SPX Corporation (SPXC) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 2, 2022. The filing is by SPX Corporation; it reports the planned reorganization under which SPX Technologies, Inc. would become the publicly traded holding company. The transaction was targeted for completion around August 15, 2022.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $354.0 million | $296.6 million | $661.1 million | $583.8 million |
| Operating income | $27.2 million | $17.1 million | $38.6 million | $42.1 million |
| Continuing operations income | $19.1 million | $17.7 million | $32.1 million | $40.7 million |
| Net income | $13.0 million | $61.9 million | $24.4 million | $88.7 million |
| Diluted EPS, continuing operations | $0.41 | $0.38 | $0.69 | $0.88 |
| Gross margin | 35.2% | 34.5% | 34.6% | 35.4% |
- Revenue increased 19.4% in Q2 and 13.2% in the first half. Management attributed growth to acquisitions and organic growth, including pricing and volume in heating products and growth across Detection and Measurement product lines.
- Q2 operating income rose, led by Detection and Measurement. First-half operating income declined as HVAC segment income fell and corporate expense increased. HVAC faced weaker manufacturing-cost absorption from supply-chain delays and labor shortages; Cincinnati Fan acquisition amortization also weighed on segment results.
- Q2 net income comparisons are affected by discontinued operations: 2021 included substantial income and tax benefits related to Transformer Solutions, while 2022 included a $6.1 million after-tax discontinued-operations loss. First-half discontinued-operations losses were $7.7 million in 2022 versus income of $48.0 million in 2021.
- First-half cash from continuing operating activities was negative $83.5 million, versus positive $39.6 million in 2021. Drivers included $48.8 million of income-tax payments, including payments related to the Transformer Solutions sale, higher inventory purchases, project-cash-receipt timing, and $10.0 million paid to transfer a postretirement benefit obligation.
- Cash and equivalents were $189.8 million at July 2, 2022 ($195.2 million including cash of discontinued businesses), down from $388.2 million at December 31, 2021. Total debt was $239.6 million; revolving-credit availability was $439.0 million, and the company reported compliance with credit covenants. The term loan’s remaining balance is due December 17, 2024.
Material changes and management commentary
- Segment revenue and income: HVAC revenue was $218.7 million in Q2, up 18.0%; segment income was $25.6 million versus $25.9 million. Detection and Measurement revenue was $135.3 million, up 21.7%; segment income increased to $22.5 million from $11.4 million.
- Backlog rose year over year to $321.6 million in HVAC from $190.7 million, and to $195.6 million in Detection and Measurement from $141.9 million.
- Management said supply-chain disruption, labor shortages, COVID-related absenteeism at some facilities, and higher material, component, and transportation costs negatively affected first-half results. It expected these impacts to diminish as 2022 progressed. No specific full-year financial guidance is provided in the filing.
- The company acquired International Tower Lighting in March 2022 for $41.8 million net of acquired cash. It also repurchased 706,827 shares for $33.7 million in Q2; $66.3 million remained under the authorization at quarter-end.
- Other unusual items included $3.8 million of U.S. pension settlement and actuarial losses in Q2, and a $4.4 million first-half gain from remeasuring an equity security.
Risks, contingencies, and controls
- DBT, a discontinued business, remains involved in disputes over two South African power projects. The company disclosed DBT claims against MHI of approximately $61.5 million and substantial counterclaims, bond matters, and uncertainty around outcomes. No revenue was recorded for DBT’s claims; management could not estimate a potential loss range for certain MHI claims.
- Asbestos-related liabilities were $592.5 million, with associated insurance-recovery assets of $510.6 million. Recovery depends on insurer solvency and coverage; changes in claims or insurance availability could materially affect results, cash flows, or financial position.
- Disclosure controls were deemed ineffective at July 2, 2022 because of a previously identified material weakness in controls over asbestos-related insurance-recovery assets. Remediation was underway but had not yet been demonstrated effective.
- Other disclosed risks include environmental and other legal contingencies, inflation and fixed-price contract exposure, customer-project delays, supply-chain and labor constraints, acquisition integration and impairment risks, and geopolitical and market uncertainty.
Important facts for investors to verify
- Whether supply-chain, labor, and inflation pressures eased as management expected and whether margins recovered, particularly in HVAC.
- Cash conversion and working-capital trends, including inventory growth and the timing of project-related customer receipts.
- Progress and testing of remediation for the asbestos insurance-recovery control weakness.
- Developments in DBT disputes and asbestos claims, including any changes to recorded liabilities or insurance recoveries.
- Completion and effects of the planned corporate reorganization, and the performance of recent acquisitions relative to their forecasts.