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SPW > SEC Filings for SPW > Form 10-Q on 1-Aug-2012All Recent SEC Filings

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Form 10-Q for SPX CORP


1-Aug-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

Revenues for the three and six months ended June 30, 2012 increased, when compared to the same periods in 2011, by 10.9% and 14.3%, respectively, primarily as a result of incremental revenue associated with the December 2011 acquisition of Clyde Union (Holdings) S.A.R.L. ("Clyde Union") of $143.7 and $268.6, respectively, and organic revenue growth of 3.1% and 4.7%, respectively. Despite the increase in revenues, income associated with our reportable and other operating segments declined to $198.5 in the first half of 2012 (compared to $221.6 in the same period in 2011). The decline in income associated with our reportable and other operating segments was attributable primarily to (i) earnings dilution associated with the Clyde Union acquisition, including charges related to the excess fair value (over historical cost) of inventory acquired and subsequently sold during the first half of 2012 of $8.1, and (ii) organic revenue declines within our Thermal Equipment and Services reportable segment of 5.5%. These decreases in income were offset partially by the favorable impact of organic revenue growth within our Flow Technology reportable segment of 11.2%. Cash flows from continuing operations also declined on a year-over-year basis from an inflow of $20.6 in the first half of 2011 to an outflow of $191.6 in the first half of 2012, primarily as a result of
(i) investments in working capital at Clyde Union of approximately $75.0,
(ii) the timing of milestone cash receipts for certain large projects within our Flow Technology and Thermal Equipment and Services reportable segments, (iii) an increase in pension contributions and direct benefit payments of $18.5 and
(iv) income tax payments, net of refunds, of $27.3 during the first half of 2012 compared to income tax refunds, net of payments, of $18.8 during the first half of 2011.

Other items of note that impacted our first half of 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 Accounting Standards Codification ("Codification") and, thus, recorded a pre-tax gain during the first quarter of 2012 of $20.5, with such gain included in "Other income (expense), 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 half 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 reportable segment. As a result of classifying our Service Solutions business as a discontinued operation, we changed our segment reporting structure. The remaining two businesses that had been included within the Test and Measurement reportable segment, along with our remaining operating segments, which do not meet the quantitative threshold criteria of the Segment Reporting Topic of the Codification, were combined within our "All Other" category Industrial Products and Services. This is not considered a reportable segment. See Notes 3 and 4 to our condensed consolidated financial statements for further details.

On February 16, 2012, we entered into a written trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended, 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. During the six months ended June 30, 2012, we repurchased 0.992 shares of our common stock under this plan for cash consideration of $75.0.

On March 21, 2012, in our Flow Technology reportable 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.

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, as amended ("2011 Annual Report on Form 10-K/A"). 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 reportable or operating 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"), 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 and six months ended June 30, 2012 and July 2, 2011, respectively, including the reconciliation of organic revenue growth to net revenue growth:

                                    Three months ended                   Six months ended
                             June 30,     July 2,               June 30,     July 2,
                               2012        2011      % Change     2012        2011      % Change
Revenues                     $ 1,260.3   $ 1,136.8       10.9   $ 2,425.5   $ 2,121.7       14.3
Gross profit                     337.3       314.4        7.3       638.7       607.2        5.2
% of revenues                     26.8 %      27.7 %                 26.3 %      28.6 %
Selling, general and
administrative expense           249.5       231.9        7.6       523.0       474.3       10.3
% of revenues                     19.8 %      20.4 %                 21.6 %      22.4 %
Intangible amortization            9.4         5.7       64.9        18.1        11.3       60.2
Impairment of goodwill and
other intangible assets              -        24.7          *           -        24.7          *
Special charges, net               8.4         4.2      100.0        10.8         6.6       63.6
Other income (expense),
net                               (2.8 )      (0.9 )        *        19.0         2.1          *
Interest expense, net            (26.3 )     (22.3 )     17.9       (53.5 )     (45.0 )     18.9
Equity earnings in joint
ventures                           6.9         5.0       38.0        16.4        13.8       18.8
Income from continuing
operations before income
taxes                             47.8        29.7       60.9        68.7        61.2       12.3
Income tax provision              (9.3 )      (4.7 )     97.9       (22.3 )     (15.5 )     43.9
Income from continuing
operations                        38.5        25.0       54.0        46.4        45.7        1.5

Components of consolidated
revenue growth:
Organic growth                                            3.1                                4.7
Foreign currency                                         (5.2 )                             (3.5 )
Acquisitions/divestitures,
net                                                      13.0                               13.1
Net revenue growth                                       10.9                               14.3



* Not meaningful for comparison purposes.

