SPX Corporation — FY 2018 Form 10-K
Business context and reporting period. The filing is for the fiscal year ended December 31, 2018; it reports full-year results, not a standalone fourth-quarter filing. SPX Corporation is a diversified supplier of HVAC, detection and measurement, power transformer, and process cooling products. It reorganized reporting in Q4, moving its South African DBT and Heat Transfer businesses to “All Other.”
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Revenue | $1,538.6 million | $1,425.8 million | Up 7.9%; organic revenue was generally flat. Acquisitions and ASC 606 adoption contributed to growth. |
| Gross profit / margin | $410.7 million / 26.7% | $330.2 million / 23.2% | Margin improved, partly because 2017 included South Africa project estimate charges. |
| Operating income / margin | $107.6 million / 7.0% | $59.9 million / 4.2% | Improved year over year. |
| Continuing-operations income | $78.2 million | $84.0 million | Down 6.9%; 2017 benefited from a $77.6 million tax benefit. |
| Net income / diluted EPS | $81.2 million / $1.82 | $89.3 million / $2.03 | Both declined year over year. |
| Operating cash flow, continuing operations | $112.9 million | $53.5 million | Increase primarily reflected $44.3 million of net tax refunds versus $22.9 million of net tax payments in 2017. |
| Cash and equivalents | $68.8 million | $124.3 million | Declined $55.5 million during 2018. |
| Total debt | $381.8 million | $356.8 million | Increased, principally reflecting acquisition financing. |
Gross margin was also affected by acquired-inventory fair-value charges of $4.6 million and lower transformer profitability from mix, commodity costs, and cost absorption. The effective tax rate was 1.8% in 2018, reflecting use of previously unbenefited foreign losses and other tax benefits; tax rates and earnings comparisons are therefore affected by unusual tax items.
Segments
- HVAC: Revenue $582.1 million, up 13.9%; segment income $90.0 million, up 21.5%, supported by organic growth across primary product lines.
- Detection and Measurement: Revenue $320.9 million, up 23.3%, mainly from the Schonstedt and Cues acquisitions; organic revenue declined slightly, including lower bus fare collection sales. Segment income rose to $72.4 million, while margin fell to 22.6% from 24.4%.
- Engineered Solutions: Revenue $537.0 million, down 4.2%; income fell to $35.0 million from $44.2 million. Process cooling sales declined, and transformer profitability weakened.
- All Other: Revenue $98.6 million; operating loss narrowed to $18.9 million from $56.8 million, largely because 2017 included $52.8 million of charges on South African power projects.
Material changes, outlook and commentary
- SPX acquired Schonstedt for $16.4 million and Cues for $164.4 million, net of cash acquired, in 2018. Cues added $52.3 million of revenue after acquisition and recorded a $0.4 million net loss for that period.
- In February 2019, SPX acquired Sabik Marine for $77.0 million; its results are expected in Detection and Measurement beginning Q1 2019.
- SPX initiated a Heat Transfer wind-down in 2018, recording $3.5 million of related charges, and expected to complete it in the first half of 2019.
- Management expected 2019 capital expenditures of approximately $15–$20 million and minimum pension contributions and direct benefit payments of approximately $15.3 million.
- Backlog at year-end was $456.8 million across the reported segments and All Other, with management expecting most of it to convert to revenue during 2019. Separately, remaining performance obligations subject to ASC 606 disclosure were $97.2 million.
- Management said available cash, operating cash flows, and borrowing facilities should fund working capital, planned capital expenditures, operations, and debt service. At year-end, SPX had $311.6 million of available revolving capacity, $27.0 million under its receivables financing arrangement, and $30.1 million of foreign credit-instrument issuance capacity; it reported compliance with credit covenants.
Risks, contingencies and unusual items
- South African power projects: DBT targeted completion of remaining scope by the end of 2019. Recorded project claims and unapproved change orders totaled $37.9 million. A subcontractor adjudication called for $17.7 million; SPX disputed the decision and recorded no liability. A prime contractor later asserted an $8.0 million claim, which SPX also considered not probable. Adverse outcomes or further cost-estimate revisions could materially affect results and cash flows.
- Legacy liabilities: Recorded liabilities for claims totaled $631.7 million, including $587.5 million for asbestos matters, alongside $541.9 million of related insurance recovery assets. Recoveries depend on insurers and other assumptions. Environmental, product-liability, and other claims also remain potential exposures.
- Debt and interest: Total debt was $381.8 million; the senior facilities mature in 2022, with a weighted-average borrowing rate of approximately 4.3% at year-end. Covenant limits and variable-rate exposure could constrain financial flexibility, notwithstanding interest-rate swaps covering $260 million of borrowings.
- Market and operating risks: Cyclical customer investment, seasonality, tariffs and raw-material costs, fixed-price contract overruns, supplier disruptions, foreign exchange, competition, cybersecurity, regulation, and acquisition integration could affect performance.
- Accounting and unusual items: Adoption of ASC 606 increased 2018 revenue by $14.2 million and operating income by $2.0 million versus prior guidance, mainly changing the timing of transformer revenue recognition. 2017 results included a $10.2 million contract-settlement gain and significant South Africa project charges; the 2018 discontinued-operations gain included a $3.8 million after-tax Balcke Dürr settlement benefit.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded acquired Cues, representing about 9% of year-end assets and 3% of 2018 revenue. No dividend was paid in 2018.
Important facts for investors to verify
- Whether the South African projects are completed on schedule and disputed claims and recorded recoveries resolve as management expects.
- Whether 2018 revenue and earnings growth is sustainable absent acquisitions, tax refunds, accounting-timing effects, and prior-year project charges.
- Integration, margins, and returns from Cues and Schonstedt, as well as the 2019 Sabik Marine acquisition.
- Actual debt reduction, liquidity, covenant headroom, and cash generation after acquisition spending and scheduled debt payments.
- Adequacy and collectability of asbestos insurance recoveries and estimates for environmental, pension, and other retained liabilities.
- Completion costs and timing of the Heat Transfer wind-down and the trajectory of transformer and process cooling profitability.