SPX Corporation (now identified in the request as SPX Technologies) — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 26, 2015; nine months ended September 26, 2015. The filing registrant is named SPX Corporation. On September 26, SPX completed the spin-off of SPX FLOW; its results are presented as discontinued operations. SPX adopted new continuing-operation segments: HVAC, Detection and Measurement, and Power.
Financial results and liquidity
Amounts below are in millions, except per-share data. Comparative 2014 continuing-operation figures reflect reclassification of SPX FLOW as discontinued operations.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $374.1 | $489.6 | $1,209.8 | $1,397.1 |
| Gross profit (margin) | $2.9 (0.8%) | $112.5 (23.0%) | $173.4 (14.3%) | $314.3 (22.5%) |
| Operating loss | $(113.6) | $(2.1) | $(166.9) | $(62.5) |
| Loss from continuing operations | $(130.7) | $(12.2) | $(183.6) | $217.5 |
| Net income (loss) attributable to SPX common shareholders | $(105.0) | $63.3 | $(73.2) | $430.0 |
| Basic EPS attributable to SPX common shareholders | $(2.58) | $1.51 | $(1.80) | $9.99 |
Continuing-operations revenue declined 23.6% in Q3 and 13.4% year to date. The 2014 nine-month continuing result included a $491.2 gain on the sale of SPX’s EGS interest, which makes the year-over-year earnings comparison unusual. Discontinued SPX FLOW generated Q3 revenue of $589.5 and net income of $0.7; nine-month revenue was $1,775.1 and net income was $80.8.
- Cash flow: Nine-month cash used in continuing operating activities was $168.3, versus $299.9 used in 2014. Continuing investing cash outflow was $10.8 and financing cash outflow was $122.3. Consolidated cash declined $345.1 during the period to $82.5; the change included $57.8 of adverse foreign-exchange effects and $207.1 of cash distributed with the spin-off.
- Debt and liquidity: Continuing-operations debt was $422.0 at quarter-end: $70.2 short-term debt, $4.8 current maturities, and $347.0 long-term debt. Cash was $82.5. The company reported $300.5 of available revolving-credit capacity after letters of credit, plus $3.3 available under its receivables facility. It was in compliance with credit-agreement covenants.
- Balance sheet: Current assets were $878.5 and current liabilities $751.8 at September 26, 2015. These balances reflect the post-spin company; December 31, 2014 included SPX FLOW assets and liabilities classified as discontinued operations.
- Other: SPX discontinued dividend payments after its second-quarter 2015 dividend. Nine-month capital expenditures were $12.8.
Material changes and segment performance
- The most significant operating impact was a $95.0 reduction in expected profit on large South African power projects in Q3, reflected as a $57.2 revenue reduction and $37.8 increase in cost of products sold. Management said the adjustment increased net loss by $71.2, or $1.75 per share.
- HVAC revenue increased 3.9% in Q3 to $142.7 and segment income rose to $23.5. Detection and Measurement revenue declined 2.4% to $55.9 and income fell to $8.3. Power revenue declined 40.5% to $175.5, and the segment recorded a $96.5 loss, compared with $9.2 income a year earlier.
- Management attributed broader revenue declines to the South Africa revisions, weaker organic sales—especially in Power—and the stronger U.S. dollar. Nine-month organic revenue declined 5.3%, excluding currency effects and the South Africa revision.
- The spin-off reduced SPX’s scale and transferred SPX FLOW debt and operations out of continuing results. Management expects future corporate overhead and related cash disbursements to be significantly lower because some historic costs supported SPX FLOW.
Outlook, risks, and unusual items
- South African projects: Management described delays, cost overruns, complex contractual relationships, and disputes with prime contractors and subcontractors. It was pursuing scope changes and claim settlements. Project revenue included $48.4 for claims and unapproved change orders that management considered recoverable; further estimate revisions could materially affect results.
- Markets and backlog: Management cited weak demand for power-generation equipment and competitive pricing in transformers. Power segment backlog was $822.1, down from $936.7 a year earlier; some backlog is long-term. The filing provides no specific earnings or revenue guidance.
- Restructuring and pensions: Q3 special charges were $8.4, primarily restructuring costs. The company reported $12.7 of restructuring liabilities and approximately $2.0 of expected remaining charges under approved actions. Pension plan amendments generated $12.1 of actuarial losses, partly offset by a $5.1 curtailment gain.
- Restatement: SPX corrected prior-period errors involving software development costs, trademark impairment, and deferred taxes. It concluded prior years were not materially misstated, but reduced 2014 continuing income by $0.2 for Q3 and $2.9 for the first nine months.
- Contingencies and impairment: Recorded contingency accruals were $573.3, including $536.3 for risk-management matters; related insurance recovery assets were $479.1. Two Power reporting units had fair-value cushions of less than 10%, with $39.5 of aggregate goodwill. Management said claims, environmental matters, and tax positions were adequately provided for, while noting ultimate outcomes could differ.
- Taxes: SPX recognized no tax benefit on approximately $102.0 of Q3 pre-tax losses and $130.0 year to date, largely related to South Africa, because realization was considered unlikely. Gross unrecognized tax benefits were $42.0; a $2.0–$6.0 decrease within 12 months was considered reasonably possible.
Important facts for investors to verify
- Progress, remaining costs, claim recoveries, and potential further estimate changes on the South African projects.
- Post-spin results and cash generation of the continuing segments, including whether lower corporate overhead offsets weaker Power demand.
- Liquidity, debt balances, revolver availability, and covenant headroom as the new credit arrangements season.
- Whether the restated financial information and related control disclosures require further clarification; management reported effective disclosure controls at quarter-end.
- Resolution of tax examinations, litigation and other contingencies, and annual goodwill and trademark impairment testing.