Revenues- For the three and six months ended June 30, 2012, the increase in revenues, compared to the respective 2011 periods, was due to incremental revenues of $155.0 and $288.3, respectively, associated with the acquisitions of Seital in the first quarter of 2012, Clyde Union and e&e Verfahrenstechnik GmbH ("e&e") in the fourth quarter of 2011, and B.W. Murdoch Ltd. ("Murdoch") in the first quarter of 2011, as well as organic revenue growth. These increases were offset partially by the impact of a stronger U.S. dollar during the first half of 2012. The organic revenue growth was attributable primarily to additional sales in the Americas and Asia Pacific by our Flow Technology reportable segment and increases in power transformer sales volumes. These increases in organic revenue were offset partially by decreases in sales by our Thermal Equipment and Services reportable segment of $81.7 and $86.5 during the three and six months ended June 30, 2012, respectively.


Gross Profit- For the three and six months ended June 30, 2012, the increase in gross profit, compared to the respective 2011 periods, was due primarily to the revenue performance described above. Gross profit as a percentage of revenues declined during the three and six months ended June 30, 2012, compared to the respective 2011 periods, primarily as a result of the following:

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

Charges of $1.9 and $8.1 during the three and six months ended June 30, 2012, respectively, associated with the excess fair value (over historical cost) of inventory acquired in the Clyde Union transaction that was subsequently sold in the first and second quarters of 2012; and

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

A decline in high-margin sales within our Thermal Equipment and Services reportable segment during the three and six months ended June 30, 2012; and

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

Selling, General and Administrative ("SG&A") expenses - For the three and six months ended June 30, 2012, the increase in SG&A expense, compared to the respective periods in 2011, was due primarily to incremental SG&A of $25.9 and $54.2, respectively, associated with the acquisition of Clyde Union.

Intangible Amortization - For the three and six months ended June 30, 2012, the increase in intangible amortization, compared to the respective periods in 2011, was due primarily to incremental amortization of $3.3 and $6.2, respectively, associated with intangible assets purchased in the Clyde Union acquisition.

Impairment of Goodwill and Other Intangible Assets - For the three and six months ended July 2, 2011, we recorded an impairment charge of $24.7 associated with the goodwill and indefinite-lived intangible assets of our SPX Heat Transfer Inc. reporting unit, with $17.2 of the charge related to goodwill and $7.5 to tradenames. See Note 7 to the condensed consolidated financial statements for further discussion.

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 (Expense), net - Other expense, net, for the three months ended June 30, 2012 was composed primarily of foreign currency transaction losses of $3.0, losses on foreign currency forward contracts ("FX forward contracts") of $0.5, and a loss of $1.0 associated with a fire at our power transformer manufacturing facility in Waukesha, WI. These amounts were offset partially by gains on currency forward embedded derivatives ("FX embedded derivatives") of $1.6. Other expense, net, for the three months ended July 2, 2011 was composed primarily of losses on FX embedded derivatives of $2.7 and foreign currency transaction losses of $1.6. These amounts were offset partially by investment earnings of $1.2 on participant deferred compensation balances, insurance settlements of $1.2 related to death benefits received, and gains on FX forward contracts if $0.8. See Note 11 to our condensed consolidated financial statements for further discussion on our FX forward contracts and FX embedded derivatives.

Other income, net, for the six months ended June 30, 2012 was composed primarily of a gain of $20.5 associated with the deconsolidation of our dry cooling business in China, investment earnings of $5.4, and gains on FX forward contracts of $0.1, partially offset by foreign currency transaction losses of $5.9, losses on FX embedded derivatives of $1.3, and the $1.0 loss associated with the fire mentioned above. Other income, net, for the six months ended July 2, 2011 was composed primarily of investment earnings of $4.7 on participant deferred compensation balances, insurance settlements of $2.8 related to death benefits received and a property insurance claim, and gains on FX forward contracts of $1.4, partially offset by foreign currency transaction losses $4.7 and losses on FX embedded derivative contracts of $2.4. See Note 3 to our condensed consolidated financial statements for further discussion on the deconsolidation of the dry cooling business in China.

Interest Expense, net - Interest expense, net, includes both interest expense and interest income. The increase in interest expense, net, during the three and six months ended June 30, 2012, when compared to the same periods in 2011, was the result of interest incurred during the first half 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, interest expense associated with the term loans of approximately $2.5 and $5.0, respectively, was allocated to discontinued operations for the three and six months ended June 30, 2012. Refer to the discussion of Liquidity and Financial Condition in our 2011 Annual Report on Form 10-K/A 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 $7.2 and $4.8 during the three months ended June 30, 2012 and July 2, 2011, respectively, and $16.5 and $13.3 for the six months ended June 30, 2012 and July 2, 2011, respectively. Our equity earnings from the Shanghai Electric JV were not material for the three and six months ended June 30, 2012.

