SPX Technologies, Inc. — Q1 2023 Form 10-Q
Business context and period. The quarter ended April 1, 2023; comparison is with the three months ended April 2, 2022. SPX reports HVAC and Detection and Measurement segments. The filing notes the 2023 quarter had one fewer day than the prior-year quarter. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $399.8 million | $307.1 million |
| Gross profit / margin | $149.9 million / 37.5% | $104.0 million / 33.9% |
| Operating income / margin | $49.8 million / 12.5% | $11.4 million / 3.7% |
| Continuing-operations income | $39.1 million | $13.0 million |
| Net income | $42.8 million | $11.4 million |
| Diluted EPS | $0.92 | $0.25 |
| Cash from continuing operations | $0.8 million | Cash used: $48.6 million |
Revenue increased 30.2%; management attributed the increase primarily to organic growth, with reported growth components of 30.6 percentage points organic, negative 1.1 points from foreign currency, and 0.7 points from acquisitions. HVAC revenue rose 30.3% to $251.6 million and segment income increased to $47.7 million from $20.6 million. Detection and Measurement revenue rose 30.0% to $148.2 million and segment income increased to $26.7 million from $19.0 million.
Net income includes a $3.7 million after-tax gain on discontinued operations. Continuing-operations effective tax rate was 22.4%, versus 16.7%. Other income, net included a $3.6 million gain from revaluing an equity security; interest expense was $2.4 million, with $0.5 million interest income.
Cash, debt and liquidity
Cash and equivalents were $204.8 million at April 1, 2023, compared with $147.8 million at December 31, 2022. Consolidated cash was $212.7 million including $7.9 million held in discontinued businesses. Operating cash flow from continuing operations was $0.8 million; working-capital investment included $21.2 million of inventory cash use. Total operating cash flow including discontinued operations was negative $4.4 million. Capital expenditures were $4.0 million.
Total debt was $313.9 million, including $68.9 million classified as short-term debt and $241.5 million of long-term debt. Debt increased from $246.8 million at year-end, including $20.0 million in revolving borrowings and $47.0 million under a trade-receivables financing arrangement. The receivables facility had $0.9 million available; revolving credit facilities had $469.2 million available. The weighted-average rate on senior-credit-agreement borrowings was approximately 6.4%, and SPX reported compliance with its covenants.
Changes, outlook and significant matters
- Profitability improved substantially year over year. Management cited higher volumes, pricing, better manufacturing-cost absorption, and more stable labor and supply chains; lower corporate expense and intangible amortization also contributed.
- Management reported minimal COVID-19 impact and no significant adverse operating impact from the Russia/Ukraine conflict in the quarter. It expects no material impact from the latter based on current information.
- No quantified full-year earnings or revenue guidance is provided in the supplied filing text. Remaining performance obligations were $227.0 million; SPX expects to recognize approximately 80% within 12 months and 91% within 24 months. Backlog was $270.3 million for HVAC and $244.7 million for Detection and Measurement. Management says businesses tend to be stronger in the second half, with heating activity often stronger in the third and fourth quarters.
- On April 3, after quarter-end, SPX acquired T.A. Morrison & Co. for approximately $125 million net of cash acquired. On April 21 it arranged up to $300 million of additional term-loan commitments for acquisitions and other corporate purposes. On April 28 it agreed to acquire ASPEQ for approximately $418 million, subject to closing conditions and regulatory approvals.
- South African DBT project disputes remain a material uncertainty despite DBT being a discontinued operation. SPX recorded $7.0 million of income after an arbitration ruling in its favor; it also disclosed substantial claims by MHI, including a $92.0 million notice of intent to claim, for which no loss was recorded and potential loss could not be estimated. SPX guarantees DBT’s project performance.
- Other risks include ordinary-course litigation, environmental and self-insured claims, retained liabilities from dispositions, supply-chain and labor issues, inflation and fixed-price contract exposure, and acquisition integration and financing. Recorded liabilities for general claims and related matters were $38.9 million. The asbestos-liability subsidiaries were divested in 2022, with uncapped, time-unlimited indemnification obligations from those subsidiaries to SPX.
- SPX reported no special charges in either quarter and no significant future restructuring charges expected for actions approved at quarter-end. The Cincinnati Fan reporting unit had less than 10% fair-value headroom over carrying value in its 2022 test; failure to meet its forecast could lead to impairment.
Important facts for investors to verify
- Whether strong organic growth, segment margins and backlog convert into sustained earnings and cash flow, given quarterly working-capital volatility and seasonality.
- Acquisition funding and resulting leverage, including any draw on the $300 million incremental term facility and completion and integration of the proposed ASPEQ transaction.
- Developments and possible financial exposure from DBT’s South African disputes, MHI claims and SPX’s guarantee obligations.
- Whether Cincinnati Fan meets its forecast and whether any impairment indicators emerge; also monitor the valuation of the equity security that generated the quarterly gain.
- Changes in tax exposures, environmental and other contingent liabilities, and the availability and cost of credit facilities.