Business context and reporting period
SPX Corporation (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended September 28, 2019. It operates through HVAC, Detection and Measurement, and Engineered Solutions, with South African projects and the Heat Transfer wind-down reported in “All Other.” Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $364.8 | $362.5 | $1,080.8 | $1,093.6 |
| Gross profit / margin | $106.2 / 29.1% | $87.7 / 24.2% | $297.6 / 27.5% | $275.5 / 25.2% |
| Operating income | $27.6 | $13.4 | $56.9 | $55.4 |
| Continuing-operations income | $21.2 | $6.8 | $41.2 | $38.9 |
| Net income | $21.5 | $6.6 | $39.9 | $42.0 |
| Diluted EPS | $0.48 | $0.15 | $0.89 | $0.94 |
- Q3 operating margin was approximately 7.6%, compared with 3.7%; nine-month operating margin was approximately 5.3%, compared with 5.1%.
- Continuing-operations operating cash flow was $73.3 for the first nine months, versus $15.0 a year earlier. Capital expenditures were $10.7; acquisition spending was $87.2. Cash and equivalents fell to $49.3 from $68.8 at year-end 2018.
- Total debt was $382.9, versus $381.8 at year-end 2018; long-term debt was $323.8. The company reported $299.3 of revolving-credit availability and $11.8 available under its receivables facility, and was in compliance with credit covenants.
- At September 28, current assets were $563.1 and current liabilities $466.8. The balance sheet also included $26.2 of operating-lease liabilities.
Material changes versus comparable periods
- Q3 revenue rose 0.6%; nine-month revenue declined 1.2%. Management attributed the Q3 increase primarily to Sabik and SGS acquisitions, offset by lower organic revenue. Nine-month revenue was affected by organic declines, currency, and $23.5 of South Africa project revenue reductions, partly offset by acquisitions.
- Gross profit and gross margin improved in both comparisons, which management attributed to mix—including acquired businesses with higher historical margins—and operational improvements in HVAC cooling. SG&A and amortization increased, primarily reflecting acquisitions.
- Q3 operating income more than doubled, driven mainly by HVAC and Detection and Measurement improvement. Nine-month operating income was modestly higher despite increased South Africa project losses.
- Detection and Measurement revenue increased 15.8% in Q3 and 26.7% year to date, with acquisition contributions and organic growth. HVAC Q3 revenue increased 6.1%; Engineered Solutions Q3 revenue declined 3.0%. “All Other” revenue fell sharply as South African projects neared completion and Heat Transfer wound down.
- Nine-month net income declined despite higher continuing-operations income, in part because 2018 included a $3.8 after-tax gain on the Balcke Dürr disposition settlement, while 2019 included a $1.3 discontinued-operations loss. 2019 also included a $7.9 fair-value gain on an equity security.
Outlook, commentary, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management expected DBT’s remaining South African project scope to be substantially complete by year-end 2019 and anticipated completing the Heat Transfer wind-down by year-end.
- South Africa project estimates remain uncertain. DBT reduced cumulative revenue by $17.5 in Q1 after contractor claims and by $6.0 in Q2 under a settlement with Alstom/GE. Claims, counterclaims, change orders and dispute outcomes could materially affect results and cash flows. The filing says $9.8 of cumulative revenue remained recognized for related variable consideration at quarter-end.
- After quarter-end, on October 16, SPX entities agreed to settle the DBT BEE Partner put option and related claims for ZAR 230.0 (about $15.3); payment was made October 21, 2019.
- Recorded liabilities for claims totaled $583.7, including $539.9 for asbestos product-liability matters; related asbestos insurance-recovery assets were $502.8. Recovery depends on assumptions including insurer solvency, and actual claims or coverage outcomes could differ materially.
- Other items to monitor include $66.1 of bonds issued for South African projects, a subcontractor dispute with a claimed amount of about $17.1 for which no loss was recorded, and tax examinations and uncertain tax benefits. Management stated that market-risk exposure had not significantly changed and disclosure controls were effective.
- The 2019 effective tax rate was 11.7% for Q3 and 21.8% year to date; Q3 benefited from a $1.9 adjustment related to taxation of foreign earnings. The nine-month rate also reflected foreign losses for which no tax benefit was recognized.
Important facts for investors to verify
- Whether South African project claims, remaining work, bonds and revenue estimates resolve within the recorded provisions and management’s stated completion timetable.
- Whether the asbestos liability and related insurance-recovery asset assumptions remain supportable, including insurer capacity and future claim trends.
- How acquisition contributions, organic demand, margins and backlog convert into cash and earnings after the acquired-business effects subside.
- Whether cash generation and available credit capacity remain adequate alongside debt, acquisition needs and the October 2019 settlement payment.
- The sustainability of reported earnings excluding the $7.9 equity-security fair-value gain and tax-related benefits, and the outcome of tax examinations.