SPX Corporation (identified in request as SPX Technologies) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative quarter ended April 2, 2011. Unless noted, amounts are in millions of dollars. The filing reports continuing operations separately from discontinued operations.
Business context and results
SPX is a global engineered-products and services company. Its reportable segments are Flow Technology, Thermal Equipment and Services, and Industrial Products and Services. The quarter included the Clyde Union acquisition’s first full-quarter contribution, the Seital acquisition, and the classification of Service Solutions as a discontinued operation following its proposed sale to Robert Bosch GmbH.
| Continuing operations | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1,165.2 | $984.9 |
| Gross profit | $301.4 | $292.8 |
| Gross margin | 25.9% | 29.7% |
| Operating income | $16.8 | $42.4 |
| Operating margin | 1.4% | 4.3% |
| Income from continuing operations | $7.9 | $20.7 |
| Continuing-operations EPS attributable to common shareholders | $0.17 basic and diluted | $0.38 basic; $0.37 diluted |
| Net income attributable to SPX common shareholders, including discontinued operations | $13.5 | $23.1 |
| Net EPS attributable to SPX common shareholders | $0.27 basic; $0.26 diluted | $0.46 basic; $0.45 diluted |
Revenue increased 18.3%; management attributed 6.7 percentage points to organic growth, 13.2 points to acquisitions and divestitures net, and a 1.6-point reduction to foreign currency. Despite higher revenue, gross profit rose only 2.9%, while operating income declined substantially. The filing cites Clyde Union acquisition dilution, including $6.2 of acquired-inventory fair-value charges and $2.9 of incremental intangible amortization, lower-margin acquired projects, reduced high-margin evaporative-cooling revenue, and the absence of a $6.3 product-liability insurance recovery recorded in Q1 2011.
Segments and material changes
| Segment | Revenue, Q1 2012 (change) | Segment income (change) | Margin, Q1 2012 |
|---|---|---|---|
| Flow Technology | $628.1 (+37.8%; organic +10.4%) | $46.4 (−17.7%) | 7.4%, versus 12.4% |
| Thermal Equipment and Services | $320.5 (−1.5%) | $10.3 (−51.6%) | 3.2%, versus 6.5% |
| Industrial Products and Services | $216.6 (+6.3%) | $25.8 (−5.8%) | 11.9%, versus 13.5% |
Flow Technology revenue growth reflected acquisitions and stronger food-and-beverage, power-and-energy, and industrial demand; profit was pressured by Clyde Union. Thermal results were affected by lower evaporative-cooling activity and mild-weather-related weakness in heating products. Industrial segment income was weighed down by about $3.6 of start-up and unabsorbed costs from the Waukesha transformer-facility expansion and by the prior-year insurance recovery.
Discontinued operations generated revenue of $226.2 and pre-tax income of $8.0 in Q1 2012, compared with revenue of $214.1 and pre-tax income of $8.7 in Q1 2011. Their net income was $4.9 versus $4.1.
Cash flow, balance sheet, debt and liquidity
- Cash flow: Continuing-operations operating cash use was $193.5, versus $19.1 in Q1 2011. Total operating cash use, including discontinued operations, was $237.1. Investing cash use was $44.0 for continuing operations; financing provided $63.9. Cash declined $213.9 to $337.1 from $551.0 at year-end 2011.
- Drivers of operating cash use: Management cited $57.0 of Clyde Union initial working-capital funding, timing of project milestone receipts, other working-capital investment, higher pension contributions, and higher net tax payments. Working capital outflows included $81.6 for accounts receivable and other assets, $30.6 for inventories, and $130.9 for accounts payable, accrued expenses and other.
- Capital spending and acquisitions: Capital expenditures were $21.6; acquisitions used $30.5, primarily for Seital. Seital’s purchase price was $28.8 net of cash acquired and including assumed debt.
