SPX Corporation (now trading as SPXC) — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; filed May 6, 2016. Amounts are in millions except per-share data. The company completed the SPX FLOW spin-off in September 2015, so Q1 2015 SPX FLOW results are reported as discontinued operations; continuing-operations comparisons reflect the remaining business.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $389.3 | $376.3 |
| Gross profit / margin | $89.8 / 23.1% | $74.5 / 19.8% |
| Operating income (loss) | $20.3 | $(44.6) |
| Continuing-operations income (loss), attributable to SPX common shareholders | $14.1 | $(38.4) |
| Net income (loss), attributable to SPX common shareholders | $13.0; $0.31 per diluted share | $(7.1); $(0.18) per diluted share |
| Cash flow from operating activities | $(62.2), including $(1.3) from discontinued operations | $(108.8), including $7.6 from discontinued operations |
| Cash and equivalents at period end | $97.9 | $101.4 at December 31, 2015 |
| Total debt | $389.5 | $371.8 at December 31, 2015 |
Continuing-operations cash used was $60.9 versus $116.4 in Q1 2015. Investing activities provided $43.9, including $45.9 net proceeds from the dry cooling sale, partly offset by $2.0 of capital expenditures. Financing activities provided $14.4. Total debt comprised $38.4 short-term debt, $13.5 current maturities, and $337.6 long-term debt. The company reported $290.8 of available revolving-credit capacity and $32.7 available under its trade-receivables facility; it was in compliance with senior-credit covenants. Current assets were $665.7 and current liabilities $569.2.
Material changes and segment results
- Revenue rose 3.5%; organic growth was 5.8%, partly offset by a 2.3% foreign-currency impact. Management attributed growth to all three segments.
- Gross margin increased to 23.1% from 19.8%, reflecting organic growth, better operating efficiency and cost reductions, and a more profitable sales mix.
- SG&A fell to $82.2 from $114.9. The comparison benefited from lower corporate and incentive-compensation costs after the spin-off; Q1 2015 included substantial costs for personnel and support transferred to SPX FLOW.
| Segment | Revenue, Q1 2016 (Q1 2015) | Segment income (loss), Q1 2016 (Q1 2015) |
|---|---|---|
| HVAC | $111.6 ($107.7) | $15.9 ($12.9) |
| Detection and Measurement | $55.4 ($51.9) | $11.0 ($8.9) |
| Power | $222.3 ($216.7) | $(5.5) ($(11.4)) |
Power backlog was $717.3, down from $877.7 a year earlier; the prior-year balance included $169.8 related to the dry cooling business, and currency accounted for $48.9 of the decline. HVAC and Detection and Measurement backlogs were $40.9 and $36.4, respectively.
Outlook, risks, and unusual items
- No specific financial guidance is provided. Management says results are seasonal and generally stronger in the second half; HVAC demand tends to strengthen in Q3 and Q4, while large power projects and outages can cause substantial period-to-period variability.
- On March 30, SPX completed the dry cooling business sale for $45.9 net cash proceeds and recorded a $17.9 gain. The gain included a $40.4 foreign-currency translation reclassification from accumulated other comprehensive income. Final working-capital settlement remained pending, and the sale price and gain could be materially adjusted.
- SPX recorded a $4.0 impairment of SPX Heat Transfer trademarks after revising revenue expectations. Further deterioration could result in impairment of its $27.9 of definite-lived intangible assets.
- Power operations faced continuing delays, cost overruns, and claim disputes on large South African projects. Reported projected revenue included about $26.0 for claims and unapproved change orders, which management considered recoverable; revisions to estimates could materially affect results.
- Recorded liabilities for claims and contingencies were $589.5, including $534.1 for asbestos matters. Related recorded insurance-recovery assets were $493.3; their value depends in part on insurer solvency and coverage. The company warns that claim, insurance, or estimate changes could materially affect results, financial position, or cash flows.
- Gross unrecognized tax benefits were $44.7. SPX considered it reasonably possible that $6.0–$10.0 of previously unrecognized benefits could decrease within 12 months; it also said it could pay approximately $6.0–$10.0 for uncertain tax positions, including estimated interest and penalties.
- Restructuring charges were $0.3 in Q1; approximately $3.5 of charges remained expected under actions approved by April 2. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the final working-capital adjustment and any subsequent change to the dry cooling sale proceeds or gain.
- Track Power-segment execution, backlog conversion, and the recoverability of South African project claims and change orders.
- Assess continuing cash consumption, debt and borrowing capacity, and covenant compliance; Q1 operating cash flow remained negative.
- Monitor Heat Transfer performance and potential further impairment, along with restructuring costs and savings.
- Review developments in asbestos and other claims, insurance recoveries, and uncertain tax examinations or settlements.