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SPX CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) (in millions) EXECUTIVE OVERVIEW Revenues for the three and nine months ended September 27, 2014 generally were comparable to the respective periods in 2013, with the most significant fluctuations related to an increase in sales of power transformers, cooling equipment, heating and ventilation products and decreases in sales associated with our large power projects in South Africa, power and energy pumps and fare collection systems. Income associated with our reportable and other operating segments totaled $139.7 and $360.5 for the three and nine months ended September 27, 2014, respectively, and $129.5 and $323.8 for the three and nine months ended September 28, 2013, respectively. The year-over-year increase in income associated with our reportable and other operating segments was primarily the result of improved operational execution and favorable sales mix within the Flow Technology reportable segment, as well as cost reductions associated with restructuring actions during 2013 and the first quarter of 2014 within the Flow Technology and Thermal Equipment and Services reportable segments. Cash flows used in continuing operations totaled $66.2 during the first nine months of 2014, compared to $150.1 during the first nine months of 2013. Cash flows for the first nine months of 2014 included approximately $167.0 of income tax payments associated with the sales of our (i) interest in EGS Electrical Group, LLC and Subsidiaries ("EGS") joint venture, (ii) Thermal Products Solutions ("TPS") business, and (iii) SPX Precision Components ("Precision Components") business (see below for additional details). Cash flows for the nine months ended September 28, 2013 included a discretionary pension contribution of $250.0 to the SPX U.S. Pension Plan. Other items that impacted our financial performance during the first nine months of 2014 included: † Sale of joint venture interest - On January 7, 2014, we completed the sale of our 44.5% interest in the EGS joint venture to Emerson Electric Co. for cash proceeds of $574.1. As a result of the sale, we recorded a gain of $491.2 to "Other income (expense), net" during the first quarter of 2014. † Redemption of senior notes - On February 11, 2014, we completed the redemption of all our 7.625% senior notes due in December 2014 for a total redemption price of $530.6. As a result of the redemption, we recorded a charge of $32.5 to "Loss on early extinguishment of debt" during the first quarter of 2014, which consisted of the premiums paid of $30.6, the write-off of unamortized deferred financing fees of $1.0, and other costs incurred to redeem the notes of $0.9. † Pension plan actions - During a designated election period in the first quarter of 2014, we offered approximately 7,100 eligible former employees under the SPX U.S. Pension Plan (the "Plan") a voluntary lump-sum payment option in lieu of a future pension benefit under the Plan. Approximately 38%, or $165.2, of the projected benefit obligation of the Plan was settled as a result of lump-sum payments made to those who accepted the offer. These payments were made during March 2014 and resulted in a settlement charge of $4.6 being reflected in net periodic pension benefit expense for the first quarter of 2014. In addition, and in connection with the lump-sum payment action, we remeasured the assets and liabilities of the Plan as of March 29, 2014, which resulted in a charge to net periodic pension benefit expense of $14.8 for the three months then ended. Lastly, we reduced net periodic pension benefit expense by $4.2 during the first three quarters of 2014 as a result of a reduction to the estimated settlement charge that was recorded during the fourth quarter of 2013 in connection with the transfer of the pension obligation for the retirees of the Plan to Massachusetts Mutual Life Insurance Company. † Share repurchases - During the first nine months of 2014, we repurchased 4.029 shares of our common stock under a Rule 10b5-1 trading plan, which was entered into on December 18, 2013 to facilitate the repurchase of up to $500.0 of shares of our common stock on or before December 31, 2014, for $414.3. Through September 27, 2014, total repurchases under the trading plan were $425.5. 