SPX Corporation — Form 10-Q summary
Business context and period. The filing is by SPX Corporation, the registrant identified in the 10-Q, for the quarter ended July 2, 2011; the six-month comparison is with the period ended July 3, 2010. The company reported four segments: Flow Technology, Test and Measurement, Thermal Equipment and Services, and Industrial Products and Services.
Financial performance
Amounts are in millions of dollars except per-share data. Second-quarter and six-month comparisons are year over year.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,384.0 | $1,188.8 | $2,583.0 | $2,273.4 |
| Gross profit / margin | $383.3 / 27.7% | $353.0 / 29.7% | $732.6 / 28.4% | $666.2 / 29.3% |
| Operating income | $58.9 | $87.7 | $110.3 | $139.6 |
| Continuing-operations income | $32.3 | $69.6 | $59.0 | $87.5 |
| Net income attributable to SPX common shareholders | $34.3 | $78.8 | $57.4 | $100.9 |
| Diluted EPS | $0.67 | $1.57 | $1.12 | $2.01 |
- Revenue rose 16.4% in Q2 and 13.6% for six months. For Q2, organic growth was 7.1%; foreign currency contributed 6.0% and acquisitions 3.3%. Six-month organic growth was 6.3%.
- Operating margin was 4.3% in Q2 versus 7.4% a year earlier, and 4.3% for the half versus 6.1%. Lower gross margin, the $24.7 impairment, and higher special charges weighed on operating income. The filing cites unfavorable project mix and lower transformer pricing.
- Segment results for Q2: Flow Technology revenue/income $492.8/$56.6; Test and Measurement $288.1/$29.0; Thermal Equipment and Services $431.9/$35.8; Industrial Products and Services $171.2/$10.9. Thermal and Industrial segment income declined year over year.
- Cash from continuing operations was $12.8 for the half, down from $23.4; total operating cash flow was $10.5, versus $20.5. Investing used $102.5, including $46.9 of capital expenditures. Cash declined $60.3 to $395.1 from year-end.
- At July 2, cash was $395.1, current assets $2,563.2, and current liabilities $1,793.0. Total debt was $1,246.8, including $134.8 short-term debt; net debt was approximately $851.7. Total debt increased from $1,197.6 at year-end.
Material changes and notable items
- Q2 revenue growth was led by Flow Technology and Test and Measurement. Flow Technology organic revenue grew 14.2% and Test and Measurement 8.0%. Thermal results faced weak Chinese dry-cooling demand and SPX Heat Transfer declines; Industrial results reflected lower power-transformer pricing and precision-component sales.
- The company recorded a $24.7 non-cash impairment at SPX Heat Transfer: $17.2 goodwill and $7.5 indefinite-lived intangible assets, citing deteriorating revenue and profitability amid challenging U.S. power-market conditions. Management nevertheless expected the reporting unit to rebound in the second half and later years.
- Acquisitions included Teradyne’s Diagnostic Solutions business for $40.2 and B.W. Murdoch for $8.1. Management said acquisition pro forma effects were not material.
- A change in the amortization period for unrecognized gains and losses in a domestic pension plan reduced pension expense by approximately $10.0 in the first half. An insurance recovery of $6.3 also benefited first-half Industrial segment results.
- Income from discontinued operations included $2.7 in Q2 and $0.8 for the half, largely from tax and disposition-related adjustments; these amounts supported reported net income.
Outlook, liquidity, and risks
- Management expected second-half organic growth in Flow Technology and Test and Measurement at rates comparable to Q2, with more favorable trends in Thermal and Industrial. Full-year segment forecasts: Flow revenue growth 21%–23%, margin 12.8%–13.1%; Test and Measurement growth 17%–19%, margin 9.1%–9.4%; Thermal growth 4%–6%, margin 9.9%–10.2%; Industrial growth 8%–10%, margin 8.9%–9.2%. No consolidated earnings or EPS guidance was provided.
- Backlog was $906.6 in Flow, $1,448.0 in Thermal, and $494.4 in Industrial. Management expected to convert approximately 74%, 43%, and 62%, respectively, during the rest of 2011. Thermal backlog includes long-duration projects and can produce period-to-period volatility.
- New senior credit facilities, effective June 30, provide $1.8 billion of committed capacity and mature in 2016. SPX reported covenant compliance. It had $479.2 of available revolving-credit capacity and $4.7 available under its receivables facility; substantial letters of credit were outstanding. Required covenants include minimum interest coverage of 3.50:1 and maximum leverage of 3.25:1, subject to specified acquisition provisions.
- Key risks include project timing and execution, power-market weakness, China demand, pricing and raw-material pressures, acquisition integration, foreign-exchange exposure, pension funding, and litigation, environmental and self-insured claims. Contingency accruals were $430.8, including $365.6 for risk-management matters; related insurance-recovery assets were $319.0. The company cautioned that insurance or indemnification may be insufficient.
- Gross unrecognized tax benefits were $92.1; management said $15–$25 could be paid within 12 months for uncertain tax positions, including estimated interest and penalties. IRS, state, and foreign examinations and appeals remained unresolved.
Investor verification priorities
- Assess how much reported revenue growth and future segment outlook depend on acquisitions and currency versus organic demand, and whether Thermal and Industrial improvement materialized.
- Review the assumptions behind the SPX Heat Transfer impairment and management’s expected recovery, including exposure to continued weakness in the U.S. power market.
- Track operating cash conversion and working-capital use, particularly receivables and inventory, alongside capital spending and debt levels.
- Verify headroom under credit covenants and practical liquidity after letters of credit, and monitor refinancing and interest costs.
- Evaluate the quality and recurrence of reported earnings, including impairment, pension accounting effects, insurance proceeds, and discontinued-operation and tax adjustments.
- Monitor project backlog conversion, consortium joint-and-several obligations, environmental matters, and resolution of tax and other contingencies.