SPX Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 29, 2012; comparisons are with the quarter ended October 1, 2011. The filing identifies the registrant as SPX Corporation. Unless noted, financial amounts are in millions of dollars. Service Solutions is presented as a discontinued operation.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,249.4 | $1,166.0 | $3,674.9 | $3,287.7 |
| Gross profit / margin | $337.1 / 27.0% | $323.6 / 27.8% | $975.8 / 26.6% | $930.8 / 28.3% |
| Operating income | $85.9 | $88.3 | $172.7 | $178.6 |
| Continuing-operations income attributable to SPX common shareholders | $52.5 | $49.2 | $98.8 | $92.5 |
| Diluted EPS, continuing operations | $1.05 | $0.97 | $1.94 | $1.81 |
| Net income attributable to SPX common shareholders, including discontinued operations | $57.8 | $60.7 | $118.7 | $118.1 |
| Diluted EPS, total | $1.16 | $1.20 | $2.34 | $2.31 |
- Revenue increased 7.2% in the quarter and 11.8% year to date, but organic revenue was down 0.5% in Q3 and up 2.9% for nine months. Acquisitions added materially to reported growth; foreign currency reduced it.
- Operating income declined despite higher revenue. Gross margin fell 0.8 percentage points in Q3 and 1.7 points year to date. Management cited Clyde Union acquisition dilution, lower-margin acquired projects and product mix, and fewer high-margin Thermal segment projects.
- Q3 income from continuing operations rose to $54.9 from $50.8, while nine-month income rose to $101.3 from $96.5. The prior-year quarterly result included a substantial tax benefit; tax provision was $12.5 in Q3 2012 versus a benefit of $11.5 in Q3 2011. Nine-month effective tax rates were 25.6% and 4.0%, respectively.
- Segment results: Flow Technology revenue was $648.6 in Q3, up 22.9%, and segment income was $78.1, up 11.4%; Thermal Equipment and Services revenue fell 12.2% to $381.0 and income fell 26.5% to $30.0; Industrial Products and Services revenue rose 7.6% to $219.8 while income declined 3.7% to $26.1.
Cash flow, balance sheet and debt
- Continuing-operations operating cash flow was negative $139.4 for the first nine months, versus positive $106.4 in 2011. Total operating cash flow, including discontinued operations, was negative $153.2. Capital expenditures were $58.5; continuing-operations investing cash outflow was $76.9.
- Management attributed weaker operating cash flow mainly to about $100 of working-capital investment at Clyde Union, timing of project milestone receipts, higher pension contributions and benefit payments ($37.8 versus $9.2), and $32.0 of net income-tax payments versus $13.0 of net refunds in 2011.
- Cash and equivalents were $346.3 at September 29, 2012, down from $551.0 at year-end 2011. Total debt was $2,149.2, compared with $2,001.1; the filing’s balance sheet shows $223.8 of short-term debt, $331.1 of current maturities and $1,594.3 of long-term debt. Cash less total debt was approximately negative $1,802.9.
- Available borrowing capacity was $393.7 under revolving facilities and $0.5 under the trade-receivables arrangement; foreign trade-facility issuance capacity was $401.3. SPX reported compliance with debt covenants. A $325 term-loan repayment was classified as current and was expected to be made from proceeds of the planned Service Solutions sale.
Material changes, outlook and risks
- The pending sale of Service Solutions to Robert Bosch GmbH was agreed for cash proceeds of $1,150, with closing expected in December 2012 and an estimated net gain of approximately $450. The gain had not yet been realized. The business generated $196.9 of Q3 revenue and $667.9 for nine months, and is reported in discontinued operations.
- SPX acquired Seital in March 2012 for $28.8 net of acquired cash. Clyde Union, acquired in December 2011, materially increased Flow Technology revenue and debt-related interest expense; integration and acquired-project margin dilution remained factors. A $20.5 pretax gain was recorded in Q1 2012 on the transfer of China dry-cooling assets to the Shanghai Electric joint venture.
- Management’s 2012 segment outlook: Flow Technology revenue growth of 30%–32% and margins of 10.7%–10.9%; Thermal revenue decline of 11%–12% and margins of 6.4%–6.6%; Industrial Products and Services revenue growth of 7%–8% and margins of 12.6%–12.8%. These were forecasts in the filing, not reported results.
- Backlog at September 29 was $1,434.3 for Flow, $890.2 for Thermal and $480.8 for Industrial Products and Services. Expected conversion during the remainder of 2012 was approximately 45%, 29% and 68%, respectively. Thermal results may fluctuate with large projects; some backlog extended through 2015.
- SPX warned that its Cooling and Clyde Union reporting units could face goodwill impairment if they missed forecasts; their goodwill balances were $353.3 and $350.2, respectively. Other risks include acquisition integration, foreign exchange, raw-material costs, pensions, project timing and international market conditions.
- Contingencies included $543.7 of accrued claims and risk-management matters, partly offset by $428.5 of insurance recovery assets; environmental liabilities at owned or controlled sites; and ongoing tax examinations. Management considered accruals adequate but acknowledged outcomes could differ. Gross unrecognized tax benefits were $85.0.
- Special charges were $7.1 in Q3 and $17.9 year to date, primarily for restructuring, integration and cost-reduction actions. The prior-year nine-month period included a $24.7 impairment charge; 2012 did not.
Investor verification priorities
- Confirm whether and when the Bosch sale closed, final proceeds and gain, and the resulting $325 term-loan repayment and planned capital allocation.
- Track working-capital recovery and operating cash generation after the reported cash outflow, particularly at Clyde Union and on large project milestones.
- Assess whether segment outlook and margins were achieved, focusing on Clyde Union integration and continued weakness in Thermal markets and project mix.
- Review fourth-quarter goodwill impairment testing for the Cooling and Clyde Union reporting units and any changes in forecasts or carrying values.
- Monitor tax-audit resolutions, divestiture working-capital adjustments, environmental and claims exposures, and covenant headroom.