31 -------------------------------------------------------------------------------- † Discontinued operations: † Completed the sale of TPS in the first quarter of 2014 for cash proceeds of $38.5 and a promissory note of $4.0. In connection with the sale, we recorded a gain, net of taxes, of $21.2. The promissory note was collected in full during the third quarter of 2014. † Completed the sale of Precision Components in the second quarter of 2014 for cash proceeds of $63.0. In connection with the sale, we recorded a loss, net of taxes, of $7.3. During the third quarter of 2014, we reduced the net loss by $0.4, associated primarily with revisions to certain liabilities related to the sale, and paid $0.4 associated with the working capital settlement. † Completed the sale of Fenn LLC in the third quarter of 2014 for cash proceeds of $3.5. In connection with the sale, we recorded a loss, net of taxes, of $0.4. † Income taxes - The most significant items impacting the effective tax rate for the first nine months of 2014 were the U.S. income taxes provided in connection with the $491.2 gain recorded during the first quarter on the sale of our interest in EGS, and the favorable impacts of (i) $10.3 of tax benefits related to various audit settlements and statute expirations and (ii) $6.7 of tax benefits related to a loss on an investment in a foreign subsidiary, partially offset by tax charges of $12.2 resulting from net increases in valuation allowances recorded against certain foreign deferred income tax assets. † Special charges - During the nine months ended September 27, 2014, we recorded $18.3 to "Special charges, net," related primarily to restructuring actions in our Flow Technology reportable segment. 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 2013 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 first calendar 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 2014 were March 29, June 28 and September 27, compared to the respective March 30, June 29 and September 28, 2013 dates. We had one less day in the first quarter of 2014 and will have one more day in the fourth quarter of 2014 than in the respective 2013 periods. Seasonality and Competition - Many of our businesses closely follow changes in the industries and end markets they serve. In addition, certain businesses have seasonal fluctuations. Demand in the oil and gas aftermarket is typically stronger in the second half of the year. 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, food and beverage systems and related services is highly correlated to timing on large construction contracts, which may cause significant fluctuations in our financial performance 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 innovation and price. These methods vary with the type of product sold. We believe we compete effectively on the basis of each of these factors. Non-GAAP Measures - Organic revenue growth (decline) presented herein is defined as revenue growth (decline) excluding the effects of foreign currency fluctuations and acquisitions. We believe 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. 32 -------------------------------------------------------------------------------- The following table provides selected financial information for the three and nine months ended September 27, 2014 and September 28, 2013, respectively, including the reconciliation of organic revenue growth (decline) to net revenue growth: Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 % Change 2014 2013 % Change Revenues $ 1,158.1 $ 1,145.8 1.1 $ 3,407.2 $ 3,398.2 0.3 Gross profit 342.1 336.8 1.6 980.9 960.0 2.2 % of revenues 29.5 % 29.4 % 28.8 % 28.3 % Selling, general and administrative expense 226.9 224.8 0.9 734.7 710.6 3.4 % of revenues 19.6 % 19.6 % 21.6 % 20.9 % Intangible amortization 7.6 8.2 (7.3 ) 24.2 24.4 (0.8 ) Impairment of intangible assets - - - - 2.0 * Special charges, net 4.1 6.9 (40.6 ) 18.3 25.1 (27.1 ) Other income (expense), net 1.1 (4.1 ) (126.8 ) 490.5 (4.2 ) * Interest expense, net (14.1 ) (24.5 ) (42.4 ) (45.2 ) (77.2 ) (41.5 ) Loss on early extinguishment of debt - - - (32.5 ) - * Equity earnings in joint ventures 0.3 11.4 (97.4 ) 0.8 30.6 (97.4 ) Income from continuing operations before income taxes 90.8 79.7 13.9 617.3 147.1 * Income tax provision (26.0 ) (16.6 ) 56.6 (202.6 ) (30.2 ) * Income from continuing operations 64.8 63.1 2.7 414.7 116.9 * Components of consolidated revenue growth: Organic growth (decline) 1.5 (0.1 ) Foreign currency (0.4 ) 0.4 Net revenue growth 1.1 0.3 -------------------------------------------------------------------------------- * Not meaningful for comparison purposes. Revenues - For the three months ended September 27, 2014, the increase in revenues, compared to the respective 2013 period, was due to organic revenue growth partially offset by the impact of currency rate fluctuations. The increase in organic revenue was due to increased shipments of power transformers and increased sales of cooling equipment and heating and ventilation products in the U.S. These increases in organic revenue were offset partially by lower sales of power and energy pumps, lower sales of fare collection systems, and the expected decline in revenues from our large power projects in South