SPX Corporation — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2018; comparable quarter ended April 1, 2017. The filing registrant is SPX Corporation.
Financial performance
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Revenue | $351.9 million | $340.6 million |
| Gross profit / margin | $90.1 million / 25.6% | $88.1 million / 25.9% |
| Operating income | $19.3 million | $19.1 million |
| Continuing-operations income | $12.4 million | $10.3 million |
| Net income | $12.4 million | $17.4 million |
| Diluted EPS | $0.28 | $0.40 |
| Operating cash flow, continuing operations | $2.7 million | $5.4 million |
- Revenue increased 3.3%, but organic revenue declined 4.8%; reported growth reflected foreign currency, the Schonstedt acquisition, and adoption of ASC 606.
- Q1 2018 continuing-operations results included a $4.1 million tax provision on $16.5 million of pretax income, a 24.8% effective tax rate. Prior-year net income included a $7.1 million after-tax gain on discontinued operations, explaining why net income and EPS were lower year over year despite improved continuing-operations income.
- Cash and equivalents were $103.7 million at March 31, down from $124.3 million at year-end. Total debt was $356.6 million, including $344.9 million long-term debt. SPX reported $317.3 million of available revolving-credit capacity after letters of credit and compliance with credit covenants.
- Net cash used in investing was $19.3 million, primarily the $16.3 million Schonstedt purchase and $3.2 million of capital expenditures. The company received $18.9 million in net income-tax refunds during the quarter.
Segments and material changes
- HVAC: Revenue rose 16.0% to $127.7 million and segment income increased to $18.6 million. Higher heating-product sales drove growth; margin eased to 14.6% from 15.0% due to sales mix and higher commodity and freight costs.
- Detection and Measurement: Revenue grew 22.4% to $65.6 million and segment income rose 40.2% to $15.7 million. Organic growth in communications technologies was supplemented by currency effects and Schonstedt.
- Engineered Solutions: Revenue fell 10.3% to $158.6 million and segment income declined to $2.7 million from $6.6 million. Lower process-cooling and South African project activity, transformer shipment timing, and less favorable transformer mix were cited.
- ASC 606 adoption shifted power-transformer revenue recognition from delivery to recognition over time. It increased reported Q1 revenue by $21.4 million and operating income by $2.0 million versus prior guidance; without adoption, revenue would have been $330.5 million and continuing-operations income $10.9 million. The transition also changed balance-sheet presentation of contract assets and liabilities and reduced inventory.
- Special charges were $2.0 million, primarily severance costs in Engineered Solutions and corporate functions, versus $0.5 million a year earlier.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management said businesses tend to be stronger in the second half, with HVAC heating products generally stronger in the third and fourth quarters; interim results are not necessarily indicative of full-year results.
- For South African power projects, management reported delays, cost overruns and claim disputes, but said most contractual scope was complete and expected the remainder to be completed by the end of 2019. Q1 revenue included approximately $44.5 million related to claims and unapproved change orders on these projects; revisions to estimates could materially affect results.
- Recorded liabilities for claims and other matters totaled $672.8 million, including $629.5 million for asbestos product liability. Related insurance recovery assets were $582.1 million; both estimates depend on assumptions, including insurer solvency and recoverability.
- Other notable exposures include uncertain tax positions, environmental and self-insurance matters, and litigation. A South African court set aside an arbitration ruling concerning a subsidiary’s noncontrolling-interest put option; the other party sought leave to appeal. A patent-infringement verdict favorable to SPX was under appeal.
- After quarter-end, SPX agreed to acquire Cues for approximately $189 million, with closing expected by the end of Q2 2018, subject to customary conditions and shareholder approval. SPX also reached a Balcke Dürr sale-related settlement expected to produce a gain in Q2; the buyer is to pay €3.0 million.
- Management cited acquisition integration, economic and market changes, raw-material costs, pricing pressure, pension funding, and legal and regulatory matters among risks to forward-looking results. Disclosure controls were concluded effective as of March 31, 2018.
Important facts for investors to verify
- How much of reported growth and earnings depended on ASC 606, and how transformer shipment timing affects subsequent quarters.
- Progress, remaining costs, claims and cash-collection timing for the South African projects, including the $44.5 million of claims and unapproved change orders.
- Cash conversion and working-capital movements, given lower continuing-operations operating cash flow and the quarter’s acquisition spending.
- Recoverability of asbestos-related insurance assets and adequacy of related liabilities, alongside litigation and tax contingencies.
- Final Cues transaction terms and funding, and the amount and timing of the Balcke Dürr settlement gain.