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SPW > SEC Filings for SPW > Form 10-Q on 31-Oct-2012All Recent SEC Filings

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Form 10-Q for SPX CORP


31-Oct-2012

Quarterly Report


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

(in millions)

EXECUTIVE OVERVIEW

Revenues for the three and nine months ended September 29, 2012 increased, when compared to the same periods in 2011, by 7.2% and 11.8%, 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 $126.5 and $395.1, respectively. During the three months ended September 29, 2012, organic revenue declined 0.5%, when compared to the same period in 2011, while during the nine months ended September 29, 2012, organic revenue increased 2.9% when compared to the same period in 2011. Our Flow Technology reportable segment and Industrial Products and Services experienced organic revenue growth during the three and nine months ended September 29, 2012, while our Thermal Equipment and Services reportable segment experienced declines in organic revenue during these same 2012 periods. Income associated with our reportable and other operating segments declined to $134.2 and $332.7, respectively, during the three and nine months ended September 29, 2012 (compared to $138.0 and $359.6 in the respective 2011 periods). The decline in income associated with our reportable and other operating segments was attributable primarily to (i) the organic revenue declines and a lower proportion of high-margin project revenues within our Thermal Equipment & Services reportable segment and (ii) 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. Cash flows from continuing operations also declined on a year-over-year basis from an inflow of $106.4 in the nine months ended October 1, 2011, to an outflow of $139.4 in the nine months ended September 29, 2012, primarily as a result of (i) investments in working capital at Clyde Union of approximately $100.0, (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 $28.6 and (iv) income tax payments, net of refunds, of $32.0 during the nine months ended September 29, 2012, compared to income tax refunds, net of payments, of $13.0 during the nine months ended October 1, 2011.

Other items of note that impacted our financial results for the first nine months of 2012 are as follows:

On December 30, 2011, we contributed and sold certain assets of our dry cooling products business in China to the Shanghai Electric 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. In connection with the transaction, we 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 in December 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, have been combined within our "All Other" category, which we refer to as 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. During the first half of 2012, 0.992 shares of our common stock were repurchased for cash consideration of $75.0, with the remainder scheduled to be repurchased following the consummation of the sale of the Service Solutions business, in accordance with the share repurchase program. There were no common stock repurchases during the nine months ended October 1, 2011.


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 nine months ended September 29, 2012 and October 1, 2011, respectively, including the reconciliation of organic revenue growth (decline) to net revenue growth:

                                         Three months ended                           Nine months ended
                              September 29,     October 1,                 September 29,     October 1,
                                  2012             2011       % Change         2012             2011       % Change
Revenues                     $       1,249.4   $    1,166.0         7.2   $       3,674.9   $    3,287.7        11.8
Gross profit                           337.1          323.6         4.2             975.8          930.8         4.8
% of revenues                           27.0 %         27.8 %                        26.6 %         28.3 %
Selling, general and
administrative expense                 235.0          222.5         5.6             758.0          696.8         8.8
% of revenues                           18.8 %         19.1 %                        20.6 %         21.2 %
Intangible amortization                  9.1            5.6        62.5              27.2           16.9        60.9
Impairment of goodwill and
other intangible assets                    -              -           *                 -           24.7           *
Special charges, net                     7.1            7.2        (1.4 )            17.9           13.8        29.7
Other income (expense),
net                                        -          (33.7 )         *              19.0          (31.6 )         *
Interest expense, net                  (27.1 )        (22.4 )      21.0             (80.6 )        (67.4 )      19.6
Equity earnings in joint
ventures                                 8.6            7.1        21.1              25.0           20.9        19.6
Income from continuing
operations before income
taxes                                   67.4           39.3        71.5             136.1          100.5        35.4
Income tax (provision)
benefit                                (12.5 )         11.5           *             (34.8 )         (4.0 )     770.0
Income from continuing
operations                              54.9           50.8         8.1             101.3           96.5         5.0

Components of consolidated
revenue growth:
Organic growth (decline)                                           (0.5 )                                        2.9
Foreign currency                                                   (3.4 )                                       (3.5 )
Acquisitions/divestitures,
net                                                                11.1                                         12.4
Net revenue growth                                                  7.2                                         11.8



* Not meaningful for comparison purposes.