Africa (see "Results of Reportable Segments and Other Operating Segments" for additional details). For the nine months ended September 27, 2014, the increase in revenues, compared to the respective 2013 period, was due to currency rate fluctuations partially offset by a slight decline in organic revenue. The slight decline in organic revenue was the result of the expected decrease in revenues associated with our large power projects in South Africa, and lower sales of power and energy pumps and fare collection systems. These declines in organic revenue generally were offset by increased shipments of power transformers, increased sales of cooling equipment in the U.S. and Asia Pacific, and increased sales of heating and ventilation products in the U.S. (see "Results of Reportable Segments and Other Operating Segments" for additional details). Gross Profit - The increase in gross profit and gross profit as a percentage of revenue for the three months ended September 27, 2014, compared to the respective 2013 period, was the result of improved operational execution and favorable sales mix within the Flow Technology reportable segment, cost reductions associated with restructuring initiatives, and the organic revenue growth discussed above. These increases were offset partially by unfavorable sales mix within the group of businesses included in Industrial Products and Services and Other (see "Results of Reportable and Other Operating Segments" for additional details). 33 -------------------------------------------------------------------------------- The increase in gross profit and gross profit as a percentage of revenue for the nine months ended September 27, 2014, compared to the respective 2013 period, was the result of the improved operational execution and favorable sales mix within the Flow Technology reportable segment and the cost reductions associated with restructuring initiatives noted above, partially offset by $8.3 of charges recorded in the second quarter of 2014 related to increased cost estimates on the large power projects in South Africa and the unfavorable sales mix within the group of businesses included in Industrial Products and Services and Other (see "Results of Reportable and Other Operating Segments" for additional details). Selling, General and Administrative ("SG&A") Expenses - For the three months ended September 27, 2014, the increase in SG&A expense, when compared to the respective 2013 period, was due primarily to an increase in pension and postretirement expense of $6.5 (overall increase in pension and postretirement expense of $7.0, with $0.5 of the increase reflected in cost of goods sold), and a $3.9 increase in incentive compensation expense resulting from a projected increase in earnings in 2014. These increases were largely offset by cost reductions from restructuring actions completed in 2013 and the first quarter of 2014 within our Flow Technology and Thermal Equipment and Services reportable segments. For the nine months ended September 27, 2014, the increase in SG&A expense, when compared to the respective 2013 period, was due primarily to an increase in pension and postretirement expense of $35.7 (overall increase in pension and postretirement expense of $38.3, with $2.6 of the increase reflected in cost of goods sold), and a $15.4 increase in incentive compensation expense. These increases were partially offset by cost reductions from the restructuring actions noted above. Intangible Amortization - For the three and nine months ended September 27, 2014, the decrease in intangible amortization was due primarily to the impact of foreign currency translation. Impairment of Intangible Assets - No impairment charges were recorded in the first nine months of 2014. In the first quarter of 2013, we recorded an impairment charge of $2.0 related to the trademarks of Clyde Union. Special Charges, net - Special charges, net, related primarily to restructuring initiatives to consolidate manufacturing, distribution, sales and administrative facilities, reduce workforce and rationalize certain product lines. See Note 5 to our condensed consolidated financial statements for the details of actions taken in 2014 and 2013. Other Income (Expense), net - Other income, net, for the three months ended September 27, 2014 was composed primarily of gains on currency forward embedded derivatives ("FX embedded derivatives") of $3.1, net gains on investments of $1.9 and foreign currency transaction gains of $0.6, partially offset by losses on foreign currency forward contracts ("FX forward contracts") of $4.6. Other expense, net, for the three months ended September 28, 2013 was composed primarily of foreign currency transaction losses of $5.6 and losses on FX embedded derivatives of $0.8, partially offset by net gains