SPX Corporation (NYSE: SPXC) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is for SPX Corporation, not a separately identified SPX Technologies registrant. Amounts are in U.S. dollars, millions, except per-share data. Comparisons are primarily with FY 2016.
Business context
SPX is a diversified supplier of engineered infrastructure products, with three continuing-operations segments: HVAC; Detection and Measurement; and Engineered Solutions. The company reported more than 5,000 employees and operations in approximately 15 countries. Its strategy emphasizes HVAC and detection and measurement growth businesses, alongside power transformers and process cooling. SPX FLOW and Balcke Dürr are presented as discontinued operations; dry cooling was sold in 2016.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1,425.8 | $1,472.3 |
| Gross profit / margin | $330.2 / 23.2% | $375.8 / 25.5% |
| Operating income | $54.8 | $55.0 |
| Income from continuing operations | $84.0 | $30.3 |
| Net income (loss), including discontinued operations | $89.3 | $(67.6) |
| Diluted EPS | $2.03 | $(2.02) |
| Operating cash flow from continuing operations | $54.2 | $53.4 |
| Capital expenditures | $11.0 | $11.7 |
| Cash and equivalents at year-end | $124.3 | $99.6 |
| Total debt at year-end | $356.8 | $356.2 |
FY 2017’s $47.9 income tax benefit was unusually large: it included a $77.6 benefit from a worthless-stock deduction related to a South African subsidiary, partly offset by $11.8 of provisional U.S. tax-reform charges and $68.2 of foreign losses for which no tax benefit was recognized. Pre-tax continuing-operations income was $36.1, versus $39.4 in 2016.
Segments and changes versus prior year
- HVAC: Revenue increased 0.3% to $511.0; segment income declined to $74.1 from $80.2. Management cited less favorable product mix and lower fixed-cost absorption in boilers.
- Detection and Measurement: Revenue rose 15.0% to $260.3; segment income increased 40.0% to $63.4, supported by growth across product lines and cost reductions.
- Engineered Solutions: Revenue fell 11.1% to $654.5 and the segment recorded a $12.6 loss, compared with $17.3 income in 2016. South African project estimate revisions reduced 2017 revenue by $36.9 and profit by $52.8.
Consolidated revenue declined 3.2%. Organic revenue was down 0.8%; currency contributed 0.6 percentage points positively, while South African project revisions and the prior-year dry-cooling sale reduced the comparison. The South Africa project revisions, along with lower Engineered Solutions revenue, drove the gross-profit and margin declines. FY operating income was broadly flat, but included a $10.2 gain on a cancelled-contract settlement and $2.7 gain from discontinuing hedge accounting.
Fourth-quarter highlights
Q4 2017 revenue was $387.0 versus $395.3 in Q4 2016; gross profit was $80.9 versus $114.0. Continuing-operations income was $60.0, compared with a $3.0 loss, and net income was $58.6 versus an $86.1 loss. The Q4 2017 continuing-operations result included the $77.6 tax benefit and $11.8 provisional tax-reform charge; Q4 2016 included the $78.6 net loss on the Balcke Dürr sale.
Liquidity, debt and outlook
- Year-end current assets were $632.5 and current liabilities $461.0. Cash was $124.3; revolving-credit availability was $314.3 after letters of credit, with a further $33.3 available under the receivables financing arrangement.
- In December 2017, SPX amended and extended its senior credit facilities to December 19, 2022, including a $350.0 term loan. The term loan’s weighted-average rate was approximately 3.2% at year-end. SPX reported compliance with all credit covenants.
- Operating cash flow from continuing operations was $54.2, despite $56.5 of cash outflows associated with the South African projects and $22.9 of net income-tax payments.
- Management expected 2018 capital expenditures of $12–$14 and minimum pension funding contributions/direct benefit payments of $17.4. It expected to complete the remaining South African project scope by the end of 2019. Year-end segment backlog was $529.4 in aggregate; expected 2018 revenue recognition was 99% of HVAC backlog, 65% of Detection and Measurement backlog, and 83% of Engineered Solutions backlog.
- The filing provides no specific consolidated revenue or earnings guidance. Management said cash, operating cash flow and available facilities were expected to fund working capital, planned capital expenditures and debt service.
Risks, contingencies and unusual items
- South African projects: Delays, cost overruns, subcontractor issues and contractual disputes prompted substantial estimate revisions. Approximately $29.0 of projected project revenue related to claims and unapproved change orders. Management considered recovery probable, but further estimate changes could materially affect results.
- Tax reform: Accounting for the December 2017 Tax Cuts and Jobs Act remained provisional; subsequent analysis or guidance could materially affect 2018 results.
- Asbestos and other claims: Recorded liabilities for claims totaled $685.7, including $641.2 for asbestos matters, against related insurance-recovery assets of $590.9. Recoverability depends in part on insurer solvency and other estimates.
- Balcke Dürr guarantees and bonds: SPX remained contingently obligated under guarantees and bonds after the sale; recorded liability was $8.7 at year-end, partly offset by $2.8 of indemnification assets. Instruments remain in place through expirations extending to 2022.
- Other legal matters: A South African court set aside an arbitration ruling concerning a subsidiary shareholder put option in January 2018; the shareholder sought leave to appeal. A patent-infringement verdict favorable to SPX Cooling Technologies was under appeal.
- Controls: SPX disclosed prior-year South African subsidiary misstatements in percentage-of-completion revenue and costs. Management identified material weaknesses in related controls and reported remediation; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2017.
- Other key exposures include cyclical customer capital spending, fixed-price contract estimation, raw-material costs, competition, foreign exchange, pensions, environmental matters, cybersecurity, and reliance on suppliers. The company paid no dividends in 2017 and stated it did not expect to resume dividends in the foreseeable future.
Investor verification priorities
- Assess the remaining cost, cash outflow, claim recoverability and completion risk for the South African projects.
- Separate recurring operating performance from the large tax benefit, project estimate charges, contract-settlement gain and discontinued-operation adjustments.
- Review asbestos liabilities and insurance recoveries, including insurer credit and assumptions used to estimate both balances.
- Confirm the status of the South African shareholder appeal, patent appeal, and Balcke Dürr guarantees and bonds.
- Track 2018 tax accounting adjustments, debt-covenant headroom, and progress sustaining the remediation of South African financial-reporting controls.