Revenues- For the three and nine months ended September 29, 2012, the increase in revenues, compared to the same 2011 periods, was due to incremental revenues of $139.3 and $427.6, respectively, associated with the acquisitions of Seital in the first quarter of 2012 and Clyde Union and e&e Verfahrenstechnik GmbH ("e&e") in the fourth quarter of 2011. During the three months ended September 29, 2012, organic revenue declined, as compared to the same period in 2011, primarily as a result of a decrease in sales of cooling and thermal products in the Americas and Europe. Such decrease in organic revenue was offset partially by an increase in sales volumes and, to a lesser extent, prices of power transformers. During the nine months ended September 29, 2012, organic revenue increased, as compared to the same period in 2011, primarily as a result of (i) additional sales into our Flow Technology reportable segment's power and energy and industrial end-markets in the Americas and its food and beverage and industrial end-markets in Asia Pacific and (ii) an increase in sales volumes and, to a lesser extent, prices of power transformers. These increases in organic revenue were offset partially by a decline in sales of cooling and thermal products in the Americas and Europe. A stronger U.S. dollar negatively impacted revenues during the three and nine months ended September 29, 2012, when compared to the same periods in 2011.

Gross Profit- For the three and nine months ended September 29, 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 nine months ended September 29, 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 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

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

A decline in high-margin sales within our Thermal Equipment and Services reportable segment during the three and nine months ended September 29, 2012;

A significant increase during the three and nine months ended September 29, 2012 of sales of food and beverage systems within our Flow Technology reportable segment, as such sales typically have lower profit margins than the segment's food and beverage component revenues; and

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

The above decreases in gross profit as a percentage of revenues were offset partially by improved cost absorption associated with the increase in sales of power transformers during 2012.

Selling, General and Administrative ("SG&A") expenses - For the three and nine months ended September 29, 2012, the increase in SG&A expense, compared to the respective periods in 2011, was due primarily to incremental SG&A of $23.3 and $77.5, respectively, associated with the acquisition of Clyde Union. The increases in SG&A were offset partially by decreases of $6.7 and $18.8, respectively, during the three and nine months ended September 29, 2012 associated with a stronger U.S. dollar during these periods when compared to the same periods in 2011.

Intangible Amortization - For the three and nine months ended September 29, 2012, the increase in intangible amortization, compared to the respective periods in 2011, was due primarily to incremental amortization of $3.3 and $9.5, respectively, associated with intangible assets purchased in the Clyde Union acquisition.

Impairment of Goodwill and Other Intangible Assets - For the nine months ended October 1, 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 relate 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 September 29, 2012 was composed primarily of foreign currency transaction losses of $3.0 and losses on currency forward embedded derivatives ("FX embedded derivatives") of $1.8, as well as investment earnings of $3.3 and gains on foreign currency protection agreements ("FX forward contracts") of $1.6. Other expense, net, for the three months ended October 1, 2011 was composed primarily of charges associated with our FX forward contracts of $35.2, partially offset by gains on our FX embedded derivatives of $3.8 and foreign currency transaction gains of $0.5. The expense associated with the FX forward contracts included a non-cash charge of $30.6 related to our hedging a significant portion of the purchase price of the Clyde Union acquisition, which was paid at closing in GBP. From the inception of these FX forward contracts through October 1, 2011, the U.S. dollar strengthened against the GBP by approximately 5.0%.

