SPX Corporation — Q2 2010 Form 10-Q
Business context and reporting period. The filing identifies the registrant as SPX Corporation. It covers the unaudited quarter and six months ended July 3, 2010; comparable 2009 periods ended June 27, 2009. SPX supplies flow technology, test and measurement products, thermal equipment and services, and industrial products and services. Amounts below are in millions, except per-share data.
Financial results and position
| Metric | Three months ended July 3, 2010 | Three months ended June 27, 2009 | Six months ended July 3, 2010 | Six months ended June 27, 2009 |
|---|---|---|---|---|
| Revenue | $1,189.7 | $1,193.5 | $2,275.3 | $2,353.1 |
| Gross profit / margin | $353.2 / 29.7% | $348.1 / 29.2% | $666.7 / 29.3% | $680.1 / 28.9% |
| Operating income / margin | $87.5 / 7.4% | $77.5 / 6.5% | $139.2 / 6.1% | $150.4 / 6.4% |
| Continuing-operations income attributable to SPX shareholders | $70.2 | $39.5 | $88.7 | $78.3 |
| EPS from continuing operations, diluted | $1.40 | $0.80 | $1.77 | $1.57 |
| Net income attributable to SPX shareholders, including discontinued operations | $78.8 | $33.4 | $100.9 | $57.8 |
Quarterly revenue was down 0.3%; first-half revenue was down 3.3%. Organic revenue declined 2.0% for the quarter and 6.7% for the half. First-half segment income was $241.8, down from $262.1. Results included lower special charges ($11.2 in the first half versus $35.2 in 2009), while SG&A rose to $503.7 from $484.1.
Quarterly continuing-operations income benefited from a $22.0 tax benefit related to completion of IRS examinations of 2006 and 2007 federal returns. First-half effective tax rate was 15.4%, versus 30.5% in 2009; the 2010 rate also reflected a $6.2 charge related to retiree prescription-drug benefits under Medicare Part D. Discontinued-operations gains and tax benefits contributed $8.6 to quarterly and $12.2 to first-half reported net income.
Segment performance
| Segment | Q2 2010 revenue | Q2 2010 segment income | Year-over-year context |
|---|---|---|---|
| Flow Technology | $383.4 | $45.2 | Revenue down 3.2%; organic decline, partly offset by Gerstenberg acquisition. |
| Test and Measurement | $239.9 | $23.7 | Revenue up 15.6%, primarily organic; income rose with higher sales and restructuring savings. |
| Thermal Equipment and Services | $393.1 | $48.9 | Revenue up 6.6%, including Yuba acquisition; income benefited from execution, project mix and acquisition contribution. |
| Industrial Products and Services | $173.3 | $17.7 | Revenue down 21.5%; lower power-transformer volumes and prices drove the decline. |
Cash flow, debt and liquidity
- First-half cash from continuing operations was $22.5, versus $26.9 in 2009; total operating cash flow was $20.5, versus $35.1. Management attributed the decline principally to working-capital changes and the prior-year $23.2 tax refund.
- First-half investing cash outflow was $84.7, including $58.3 for acquisitions and other investments; capital expenditures were $23.6, down from $44.9. Financing cash outflow was $32.6. Cash declined $114.8 to $408.1.
- Total debt was $1,281.8 at July 3, 2010, versus $1,279.0 at year-end 2009. Current maturities of long-term debt were $97.5. The $21.3 balance of 6.25% notes is due June 2011.
- SPX reported $389.6 of available revolving-credit borrowing capacity and $25.3 available under its receivables facility. It stated that cash, operating cash flow and available facilities should fund foreseeable requirements. The company was in compliance with credit-facility covenants at quarter-end.
- Current assets were $2,248.9 and current liabilities $1,575.9. The filing does not provide a separately stated current ratio.
Material changes and management commentary
Management described stabilization in some businesses, including early-cycle industrial businesses and diagnostic tools, but continued weakness in later-cycle markets such as power transformers and project-related Flow Technology. Quarterly gross margin improved, reflecting project execution, project mix and savings from 2009 restructuring, partly offset by lower transformer pricing. First-half revenue and segment income remained below 2009 levels.
Acquisitions included Gerstenberg ($32.1 net of cash acquired and including assumed debt) and TTS ($15.7 net of cash acquired). After quarter-end, SPX acquired Anhydro on July 21, 2010 for approximately $68.0 net of approximately $9.0 cash acquired. SPX also contributed $15.8 to its EGS joint venture toward EGS’s acquisition of Nutsteel. The company sold PSD in Q1 2010 for $3.0 cash, recording a $3.6 net gain in discontinued operations.
Outlook, risks and contingencies
- Management did not expect a significant recovery in operating results in the second half of 2010 and said it had not seen a clear economic inflection point.
- Full-year 2010 revenue outlook versus 2009: Flow Technology up 1%–3%; Test and Measurement up 6%–8%; Thermal Equipment and Services flat to up 2%; Industrial Products and Services down 10%–12%. Outlook includes acquisition contributions and depends on market conditions and project timing.
- Backlog at July 3 was $635.7 in Flow Technology, $1,597.4 in Thermal Equipment and Services, and $369.2 in Industrial Products and Services. Test and Measurement backlog was not material. Management expected to convert approximately 64%, 37% and 68%, respectively, of those three segments’ backlogs into revenue during the remainder of 2010.
- Key exposures include continued recessionary pressure, transformer volume and pricing, delays or fluctuations in large projects, foreign-exchange movements, raw-material costs, pension funding and acquisition integration. SPX’s credit facilities impose leverage and interest-coverage tests and restrict certain activities, including dividends and repurchases under specified leverage conditions.
- SPX reported $299.1 of accruals for claims and other matters, including $227.7 for risk management. It had remediation liabilities at 99 owned or controlled sites and potential responsibility at 27 offsite sites; management said recorded environmental accruals were adequate but could not estimate possible additional losses.
- Gross unrecognized tax benefits were $98.1; SPX said these could decrease by approximately $25–$35 million within 12 months. It also considered $15–$20 million of payments relating to uncertain tax positions reasonably possible in that period. Certain divestiture working-capital settlements and retained liabilities remain subject to adjustment.
Important facts for investors to verify
- How much of reported earnings reflects underlying operations versus the $22.0 continuing-operations tax benefit and discontinued-operation gains?
- Whether segment revenue and margins recover as forecast, especially in power transformers, Flow Technology end markets and project-driven thermal businesses.
- Backlog conversion, project delays and the contribution and integration costs of Gerstenberg, TTS, Yuba and post-quarter Anhydro.
- Working-capital trends and cash generation, given first-half operating cash flow and the acquisition-related investing outflow.
- Debt maturities, covenant headroom, interest-rate and foreign-exchange exposures, and the potential cash impact of tax, environmental, litigation and divestiture contingencies.