges associated with a lump-sum settlement and plan remeasurement. The lump-sum payments settled approximately 38% ($165.2) of the U.S. plan’s projected benefit obligation.
- Risks include cost and profitability uncertainty on South African power projects, foreign-currency exposure, potential changes in divestiture proceeds and retained liabilities, pension obligations, tax examinations, and litigation, environmental, product-liability, and other risk-management claims. Recorded contingency accruals totaled $608.3, including $564.4 for risk-management matters; the company stated ultimate costs could exceed accruals, though it did not expect a material overall impact.
- Gross unrecognized tax benefits were $82.7. SPX said it was reasonably possible that previously unrecognized benefits could decrease by $20–$30 million within 12 months; it also estimated possible tax payments of $30–$40 million related to uncertain tax positions, including interest and penalties.
Most important facts for investors to verify
- Assess ongoing earnings apart from the $491.2 EGS disposal gain, discontinued operations, and debt-redemption and pension charges.
- Track South African project cost estimates, profitability, and backlog conversion; the filing cited $8.3 of added cost estimates and excluded estimated inflation-related price increases from reported backlog.
- Confirm the status, terms, costs, timing, and approvals for the proposed spin-off announced after quarter-end.
- Monitor cash generation, debt maturity and borrowing capacity, and the sustainability of share repurchases and the increased annual dividend of $1.50 per share.
- Review tax audit outcomes, divestiture working-capital adjustments and retained liabilities, and the adequacy of contingency and environmental accruals.