SPX Corporation (identified in the request as SPX Technologies) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparative periods ended July 2, 2011. Unless noted, amounts are in millions of dollars. The filing reports continuing and discontinued operations separately.
Business context and performance
SPX is a global engineered-products and services manufacturer. Its reportable segments are Flow Technology and Thermal Equipment and Services; Industrial Products and Services is presented as an “All Other” category. Service Solutions was classified as a discontinued operation following an agreement to sell it.
- Q2 revenue: $1,260.3, up 10.9%; organic growth was 3.1%. First-half revenue: $2,425.5, up 14.3%; organic growth was 4.7%. Acquisitions, led by Clyde Union, contributed substantially; currency reduced growth.
- Q2 continuing operations: Operating income was $70.0 versus $47.9; income attributable to SPX common shareholders was $37.7 versus $24.3, or diluted EPS of $0.74 versus $0.47. Including discontinued operations, common-shareholder net income was $47.4 versus $34.3, or diluted EPS of $0.93 versus $0.67.
- First-half continuing operations: Operating income was $86.8 versus $90.3; income attributable to common shareholders was $46.3 versus $43.3, or diluted EPS of $0.90 versus $0.85. Total common-shareholder net income was $60.9 versus $57.4, or diluted EPS of $1.19 versus $1.12.
- Margins: Gross margin was 26.8% in Q2 versus 27.7%, and 26.3% for the first half versus 28.6%. Management attributed the decline mainly to Clyde Union dilution and acquired low-margin projects, fewer high-margin Thermal segment sales, and the absence of a prior-year insurance recovery.
- Segments, first half: Flow Technology revenue rose 37.6% (11.2% organic), but segment income increased only 2.8% and margin declined to 8.9% from 11.9%. Thermal Equipment and Services revenue fell 11.4% and income fell 53.9%; margin was 3.9% versus 7.5%. Industrial Products and Services revenue rose 8.1% and income rose 8.7%.
Cash flow, balance sheet and debt
- First-half cash used in continuing operating activities was $191.6, compared with $20.6 generated in the prior-year period. Management cited about $75.0 of Clyde Union working-capital investment, timing of project milestone receipts, higher pension payments, and a shift from tax refunds to net tax payments.
- Cash used in investing activities was $57.1; capital expenditures were $37.1 and acquisitions were $30.5. Financing activities provided $64.8, including net borrowings, partly offset by $75.0 of share repurchases. Cash declined $223.5 to $327.5 from $551.0 at year-end.
- At June 30, total debt was $2,163.5, versus $2,001.1 at December 31, 2011. It included $237.4 short-term debt and $331.6 current maturities, including $325.0 of term loans expected to be repaid from the Service Solutions sale proceeds. Long-term debt was $1,594.5.
- Available revolving-credit borrowing capacity was $378.8; available borrowing capacity under the trade-receivables arrangement was $13.6. SPX reported compliance with its debt covenants. Cash plus current assets should be considered alongside current liabilities, which rose to $2,344.1 from $1,962.0; reported current assets include $734.4 of discontinued-operation assets.
Outlook, material changes and risks
- Management’s 2012 segment outlook: Flow Technology revenue growth of 30%–35% and margins of 10.5%–11.0%; Thermal revenue decline of 10%–13% and margins of 7.3%–7.6%; Industrial Products and Services revenue growth of 10%–13% and margins of 13.0%–13.3%. Backlog at June 30 was $1,450.0, $958.7 and $483.9, respectively. Management cautioned that Thermal results can fluctuate with large contracts.
- SPX agreed to sell Service Solutions to Robert Bosch GmbH for $1,150.0 cash, expected to close in the second half of 2012, with an estimated net gain of approximately $450.0. The sale proceeds are also expected to fund the $325.0 term-loan repayment.
- A $20.5 pretax gain from forming the Shanghai Electric joint venture benefited first-half other income. The transaction also generated an incremental $6.1 tax charge because allocated goodwill was not tax deductible. Q2 other expense included foreign-currency transaction losses and a $1.0 loss related to a power-transformer facility fire.
- Special charges were $8.4 in Q2 and $10.8 for the first half, principally restructuring and acquisition-integration costs. First-half interest expense increased, partly due to the Clyde Union acquisition financing.
- Risks include weaker Thermal demand, acquisition integration and margin dilution, working-capital and project-receipt timing, foreign-exchange movements, and litigation, environmental and self-insurance exposures. SPX reported $85.5 of gross unrecognized tax benefits and said $5.0–$15.0 of uncertain-tax-position payments may be possible within 12 months; tax examinations and appeals remain unresolved.
Important facts for investors to verify
- Whether the Service Solutions sale closed on the expected timetable, its final proceeds and gain, and the required debt repayment.
- Whether Flow Technology achieves its revenue and margin outlook as Clyde Union integration progresses, and whether Thermal demand and margins stabilize.
- Whether working-capital investment and milestone-receipt timing improve cash conversion after the first-half operating cash outflow.
- How pending tax examinations, retained divestiture liabilities, environmental matters and other claims affect future cash flows.