SPX Corporation (SPXC) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. The filing registrant is SPX Corporation.
Business context and results
SPX is a global engineered-solutions supplier with three reportable segments: HVAC, Detection and Measurement, and Engineered Solutions. DBT and the Heat Transfer business are reported in “All Other.” The company completed its Sabik Marine acquisition on February 1, 2019, for $77.0 million net of acquired cash.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $343.6 million | $351.9 million | Down 2.4% |
| Gross profit / margin | $83.2 million / 24.2% | $90.1 million / 25.6% | Margin down 1.4 points |
| Operating income / margin | $3.0 million / 0.9% | $19.3 million / 5.5% | Down $16.3 million |
| Continuing-operations income | $0.6 million | $12.4 million | Down 95.2% |
| Net income (loss) | $(0.8) million | $12.4 million | Includes $1.4 million discontinued-operations loss |
| Basic and diluted EPS | $(0.02) | $0.29 basic; $0.28 diluted | |
| Continuing-operations operating cash flow | $11.5 million | $2.7 million | Improved |
| Capital expenditures | $3.7 million | $3.2 million | |
| Total debt | $421.5 million | $381.8 million at Dec. 31, 2018 | Up $39.7 million |
Liquidity and debt
Cash and equivalents were $39.0 million, down from $68.8 million at year-end 2018. Current assets were $553.7 million and current liabilities $495.0 million. The company reported $283.7 million of available borrowing capacity under revolving credit facilities and $5.3 million available under its trade-receivables financing arrangement. It was in compliance with senior credit agreement covenants. The term loan’s remaining balance is due December 2022.
Cash used in investing was $74.7 million, primarily reflecting the Sabik acquisition, partly offset by $5.5 million of proceeds from sale of the Heat Transfer facility. Financing provided $32.7 million. Overall cash declined $29.8 million during the quarter.
Material changes and management commentary
- Revenue fell despite acquisition contributions: organic revenue declined 2.5%, foreign currency reduced revenue 1.4%, and the South Africa revenue adjustment reduced it 4.7%; acquisitions contributed 6.2%.
- Management reduced cumulative revenue recognized for variable consideration on South African power projects by $17.5 million after new contractor claims raised the risk of a significant revenue reversal. Remaining recognized revenue tied to that variable consideration was $19.9 million.
- Segment revenue was $128.4 million for HVAC, $85.1 million for Detection and Measurement, and $138.0 million for Engineered Solutions. Detection and Measurement growth largely reflected acquisitions; Engineered Solutions growth was primarily organic, led by power transformers.
- “All Other” recorded revenue of $(7.9) million and a $22.6 million segment loss, reflecting the South Africa adjustment, lower project activity, and the Heat Transfer wind-down. Backlog there fell to $30.2 million from $89.1 million a year earlier.
- Other income included a $6.3 million gain from remeasurement of an equity security. The effective tax rate was 88.5%, principally reflecting foreign losses for which no tax benefit was recognized and stock-based compensation tax benefits.
Outlook, risks, and unusual items
The filing gives no quantified full-year financial guidance and cautions that interim results are not necessarily indicative of full-year performance. Management said businesses tend to be stronger in the second half, including seasonal strength in heating products. The Heat Transfer wind-down was expected to be completed by the end of Q2 2019; DBT’s remaining work on the Kusile and Medupi projects was expected to be substantially complete by year-end 2019.
Key uncertainties include South African project disputes and claims. Alstom/GE asserted potential liquidated damages of $19.0 million, and MHPSA asserted $18.1 million; the company recorded no loss for these notices, citing defenses, but said some loss was reasonably possible and not estimable. A separate MHPSA claim included approximately $65.0 million of direct damages; SPX said prior-period provisions reflected its probable loss, but additional loss was reasonably possible and not estimable. SPX also disclosed $56.9 million of project bonds plus another $22.4 million bond, and a performance guarantee.
Other material exposures include asbestos-related liabilities of $574.0 million, partly offset by $530.7 million of recorded insurance recovery assets, and ordinary-course litigation, environmental, and self-insured claims. Recovery assets depend on insurer solvency and coverage. The quarter also included $1.8 million of charges related to revised liabilities retained after the 2016 dry-cooling sale and a $1.4 million tax-related loss on disposition of discontinued operations.
Important facts for investors to verify
- Whether South African project claims, counterclaims, and dispute processes change the $19.9 million of remaining recognized variable consideration or create additional losses.
- Progress and final purchase accounting for Sabik, including its contribution to segment earnings, margins, and debt requirements.
- Cash conversion, working-capital trends, and liquidity after acquisition spending and the increase in debt.
- Recoverability of asbestos insurance assets and adequacy of related liabilities, alongside the outcome of material legal and tax matters.
- Execution of the Heat Transfer wind-down and DBT’s expected project completion timetable.