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SPW > SEC Filings for SPW > Form 10-Q on 2-May-2012All Recent SEC Filings

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Form 10-Q for SPX CORP


2-May-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

(in millions, except per share data)

EXECUTIVE OVERVIEW

Business volume trends for the first quarter of 2012 were positive, as revenues grew 18.3%, inclusive of organic revenue growth of 6.7%, as compared to the first quarter of 2011, and backlog increased $142.4, or 4.8%, since December 31, 2011. Despite the increase in organic revenue, operating income declined on a year-over-year basis from $42.4 in the first quarter of 2011 to $16.8 in the first quarter of 2012. Much of the decrease in operating income was attributable to the earnings dilution associated with the Clyde Union (Holdings) S.A.R.L. ("Clyde Union") acquisition, including (i) charges of $6.2 related to the excess fair value (over historical cost) of inventory acquired and subsequently sold in the first quarter of 2012 and (ii) amortization expense of $2.9 related to intangible assets acquired. In addition, operating income was impacted negatively by a decline in high-margin evaporative cooling project revenues during the first quarter of 2012. Operating cash flows, which historically have been negative during the first quarter, also declined on a year-over-year basis [Q1 2012 - ($193.5) and Q1 2011 - ($19.1)] primarily as a result of (i) net cash outflows of $57.0 during the period in order to fund Clyde Union's initial working capital requirements, (ii) the timing of milestone cash receipts for certain large projects within our Flow Technology and Thermal Equipment and Services segments and (iii) other working capital investments to support organic growth projections.

Other items of note that impacted our first quarter 2012 financial performance are as follows:

On December 30, 2011, we and Shanghai Electric Group Co., Ltd. ("Shanghai Electric") established the Shanghai Electric joint venture, to supply dry cooling and moisture separator reheater products and services to the power sector in China and other selected regions of the world. We contributed and sold certain assets of our dry cooling products business in China to the joint venture in consideration for (i) a 45% ownership interest in the joint venture and (ii) cash payments of RMB 96.7, with RMB 51.5 received on January 18, 2012, RMB 25.8 to be received no later than December 31, 2012, and the remaining RMB payment contingent upon the joint venture achieving defined sales order volumes. Final approval for the transaction was received on January 13, 2012. We have accounted for the transaction under the deconsolidation criteria of the Codification and, thus, recorded a pre-tax gain during the first quarter of 2012 of $20.5, with such gain included in "Other income, net" in our condensed consolidated statement of operations. See Note 3 to our condensed consolidated financial statements for additional details on the transaction.

On January 23, 2012, we entered into an agreement to sell our Service Solutions business to Robert Bosch GmbH for cash proceeds of $1,150.0. We expect the sale to close during the second or third quarter of 2012, resulting in an estimated net gain of $450.0. We have reported our Service Solutions business as a discontinued operation within our condensed consolidated financial statements. Our Service Solutions business previously was reported within our Test and Measurement segment. As a result of classifying our Service Solutions business as a discontinued operation, the remaining two businesses that had been included within the Test and Measurement segment now are being reported within Industrial Products and Services. See Notes 3 and 4 to our condensed consolidated financial statements for further details.

On March 21, 2012, in our Flow Technology segment, we completed the acquisition of Seital S.r.l. ("Seital"), a leading supplier of disk centrifuges (separators and clarifiers) to the global food and beverage, biotechnology, pharmaceutical and chemical industries, for a purchase price of $28.8, net of cash acquired of $2.5 and including debt assumed of $0.8.

During the first quarter of 2012, we repurchased 0.575 shares of our common stock for cash consideration of $43.2, associated with a written trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended. We entered into this plan on February 16, 2012, to facilitate the repurchase of up to $350.0 of shares of our common stock on or before February 14, 2013, in accordance with a share repurchase program authorized by our Board of Directors. Of the amount under the plan, $75.0 may be repurchased prior to the completion of the sale of Service Solutions, with the remainder scheduled to be repurchased following the consummation of the sale of the Service Solutions business. The $75.0 of shares authorized for repurchase prior to the completion of the sale of our Service Solutions business were purchased in full during March and April 2012.

