SPX Corporation (SPXC) — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 3, 2021; comparisons are with the quarter ended June 27, 2020. The filing is by SPX Corporation, the registrant identified in the filing.
Business context
SPX reported continuing operations in HVAC and Detection and Measurement. Following its agreement to sell Transformer Solutions, that business was presented as a discontinued operation; the sale was expected to close in Q4 2021 for $645 million in cash, subject to customary conditions and closing adjustments. SPX said it would focus on HVAC and Detection and Measurement after the sale. Acquisitions of Sealite, ULC Robotics, and Sensors & Software contributed to Detection and Measurement results.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $296.7 million | $258.0 million | $584.6 million | $514.8 million |
| Gross profit margin | 34.4% | 34.2% | 35.2% | 34.6% |
| Operating income | $12.9 million | $17.5 million | $32.9 million | $33.6 million |
| Income from continuing operations | $14.7 million | $15.2 million | $33.7 million | $24.7 million |
| Net income, including discontinued operations | $61.5 million | $27.1 million | $88.3 million | $49.8 million |
| Diluted earnings per share | $1.32 | $0.59 | $1.90 | $1.09 |
Revenue increased 15.0% in Q2 and 13.6% for the first half. Management attributed growth mainly to organic gains in heating and location and inspection products, plus acquisitions; organic revenue growth was 9.4% for Q2 and 8.0% for the first half. Operating income declined in Q2 as higher corporate costs, a $2.7 million asbestos-related charge, and lower Detection and Measurement profitability offset HVAC growth. First-half continuing income improved despite slightly lower operating income, aided by higher other income and lower net interest expense.
Reported net income includes discontinued operations and is not representative of continuing operations alone. Q2 discontinued-operation income was $46.8 million, including a $4.1 million net gain on dispositions; Transformer Solutions also recorded substantial tax benefits related to the planned sale. For the first half, discontinued-operation income was $54.6 million.
Cash flow, debt, and liquidity
- First-half cash from continuing operating activities was $38.9 million, versus $9.9 million used in the prior-year period. Cash from discontinued operations was $40.0 million; total operating cash flow was $78.9 million.
- Investing activities used $82.2 million in continuing operations, primarily for the $81.6 million Sealite acquisition. Capital expenditures were $4.2 million.
- Cash and equivalents were $69.1 million at July 3, 2021. Total debt was $416.7 million, comprising $168.3 million short-term debt, $10.4 million current maturities, and $238.0 million long-term debt.
- Available revolving-credit borrowing capacity was $297.8 million, with a further $24.0 million available under the trade receivables financing arrangement. SPX reported compliance with its credit-agreement covenants.
Material changes, outlook, and risks
- HVAC revenue rose 12.2% in Q2 and segment income rose 29.6%; margin increased to 13.7% from 11.9%. Detection and Measurement revenue rose 20.7%, substantially reflecting acquisitions, but segment income fell 28.8% and margin declined to 10.3% from 17.4%, due principally to acquisition-related amortization and lower bus fare collection sales.
- Management gave no specific full-year financial guidance in the provided filing text. It noted that businesses generally tend to be stronger in the second half, and heating tends to be stronger in the third and fourth quarters. Interim results are not necessarily indicative of full-year results.
- COVID-19 impacts in the first half of 2021 were generally limited to some project delays, but management cited possible renewed supply-chain disruption, higher input costs, labor shortages, and facility closures.
- South African power-project disputes remain uncertain. DBT received favorable adjudication rulings and payments, but the rulings may proceed to arbitration and were not recognized as income. MHI has asserted claims; SPX said it could not estimate potential loss for certain claims. MHI also drew $29.3 million in bonds, which SPX recorded as a non-current asset while pursuing reimbursement.
- Asbestos claims remain a material estimation and insurance-recovery exposure: recorded claims liabilities were $512.7 million and related insurance-recovery assets were $478.7 million at July 3, 2021. SPX warned that claim growth or insurance coverage problems could materially affect results, financial position, or cash flows.
- Other notable items include a $7.4 million first-half gain from an equity security’s fair-value increase, and a post-quarter acquisition of ECS completed August 2, 2021 for $38.2 million net cash proceeds, with potential additional consideration.
Important facts for investors to verify
- Whether and when the Transformer Solutions sale closes, final proceeds and adjustments, and the effect of lost revenue and earnings.
- Underlying continuing-operations earnings and cash generation, separating them from discontinued operations, sale-related tax benefits, disposition gains, and fair-value gains.
- Detection and Measurement segment margins and acquisition integration performance, including the contribution from acquired businesses.
- Developments in DBT’s arbitration and bond-reimbursement matters, and any resulting loss, recovery, or cash-flow effects.
- Changes in asbestos liabilities and insurance recoveries, as well as COVID-related supply, labor, and cost pressures.