Business context and reporting period
SPX Corporation filed this unaudited Form 10-Q for the three months ended April 1, 2017, compared with the three months ended April 2, 2016. Its reportable segments are HVAC, Detection and Measurement, and Engineered Solutions. The company noted the 2017 quarter had two fewer days than the comparable quarter, which it did not consider material.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $340.6 million | $360.6 million |
| Gross profit / margin | $88.1 million / 25.9% | $89.9 million / 24.9% |
| Operating income | $17.8 million | $28.1 million |
| Continuing-operations income | $10.3 million | $20.2 million |
| Net income attributable to SPX common shareholders | $17.4 million; $0.41 basic EPS | $13.0 million; $0.31 basic EPS |
| Cash from continuing operating activities | $5.4 million | Cash used: $50.6 million |
| Cash and equivalents | $92.7 million | $99.6 million at Dec. 31, 2016 |
| Total debt | $354.5 million | $356.2 million at Dec. 31, 2016 |
| Current assets / current liabilities | $511.1 million / $450.9 million | $527.6 million / $476.3 million at Dec. 31, 2016 |
Revenue declined 5.5% year over year: organic decline was 4.2%, currency contributed 0.5% growth, and the dry-cooling divestiture reduced revenue by 1.8%. Gross margin improved, while operating income fell partly because the prior-year quarter included a $17.9 million gain on the dry-cooling sale. Q1 2017 discontinued-operations income included a $7.2 million after-tax benefit from revising the Balcke Dürr sale loss; therefore, reported net income is not a clean measure of continuing performance.
Segment revenue and income were: HVAC, $110.1 million and $16.5 million; Detection and Measurement, $53.6 million and $11.2 million; Engineered Solutions, $176.9 million and $6.6 million. Engineered Solutions revenue fell 8.6%, primarily from lower process-cooling and heat-exchanger sales and the divestiture, while segment income improved with transformer efficiency and restructuring savings. Backlog was $33.0 million for HVAC, $76.5 million for Detection and Measurement, and $402.2 million for Engineered Solutions.
Operating cash flow improvement reflected working-capital efforts, timing of large-project receipts, the dry-cooling sale’s absence from the business mix, and $8.5 million received in an insurance settlement. Investing used $2.2 million, primarily capital expenditures; financing used $5.1 million. Cash decreased $6.9 million overall. The company reported compliance with senior-credit covenants, $313.9 million available under revolving facilities after letters of credit, and $39.9 million available under its trade-receivables facility. The term loan’s remaining balance is due September 2020.
Changes, outlook, risks and unusual items
- Management cited improved gross margin, lower SG&A, power-transformer operating efficiency, and prior restructuring savings, despite lower sales and operating income.
- No specific full-year financial guidance is provided in the filing. Management said its businesses generally perform more strongly in the second half, with certain heating businesses seasonal; interim results are not necessarily indicative of full-year results.
- South African large power projects remain challenging, with delays, cost overruns, and claim disputes. Projected revenue includes approximately $27.5 million for claims and unapproved change orders; management considers recovery probable, but revisions to project estimates could materially affect results.
- Contingencies include $651.7 million of recorded liabilities for claims and other matters, including $604.1 million for asbestos product liability, alongside $554.0 million of related insurance-recovery assets. Collection depends on insurers and other assumptions; adverse developments could materially affect results or cash flows.
- Balcke Dürr sale working-capital terms remain unsettled. SPX also retains approximately €79 million of parent guarantees and €71 million of bank and surety bonds; the buyer and business provided indemnities and related security.
- The BEE partner in a South African subsidiary was awarded a redemption amount in arbitration; SPX disputes the determination and says it will pursue legal recourse. A patent-infringement jury verdict favored SPX’s subsidiary, but further judicial proceedings, including a possible appeal, remain possible.
- Other risks include tax examinations and $27.1 million of net unrecognized tax benefits including interest; the company said $6 million to $10 million could reasonably decrease within 12 months. The filing also cites ordinary-course litigation, environmental, product-liability, and self-insurance exposures.
Important facts for investors to verify
- Whether Engineered Solutions’ lower revenue and backlog develop as expected, and whether South African project claims and cost estimates are ultimately supported.
- How much of reported Q1 net income reflects continuing operations versus the Balcke Dürr sale-related tax benefit, and the resulting trend in underlying earnings.
- Whether working-capital cash-flow gains persist beyond timing effects and the one-time $8.5 million insurance receipt.
- Any changes to asbestos liabilities or insurance recoverability, retained divestiture guarantees, tax positions, or the South African redemption dispute.
- Debt repayment, borrowing availability, and covenant compliance in subsequent periods.