on investments of $1.4 and gains on FX forward contracts of $0.9. Other income, net, for the nine months ended September 27, 2014 was composed primarily of the gain on sale of our interest in EGS of $491.2 and, to a much lesser extent, net gains on investments of $5.3 and gains on FX embedded derivatives of $1.0, partially offset by foreign currency transaction losses of $3.9 and losses on FX forward contracts of $2.8. Other expense, net, for the nine months ended September 28, 2013 was composed primarily of foreign currency transaction losses of $13.3 and losses on FX forward contracts of $1.2, partially offset by net gains on investments of $5.3 and gains on FX embedded derivatives of $4.9. Interest Expense, net - Interest expense, net, includes both interest expense and interest income. The decrease in interest expense, net, during the three and nine months ended September 27, 2014, when compared to the same periods in 2013, was primarily a result of the redemption of all our 7.625% senior notes during the first quarter of 2014 and, to a lesser extent, lower average interest rates and fees related to our senior credit facilities during the three and nine months ended September 27, 2014, compared to the respective periods in 2013. Refer to the discussion of Liquidity and Financial Condition in our 2013 Annual Report on Form 10-K for details pertaining to our 2013 debt activity. Loss on Early Extinguishment of Debt - As previously noted, on February 11, 2014, we completed the redemption of all our 7.625% senior notes due in December 2014 for a total redemption price of $530.6. As a result of the redemption, we recorded a charge of $32.5 during the first quarter of 2014, which consisted of the premiums paid of $30.6, the write-off of unamortized deferred financing fees of $1.0, and other costs incurred to redeem the notes of $0.9. 34 -------------------------------------------------------------------------------- Equity Earnings in Joint Ventures - Prior to 2014, our equity earnings in joint ventures were attributable primarily to our investment in EGS. As previously noted, we completed the sale of our investment interest in EGS on January 7, 2014. Accordingly, we recognized no equity earnings from this joint venture during the three and nine months ended September 27, 2014. Our equity earnings from this investment totaled $11.4 and $30.5 during the three and nine months ended September 28, 2013. See Note 1 to our condensed consolidated financial statements for further discussion regarding the sale of our EGS interest. Income Tax Provision - For the three months ended September 27, 2014, we recorded an income tax provision of $26.0 on $90.8 of pre-tax income from continuing operations, resulting in an effective rate of 28.6%. This compares to an income tax provision for the three months ended September 28, 2013 of $16.6 on $79.7 of pre-tax income from continuing operations, resulting in an effective rate of 20.8%. The effective tax rate for the third quarter of 2014 was impacted unfavorably by income tax charges of (i) $4.0 related to incremental state income taxes provided in connection with the gain recorded during the first quarter on the sale of our interest in EGS and (ii) $1.4 related to valuation allowances recorded against certain foreign deferred income tax assets, partially offset by $0.4 of tax benefits recorded in connection with various audit settlements and statute expirations. The effective tax rate for the third quarter of 2013 was impacted favorably by income tax benefits of (i) $6.4 associated with net reductions to valuation allowances recorded against certain foreign deferred income tax assets and (ii) $2.3 recorded in connection with various audit settlements and statute expirations during the period. For the nine months ended September 27, 2014, we recorded an income tax provision of $202.6 on $617.3 of pre-tax income from continuing operations, resulting in an effective tax rate of 32.8%. This compares to an income tax provision for the nine months ended September 28, 2013 of $30.2 on $147.1 of pre-tax income from continuing operations, resulting in an effective tax rate of 20.5%. The most significant items impacting the effective tax rate for the first nine months of 2014 were the U.S. income taxes provided in connection with the $491.2 gain recorded during the first quarter on the sale of our interest in EGS, and the favorable impacts of (i) $10.3 of tax benefits related to various audit settlements and statute expirations and (ii) $6.7 of tax benefits related to a loss on an investment in a foreign subsidiary, partially offset by tax charges of $12.2 resulting from net increases in valuation allowances recorded against certain foreign deferred income tax assets. The effective tax rate for the first nine months of 2013 was impacted favorably by the $8.7 of tax benefits noted above that were realized during the third quarter of 2013, as well as tax benefits realized during the first half of 2013 of $4.1 related to the Research and Experimentation Credit generated in 2012, $2.0 related to various foreign tax credits, and $1.8 for statute expirations. 