RESULTS OF CONTINUING OPERATIONS

The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2011 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year. We establish actual interim closing dates using a "fiscal" calendar, which requires our businesses to close their


books on the Saturday closest to the end of the calendar quarter for the first quarter, with the second and third quarters being 91 days in length. Our fourth quarter ends on December 31. The interim closing dates for the first, second and third quarters of 2012 are March 31, June 30 and September 29, compared to the respective April 2, July 2 and October 1, 2011 dates. We had one fewer day in the first quarter of 2012 and will have two more days in the fourth quarter of 2012 than in the respective 2011 periods.

Seasonality and Competition - Many of our businesses closely follow changes in the industries and end markets that they serve. In addition, certain businesses have seasonal fluctuations. Our heating and ventilation products businesses tend to be stronger during the third and fourth quarters, as customer buying habits are driven largely by seasonal weather patterns. Demand for cooling towers and related services is highly correlated to timing on large construction contracts, which may cause significant fluctuations from period to period. In aggregate, our businesses generally tend to be stronger in the second half of the year.

Although our businesses operate in highly competitive markets, our competitive position cannot be determined accurately in the aggregate or by segment since our competitors do not offer all the same product lines or serve all the same markets. In addition, specific reliable comparative figures are not available for many of our competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are service, product performance, technical innovations and price. These methods vary with the type of product sold. We believe we can compete effectively on the basis of each of these factors as they apply to the various products and services we offer.

Non-GAAP Measures - Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations, acquisitions and the impact of contributing a business to a joint venture. We believe that this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as, when read in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool they can use to evaluate our management of assets held from period to period. In addition, organic revenue growth (decline) is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted in the United States ("GAAP") and should not be considered a substitute for revenue growth (decline) as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

The following table provides selected financial information for the three months ended March 31, 2012 and April 2, 2011, respectively, including the reconciliation of organic revenue growth to net revenue growth, as defined herein:

                                                  March 31,        April 2,
                                                     2012            2011         % Change
Revenues                                         $    1,165.2    $      984.9          18.3
Gross profit                                            301.4           292.8           2.9
% of revenues                                            25.9 %          29.7 %
Selling, general and administrative expense             273.5           242.4          12.8
% of revenues                                            23.5 %          24.6 %
Intangible amortization                                   8.7             5.6          55.4
Special charges, net                                      2.4             2.4             -
Interest expense, net                                   (27.2 )         (22.7 )        19.8
Other income, net                                        21.8             3.0             *
Equity earnings in joint ventures                         9.5             8.8           8.0
Income from continuing operations before
income taxes                                             20.9            31.5         (33.7 )
Income tax provision                                    (13.0 )         (10.8 )        20.4
Income from continuing operations                         7.9            20.7         (61.8 )

Components of consolidated revenue growth:
Organic growth                                                                          6.7
Foreign currency                                                                       (1.6 )
Acquisitions and divestitures, net                                                     13.2
Net revenue growth                                                                     18.3



* Not meaningful for comparison purposes.

Revenues - For the three months ended March 31, 2012, the increase in revenues, compared to the respective 2011 period, was due to incremental revenues of $133.3 associated with the 2011 acquisitions of Clyde Union and e&e Verfahrenstechnik GmbH ("e&e"), and organic revenue growth, partially offset by the impact of a stronger U.S. dollar during the period. The organic revenue growth was attributable primarily to additional sales into the food and beverage, power and


energy, and general industrial end markets of our Flow Technology segment, additional sales in South Africa by our Thermal Equipment and Services segment, and an increase in power transformer volumes within our Industrial Products and Services segment. These increases in organic revenue were offset partially by declining sales of evaporative and dry cooling products in other regions of the world within our Thermal Equipment and Services segment, as well as a decrease in sales of crystal growing machines within our Industrial Products and Services segment.

