SPX Technologies, Inc. quarterly report, Q1 FY2013

Business context and reporting period

SPX Corporation (the registrant identified in this filing; the request metadata names SPX Technologies) filed this unaudited Form 10-Q for the quarter ended March 30, 2013. SPX is a global engineered-solutions supplier with two reportable segments—Flow Technology and Thermal Equipment and Services—and an “Industrial Products and Services and Other” group. The quarter had two fewer days than the comparable 2012 quarter. Amounts below are in millions, except per-share data.

Financial performance and position

Q1 2013 net income included a $7.4 after-tax loss from discontinued operations, including a $5.2 after-tax loss on disposition. Interest expense was $29.2, interest income $2.1, and equity earnings in joint ventures $9.1. The income-tax benefit was $4.2 on $6.8 of continuing pretax income, an effective rate of (61.8)%; the filing attributes benefits to the Research and Experimentation Credit and foreign tax credits.

Cash used in investing activities was $19.4, including $19.3 of capital expenditures. Financing activities used $142.4, including $131.4 of share repurchases. Total cash declined $229.0 during the quarter. At March 30, current assets were $2,874.1 and current liabilities $1,560.8. Cash less total debt was approximately $(935.6) (net debt of $935.6). The company reported $533.8 of available revolving-credit borrowing capacity and $48.8 under its trade-receivables facility; these figures are subject to facility terms and subsequent amendments.

Changes versus the prior comparable period

• Revenue declined 1.7%, primarily from foreign-exchange effects; organic revenue was broadly flat. Improved gross margin and operating income reflected better execution and a prior-year Clyde Union inventory charge, partly offset by legacy contract cost-estimate charges and weaker thermal volumes.
• Flow Technology revenue fell 2.4%, while segment income rose to $55.0 from $46.4 and margin increased to 9.0% from 7.4%. Thermal Equipment and Services revenue fell 4.7%; income declined to $1.7 from $10.6. Industrial Products and Services and Other revenue rose 5.0% to $215.6, while income was nearly unchanged at $25.7.
• Other income fell to $2.2 from $21.8, mainly because Q1 2012 included a $20.5 gain on formation of the Shanghai Electric joint venture. The 2013 quarter also included a $2.0 Clyde Union trademark impairment.
• Continuing operating cash outflow improved by $130.0 year over year, which management attributed mainly to improved Clyde Union cash generation and working-capital trends. Despite higher continuing income, reported common-shareholder net income fell, principally because discontinued operations moved from $4.5 income after tax to a $7.4 loss.

Outlook, commentary and risks

Management projected 2013 Flow Technology revenue growth of 1%–5% and margins of 11.6%–12.0%; Thermal Equipment and Services revenue decline of 7%–12% and margins of 4.9%–5.4%; and Industrial Products and Services and Other revenue growth of 6%–11% and margins of 13.6%–14.1%. These are segment expectations, not consolidated guidance. Backlog at March 30 was $1,337.2, $717.1 and $483.8, respectively, with management expecting to convert about 80%, 60% and 73% to revenue during the remainder of 2013. Thermal projects may extend through 2015 and can cause period-to-period volatility. Management noted many businesses tend to perform more strongly in the second half.

Management said Clyde Union’s 2012 goodwill valuation had only about 2% headroom over carrying value; failure to achieve forecasts—dependent on improved project profitability, order rates and cost structure—could lead to a material future impairment. Clyde Union goodwill was $371.0. SPX also recorded $4.5 of charges for changes in estimates on certain legacy Clyde Union contracts. In April 2013, after quarter-end, SPX contributed approximately $275.0 to qualified pension plans, including $250.0 discretionary; it expected the contributions to reduce 2013 pension expense by $12.5 and described an approximately $95.0 tax-balance-sheet impact.

Other risks include foreign-exchange exposure, pension funding, environmental remediation, insurance and self-insured claims, tax examinations, and unresolved divestiture working-capital and retained-liability adjustments. Accruals for contingencies were $550.3, including $503.5 for risk-management matters, partly offset by $432.8 of insurance-recovery assets. The filing says contingent outcomes or changes in estimates could differ from current accruals. SPX was in compliance with debt covenants at March 30. On April 17, it amended its trade-receivables facility, reducing capacity from $130.0 to $80.0. The filing provides no consolidated full-year revenue or earnings guidance.

Most important facts for investors to verify

• Whether Clyde Union improves project profitability and order rates enough to meet forecasts and avoid a material goodwill impairment.
• Whether Thermal Equipment and Services’ expected revenue decline and low projected margins are consistent with subsequent orders, backlog conversion and project execution.
• Whether working-capital cash outflows, especially inventory and accrued-payable movements, improve after the seasonally weak first quarter.
• How the $275.0 April pension contribution, including its funding and tax effects, affects liquidity and reported pension expense.
• Whether divestiture settlements, tax examinations, environmental matters or risk-management claims require material additional payments or adjustments.
• How the April reduction in trade-receivables facility capacity affects available liquidity, alongside debt covenants and planned share repurchases.