Business context and reporting period
This is SPX Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2017; the filing identifies the registrant as SPX Corporation, although the request metadata names SPX Technologies, Inc. SPX reports HVAC, Detection and Measurement, and Engineered Solutions. Balcke Dürr is reported as a discontinued operation.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $348.5 million | $345.0 million | $1,038.8 million | $1,077.0 million |
| Gross profit / margin | $85.1 million / 24.4% | $80.8 million / 23.4% | $249.3 million / 24.0% | $261.8 million / 24.3% |
| Operating income | $31.2 million | $11.3 million | $53.1 million | $53.2 million |
| Continuing operations income | $22.0 million | $6.6 million | $24.0 million | $33.3 million |
| Net income attributable to common shareholders, adjusted as presented | $22.3 million | $1.9 million | $30.7 million | $0.8 million |
| Diluted EPS | $0.51 | $0.04 | $0.70 | $0.02 |
Q3 operating margin was approximately 9.0%, versus 3.3% a year earlier; nine-month operating income was essentially flat. Q3 net income included $0.3 million from discontinued operations; nine-month income included a $6.7 million net gain from discontinued operations, chiefly sale-related adjustments.
Cash, debt and liquidity
- For the first nine months, continuing operations used $2.4 million of operating cash; total operating cash use, including discontinued operations, was $8.5 million. Capital expenditures were $8.4 million, and cash declined $12.4 million to $87.2 million.
- Total debt was $368.0 million at September 30, 2017, compared with $356.2 million at December 31, 2016. This included $39.0 million short-term debt, $18.0 million current maturities, and $311.0 million long-term debt.
- Current assets were $559.0 million and current liabilities $486.0 million. The company reported $314.1 million available under revolving credit facilities and $18.3 million available under its trade-receivables financing arrangement. It reported compliance with senior credit agreement covenants.
Material changes and management commentary
- Q3 revenue rose 1.0%; nine-month revenue fell 3.5%. Detection and Measurement grew strongly, while Engineered Solutions declined; the latter’s nine-month revenue also reflected the South Africa project revision and the prior-year dry-cooling business sale.
- Detection and Measurement revenue increased 27.9% in Q3 and segment income rose to $16.5 million from $7.8 million. Engineered Solutions revenue declined 7.7% in Q3 and 9.8% year to date. HVAC Q3 revenue increased 2.1%, with segment income unchanged at $15.6 million.
- Q3 operating income benefited from a $10.2 million gain on settlement of a canceled customer contract. Nine-month 2017 operating results included a $22.9 million charge for South African power projects; 2016 included an $18.4 million dry-cooling sale gain and a $4.0 million intangible impairment.
- Management attributed improved operating cash flow versus 2016 to working-capital efforts, the dry-cooling divestiture’s removal of cash use, and an $8.5 million insurance settlement receipt. Offsets included higher tax payments ($22.4 million versus $5.1 million) and greater South Africa project cash outflows ($43.9 million versus $20.6 million).
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management notes that business results are cyclical and seasonal, with the businesses generally stronger in the second half of the year.
- South African projects remain exposed to delays, cost overruns, disputes, subcontractor financial difficulties, and further estimate revisions. Project revenue includes approximately $29.5 million of claims and unapproved change orders that management considers recoverable; future revisions could materially affect results.
- Recorded liabilities for claims and contingencies totaled $646.7 million, including $602.0 million for asbestos product-liability matters. Related insurance recovery assets were $554.0 million; recovery depends in part on insurer solvency and coverage. Changes in claims, insurance disputes, or recoverability could materially affect results and cash flows.
- Other exposures include environmental and self-insured claims, tax examinations and $32.6 million of gross unrecognized tax benefits, the South African minority-interest redemption dispute, and an appealed patent-infringement case. SPX also retained guarantees and bonds related to the Balcke Dürr sale.
- A favorable September ruling on retiree healthcare reduced the postretirement liability by $26.8 million, recorded in accumulated other comprehensive income; a separate remeasurement produced a $2.6 million benefit in Q3 expense. The Q3 tax rate was 17.9%; the nine-month rate was 36.8%, affected by foreign losses for which no tax benefit was recognized and tax audit-related benefits.
- Management said market-risk exposure had not significantly changed. Disclosure controls were assessed as effective, with no material internal-control changes reported for the quarter.
Important facts for investors to verify
- Whether South Africa project costs, cash outflows, claims recoveries, and remaining completion estimates change further.
- Whether the $10.2 million contract-settlement gain and the postretirement benefit effects are nonrecurring when assessing underlying earnings.
- Whether asbestos insurance recoveries remain collectible and whether claims or related liabilities require revision.
- How ongoing tax examinations, the South African minority-interest dispute, and retained Balcke Dürr guarantees affect cash requirements or reported liabilities.
- Whether the strong Detection and Measurement performance can offset ongoing Engineered Solutions revenue and backlog declines.