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. We report businesses or asset groups as discontinued operations when, among other things, we terminate the operations of the business or asset group, commit to a plan to divest the business or asset group or we actively begin marketing the business or asset group, and the sale of the business or asset group is deemed probable within the next twelve months. The following businesses, which have been sold or for which operations have been terminated, met these requirements and therefore have been reported as discontinued operations for all periods presented: Quarter of Sale Quarter or Termination Business Discontinued of Operations Fenn LLC ("Fenn") Q3 2013 Q3 2014SPX Precision Components ("Precision Components") Q3 2013 Q2 2014 Thermal Product Solutions ("TPS") Q3 2013 Q1 2014 Broadcast Antenna System business ("Dielectric") Q2 2013 Q2 2013 Crystal Growing business ("Kayex") Q1 2013 Q1 2013 35 --------------------------------------------------------------------------------Fenn - Sold for cash consideration of $3.5 during the third quarter of 2014, resulting in a loss, net of taxes, of $0.4. Precision Components - Sold for cash consideration of $63.0 during the second quarter of 2014, resulting in a loss, net of taxes, of $7.3. During the third quarter of 2014, we reduced the net loss by $0.4, primarily as a result of revisions to certain liabilities related to the sale, and paid $0.4 associated with the working capital settlement. TPS - Sold for cash consideration of $38.5 and a promissory note of $4.0 during the first quarter of 2014, resulting in a gain, net of taxes, of $21.5. During the third quarter of 2014, the amount due under the promissory note was collected in full, and we reduced the net gain on the sale of the business by $0.3 related to revisions of certain retained liabilities associated with the sale. Dielectric - We sold assets of the business during the second quarter of 2013 for cash consideration of $4.7, resulting in a gain of less than $0.1. Kayex - We closed the business during the first quarter of 2013. In connection with the closure, we recorded a loss, net of taxes, of $2.1 during the first quarter of 2013, with such loss related primarily to severance costs and asset impairment charges. During the third quarter of 2013, we recorded a gain, net of taxes, of $3.6 associated primarily with the sale of a perpetual license related to certain of the business's intangible assets. Proceeds from the sale of the perpetual license totaled $6.9. In addition to the businesses discussed above, we recognized net losses of $2.6 and $1.9 during the three and nine months ended September 27, 2014, respectively, and net losses of $3.4 and $3.8 during the three and nine months ended September 28, 2013, respectively, resulting from adjustments to gains/losses on dispositions of previously discontinued businesses. Refer to the consolidated financial statements contained in our 2013 Annual Report on Form 10-K for the disclosure of all businesses discontinued during 2011, 2012 and 2013. 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 with the buyers, an arbitration or other dispute-resolution process. Final agreement of the working capital figures with the buyers 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 27, 2014 and September 28, 2013, income from discontinued operations and the related income taxes are shown below: Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Income from discontinued operations $ 3.3 $ 9.0 $ 36.9 $ 13.3 Income tax provision (4.3 ) (3.6 ) (20.0 ) (4.5 ) Income (loss) from discontinued operations, net $ (1.0 ) $ 5.4 $ 16.9 $ 8.8 For the three and nine months ended September 27, 2014 and September 28, 2013, results of operations for discontinued operations were as follows: Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Revenues $ 13.4 $ 50.7 $ 63.1 $ 154.2 Pre-tax income 3.4 8.6 8.0 15.9 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 a description of each of our reportable and other operating segments. 