Income Tax Provision - For the three months ended June 30, 2012, we recorded an income tax provision of $9.3 on $47.8 of pre-tax income from continuing operations, resulting in an effective tax rate of 19.5%. This compares to an income tax provision for the three months ended July 2, 2011 of $4.7 on $29.7 of pre-tax income from continuing operations, resulting in an effective tax rate of 15.8%. The effective income tax rate for the three months ended June 30, 2012 was impacted favorably by tax benefits of $2.5 recorded in connection with various audit settlements and statute expirations during the period. The effective income tax rate for the three months ended July 2, 2011 was impacted favorably by tax benefits of $2.5 associated with the conclusion of a Canadian appeals process. In addition, we recorded an income tax benefit of $9.8 associated with the $24.7 impairment charge that was recorded during the three months ended July 2, 2011 related to the goodwill and indefinite-lived intangible assets of SPX Heat Transfer Inc.

For the six months ended June 30, 2012, we recorded an income tax provision of $22.3 on $68.7 of pre-tax income from continuing operations, resulting in an effective tax rate of 32.5%. This compares to an income tax provision for the six months ended July 2, 2011 of $15.5 on $61.2 of pre-tax income from continuing operations, resulting in an effective tax rate of 25.3%. The effective income tax rate for the six months ended June 30, 2012 was impacted negatively by an incremental income tax charge of $6.1 associated with the deconsolidation of the dry cooling business in China, as the goodwill allocated to the transaction is not deductible for income tax purposes, partially offset by the income tax benefits noted above that were recorded during the second quarter of 2012 in connection with various audit settlements and statute expirations. The effective income tax rate for the six months ended July 2, 2011 was impacted favorably by the Canadian tax benefits of $2.5 and the income tax benefit of $9.8 associated with SPX Heat Transfer Inc. impairment charges noted above.

RESULTS OF 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 continual 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 half 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 $0.6 and $0.9 during the three and six months ended June 30, 2012, respectively, and net gains of $2.7 and $0.8 during the three and six months ended July 2, 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/A 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 three and six months ended June 30, 2012 and July 2, 2011, income from discontinued operations and the related income taxes are shown below:

                                              Three months ended          Six months ended
                                            June 30,      July 2,      June 30,       July 2,
                                              2012          2011         2012          2011
Income from discontinued operations        $     15.9    $      9.3   $     23.4    $      16.1
Income tax (provision) benefit                   (6.2 )         0.7         (8.8 )         (2.0 )
Income from discontinued operations, net   $      9.7    $     10.0   $     14.6    $      14.1


For the three and six months ended June 30, 2012 and July 2, 2011, results of operations for our businesses reported as discontinued operations were as follows:

                   Three months ended       Six months ended
                  June 30,     July 2,     June 30,    July 2,
                    2012         2011        2012        2011
Revenues         $    244.8    $  247.2   $    471.0   $  461.3
Pre-tax income         17.1        10.1         25.1       18.8

RESULTS OF REPORTABLE SEGMENTS AND OTHER OPERATING SEGMENTS

The following information should be read in conjunction with our condensed consolidated financial statements and related notes. These 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 reportable segments and our other operating segments.

Non-GAAP Measures- Throughout the following discussion of the results of our reportable and other operating segments, 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 Reportable Segment



                                        Three months ended                   Six months ended
                                 June 30      July 2,                June 30,     July 2,
                                   2012         2011      % Change     2012         2011      % Change
Revenues                        $    677.3   $    492.8       37.4   $ 1,305.4   $    948.7       37.6
Income                                69.8         56.6       23.3       116.2        113.0        2.8
% of revenues                         10.3 %       11.5 %                  8.9 %       11.9 %
Components of revenue growth:
Organic growth                                                11.9                                11.2
Foreign currency                                              (6.0 )                              (4.0 )
Acquisitions                                                  31.5                                30.4
Net revenue growth                                            37.4                                37.6


Revenues- For the three and six months ended June 30, 2012, the increase in revenues, compared to the respective 2011 periods, was due to incremental revenues of $155.0 and $288.3, respectively, associated with the acquisitions of Seital in the first quarter of 2012, Clyde Union and e&e in the fourth quarter of 2011, and Murdoch in the first quarter of 2011, as well as organic revenue growth. These increases were offset partially by the impact of a stronger U.S. dollar during the first half of 2012. The organic revenue growth was attributable primarily to additional sales into the (i) power and energy and industrial end markets in the Americas and (ii) food and beverage and industrial end markets in Asia Pacific. These increases in organic revenue were offset slightly by decreases in sales in Europe.

Income- For the three and six months ended June 30, 2012, income increased, compared to the respective 2011 periods, primarily as a result of the organic revenue growth noted above, partially offset by the impact of a stronger U.S. dollar in 2012. Margins for the three and six months ended June 30, 2012 declined, compared to the respective periods in 2011, primarily as a result of the impact of dilution related to Clyde Union's operating results during the periods, including (i) charges of $1.9 and $8.1, respectively, associated with the excess fair value (over historical cost) of inventory acquired in the Clyde Union transaction and subsequently sold in the first and second quarters of 2012, (ii) incremental amortization expense of $3.3 and $6.2, respectively, 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 and second quarters of 2012. In addition, margins . . .

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