SPX Corporation (filing issuer) — Q1 2011 Form 10-Q
Reporting period: Three months ended April 2, 2011; comparable period ended April 3, 2010. The filing identifies the registrant as SPX Corporation. Amounts below are in millions of dollars, except per-share data and percentages. The 2011 quarter had one fewer day than the comparable quarter.
Financial results and position
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $1,199.0 | $1,084.6 | Up 10.5%; organic growth was 5.8%, with foreign currency contributing 2.1% and acquisitions 2.6%. |
| Gross profit / margin | $349.3 / 29.1% | $313.2 / 28.9% | Margin improved 0.2 percentage points. |
| Operating income | $51.4 | $51.9 | Down 1.0%; operating margin was approximately 4.3% versus 4.8%. |
| Continuing-operations income | $26.7 | $17.9 | Up 49.2%; attributable to SPX common shareholders: $25.0 versus $18.7. |
| Net income attributable to SPX common shareholders | $23.1 | $22.1 | Basic EPS $0.46 versus $0.45; diluted EPS $0.45 versus $0.44. |
| Cash from operating activities | $(36.2) | $(26.7) | Continuing operations used $35.4 versus $25.2. |
| Cash from investing activities | $(64.7) | $(37.4) | Included $46.5 of acquisitions and $16.4 of capital expenditures. |
Cash and equivalents were $372.0 at quarter-end, down from $455.4 at December 31, 2010. Total debt was $1,221.9, compared with $1,197.6 at year-end; net debt was approximately $849.9. Current liabilities were $1,703.3 and current assets $2,439.0. SPX reported $508.7 of available revolving-credit capacity after letters of credit, $181.3 of foreign-trade issuance capacity, and $0.9 available under its receivables financing arrangement. It was in compliance with its debt covenants.
Material changes and segment performance
- Flow Technology: Revenue rose 28.8% to $455.9, including 18.1% organic growth; segment income rose 36.6% to $56.4. Growth came from power and energy, oil and gas, general industrial, and food and beverage markets.
- Test and Measurement: Revenue rose 21.8% to $248.9, and segment income rose 46.3% to $19.6, mainly on higher automotive OEM demand.
- Thermal Equipment and Services: Revenue fell 7.7% to $325.3 and segment income fell 32.8% to $21.3, primarily reflecting lower dry-cooling sales in China and unfavorable project mix.
- Industrial Products and Services: Revenue fell 2.8% to $168.9 and segment income fell 14.4% to $17.2, reflecting transformer shipment timing and lower pricing. A $6.3 insurance recovery related to a product-liability matter partly offset the decline.
Consolidated segment income increased 7.5% to $114.5, but higher corporate and stock-based compensation costs offset segment gains. SG&A rose 15.8% to $287.6; stock-based compensation expense rose to $19.7 from $11.9. Pension and postretirement expense declined, including an approximately $5.0 benefit from a change in amortization for a domestic pension plan. The effective tax rate was 33.6%, compared with 39.5% in 2010; the prior-year rate reflected a Medicare Part D-related charge, partly offset by discrete tax benefits.
Outlook, risks and unusual items
- Management projected 2011 revenue growth of 15%–20% and segment margins of 13.2%–13.7% for Flow Technology; growth of 13%–18% and margins of 8.7%–9.2% for Test and Measurement; growth of 3%–8% and margins of 10.1%–10.6% for Thermal Equipment and Services; and growth of 4%–9% and margins of 8.8%–9.3% for Industrial Products and Services.
- Management expected Flow Technology and Test and Measurement growth trends to continue, with more favorable revenue trends in Thermal Equipment and Services and Industrial Products and Services. It attributed first-quarter negative operating cash flow primarily to working-capital investment ahead of anticipated volume increases. The filing notes that businesses tend to be stronger in the second half and that large thermal contracts can cause period-to-period volatility.
- Q1 acquisitions included Teradyne’s Diagnostic Solutions business for $39.1 and B.W. Murdoch for $7.4. SPX also redeemed $28.2 of 7.50% senior notes. Acquisitions, capital investment and working capital contributed to cash outflows.
- Discontinued operations produced a $1.9 net loss, including $1.8 of adjustments to gains or losses on prior divestitures. The filing warns that final sale-price and retained-liability adjustments could materially change divestiture results.
- SPX reported $431.9 of accruals for litigation, environmental and risk-management matters, including $367.3 for risk management, alongside $319.9 of related insurance-recovery assets. It cited remediation liabilities at 93 owned or controlled sites and potential responsibility at 27 offsite sites; management considered recorded amounts adequate but noted outcomes remain uncertain.
- Gross unrecognized tax benefits were $98.0. SPX said these could decrease by about $30–$35 over the next 12 months and that it might pay approximately $20–$30 for uncertain tax positions, including estimated interest and penalties. Federal and foreign tax examinations and appeals remain ongoing.
- Management said Japan-related events were not expected to materially affect 2011 results; Japan represented about 1% of annual revenue, and nuclear power orders were approximately $185.0 in backlog. The filing also identifies foreign-exchange, commodity, pricing, pension, acquisition-integration, legal and regulatory risks.
Most important facts for investors to verify
- Whether the segment revenue and margin outlook is achieved, especially the recovery projected for Thermal Equipment and Services and Industrial Products and Services.
- Whether working-capital needs and seasonal cash use reverse as expected; Q1 continuing-operations operating cash flow was negative $35.4.
- Debt maturities and liquidity: $21.3 of 6.25% notes were due June 15, 2011, and the receivables facility had only $0.9 available at quarter-end.
- The durability of reported profit improvement, including the $6.3 insurance recovery and approximately $5.0 pension-expense reduction, as well as higher stock compensation and corporate costs.
- Potential changes in divestiture proceeds or retained liabilities, tax exposures, litigation and environmental accruals, and insurance recoverability.