36 -------------------------------------------------------------------------------- Non-GAAP Measures - Throughout the following discussion of reportable and other operating 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 Reportable Segment Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 % Change 2014 2013 % Change Revenues $ 638.5 $ 651.6 (2.0 ) $ 1,916.6 $ 1,918.0 (0.1 ) Income 97.5 83.1 17.3 252.0 205.1 22.9 % of revenues 15.3 % 12.8 % 13.1 % 10.7 % Components of revenue decline: Organic decline (2.0 ) (1.3 ) Foreign currency - 1.2 Net revenue decline (2.0 ) (0.1 ) Revenues - For the three and nine months ended September 27, 2014, the decrease in revenues, compared to the respective 2013 periods, was due to a decline in organic revenue primarily associated with lower sales of power and energy pumps, partially offset by increased sales of food and beverage systems and components. The net decline in organic revenue for the nine months ended September 27, 2014 was offset partially by the benefits associated with currency rate fluctuations. Income - For the three and nine months ended September 27, 2014, income and margin increased, compared to the respective 2013 periods, primarily due to cost reductions associated with restructuring initiatives at various locations in Europe and the U.S. and improved operational execution and favorable sales mix associated primarily with the segment's power and energy business. Backlog - The segment had backlog of $1,191.1 and $1,392.0 as of September 27, 2014 and September 28, 2013, respectively. Approximately 48% of the segment's backlog as of September 27, 2014 is expected to be recognized as revenue during the remainder of 2014. Thermal Equipment and Services Reportable Segment Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 % Change 2014 2013 % Change Revenues $ 338.8 $ 324.1 4.5 $ 945.7 $ 979.5 (3.5 ) Income 23.2 21.7 6.9 41.9 49.6 (15.5 ) % of revenues 6.8 % 6.7 % 4.4 % 5.1 % Components of revenue growth (decline): Organic growth (decline) 6.2 (2.0 ) Foreign currency (1.7 ) (1.5 ) Net revenue growth (decline) 4.5 (3.5 ) Revenues - For the three months ended September 27, 2014, the increase in revenues, compared to the respective 2013 period, was due to an increase in organic revenue, partially offset by the impact of a weaker South African Rand. The organic revenue growth was the result of an increase in sales of cooling equipment and heating and ventilation products in the U.S. These increases in organic revenue were offset partially by the expected decrease in revenue associated with the large power projects in South Africa. For the nine months ended September 27, 2014, the decrease in revenues, compared to the respective 2013 period, was due to a decline in organic revenue and, to a lesser extent, the weakening of the South African Rand. The decline in organic revenue was the result of the expected decrease in revenue associated with the large power projects in South Africa, partially offset by increases in sales of cooling equipment in the U.S. and Asia Pacific, as well as heating and ventilation products in the U.S. 37 -------------------------------------------------------------------------------- Income -For the three months ended September 27, 2014, income and margin increased, compared to the respective 2013 period, primarily due to the organic revenue growth noted above and the impact of cost reductions associated with restructuring initiatives. These increases in income and margin were offset partially by lower income and margin on the large power projects in South Africa during the 2014 period. For the nine months ended September 27, 2014, income and margin decreased, compared to the respective 2013 period, primarily as a result of reduced profitability on the large power projects in South Africa due to (i) $8.3 of charges recorded in the second quarter of 2014 related to increased cost estimates and (ii) the impact of the organic revenue decline described above. These declines in income and margin were offset partially by the impact of cost reductions associated with restructuring initiatives. Backlog - The segment had backlog of $689.5 and $672.1 as of September 27, 2014 and September 28, 2013, respectively. Approximately 33% of the segment's backlog as of September 27, 2014 is expected to be recognized as revenue during the remainder of 2014. Portions of this backlog are long-term in nature, with the related revenues expected to be recorded through 2015 and beyond. The backlog figures as of September 27, 2014 and September 28, 2013 exclude approximately $83.0 and $110.0, respectively, of estimated price increases related to cost inflation on the large power projects in South Africa. Industrial Products and Services and Other Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 % Change 2014 2013 % Change Revenues $ 180.8 $ 170.1 6.3 $ 544.9 $ 500.7 8.8 Income 19.0 24.7 (23.1 ) 66.6 69.1 (3.6 ) % of revenues 10.5 % 14.5 % 12.2 % 13.8 % Components of revenue growth: Organic growth 5.8 7.9 Foreign currency 0.5 0.9 Net revenue growth 6.3 8.8 Revenues - For the three and nine months ended September 27, 2014, the increase in revenues, compared to the