SPX Corporation (filing requested for SPX Technologies) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are to the quarter and six months ended July 1, 2017. The filing identifies the registrant as SPX Corporation.
Business context and reporting period
SPX reported three segments: HVAC; Detection and Measurement; and Engineered Solutions. During the quarter, it acquired Cues, a pipeline inspection and rehabilitation equipment maker, and began winding down its SPX Heat Transfer business as part of a shift away from power-generation end markets. The filing notes that the second half is typically stronger for the company’s businesses.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $379.2 million | $349.7 million | $731.1 million | $690.3 million |
| Gross profit | $97.7 million | $76.1 million | $187.8 million | $164.2 million |
| Gross margin | 25.8% | 21.8% | 25.7% | 23.8% |
| Operating income | $22.7 million | $5.2 million | $42.0 million | $24.3 million |
| Income from continuing operations | $19.7 million | $(8.3) million | $32.1 million | $2.0 million |
| Net income (loss) | $23.0 million | $(9.0) million | $35.4 million | $8.4 million |
| Diluted EPS | $0.51 | $(0.21) | $0.79 | $0.19 |
Operating margin was approximately 6.0% for Q2 and 5.7% for the first half, compared with approximately 1.5% and 3.5%, respectively, in the prior-year periods. Q2 revenue increased 8.4% and first-half revenue increased 5.9%. Organic revenue increased in Q2 but declined for the first half; acquisitions, foreign exchange, accounting changes, and the prior-year South Africa project revision also affected reported comparisons.
- Segment trends: HVAC revenue rose 16.1% in both periods, supported by heating and cooling product sales. Detection and Measurement revenue rose 15.7% in Q2 and 18.7% for the half, mainly reflecting acquisitions; Q2 segment income fell 4.6%, including acquired-inventory charges. Engineered Solutions revenue was flat in Q2 and declined 5.4% for the half; lower process-cooling sales and power-transformer shipments weighed on organic results.
- Cash flow: First-half operating cash flow from continuing operations was $5.8 million, versus cash used of $10.0 million; total operating cash flow, including discontinued operations, was $4.7 million versus cash used of $15.7 million. Investing used $177.7 million, primarily for acquisitions; financing provided $113.9 million. Cash fell $57.6 million to $66.7 million.
- Liquidity and debt: Total debt was $473.9 million at June 30, 2018, versus $356.8 million at year-end 2017. Short-term debt was $124.1 million, current maturities $9.2 million, and long-term debt $340.6 million. The company reported $221.6 million of revolving-credit availability and $21.9 million available under its trade-receivables facility; it was in compliance with senior credit agreement covenants.
- Taxes and unusual earnings items: The effective tax rate was 2.0% in Q2 and 12.3% for the half, reflecting, among other factors, deferred-tax valuation-allowance releases and tax-reform adjustments. Q2 discontinued-operations income was $3.3 million, including a $3.8 million after-tax Balcke Dürr sale-settlement gain, partly offset by other discontinued-business losses.
Material changes versus prior comparable periods
- Operating income improved substantially in part because Q2 and first-half 2017 included a $22.9 million charge from revised estimates on South African power projects.
- Revenue recognition standard ASC 606, adopted January 1, 2018, changed the timing of power-transformer revenue recognition. Compared with prior guidance, adoption reduced Q2 revenue by $1.8 million but increased Q2 operating income by $0.5 million; for the first half it increased revenue by $19.6 million and operating income by $2.5 million.
- Acquisitions added to Detection and Measurement: Cues was purchased for $166.2 million net of cash acquired and Schonstedt for $16.4 million net of cash acquired. Cues contributed $6.9 million of post-acquisition revenue and a $0.8 million net loss through June 30, including acquired-inventory charges.
- SPX initiated the Heat Transfer wind-down, recording $2.0 million of Q2 charges; it expected to complete the wind-down by the end of Q1 2019.
Outlook, risks, contingencies, and unusual items
- No numerical company-wide earnings or revenue guidance is provided in the supplied filing text. Management says results are often stronger in the second half; the Heat Transfer wind-down is expected to finish by the end of Q1 2019.
- South African power projects remain exposed to delays, cost overruns, subcontractor and supplier challenges, and disputed claims. SPX had completed most of its contractual scope and targeted completion of the remainder by the end of 2019, but future estimate revisions could materially affect results. Reported project revenue included approximately $38.2 million of claims and unapproved change orders.
- Asbestos-related product-liability liabilities were $615.3 million, with related insurance-recovery assets of $571.5 million. Recoveries depend on insurer performance and other assumptions; changes in claims, coverage, or insurer solvency could materially affect results and cash flows.
- Other risks include pending litigation and environmental matters, uncertain tax positions, acquisition integration, commodity costs, and project-estimate uncertainty. Gross unrecognized tax benefits were $29.0 million; the company said these could decrease by up to $10.0 million within 12 months.
- The filing reports no material change in market-risk exposure, effective disclosure controls, and no identified quarterly change materially affecting internal control over financial reporting.
Important facts for investors to verify
- Whether post-acquisition Cues and Schonstedt performance, integration costs, and acquired-intangible amortization meet expectations.
- Whether power-transformer margins recover from higher commodity costs and less-profitable sales mix, and how ASC 606 timing affects comparisons.
- Progress, remaining costs, and claim outcomes for the South African projects, including realization of the $38.2 million of claims and unapproved change orders.
- Cash generation and borrowing needs following the acquisitions, given lower cash and higher debt at quarter-end.
- Potential changes in asbestos insurance recoverability, tax positions, and costs to complete the Heat Transfer wind-down.