SPX Corporation 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The filing is for SPX Corporation (NYSE: SPXC), not a separate filing by SPX Technologies. Unless noted, amounts are in millions of dollars. The company reports continuing operations in HVAC, Detection and Measurement, and Engineered Solutions.
Financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1,472.3 | $1,559.0 |
| Gross profit / margin | $375.8 / 25.5% | $275.9 / 17.7% |
| Operating income (loss) | $55.0 | $(122.2) |
| Continuing-operations income (loss), net | $30.3 | $(151.6) |
| Net income (loss) attributable to common shareholders, after specified put-option adjustment | $(85.3) | $(82.7) |
| Basic / diluted net loss per share | $(2.05) / $(2.02) | $(2.03) / $(2.03) |
| Continuing-operations operating cash flow | $53.4 | $(76.0) |
Consolidated net loss in 2016 included $97.9 of losses from discontinued operations, principally Balcke Dürr’s operating loss and divestiture loss. Continuing-operations operating income equaled approximately 3.7% of revenue, versus an operating loss in 2015. Year-end cash and equivalents were $99.6; total debt was $356.2. The company reported $313.9 of available revolving-credit capacity and $39.9 available under its receivables financing arrangement. It was in compliance with its credit covenants.
Consolidated cash flow was $6.5 from operating activities, $5.5 from investing activities, and $(20.5) from financing activities. Capital expenditures were $11.7. These consolidated cash-flow figures include discontinued operations where applicable.
Segments and changes versus prior year
- HVAC: Revenue $509.5, down 3.7%; segment income $80.2, flat, with a 15.7% segment margin. Lower heating and ventilation sales were partly offset by improved efficiency and sales mix.
- Detection and Measurement: Revenue $226.4, down 2.5%; segment income $45.3, down 1.5%, with a 20.0% margin. Currency effects and weaker communications-technology sales contributed to the decline.
- Engineered Solutions: Revenue $736.4, down 7.7%; segment income $17.3 versus a loss of $87.4. The improvement primarily reflects the $95.0 adverse adjustment to South African project estimates in 2015; lower power-generation sales and the dry-cooling divestiture weighed on revenue.
Overall revenue fell 5.6%; management attributed the decline to a 3.3% organic decrease, currency headwinds, and the dry-cooling sale, partly offset by comparison against the 2015 South African project revenue reduction. The company reduced SG&A to $301.0 from $387.8, including lower corporate, pension, and incentive-compensation expenses. International sales were $237.1, down from $303.6.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected 2017 capital expenditures of approximately $14–$18 and $20.9 of minimum pension funding contributions and direct benefit payments.
- Management’s strategy is to emphasize scalable HVAC and detection-and-measurement businesses, power transformers, and process cooling while reducing power-generation exposure. The dry-cooling business was sold in March 2016 for $47.6 cash proceeds, with an $18.4 pretax gain. Balcke Dürr was sold in December for less than $0.1 cash proceeds; SPX left $21.1 of cash in the business and provided a $9.1 loan. The sale generated a $78.6 net loss, and final working-capital adjustments remained unresolved.
- South African power projects remain exposed to delays, cost overruns, contract disputes, and estimation uncertainty. At year-end, projected project revenue included about $26.0 for claims and unapproved change orders that management considered recoverable; future estimate changes could materially affect results.
- SPX remained contingently responsible for approximately €79 million of parent guarantees and €79 million of bank and surety bonds associated with Balcke Dürr, with indemnities and collateral from the buyer and subsidiary. The recorded fair-value liability was $9.9, offset by a $4.8 asset for related indemnities.
- Recorded liabilities for claims were $653.5, including $605.6 for asbestos matters, alongside $564.4 of related insurance recovery assets. Recoveries depend in part on insurer solvency and coverage; changes in estimates could affect earnings and liquidity.
- A South African subsidiary’s minority shareholder put option resulted in an $18.5 accrued redemption amount and an $18.1 adjustment to common-shareholder earnings. SPX disputed the arbitration decision and intended to pursue legal recourse.
- Other principal risks include cyclical customer capital spending, competition and pricing, commodity costs, foreign exchange, fixed-price contract execution, pension assumptions, environmental and product-liability claims, cybersecurity, and debt covenant and refinancing constraints. Dividends had been suspended since 2015, with no resumption expected for the foreseeable future.
For the fourth quarter of 2016, revenue was $395.3; continuing-operations loss was $3.0, discontinued-operations loss was $83.1, and net loss was $86.1. The 2016 annual goodwill test found each reporting unit’s estimated fair value at least 30% above carrying value, but SPX recorded $30.1 of impairment charges for Heat Transfer intangible assets. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Investor facts to verify
- Reconcile continuing-operations profitability and improved cash generation with the full-year common-shareholder loss, including Balcke Dürr disposal charges and the South African put-option adjustment.
- Track Engineered Solutions revenue, backlog conversion, power-generation demand, and the progress and cash consequences of South African project claims and contract disputes.
- Confirm final Balcke Dürr sale working-capital adjustments and monitor the remaining guarantees, bonds, indemnities, and loan repayment.
- Assess asbestos-liability assumptions and the collectability of the related insurance recovery assets.
- Monitor debt maturities, covenant headroom, available borrowing capacity, pension funding needs, and any change in dividend policy.