Fitch Affirms SPX's IDR at 'BB+'; Outlook Negative
NEW YORK -- December 19, 2013
Fitch Ratings has affirmed SPX Corporation's (SPX) Issuer Default Rating (IDR)
and senior secured credit facilities at 'BB+'. The Rating Outlook is Negative.
The ratings cover approximately $1.7 billion of outstanding debt. A full list
of ratings follows at the end of this release.
KEY RATING DRIVERS
SPX's current leverage (debt to EBITDA) is high for the ratings, driven by a
weaker than expected operating performance and a meaningful decline of EBITDA
as a result of the divestiture of the Service Solutions business, completed in
December 2012. SPX's leverage was approximately 3.9x for the last 12 months
(LTM) ended Sept. 28, 2013, unchanged over the past two years. The company's
leverage is significantly higher than its gross debt/EBITDA target of 1.5x to
2.5x as defined in its bank agreement (the ratio is understated when compared
to Fitch's calculation). While the company occasionally exceeded its leverage
target over the past decade, SPX's inability to de-lever following the
acquisition of ClydeUnion in 2011 is somewhat unusual and is driven by
unexpected challenges associated with ClydeUnion's integration, slowdown in
product demand due to downturns in Europe and global economic markets, and the
sale of Service Solutions in 2012. High leverage was somewhat mitigated by a
significant increase in liquidity following the sale of Service Solutions and
Fitch's expectation of cash deployment toward either acquisitions or debt
Fitch's expects SPX's leverage will decline to approximately 2.8x at the end
of 2014 driven by improvements in operating performance and the expected
repayment of $500 million senior unsecured notes. On Dec. 4, 2013, the company
announced a plan to sell its 44.5% joint venture interest in EGS Electric
Group LLC (EGS) to Emerson Electric Co. for $571 million (approximately $350
million net of taxes) in the first quarter of 2014. In addition, SPX plans to
increase the size of its Term Loan A by $100 million and use the funds along
with the proceeds from the EGS sale to repay $500 million senior unsecured
notes due in December 2014. Following the repayment of the senior unsecured
notes, company leverage should be within its debt/EBITDA target as defined in
the bank agreement. In addition to debt reduction, SPX plans to repurchase
$500 million worth of shares throughout 2014.
The Negative Outlook reflects company's high leverage for its ratings. Fitch
could revise the Outlook upon the completion of the anticipated reduction in
leverage and the realization of stronger operating margins in 2014 following
recent restructuring initiatives. SPX engaged in significant restructuring
initiatives within all reporting segments during 2013 and Fitch expects the
company to achieve meaningful operating performance improvements in 2014.
SPX's sizable cash balance, expected divestiture proceeds and healthy cash
generation should enable the company to complete the announced debt reduction
and share repurchases while maintaining adequate liquidity, but failure to
follow through on the intended debt reduction would leave leverage high for
The ratings are supported by solid operating cash generation; good product and
geographic diversification; management's track record in successfully
integrating acquisitions; sizable revenues from the higher-margin aftermarket
business; and solid backlog. During 2013, SPX addressed Fitch's concern of the
underfunded status of its U.S. pension plan liabilities by making a $250
million voluntary contribution; transferring its U.S. Qualified monthly
pension payment obligations for current retirees to Massachusetts Mutual Life
Insurance Company; and offering a voluntary lump sum payment option to
eligible plan participants. These actions are expected to reduce the company's
U.S. qualified pension obligations by approximately 75%. Fitch expects SPX's
remaining pension liabilities to be fully funded by the end of 2013 and future
cash contributions to be insignificant.
Fitch is concerned with the continued weakness in the global economy and
slower than anticipated spending in SPX's various end markets and
insignificant improvement in its relatively weak operating margins in 2012.
This concern is somewhat mitigated by Fitch's expectation that margins will
improve in 2014 due to stronger backlog and improvements in operations.