respective 2013 periods, was due to organic revenue growth and, to a lesser extent, the impact of currency rate fluctuations. The increase in organic revenue was due primarily to an increase in power transformer shipments, partially offset by lower sales of fare collection systems. Income - For the three and nine months ended September 27, 2014, income and margin decreased, compared to the respective 2013 periods, primarily due to a decline in fare collection systems sales and profit. Margins were also impacted by the increased mix of lower margin power transformer sales. Backlog - The group backlog was $365.2 and $327.7 as of September 27, 2014 and September 28, 2013, respectively. Approximately 39% of the backlog as of September 27, 2014 is expected to be recognized as revenue during the remainder of 2014. Corporate and Other Expenses Three months ended Nine months ended September 27, September 28, September 27, September 28, 2014 2013 % Change 2014 2013 % Change Total consolidated revenues $ 1,158.1 $ 1,145.8 1.1 $ 3,407.2 $ 3,398.2 0.3 Corporate expense 24.7 26.2 (5.7 ) 79.0 82.2 (3.9 ) % of revenues 2.1 % 2.3 % 2.3 % 2.4 % Stock-based compensation expense 4.6 3.7 24.3 33.9 29.3 15.7 Pension and postretirement expense (income) 2.8 (4.2 ) * 25.6 (12.7 ) * -------------------------------------------------------------------------------- * Not meaningful for comparison purposes. 38 -------------------------------------------------------------------------------- Corporate Expense - Corporate expense generally relates to the cost of our Charlotte, NC corporate headquarters and our Asia Pacific center in Shanghai, China. Corporate expense for the three months ended September 27, 2014 decreased compared to the respective 2013 period due primarily to modest declines in marketing and travel-related costs. Corporate expense for the nine months ended September 28, 2013 included costs of $4.2 associated with earnings on participant deferred compensation account balances. The impact of this decline, as well as the decrease in corporate expense for the three months ended September 27, 2014, as described above, were partially offset by an increase in incentive compensation expense during the nine months ended September 27, 2014 resulting from a projected increase in earnings in 2014. Stock-based Compensation Expense - Stock-based compensation expense represents our consolidated expense, which we do not allocate for segment reporting purposes. The increases in stock-based compensation expense for the three and nine months ended September 27, 2014, compared to the respective periods in 2013, were primarily the result of an increase in the fair value of the 2014 restricted stock share and restricted stock unit awards, as the weighted-average fair value of the 2014 awards was approximately 44% higher than the 2013 awards. Pension and Postretirement Expense (Income) - Pension and postretirement expense (income) represents our consolidated expense (income), which we do not allocate for segment reporting purposes. The net periodic benefit expense for the three months ended September 27, 2014, when compared to the net periodic benefit income for the respective 2013 period, resulted from a combination of (i) an increase in the discount rate used to recognize interest cost of the SPX U.S. Pension Plan (the "Plan") and (ii) a reduction of the expected rate of return on assets of the Plan, primarily reflecting a change in allocation of the Plan's assets in connection with the lump-sum payment action that took place in March 2014. The net periodic benefit expense for the nine months ended September 27, 2014 included the effects of the above as well as a settlement charge of $4.6 related to the premium paid to settle approximately 38%, or $165.2, of the projected benefit obligation of the Plan during March 2014 and a net actuarial loss of $14.8 resulting from the remeasurement of the Plan's assets and obligations as of March 29, 2014, partially offset by a $4.2 reduction in the first three quarters of 2014 to the estimated settlement charge that was recorded during the fourth quarter of 2013 in connection with the transfer of the pension obligation for the retirees of the Plan to Massachusetts Mutual Life Insurance Company. See Note 9 to our condensed consolidated financial statements for additional details on this lump-sum settlement action as well as the components of our pension and postretirement expense (income) for the three and nine months ended September 27, 2014 and September 28, 2013. LIQUIDITY AND FINANCIAL CONDITION Below are the cash flows from (used in) operating, investing, and financing activities and discontinued operations, as well as the net change in cash and equivalents for the nine months ended September 27, 2014 and September 28, 2013. |