SPX Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 1, 2023. Amounts are in millions except per-share data. SPX operates through HVAC and Detection and Measurement segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $423.3 | $354.0 | $823.1 | $661.1 |
| Gross profit / margin | $163.6 / 38.6% | $124.6 / 35.2% | $313.5 / 38.1% | $228.6 / 34.6% |
| Operating income / margin | $51.3 / 12.1% | $27.2 / 7.7% | $101.1 / 12.3% | $38.6 / 5.8% |
| Continuing-operations income | $38.3 | $19.1 | $77.4 | $32.1 |
| Net income | $36.0 | $13.0 | $78.8 | $24.4 |
| Diluted EPS | $0.77 | $0.28 | $1.69 | $0.53 |
Revenue increased 19.6% in Q2 and 24.5% in the first half. Organic growth was 14.6% and 22.0%, respectively; acquisitions contributed 5.3 and 3.2 percentage points, while foreign currency reduced growth by 0.3 and 0.7 points. Higher cooling-product sales, price and volume gains, and large Detection and Measurement projects supported growth. Management attributed improved gross margin principally to higher volumes, better manufacturing-cost absorption, improved execution, and more stable labor and supply chains. Detection and Measurement margins were pressured by less favorable project mix.
Q2 net income includes a $2.3 loss from discontinued operations; first-half discontinued operations contributed $1.4, including gains from South African project dispute resolutions. The first-half comparison also reflects stronger continuing results and lower 2023 cash tax payments than in 2022.
Cash, debt, and liquidity
- First-half cash from continuing operating activities was $74.6, versus cash used of $83.5 in 2022. After $8.7 of capital expenditures, continuing-operations operating cash flow less capital expenditures was $65.9.
- Investing activities used $554.8, including $547.1 for acquisitions of TAMCO and ASPEQ. Financing activities provided $426.2, principally through debt borrowings.
- Cash and equivalents were $87.1 at July 1, 2023 ($95.6 including cash held in discontinued businesses), down from $147.8 on the balance sheet at December 31, 2022.
- Total debt was $675.6, compared with $246.8 at year-end 2022; long-term debt was $533.1. The weighted-average rate on Credit Agreement borrowings was approximately 6.8%.
- Available revolving borrowing capacity was $389.2, plus $12.3 under the trade-receivables facility. SPX reported compliance with all credit covenants.
Material changes and notable items
- SPX acquired TAMCO on April 3 for $125.3 net of cash acquired and ASPEQ on June 2 for $421.8 net of cash acquired. Preliminary accounting for acquired assets and liabilities remains subject to final valuation. ASPEQ contributed $8.6 in revenue and a $0.5 net loss between acquisition and quarter-end.
- SPX borrowed $300.0 under an incremental term loan, primarily to fund ASPEQ; the loan matures August 2027. Acquisition-related costs were $5.1 in the first half, and amortization rose with acquired intangibles. Estimated annual intangible amortization is approximately $44.0 in 2023 and $46.0 in 2024 and each of the following four years.
- HVAC Q2 revenue was $269.0, up 23.0%, and segment income was $55.2, up 95.1%. Detection and Measurement revenue was $154.3, up 14.0%, and segment income was $29.2, up 5.0%.
- Remaining performance obligations were $211.2; management expects to recognize approximately 82% within 12 months and 89% within 24 months. Backlog was $337.2 for HVAC and $233.9 for Detection and Measurement.
- First-half results included a $3.6 gain from an equity-security fair-value change. Q2’s effective tax rate benefited from a $1.8 release of deferred-tax valuation allowances. No special charges were recorded in 2023.
Outlook, risks, and contingencies
The filing provides no specific full-year revenue or earnings guidance. Management noted that the businesses generally tend to be stronger in the second half, and heating businesses typically have stronger third- and fourth-quarter demand. It reported more stable labor and supply-chain conditions in the first half of 2023 and continued active management of these issues. Interim results are not necessarily indicative of full-year results.
Key risks include cyclical end markets, customer capital-spending changes, input-cost and supplier risks, fixed-price contract overruns or delays, competition, acquisition integration and realization of benefits, and environmental and other retained liabilities. South African power-project disputes remain uncertain: DBT is pursuing claims against MHI, while MHI has asserted additional claims, including $89.1 of notices alleging defective products. SPX recorded no loss for these MHI claims, considers a loss not probable, but says potential loss cannot currently be estimated. Other recorded liabilities for claims, primarily environmental matters, totaled $37.7. The asbestos portfolio was divested in November 2022, with the divested subsidiaries undertaking uncapped, unlimited-duration indemnification obligations for the relevant asbestos liabilities.
Investor verification priorities
- Track post-acquisition ASPEQ and TAMCO performance, integration costs, preliminary purchase-accounting adjustments, and whether expected benefits materialize.
- Assess debt repayment capacity and interest-rate exposure, including the 6.8% weighted-average borrowing rate, available facilities, and covenant compliance.
- Monitor conversion of backlog and remaining performance obligations into revenue and cash, particularly project timing and working-capital movements.
- Follow the South African project claims and other contingencies, including the pending dispute outcomes and the inability to estimate possible losses.
- Separate recurring performance from valuation and tax items, discontinued-operation dispute gains, and acquisition-related costs when evaluating earnings growth.