SPX Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2015; comparisons are to the periods ended June 28, 2014. Amounts are in millions except per-share data.
Business context
SPX was a global supplier of engineered products and services, operating through Flow Technology, Thermal Equipment and Services, and Industrial Products and Services and Other. The company planned a tax-free spin-off of Flow Technology, Hydraulic Technologies, and certain corporate subsidiaries, targeted for completion by the end of Q3 2015.
Financial performance
- Revenue: Q2 revenue was $1,074.4, down 10.1%; first-half revenue was $2,021.3, down 11.0%. Management attributed the declines to currency translation and lower organic sales, particularly in oil-and-gas-related Flow Technology and power-generation markets. Currency accounted for 6.5 percentage points of the first-half decline; organic decline accounted for 4.6 points.
- Profit and margins: Q2 operating income was $64.1 versus $90.0; continuing-operations income was $36.9 versus $56.7. Net income attributable to SPX shareholders was $38.9 versus $51.2, or diluted EPS of $0.95 versus $1.17. First-half operating income was $78.9 versus $105.7; continuing-operations income was $27.3 versus $353.4; attributable net income was $31.8 versus $369.4, or diluted EPS of $0.78 versus $8.30. First-half 2014 included a $491.2 gain on the EGS joint-venture sale, making the headline comparison unusually favorable to 2014. Gross margin was 28.5% in Q2 versus 29.1%, and 28.1% for the first half versus 28.5%.
- Segments: Q2 Flow Technology revenue/income was $578.0/$75.9, versus $661.4/$88.3; Thermal Equipment and Services was $298.0/$6.1, versus $327.3/$9.5; Industrial Products and Services and Other was $198.4/$24.1, versus $206.4/$30.1. Thermal segment income and margin were particularly weak in the first half: income of $3.3 versus $18.7 and margin of 0.6% versus 3.1%.
- Cash flow: First-half operating cash use was $99.6, including $97.7 from continuing operations, compared with $102.0 of total operating cash use in 2014. Investing cash use was $25.9 versus $657.4 provided in 2014, which included EGS sale proceeds. Financing provided $69.6 versus $761.8 used in 2014. Cash declined by $98.7 to $328.9.
- Liquidity and debt: At June 27, cash was $328.9; current assets were $2,253.2 and current liabilities $1,687.5. Total debt was $1,474.9, up from $1,369.7 at year-end 2014; short-term debt was $294.1 and long-term debt $1,143.3. SPX reported $205.9 of available revolving-credit capacity and $50.2 under its trade-receivables facility, and stated it was in compliance with debt covenants. Outstanding senior notes of $600 mature in August 2017; the term loan balance was $567.8, with remaining repayment due in December 2018.
Changes, outlook, and notable items
- Management expected 2015 revenue and operating-profit margin for Flow Technology’s power-and-energy business to decline year over year by at least 20% and 300 basis points, respectively, amid lower oil prices and reduced customer capital spending. SPX said its businesses generally tend to be stronger in the second half, but results depend on project timing and seasonal demand.
- The planned spin-off incurred $9.0 of Q2 and $14.0 of first-half professional fees and other costs, included in SG&A. Management expected the Q2 2015 dividend to be its final cash dividend for the foreseeable future in anticipation of the spin-off.
- Restructuring charges were $6.1 in Q2 and $12.7 in the first half; approximately $4.0 of additional charges remained under approved actions. Actions included cost reductions responding to weaker oil-and-gas demand, reduced European nuclear-related demand, and lower demand in obstruction lighting.
- Operating cash use reflected lower segment profitability, incentive-compensation payments, timing of large-project receipts, and spin-off costs. Cash use in first-half 2014 included approximately $114.0 of taxes associated with asset-sale gains.
- Risks include volatile end markets, foreign-exchange movements, project delays and disputes, and restructuring execution. SPX described disputes concerning delayed South African power projects. Recorded contingency accruals totaled $617.1, including $572.3 for risk-management matters; management considered accruals adequate but noted ultimate liabilities could exceed them. Gross unrecognized tax benefits were $67.3; a $10.0–$15.0 decrease was considered reasonably possible within 12 months.
- Q2 special items included currency-contract gains and losses, asset-sale gains, and tax benefits related partly to spin-off reorganization. First-half 2015 effective tax rate was 42.2%, affected by spin-off taxes and losses for which no tax benefit was recognized. No impairment charges were recorded in the first half.
Most important facts to verify
- Whether the spin-off closed on the expected timetable and what businesses, liabilities, and cash flows were allocated to each company.
- Whether the forecast decline of at least 20% in Flow Technology power-and-energy revenue and 300 basis points in margin materialized.
- Underlying cash generation and working-capital trends, particularly receivables, inventory, and timing of large-project collections.
- Debt levels, borrowing availability, covenant compliance, and the implications of the anticipated end of cash dividends.
- Developments in South African project disputes, environmental matters, other contingencies, and open tax examinations.