SPX Corporation (SPX Technologies in the request) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended July 2, 2016; filed August 5, 2016. The filing is for SPX Corporation, now trading as SPXC. SPX completed the spin-off of SPX FLOW in September 2015, so SPX FLOW’s 2015 results are presented as discontinued operations; comparisons of continuing operations reflect the post-spin business.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $412.9 million | $459.4 million | $802.2 million | $835.7 million |
| Gross profit / margin | $94.8 million / 23.0% | $96.0 million / 20.9% | $184.6 million / 23.0% | $170.5 million / 20.4% |
| Operating income (loss) | $9.7 million | $(8.7) million | $30.0 million | $(53.3) million |
| Continuing operations income (loss), after tax | $3.4 million | $(11.8) million | $18.1 million | $(52.8) million |
| Net income (loss) attributable to common shareholders, after redeemable noncontrolling-interest adjustment | $(14.1) million; $(0.34) per share | $38.9 million; $0.96 per share | $(1.1) million; $(0.03) per share | $31.8 million; $0.78 per share |
Q2 revenue fell 10.1%; first-half revenue fell 4.0%. First-half organic revenue increased 1.4%, but foreign currency and the dry-cooling divestiture reduced reported revenue. Operating margin was approximately 2.4% in Q2 and 3.7% for the first half. Interest expense was $3.8 million in Q2 and $7.3 million in the first half; the filing attributes its year-over-year decline primarily to lower average debt.
Cash used in continuing operations was $38.0 million in the first half, versus $145.7 million used a year earlier. The filing cites lower working-capital needs, particularly in Power, and lower post-spin corporate costs. Capital expenditures were $4.3 million. Cash from the dry-cooling sale contributed $45.9 million to investing cash flow; cash and equivalents ended at $102.0 million, up $0.6 million from year-end.
Balance sheet and liquidity
- At July 2, 2016, current assets were $660.2 million and current liabilities $575.6 million (current ratio approximately 1.15). Total debt was $373.9 million, including $21.5 million short-term debt and $17.9 million current maturities; long-term debt was $334.5 million. Cash less total debt was approximately $(271.9) million.
- SPX reported $304.1 million available under revolving credit facilities after letters of credit, and $32.1 million available under its trade-receivables financing arrangement. It was in compliance with senior credit agreement covenants. The term loan matures in September 2020, with scheduled quarterly repayments beginning in Q3 2016.
Segment performance and changes versus prior periods
- HVAC: Revenue rose 3.0% in Q2 and 3.3% in the first half; segment income rose to $17.1 million and $33.0 million, respectively. Growth, improved mix, and cost efficiencies supported margins. Backlog was $46.5 million, down from $66.0 million.
- Detection and Measurement: Revenue increased 3.3% in Q2 and 4.9% in the first half; segment income rose to $12.1 million and $23.1 million. Backlog was $39.1 million versus $39.5 million.
- Power: Revenue decreased 18.4% in Q2 and 9.3% in the first half, reflecting the dry-cooling sale, currency effects, and weaker organic sales. Q2 segment loss was $1.8 million; first-half loss was $7.3 million. Project mix and lower demand weighed on results, partly offset by better transformer performance. Backlog was $648.1 million, versus $845.0 million, including the prior-year dry-cooling backlog; portions extend beyond 2016.
Consolidated SG&A fell to $81.0 million in Q2 and $163.2 million in the first half, chiefly because corporate costs and incentive compensation were lower after the spin-off. Gross margin improved year over year in both periods, although Q2 gross profit declined slightly in dollars.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management says businesses generally tend to be stronger in the second half; HVAC demand is seasonal, while large power projects and plant outages can make Power results uneven.
- The March 2016 dry-cooling sale generated $45.9 million net cash proceeds and a reported first-quarter gain of $17.9 million, including a $40.4 million foreign-currency translation reclassification. A $1.2 million Q2 charge related to retained liabilities. Final working-capital settlement remained unresolved, and indemnifications or price adjustments could materially change the sale proceeds or gain.
- A $4.0 million first-quarter impairment was recorded on Heat Transfer trademarks after lower revenue expectations. Further deterioration could trigger impairment of other Heat Transfer intangible assets.
- A South African arbitration tribunal determined a $19.4 million put-option redemption for a 25.1% noncontrolling interest, before a $2.1 million promissory-note amount; SPX recorded a net $17.3 million payable and an $18.1 million earnings-per-share adjustment. SPX disputes the determination and intends to pursue legal recourse.
- Power projects in South Africa remain subject to delays, cost overruns, and claims disputes. Project revenue estimates include approximately $24.0 million for claims and unapproved change orders that management considers recoverable; revisions could materially affect results.
- Recorded liabilities for claims and contingencies totaled $585.4 million, including $531.6 million for asbestos matters; related insurance recovery assets were $493.2 million. Recoveries depend on assumptions including insurer solvency. The filing also identifies litigation, environmental, product-liability, self-insurance, and tax uncertainties.
- Management cited foreign losses for which no tax benefit was recognized, contributing to a 43.3% Q2 effective tax rate. It considered a $6.0–$10.0 million decrease in unrecognized tax benefits reasonably possible within 12 months. Pension remeasurement charges totaled $1.8 million in Q2 after lump-sum settlements.
Most important facts for investors to verify
- Whether final working-capital adjustments, retained liabilities, or indemnification claims change the dry-cooling sale proceeds or gain.
- Progress and cost exposure on South African Power projects, including recoverability of the $24.0 million in claims and unapproved change orders, and the status of the disputed put-option redemption.
- Power segment demand, project profitability, backlog conversion, and any further Heat Transfer impairment indicators.
- Cash generation and working-capital trends against debt maturities, covenant requirements, and available borrowing capacity.
- Whether asbestos insurance recoveries and recorded contingency estimates remain supportable, and how tax audits or uncertain positions are resolved.