Gross Profit - The increase in gross profit for the three months ended March 31, 2012, compared to the respective 2011 period, was due primarily to the revenue performance described above. Gross profit as a percentage of revenues declined during the first quarter of 2012, compared to the respective 2011 period, primarily as a result of the following:

Matters related to Clyde Union's operating results during the period, including:

Charges of $6.2 associated with the excess fair value (over historical cost) of inventory acquired in the Clyde Union transaction that was subsequently sold in the first quarter of 2012; and

The impact of low-margin projects acquired and then converted to revenue during the first quarter of 2012.

A decline in high-margin evaporative cooling product sales within our Thermal Equipment and Services segment during the first quarter of 2012; and

An insurance recovery of $6.3 during the first quarter of 2011 related to a product liability matter within our Industrial Products and Services segment.

Gross profit for the first quarter of 2012 was impacted favorably by the settlement of a customer claim within our Flow Technology segment, which resulted in the reduction of the recorded liability for such claim. The favorable impact of this settlement was offset partially by charges incurred within our Flow Technology segment associated with operational issues in Europe. The net impact of these two items was a benefit to gross profit during the first quarter of 2012 of $1.4.

Selling, General and Administrative ("SG&A") expenses - For the three months ended March 31, 2012, the increase in SG&A expense was due primarily to incremental SG&A of $28.3 associated with the acquisition of Clyde Union.

Intangible Amortization - For the three months ended March 31, 2012, the increase in intangible amortization was due primarily to incremental amortization of $2.9 associated with intangible assets purchased in the Clyde Union acquisition.

Special Charges, net - Special charges, net related primarily to restructuring initiatives to consolidate manufacturing, distribution, and administrative facilities and functions. See Note 5 to the condensed consolidated financial statements for the details of actions taken in 2012 and 2011.

Other Income, net - Other income, net, for the three months ended March 31, 2012 was composed primarily of a gain of $20.5 associated with the deconsolidation of our dry cooling products business in China, investment earnings of $5.4, and earnings of $0.6 associated with an increase in the fair value of our foreign currency forward contracts ("FX forward contracts"). These amounts were offset partially by charges of $2.9 associated with our currency forward embedded derivatives ("FX embedded derivatives") and foreign currency transaction losses of $2.9. See Note 3 to our condensed consolidated financial statements for additional details on the deconsolidation of the dry cooling products business in China and the related formation of the Shanghai Electric joint venture.

Other income, net, for the three months ended April 2, 2011 was composed primarily of investment earnings of $3.5, insurance settlements of $1.5 related to death benefits received and a property insurance claim, and earnings of $1.2 and $0.6 related to FX embedded derivatives and FX forward contracts, respectively. These amounts were offset partially by foreign currency transaction losses of $4.0.


Interest Expense, net - Interest expense, net, includes both interest expense and interest income. The increase in interest expense, net, when compared to the same period in 2011, was the result of interest incurred during the first quarter of 2012 on the $800.0 of term loans that were drawn down in December 2011 in order to fund the acquisition of Clyde Union. As discussed in Note 10 to the condensed consolidated financial statements, approximately $2.5 of interest expense associated with the term loans was allocated to discontinued operations for the first quarter of 2012. Refer to the discussion of Liquidity and Financial Condition in our 2011 Annual Report on Form 10-K for details pertaining to our 2011 debt activity.

Equity Earnings in Joint Ventures - Our equity earnings in joint ventures were attributable primarily to our investment in EGS Electrical Group, LLC and Subsidiaries ("EGS"), as earnings from this investment totaled $9.3 and $8.5 during the three months ended March 31, 2012 and April 2, 2011, respectively.

