Business context and reporting period
This is SPX Corporation’s unaudited Form 10-Q for the quarter ended October 1, 2016, filed November 4, 2016. The filing identifies the registrant as SPX Corporation; “SPX Technologies” appears as a subsidiary name. SPX reported three continuing-operation segments: HVAC, Detection and Measurement, and Power. SPX FLOW had been spun off in September 2015, and its 2015 results are presented as discontinued operations, limiting direct year-over-year comparability.
Financial performance and position
| Metric | Three months ended October 1, 2016 | Nine months ended October 1, 2016 |
|---|---|---|
| Revenue | $385.2 million; up 3.0% | $1,187.4 million; down 1.9% |
| Gross profit / margin | $84.0 million / 21.8% | $268.6 million / 22.6% |
| Operating income | $7.1 million | $37.1 million |
| Income from continuing operations | $2.6 million | $20.7 million |
| Net income attributable to common shareholders, after specified adjustment | $1.9 million; $0.04 per share | $0.8 million; $0.02 per share |
| Operating cash flow from continuing operations | Not separately stated for the quarter | $(44.0) million |
For comparison, 2015 third-quarter revenue was $374.1 million and operating loss was $113.6 million; nine-month revenue was $1,209.8 million and operating loss was $166.9 million. The sharp operating improvement partly reflects the prior-year $95.0 million reduction in profit on South African power projects, as well as lower corporate and incentive compensation costs. Nine-month 2015 results also included substantial discontinued-operation income from SPX FLOW.
At October 1, 2016, cash and equivalents were $83.4 million, total debt was $364.0 million, and total equity was $273.4 million. Current assets were $628.8 million and current liabilities $534.5 million. Cash declined $18.0 million from year-end 2015. Nine-month investing cash flow was positive $37.6 million, principally reflecting $47.6 million of net proceeds from the dry cooling sale; capital expenditures were $8.4 million. SPX reported $303.5 million available under revolving credit facilities and $26.4 million available under its receivables financing arrangement. It was in compliance with senior credit agreement covenants; the term loan is due in full September 2020, subject to scheduled amortization.
Material changes and management commentary
- Quarterly revenue rose 3.0%, but management attributed the increase largely to the prior-year South African project revenue reduction. Organic revenue declined 5.2% in the quarter and 0.6% year to date; stronger U.S. dollar and the dry cooling divestiture also affected reported revenue.
- HVAC revenue fell 18.1% in the quarter and 5.0% year to date, mainly on lower heating product sales. Detection and Measurement revenue declined 6.4% in the quarter but increased 1.1% year to date. Power revenue rose 23.1% in the quarter and declined 0.9% year to date; power transformer growth was offset by weaker power-generation activity and the divestiture.
- Power segment losses narrowed to $2.2 million for the quarter and $9.5 million for the nine months, compared with losses of $96.5 million and $106.3 million in 2015. The prior-year periods included the $95.0 million South African project estimate revision. Power backlog was $568.0 million, down from $822.1 million a year earlier, including the effect of the dry cooling sale and currency.
- Management cited cost reductions and improved efficiency in heating/ventilation and power transformers. Cash used in continuing operations improved from $168.3 million in the first nine months of 2015 to $44.0 million in 2016, driven by improved transformer cash generation, lower working capital, reduced South African project outflows, and a smaller post-spin corporate structure.
Outlook, risks, contingencies and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management notes that results are affected by economic and end-market conditions, seasonality, competition, project timing, and foreign exchange; businesses generally tend to be stronger in the second half of the year. Forward-looking statements are subject to risks including restructuring and divestiture execution, power-generation demand, estimating South African project revenues and costs, raw-material costs, pricing, international operations, and pension funding.
- Dry cooling sale: SPX recorded an $18.4 million gain, including a $40.4 million foreign-currency translation amount reclassified from accumulated other comprehensive income. The sale generated $45.9 million net of cash transferred, plus $1.7 million from a working-capital settlement. Customary indemnities mean the sales price and gain could be adjusted later.
- South African power projects: Management reported continuing delays, cost overruns, contractual disputes, and claims. Projected revenue includes approximately $27.0 million for claims and unapproved change orders, which SPX considers recoverable; future estimate changes could materially affect results.
- South African subsidiary put: An arbitration tribunal determined a redemption amount for a 25.1% noncontrolling interest. SPX recorded a net $18.8 million liability and an $18.1 million earnings-per-share adjustment, disputes the determination, and intends to pursue legal remedies.
- Asbestos and other claims: Recorded liabilities for claims totaled $584.4 million, including $531.3 million for asbestos matters, with $493.5 million of related insurance recovery assets. Insurance availability, insurer solvency, claim trends, and estimates are material uncertainties.
- Patent litigation: SPX Cooling Technologies was defending a patent infringement action; trial began October 24, 2016. SPX said liability was not then considered probable and could not be reasonably estimated, but an adverse outcome could materially affect results or cash flows.
- Other items: SPX recorded a $4.0 million first-quarter trademark impairment for Heat Transfer and a $1.3 million third-quarter charge from reducing foreign credit facility commitments. Nine-month tax provision was $6.1 million despite pretax continuing income of $26.8 million; certain foreign losses received no tax benefit.
Important facts for investors to verify
- Whether the South African project estimates and the approximately $27.0 million of claims and change orders prove recoverable, and how remaining project costs evolve.
- Resolution and potential financial effects of the BEE partner redemption dispute and the patent litigation.
- Collectability and continued availability of asbestos-related insurance recoveries relative to the recorded liabilities.
- Underlying cash generation and working-capital trends, given $44.0 million of continuing-operation cash use year to date and reliance on divestiture proceeds for positive investing cash flow.
- Power backlog conversion, segment profitability, and any post-sale adjustments or indemnity exposure related to dry cooling.