Compared with a year ago, SPX is delivering better operating performance, while the company’s backlog has been rising (up 7%) and has also been de-risked as a result of greater customer order selectivity, allowing sharply better free cash flow generation to be wisely allocated to maximize shareholder value.
SPX’s operating cash flow has been enhanced by $679 million of pretax divestiture proceeds and significantly stronger U.S. pension funding, allowing a 50% increase in SPX’s dividend to $1.50 per share annually and enabling $368 million to be returned via share repurchase to shareholders.
End-markets are generally moderately improved for SPX from a year ago, with food and beverage components strong and systems bid and quote inquiries up (particularly food safety in EMEA and Asia); power and energy remains steady at a high level, while power generation is steady at low levels.
Industrial flow end-markets are enjoying strong demand for heat exchange orders for marine market applications; mining continues to be weak but inquiries are solidly higher for industrial mixers used in chemical products.
There has been no change for Waukesha distribution transformers, with replacement demand still strong but pricing still very competitive amid stable demand for medium-power transformers; constraining this cycle has been incrementally more capacity and flat to declining electricity demand.
One area that has seen a solid uptick in sales has been demand for cooling tower products for petrochemical, industrial, and data centers, but conditions for global power generation market remain soft.
SPX has not changed its guidance for sales to rise 2%-6% in 2014, with the operating margin expanding 90 basis points; 2014 guidance remains unchanged at EPS of $5.00-$5.50 and adjusted free cash flow of $225 million-$275 million.
SPX continues to focus on its three core flow technology markets (power and energy, food and beverage, and industrial flow processes); over the longer term, this will constitute the vast majority of the company, but in the near term this is more likely to be achieved via divestitures than acquisitions.
SPX will have to eventually expand its installed base to drive its oil-and-gas businesses; aftermarket accounts for about 45% of SPX’s power and energy sales, although this should grow as SPX’s installed base steadily rises over the rest of the decade.