Income Tax Provision - For the three months ended March 31, 2012, we recorded an income tax provision of $13.0 on $20.9 of pre-tax income from continuing operations, resulting in an effective tax rate of 62.2%. This compares to an income tax provision for the three months ended April 2, 2011 of $10.8 on $31.5 of pre-tax income from continuing operations, resulting in an effective tax rate of 34.3%. The income tax provision for the first quarter of 2012 was impacted negatively by an incremental income tax charge of $6.1 associated with the deconsolidation of the dry cooling products business in China, as the goodwill allocated to the transaction is not deductible for income tax purposes.

RESULTS OF DISCONTINUED OPERATIONS

Discontinued Operations

As part of our operating strategy, we regularly review and negotiate potential divestitures, some of which are or may be material. As a result of this continuous review, we determined that certain of our businesses would be better strategic fits with other companies or investors.

We report businesses or asset groups as discontinued operations when, among other things, we commit to a plan to divest the business or asset group, actively begin marketing the business or asset group, and when the sale of the business or asset group is deemed probable within the next twelve months.

On January 23, 2012, we entered into an agreement to sell our Service Solutions business to Robert Bosch GmbH for cash proceeds of $1,150.0. We expect the sale to close during the second or third quarter of 2012, resulting in a net gain of approximately $450.0. We have reported, for all periods presented, the financial condition, results of operations and cash flows of this business as a discontinued operation in our condensed consolidated financial statements.

We recognized net losses of $0.3 and $1.9 during the first quarter of 2012 and 2011, respectively, resulting from adjustments to gains/losses on sales from previously discontinued businesses. Refer to the consolidated financial statements contained in our 2011 Annual Report on Form 10-K for the disclosure of all discontinued businesses during the 2009 through 2011 period.

The final sales price for certain of the divested businesses is subject to adjustment based on working capital existing at the respective closing dates. The working capital figures are subject to agreement with the buyers or, if we cannot come to agreement, an arbitration or other dispute-resolution process. Final agreement of the working capital figures for certain of these transactions has yet to occur. In addition, changes in estimates associated with liabilities retained in connection with a business divestiture (e.g., income taxes) may occur. It is possible that the sales price and resulting gains/losses on these, and other previous divestitures, may be materially adjusted in subsequent periods.

For the first three months of 2012 and 2011, income from discontinued operations and the related income taxes were as follows:

                                             Three months ended
                                           March 31,     April 2,
                                              2012         2011
Income from discontinued operations        $      7.5    $     6.8
Income tax provision                             (2.6 )       (2.7 )
Income from discontinued operations, net   $      4.9    $     4.1


For the first three months of 2012 and 2011, results of operations for our businesses reported as discontinued operations were as follows:

Three months ended

                 March 31,     April 2,
                    2012         2011
Revenues         $    226.2    $   214.1
Pre-tax income          8.0          8.7

The major classes of assets and liabilities, excluding intercompany balances, of the businesses reported as discontinued operations included in the accompanying condensed consolidated balance sheets are shown below:

                                          March 31,    December 31,
                                            2012           2011
Assets:
Accounts receivable, net                 $     215.7   $       191.8
Inventories, net                               130.0           127.7
Other current assets                            10.6             9.3
Property, plant and equipment, net              47.8            48.7
Goodwill and intangibles, net                  285.2           283.9
Other assets                                    63.2            58.7
Assets of discontinued operations        $     752.5   $       720.1

Liabilities:
Accounts payable                         $      80.8   $       109.3
Accrued expenses                               112.0           109.4
Income taxes payable                             1.6             1.5
Deferred and other income taxes                  7.3             6.6
Other liabilities                                8.4             7.6
Liabilities of discontinued operations   $     210.1   $       234.4

SEGMENT RESULTS OF OPERATIONS

The following information should be read in conjunction with our condensed consolidated financial statements and related notes. The segment results exclude the operating results of discontinued operations for all periods presented. See Note 4 to the condensed consolidated financial statements for additional details on our segments.

Non-GAAP Measures - Throughout the following discussion of segment results, we use "organic revenue" growth (decline) to facilitate explanation of the operating performance of our segments. Organic revenue growth (decline) is a non-GAAP financial measure, and is not a substitute for revenue growth (decline). Refer to the explanation of this measure and purpose of use by management under "Results of Continuing Operations-Non-GAAP Measures."

