SPX Corporation (SPXC) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparative period ended March 30, 2019. The filing registrant is SPX Corporation. Amounts are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $369.3 | $343.6 |
| Gross profit / margin | $114.1 / 30.9% | $83.2 / 24.2% |
| Operating income / margin | $32.7 / 8.9% | $3.0 / 0.9% |
| Continuing-operations income | $22.7 | $0.6 |
| Net income (loss) | $22.7 | $(0.8) |
| Diluted EPS | $0.50 | $(0.02) |
| Operating cash flow, continuing operations | $2.7 | $11.5 |
Revenue increased 7.5% year over year, but the company reported a 1.6% organic revenue decline under its non-GAAP definition. Cash and equivalents were $163.1 at quarter-end, versus $54.7 at year-end 2019. Total debt was $511.5, up from $393.5; net debt was approximately $348.4. The $230.0 revolving-loan balance was classified as current because management expected repayment within one year, although the facilities mature in 2024. The company reported $202.7 of unused revolving capacity and $0.8 available under its trade-receivables facility, and stated aggregate cash and borrowing availability exceeded $350.0. It was in compliance with its credit covenants.
Material changes and segment performance
- Operating income and gross margin improved substantially, primarily because Q1 2019 included a $17.5 revenue reduction related to South African power-project variable consideration, and because transformer operations improved throughput and profitability.
- HVAC revenue fell 7.7% to $118.5 and segment income declined to $15.0 from $18.4, reflecting weaker heating sales and pandemic-related softness in Asia Pacific cooling, partly offset by acquisitions.
- Detection and Measurement revenue rose 8.0% to $91.9 and income rose to $18.2 from $17.0; growth included bus fare systems and the Sabik acquisition, while locator sales were affected by COVID-19.
- Engineered Solutions revenue increased 12.2% to $154.9 and income rose to $17.9 from $8.0, mainly from power-transformer growth and improved execution.
- All Other reported a $3.9 loss versus a $22.6 loss, largely reflecting the prior-year South Africa revenue adjustment. Backlog was $6.1, down from $30.2.
Cash flow, outlook, risks and unusual items
Continuing-operations operating cash flow was $2.7, down from $11.5; management attributed the decline primarily to payment in March 2020 of 2019 short-term incentive compensation. Total cash increased $108.4, principally reflecting net financing cash inflows of $113.0. Investing cash outflow was $2.5, including $3.6 of capital expenditures. The company drew $100.0 on its domestic revolver in March as a precaution amid COVID-19 uncertainty.
Management said COVID-19 had a modest adverse effect in Q1 and expected a more significant impact in Q2 and possibly longer, but could not estimate its scale or duration. Facilities had not experienced material operating interruptions at filing time, and some products and services supported essential infrastructure. The company was reducing discretionary costs and capital spending and addressing potential sourcing challenges. No numerical earnings or revenue guidance was provided.
Key uncertainties include pandemic-driven demand, customer payment and supplier performance, possible facility or supply-chain disruption, covenant compliance, and potential impairment or pension effects. Management reported no impairment indicators at March 28 but cautioned prolonged pandemic effects could require future charges. South African project disputes remain unresolved: DBT asserted claims of $65.1 against MHPSA; MHPSA claims include $54.5 in direct damages, $23.4 in liquidated damages and other claims of $10.1. No loss was recorded for these claims, and the company said potential exposure could not be estimated. SPX also had $52.4 of bonds in favor of MHPSA, including $18.8 with more stringent payment terms.
Recorded liabilities for claims totaled $580.4, including $540.6 for asbestos matters, alongside $503.6 of related insurance-recovery assets. Recovery depends in part on insurer solvency and coverage. The company also disclosed possible tax-benefit reductions of up to $10.0 within 12 months and a new ten-year headquarters lease with scheduled payments totaling $17.6.
Important facts for investors to verify
- How Q2 and subsequent results reflect COVID-19 effects, particularly HVAC and Detection and Measurement demand, customer collections, and supply availability.
- Whether the Q1 margin and earnings improvement persists after accounting for the prior-year $17.5 South Africa adjustment and acquisition contributions.
- Use and repayment of the precautionary revolver draw, debt classification, available facility capacity, and ongoing covenant compliance.
- Developments in South African project claims, bonds and guarantees, including any change in the company’s ability to estimate or record a loss.
- Collectibility of asbestos-related insurance recoveries and any impairment, pension, or tax changes as pandemic-related uncertainty evolves.