Business context and reporting period
SPX Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 28, 2014; amounts are in millions except per-share data. The company supplies engineered products and services globally through Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other. Results exclude businesses presented as discontinued operations.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,179.7 | $1,161.9 | $2,249.1 | $2,252.4 |
| Gross profit / margin | $340.1 / 28.8% | $330.1 / 28.4% | $638.8 / 28.4% | $623.2 / 27.7% |
| Operating income | $85.1 | $71.0 | $100.2 | $101.0 |
| Continuing income attributable to SPX common shareholders | $54.7 | $37.2 | $351.5 | $50.7 |
| Diluted EPS | $1.17 | $0.98 | $8.30 | $1.15 |
| Cash from (used in) continuing operations | Not separately presented quarterly | Operating: $(99.2); investing: $556.9; financing: $(761.8) | Operating: $(298.9); investing: $(35.8); financing: $(279.1) |
Second-quarter operating margin was approximately 7.2%, versus 6.1% a year earlier. First-half net income attributable to SPX common shareholders was $369.4, versus $53.9; the increase chiefly reflects the $491.2 pre-tax gain on selling the EGS joint-venture interest, not a comparable increase in underlying operations. The first half also included a $32.5 debt-extinguishment charge.
At June 28, cash and equivalents were $466.2, total debt was $1,265.2, and current assets and current liabilities were $2,504.6 and $1,657.4, respectively. Cash was down from $691.8 at year-end 2013. The company reported $409.5 of available revolving-credit capacity and $80.0 available under its trade-receivables facility; it was in compliance with debt covenants.
Material changes versus prior periods
- Revenue was up 1.5% in Q2, reflecting 0.1% organic growth and 1.4% currency benefit; first-half revenue was down 0.1%, as a 0.9% organic decline was mostly offset by currency.
- Flow Technology Q2 revenue rose 1.2% and segment income rose 31.8% to $88.3; restructuring savings and stronger valve and aftermarket sales supported margins.
- Thermal Equipment and Services revenue fell 6.6% and segment income fell 63.7% to $9.5. South African power-project revenue declined as expected, and project cost estimates increased.
- Industrial Products and Services and Other revenue increased 20.7% in Q2, mainly from power transformer shipments; segment margins eased to 13.2% from 13.8% because transformers carry lower margins.
- First-half operating cash use improved from $298.9 to $99.2, mainly because the prior-year period included a $250.0 discretionary pension contribution. The 2014 period included approximately $114.0 of tax payments associated with divestiture gains.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said businesses generally tend to be stronger in the second half; seasonality, project timing, and weather-sensitive product demand can cause period-to-period volatility.
- Management cited $8.3 of Q2 charges for increased cost estimates, primarily due to subcontractor challenges on large South African power projects. Thermal segment backlog was $690.1; approximately 55% was expected to be recognized during the remainder of 2014, with some extending beyond 2014.
- EGS was sold for $574.1 cash proceeds; SPX redeemed its 7.625% notes for $530.6. First-half repurchases totaled $274.4, and the annual dividend was increased to $1.50 per share.
- Other divestitures included Thermal Product Solutions (TPS) and Precision Components. Their reported results include a $21.5 after-tax gain on TPS and a $7.3 after-tax loss on Precision Components. Some final sale prices and retained-liability estimates remain subject to adjustment.
- Risk exposures include South African project execution and cost overruns, uncertain tax positions, pension costs, foreign exchange, environmental and risk-management claims, and possible changes in divestiture proceeds or liabilities. Recorded contingency accruals totaled $609.4; management judged them adequate but noted ultimate liabilities could exceed accruals.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of first-half earnings and cash generation is attributable to the EGS gain and other divestitures, versus recurring operating performance.
- Whether South African project estimates stabilize and whether Thermal segment margins and backlog convert as expected.
- Cash conversion, working-capital needs, and liquidity after debt redemption, share repurchases, dividends, and tax payments.
- Potential outcomes and timing for uncertain tax matters; the filing says $50–$60 may be payable within 12 months, including estimated interest and penalties.
- Any changes to final divestiture proceeds, retained liabilities, or the company’s disclosed contingency exposures.