Other income, net, for the nine months ended September 29, 2012 was composed primarily of a gain of $20.5 associated with the deconsolidation of our dry cooling business in China, investment earnings of $8.7, and gains on FX forward contracts of $1.7, partially offset by foreign currency transaction losses of $8.9, losses on FX embedded derivatives of $3.1, and a loss of $1.0 associated with a fire at our power transformer manufacturing facility in Waukesha, WI. Other expense, net, for the nine months ended October 1, 2011 was composed primarily of a charge of $33.8 associated with our FX forward contracts and foreign currency


transaction losses of $3.8, partially offset by gains on FX embedded derivatives of $1.0 and insurance settlements of $2.8 related to death benefits received and a property insurance claim. The expense associated with the FX forward contracts included a non-cash charge incurred during the third quarter of 2011 of $30.6 related to our hedging a significant portion of the purchase price of the Clyde Union acquisition. 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 nine months ended September 29, 2012, when compared to the same periods in 2011, was primarily the result of interest incurred during the first three quarters 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 $2.0 and $7.0, respectively, was allocated to discontinued operations for the three and nine months ended September 29, 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 $8.6 and $6.7 during the three months ended September 29, 2012 and October 1, 2011, respectively, and $25.1 and $20.0 for the nine months ended September 29, 2012 and October 1, 2011, respectively. Our equity earnings from the Shanghai Electric JV were not material for the three and nine months ended September 29, 2012.

Income Tax Provision - For the three months ended September 29, 2012, we recorded an income tax provision of $12.5 on $67.4 of pre-tax income from continuing operations, resulting in an effective tax rate of 18.5%. This compares to an income tax benefit for the three months ended October 1, 2011 of $11.5 on $39.3 of pre-tax income from continuing operations, resulting in an effective tax rate of (29.3)%. The effective income tax rate for the three months ended September 29, 2012 was impacted favorably by tax benefits of $4.2 recorded in connection with various audit settlements and statute expirations during the period and a benefit of $2.8 associated with a reduction in deferred tax liabilities resulting from newly enacted corporate tax rates in the United Kingdom. The effective income tax rate for the three months ended October 1, 2011 was impacted favorably by an income tax benefit of $27.8 related to the release of a valuation allowance that had been recorded against our foreign tax credit carryforwards, partially offset by $6.9 of federal income taxes recorded in connection with our plan to repatriate a portion of the earnings of a foreign subsidiary.

For the nine months ended September 29, 2012, we recorded an income tax provision of $34.8 on $136.1 of pre-tax income from continuing operations, resulting in an effective tax rate of 25.6%. This compares to an income tax provision for the nine months ended October 1, 2011 of $4.0 on $100.5 of pre-tax income from continuing operations, resulting in an effective tax rate of 4.0%. The effective income tax rate for the nine months ended September 29, 2012 was impacted favorably by the tax benefits noted above for the three months ended September 29, 2012 and tax benefits of $2.5 recorded in the second quarter of 2012 in connection with various audit settlements and statute expirations. These benefits were offset partially 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. The effective income tax rate for the nine months ended October 1, 2011 was impacted favorably by the net income tax benefits of $20.9 noted above that were recorded during the three months ended October 1, 2011, along with the tax benefits of $2.5 recorded during the first half of 2011 associated with the conclusion of the Canadian appeals process and $4.5 related to the expansion of our power transformer facility in Waukesha, WI.

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 December 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 $0.7 and $1.6 during the three and nine months ended September 29, 2012, respectively, and net gains of $0.4 and $1.2 during the three and nine months ended October 1, 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 nine months ended September 29, 2012 and October 1, 2011, income from discontinued operations and the related income taxes are shown below:

                                          Three months ended                 Nine months ended
                                     September 29,     October 1,      September 29,      October 1,
                                         2012             2011             2012              2011
Income from discontinued
operations                          $           8.4    $      18.5    $          31.8    $        34.6
Income tax provision                           (3.1 )         (7.0 )            (11.9 )           (9.0 )
Income from discontinued
operations, net                     $           5.3    $      11.5    $          19.9    $        25.6

For the three and nine months ended September 29, 2012 and October 1, 2011, results of operations for our businesses reported as discontinued operations were as follows:

                       Three months ended                 Nine months ended
                  September 29,      October 1,     September 29,      October 1,
                      2012              2011            2012              2011
Revenues         $         196.9    $      221.2   $         667.9    $      682.5
Pre-tax income               9.5            17.8              34.6            36.6

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                           Nine months ended
                                September 29,     October 1,                 September 29,     October 1,
. . .
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