- Debt: Total debt was $2,118.8 at March 31, 2012, up from $2,001.1 at December 31, 2011. Cash less total debt was approximately negative $1,781.7. Debt included $800.0 of term loans, $1,100.0 of senior notes, $100.0 of revolving borrowings, and $46.0 under the receivables financing arrangement, among other debt.
- Liquidity: SPX reported $418.4 of available revolving-credit capacity, $394.3 of remaining foreign trade-facility issuance capacity, and $13.0 of available capacity under its trade-receivables arrangement. It was in compliance with senior-credit and senior-note covenants at quarter-end. The company had $81.6 of letters of credit under revolving facilities and $805.7 under foreign credit-instrument facilities.
- Balance sheet: Current assets were $3,249.2 and current liabilities $2,317.8. Current liabilities included $331.4 of current maturities, primarily $325.0 of term loans designated for repayment when the Service Solutions sale closes.
Outlook, management commentary and notable items
- 2012 segment outlook: Flow Technology revenue growth of 35%–40% and margins of 11.2%–11.7%; Thermal Equipment and Services revenue decline of 7%–12% and margins of 7.6%–8.1%; Industrial Products and Services revenue growth of 10%–15% and margins of 13.2%–13.7%. These are management projections, not guarantees.
- Backlog: Total backlog increased $142.4, or 4.8%, from year-end. March 31 segment backlog was $1,523.5 for Flow Technology, $1,130.9 for Thermal Equipment and Services, and $473.5 for Industrial Products and Services. Management expected to convert approximately 79%, 50%, and 78%, respectively, of those balances into revenue during the remainder of 2012. Thermal backlog includes longer-duration contracts, with some revenue expected through 2015.
- Service Solutions sale: SPX agreed to sell the business to Bosch for $1,150.0 cash proceeds, with closing expected in Q2 or Q3 2012 and an estimated net gain of approximately $450.0. The company classified it as discontinued operations. A portion of proceeds is committed to repay $325.0 of term loans at closing. Final sale proceeds and gains on certain prior divestitures may be adjusted for working capital, retained liabilities, or dispute resolution.
- Other unusual items: The Shanghai Electric joint venture transaction generated a $20.5 pre-tax gain in Q1; an associated $6.1 incremental tax charge contributed to a 62.2% effective tax rate, versus 34.3% a year earlier. SPX repurchased 575,000 shares for $43.2 during the quarter and declared a $0.25-per-share dividend.
- Risks and contingencies: The filing discusses acquisition integration and profitability, project timing and seasonality, competition and pricing, foreign-exchange and commodity exposures, pension funding, environmental obligations, litigation, self-insured risk claims, and uncertain tax positions. Recorded contingencies totaled $547.9, including $497.9 for risk-management matters; insurance recovery assets related to risk management were $428.5. SPX had environmental liabilities at 98 owned or controlled sites and potential responsibility at 28 offsite sites. Gross unrecognized tax benefits were $85.9; management said $30–$40 could reasonably possibly decrease within 12 months, while timing and outcomes of tax examinations remain uncertain.
- Controls: Management concluded disclosure controls were effective as of March 31, 2012 and reported no quarterly change that materially affected, or was reasonably likely to materially affect, internal control over financial reporting.
Most important facts for investors to verify
- Whether the Bosch transaction closed on the expected timetable and whether proceeds, the estimated $450.0 gain, and the $325.0 debt repayment matched expectations.
- Whether Flow Technology integrates Clyde Union successfully and improves margins after acquisition-related inventory charges, amortization, and low-margin project effects.
- Whether the projected segment revenue and margin ranges are achieved, particularly given cooling-market weakness and the seasonal, project-driven nature of some businesses.
- Whether working capital and operating cash flow recover from the pronounced Q1 outflow, and whether liquidity and covenant headroom remain adequate.
- Whether legal, environmental, insurance, and tax exposures—including uncertain divestiture adjustments—require material additional charges or cash payments.