SPX Corporation — Q3 2018 Form 10-Q
Business context and period. This unaudited filing is for the quarter and nine months ended September 29, 2018. The registrant named in the filing is SPX Corporation, not SPX Technologies. SPX reports HVAC, Detection and Measurement, and Engineered Solutions segments. It acquired Schonstedt in March and Cues in June 2018; both are included in Detection and Measurement.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $362.5 million | $348.5 million | $1,093.6 million | $1,038.8 million |
| Gross profit / margin | $87.7 million / 24.2% | $85.1 million / 24.4% | $275.5 million / 25.2% | $249.3 million / 24.0% |
| Operating income | $13.4 million | $29.7 million | $55.4 million | $54.0 million |
| Continuing-operations income | $6.8 million | $22.0 million | $38.9 million | $24.0 million |
| Net income | $6.6 million | $22.3 million | $42.0 million | $30.7 million |
| Diluted EPS | $0.15 | $0.51 | $0.94 | $0.70 |
Cash flow and liquidity. Nine-month operating cash flow was $13.3 million, including $15.0 million from continuing operations, versus a $9.4 million consolidated operating cash outflow in 2017. The improvement reflected $16.1 million of net income tax refunds, partly offset by project-milestone receipt timing. Investing cash outflow was $177.0 million, chiefly acquisition spending; financing cash inflow was $102.8 million. Cash declined to $61.9 million from $124.3 million at year-end 2017.
At September 29, current assets were $623.1 million and current liabilities $527.0 million. Total debt was $463.0 million, up from $356.8 million at December 31, 2017; this included $113.1 million of short-term debt and $340.6 million of long-term debt. SPX reported $237.2 million of available revolving-credit capacity and $17.4 million available under its trade-receivables facility. It was in compliance with senior credit agreement covenants.
Changes versus comparable periods
- Reported revenue grew 4.0% in Q3 and 5.3% for nine months, principally reflecting acquisitions. Organic revenue declined 2.6% in Q3 and 1.8% for nine months under the company’s non-GAAP calculation.
- HVAC revenue rose 10.6% in Q3 and 14.2% for nine months; Detection and Measurement rose 26.0% and 21.4%, largely due to acquisitions. Engineered Solutions revenue fell 9.9% and 6.8%, respectively.
- Q3 operating income fell $16.3 million year over year. The prior-year quarter included a $10.2 million contract-settlement gain; 2018 results also reflected weaker Engineered Solutions performance and a $4.7 million South Africa project charge. Nine-month operating income was slightly higher year over year.
- ASC 606 adoption changed the timing of power-transformer revenue recognition. Compared with prior guidance, adoption increased 2018 revenue by $0.6 million and operating income by $1.3 million in Q3, and revenue by $20.2 million and operating income by $3.8 million for nine months; comparative 2017 periods were not restated.
- Interest expense increased, primarily due to borrowing for Cues and higher average borrowing rates. Nine-month effective tax rate was 13.7%, versus 36.8% in 2017, with the prior period affected by foreign losses for which no tax benefit was recognized.
Outlook, risks and unusual items
- No numerical full-year financial guidance is provided. Management expects to complete the SPX Heat Transfer wind-down by the end of Q1 2019 and targets completion of the remaining South African project scope by the end of 2019.
- South African power projects remain exposed to delays, cost overruns, subcontractor difficulties, and disputed claims. A third-party adjudicator’s October 30, 2018 decision awarded a subcontractor approximately $18.1 million; SPX disputes the decision, is pursuing arbitration and court proceedings, and recorded no liability because it concluded a loss was not probable. The filing says adverse outcomes or further estimate revisions could materially affect results. Recognized project revenue included approximately $38.4 million of claims and unapproved change orders.
- Asbestos-related liabilities were $605.3 million, with related insurance recovery assets of $558.5 million. The filing warns that claim trends, insurance coverage or insurer solvency, and estimate changes could materially affect financial results and cash flows.
- Other notable items include $3.8 million of after-tax gain from the Balcke Dürr sale settlement, acquisition-related inventory step-up charges, and $2.8 million of Heat Transfer wind-down charges for the first nine months. Cues purchase accounting remained preliminary.
- SPX disclosed $27.9 million of gross unrecognized tax benefits and said such benefits could decrease by up to $10.0 million within 12 months. Its assessment of the Tax Cuts and Jobs Act remained provisional.
Important facts for investors to verify
- Whether the South African project schedule, cost estimates, claims and subcontractor disputes have changed, including the status of the challenged adjudication decision.
- Whether organic sales and segment margins improve, especially in Engineered Solutions and the power-transformer business, and how much reported growth depends on acquisitions and ASC 606 timing.
- How acquisition integration, preliminary Cues purchase accounting, and higher acquisition-related debt affect earnings, cash generation and leverage.
- Whether asbestos insurance recoveries remain collectible and whether related liabilities or environmental and other contingencies require revision.
- Final tax-reform accounting, open tax examinations, and the expected timing and cash impact of uncertain tax positions.