Fitch's other concerns include SPX's cash deployment strategies, which focus
on share repurchases and acquisitions, and the company's willingness to
maintain higher leverage than its stated leverage range for a prolonged period
SPX has maintained strong liquidity of approximately $1 billion over the past
several years. At Sept. 28, 2013, the company's liquidity of $1.03 billion
consisted of $491 million in cash and $539 million of availability under its
revolving credit facilities. SPX's strong liquidity is supported by solid cash
generation. Fitch expects the company's liquidity to fluctuate in the range of
$700 million to $900 million for the next several years. The expected
liquidity range takes into account previously discussed plans to complete a
sizable share repurchase program and reduce gross debt in 2014.
The company continued experiencing significant margin headwinds throughout
2013 and 2012 due to non-profitable ClydeUnion legacy backlog, declining
organic sales, and cost pressures in Europe. Despite the challenges Fitch
expects SPX to generate about a 10% EBITDA margin, a marginal year-over-year
improvement. SPX's margin was 8.9% for the LTM ended Sept. 28, 2013, up from
8.6% for the same period ended Sept. 30, 2012. Fitch expects SPX's EBITDA
margin to improve in 2014 driven by better-quality backlog and the completion
of cost reduction initiatives. Fitch expects SPX to generate EBITDA above $450
million (as defined by Fitch) in 2014.
Fitch expects the company to report negative free cash flow (FCF) in 2013,
mainly driven by the $250 million voluntary cash contribution towards its U.S.
pension plans. SPX also reported negative FCF in 2012, primarily due to a
significant investment in net working capital in connection with the
ClydeUnion acquisition. Fitch expects SPX will generate positive FCF in the
range of $150 million to $200 million annually over the next several years.
SPX has historically deployed its cash towards acquisitions, capital
expenditures, dividends and occasional share repurchases; however, the company
significantly increased share repurchases over the past two years,
repurchasing $245 million and $249 million, respectively, in 2012 and during
the first nine months of 2013. The company announced a plan to repurchase an
additional $500 million worth of shares by the end of 2014 in connection with
the aforementioned anticipated sale of EGS. Fitch expects SPX will continue
managing cash deployment to maintain its publicly stated long-term gross
debt/EBITDA target and will maintain a relatively flat dividend pay-out ratio
and capital expenditure profile in 2014, with possible small bolt-on
Fitch expects that SPX's actions to reduce its pension liabilities in 2013,
rising interest rates, and expected strong asset returns in 2013 will bring
the remaining U.S. pension plans to fully funded status by the end of 2013.
Fitch expects future cash contributions towards U.S. pension plans to be
immaterial going forward. As of Dec. 31, 2012, SPX's foreign pension benefit
obligations totaled $323 million (86% funded). SPX also reported $148 million
underfunded OPEB obligations. The company expects to make annual benefit
payments in the range of $12 million to $15 million. In connection with
ClydeUnion acquisition in 2011, SPX assumed participation in a multi-employer
benefit plan; however contributions to this plan are not considered material.
The anticipated repayment of $500 million senior unsecured notes in 2014 will
significantly reduce company's leverage; however, Fitch estimates it will
remain slightly higher than the company's targeted range of 1.5x to 2.5x.
Fitch may consider revising the current Outlook to Stable from Negative
following the completion of the debt reduction; however, Fitch does not
anticipate taking other positive rating actions over the next several years
due to concerns related to recent revenue pressures in the company's various
end markets and weaker than anticipated operating results. Fitch may consider
a negative rating action should the company increase its target leverage, or
engage in unexpected sizable debt-funded cash deployment towards shareholders
in the form of a special dividend or additional share repurchases.
Fitch has affirmed the following ratings:
--IDR at 'BB+';
--Senior secured bank facilities at 'BB+';
--Senior unsecured debt at 'BB'.
The Rating Outlook is Negative. The senior unsecured notes are rated one-notch
below senior secured facilities due to their subordinate position to the
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage ', Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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David Petu, +1 212-908-0280
Fitch Ratings, Inc.
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Eric Ause, +1 312-606-2302
Craig Fraser, +1 212-908-0310
Media Relations, New York
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