Flow Technology



                                          Three months ended
                                        March 31,     April 2,
                                           2012         2011      % Change
Revenues                                $    628.1    $   455.9       37.8
Segment income                                46.4         56.4      (17.7 )
% of revenues                                  7.4 %       12.4 %
Components of segment revenue growth:
Organic growth                                                        10.4
Foreign currency                                                      (1.8 )
Acquisitions                                                          29.2
Net segment revenue growth                                            37.8

Revenues - For the three months ended March 31, 2012, the increase in revenues, compared to the respective 2011 period, was due to incremental revenues of $133.3 associated with the 2011 acquisitions of Clyde Union and e&e, and organic


revenue growth, partially offset by the impact of a stronger U.S. dollar during the period. Organic revenue growth was attributable primarily to additional sales into the food and beverage, power and energy, and general industrial end markets.

Segment Income - For the three months ended March 31, 2012, segment income and margin decreased, compared to the respective 2011 period, primarily as a result of the impact of the dilution related to Clyde Union's operating results during the period, including (i) charges of $6.2 associated with the excess fair value (over historical cost) of inventory acquired in the Clyde Union transaction that was subsequently sold in the first quarter of 2012, (ii) incremental amortization expense of $2.9 associated with the intangible assets acquired in the Clyde Union transaction and (iii) the impact of low-margin projects acquired and then converted to revenue during the first quarter of 2012. In addition, segment income and margin for the three months ended March 31, 2012 were impacted favorably by the settlement of a customer claim, which resulted in the reduction of the recorded liability for such claim. The favorable impact of this settlement was offset partially by charges associated with operational issues in Europe. The net impact of these two items was a benefit to segment income during the first quarter of 2012 of $1.4.

Thermal Equipment and Services



                                           Three months ended
                                         March 31,     April 2,
                                            2012         2011      % Change
Revenues                                 $    320.5    $   325.3       (1.5 )
Segment income                                 10.3         21.3      (51.6 )
% of revenues                                   3.2 %        6.5 %
Components of segment revenue decline:
Organic growth                                                          1.7
Foreign currency                                                       (2.3 )
Divestitures                                                           (0.9 )
Net segment revenue decline                                            (1.5 )

Revenues - For the three months ended March 31, 2012, the decrease in revenues, compared to the respective 2011 period, primarily was the result of the impact of a stronger U.S. dollar during the period, partially offset by organic revenue growth. The increase in organic revenues was due to additional revenue in South Africa, generally offset by declines in the Americas and Europe and a decrease in sales of boilers and other heating products due to the unusually mild winter across the majority of the United States.

Segment Income - For the three months ended March 31, 2012, segment income and margin decreased, compared to the respective 2011 period, primarily as a result of a decline in evaporative cooling product revenues, as the first quarter 2011 results were impacted favorably by a number of large, high-margin projects, and the aforementioned decrease in sales of boilers and other heating products.

Industrial Products and Services



                                          Three months ended
                                        March 31,     April 2,
                                           2012         2011      % Change
Revenues                                $    216.6    $   203.7        6.3
Segment income                                25.8         27.4       (5.8 )
% of revenues                                 11.9 %       13.5 %
Components of segment revenue growth:
Organic growth                                                         6.6
Foreign currency                                                      (0.3 )
Acquisitions                                                             -
Net segment revenue growth                                             6.3

Revenues - For the three months ended March 31, 2012, the increase in revenues, compared to the respective 2011 period, was due to an increase in organic revenues. The organic revenue growth was due primarily to an increase in power transformer volumes, partially offset by a decline in sales of crystal growing machines.

Segment Income - For the three months ended March 31, 2012, the decrease in segment income and margin, compared to the respective 2011 period, was due primarily to start-up and unabsorbed costs of approximately $3.6 associated with the expansion of our power transformer facility in Waukesha, WI. In addition, . . .

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