SPX's CEO Discusses Q1 2012 Results - Earnings Call Transcript

SPX (SPW)

Q1 2012 Earnings Call

May 02, 2012 8:30 am ET

Executives

Ryan Taylor -

Christopher J. Kearney - Chairman, Chief Executive Officer and President

Patrick J. O'Leary - Chief Financial Officer, Executive Vice President and Treasurer

Jeremy W. Smeltser - Chief Financial Officer of Flow Technology and Vice President of Flow Technology

Analysts

Nigel Coe - Morgan Stanley, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Jonathan Shaffer

Jeffrey T. Sprague - Vertical Research Partners Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 1 2012 SPX Corporation Earnings Conference Call. My name is Sharon, and I'll be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Please proceed.

Ryan Taylor

Thanks, Shannon. Good morning, everyone. Thank you for joining us today. With me on the call this morning are Chris Kearney, our Chairman, President and CEO of SPX; Patrick O'Leary, our current Chief Financial Officer. And as a reminder, Patrick is retiring later this summer. Jeremy Smeltser is also on the call this morning. Jeremy is currently transitioning from his role as Flow Technology CFO and will assume the Corporate CFO duty starting in Q3 after Patrick's retirement.

Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is being webcast with a slide presentation, which can be accessed in the Investor Relations section of our website. The webcast will be available until May 16. And I encourage you to follow along with the webcast as we reference the information on the slides. In the Appendix, we have also provided reconciliations for all non-GAAP financial measures that we included in today's presentation.

Portions of our presentation and comments today are forward looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings.

And with that, I'll turn the call over to Chris.

Christopher J. Kearney

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call. As you know, 2012 is a year of transition for our company as we focus on executing many significant strategic actions. The investments we're making to transform the company had a dilutive impact on our Q1 financial results. However, we expect to see a positive benefit from these actions over the balance of 2012 and beyond. We believe these actions will allow us to leverage the positive trends we're seeing across many of our key end markets.

I'll begin this morning with a strategic update and look at credit trends at our key end markets. Patrick and Jeremy will then provide a detailed analysis of our financial results.

Looking first at ClydeUnion. As expected during the quarter, we took aggressive actions to address the operational execution challenges that ClydeUnion faced prior to our acquisition of this business. One key area of focus was supply chain. As part of this process, we made a significant working capital investment in the business to accelerate component supply. A large portion of the working capital was funded by the seller in accordance with the final purchase agreement.

In addition to the working capital investment, we implemented a new flatter organizational structure, and we begun to streamline the factory execution. ClydeUnion's Q1 sales were below our expectations and our business results were diluted to the quarter. However, we expect significant improvements over the remainder of the year. Q1 order trends were strong, driven by an increase in aftermarket orders. And the initial customer response to this acquisition has been extremely positive.

With ClydeUnion, we now have a foundation to build out the power and energy platform within our Flow Technology segment. The integration is well underway and continue to be very encouraged by its growth potential. Later on the call, Jeremy will provide details on ClydeUnion's Q1 performance and the status of the integration.

In Q1, we also acquired Seital, a leading global supplier of separation technology for a purchase price of $28 million. Separation technology is an important component in food and beverage processing that we had previously outsourced. With the acquisition of Seital, we now have in-house capability to integrate separators into our system designs. This acquisition also enables us to participate in the aftermarket for this product. Additionally, we believe our global flow resources and capabilities significantly enhance Seital's growth opportunities.

Our Power Transformer business is on track to ship the first unit out of its expanded large power facility in the second quarter. We expect to see production at this facility ramp up as the year progresses. Our joint venture with Shanghai Electric is off to a good start. It booked its first order in Q1, and we're seeing very strong quoting activity in Q2 for dry cooling systems in China.

The sale of Service Solutions is pending regulatory approval. We expect this transaction to be completed near the end of Q2 or in the third quarter, and we've reclassified the business to discontinued operations in Q1.

From a capital allocation perspective, we completed the first phase of our share repurchase program and anticipate executing the remainder of the program in 2012 after the sale of Service Solutions is completed. The strategic actions we're executing this year are directed at narrowing our focus, improving our earnings potential and strengthening our financial position. By the end of this year, we're projecting to have over $1.4 billion of liquidity that will provide us with significant flexibility to generate shareholder value.

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