SPX Technologies, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparable period ended April 1, 2023. Amounts are in millions except per-share data. SPX operates in HVAC and Detection and Measurement. The quarter included the February 7 acquisition of Ingénia Technologies, whose results are included in HVAC.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $465.2 | $399.8 |
| Gross profit / margin | $182.9 / 39.3% | $149.9 / 37.5% |
| Operating income / margin | $64.6 / 13.9% | $49.8 / 12.5% |
| Continuing-operations income | $49.2 | $39.1 |
| Net income | $49.0 | $42.8 |
| Diluted EPS from continuing operations | $1.05 | $0.84 |
| Continuing-operations operating cash flow | $10.7 | $0.8 |
- Revenue increased 16.4%: acquisitions contributed 14.0 percentage points, organic growth 2.3 points, and foreign currency 0.1 point.
- HVAC revenue was $302.4, up 20.2%, while segment income rose to $68.4 from $47.7. Organic revenue declined 1.9%; acquisitions more than offset the decline. HVAC segment margin increased to 22.6% from 19.0%.
- Detection and Measurement revenue was $162.8, up 9.9%, and segment income increased to $31.4 from $26.7. Organic revenue grew 9.6%, principally from higher large-project volume in communication technologies. Segment margin was 19.3%, versus 18.0%.
- Operating income improved despite higher acquired-intangible amortization ($14.8 versus $6.3) and acquisition-related and other costs ($2.6 versus $0.6). Gross-margin improvement reflected operating leverage and favorable HVAC product mix.
- Income tax provision was $1.9 on $51.1 of pretax continuing income, a 3.7% effective rate, compared with $11.3 and 22.4%. Stock-based compensation excess tax benefits were $10.9 in 2024 and $0.9 in 2023; the low 2024 rate is therefore not necessarily indicative of a recurring rate.
- Cash and equivalents were $100.5 on the balance sheet, plus $5.0 held in discontinued operations. Total debt was $854.4, compared with $558.3 at December 31, 2023; short-term debt was $317.0 and long-term debt $516.6. The increase principally reflects acquisition financing. Weighted-average senior-credit-agreement borrowing cost was approximately 7.0%.
- Available capacity was $207.8 under revolving credit facilities and $5.0 under the trade-receivables facility. SPX reported compliance with all senior credit agreement covenants.
- Operating cash flow from continuing operations was $10.7; investing cash outflow was $303.9, including $294.1 for Ingénia and $9.9 in capital expenditures. Financing cash inflow was $292.7. Consolidated cash increased $0.6 during the quarter.
- HVAC backlog was $461.9, including $137.5 attributable to Ingénia, ASPEQ and TAMCO; Detection and Measurement backlog was $206.5. Remaining performance obligations were $141.4, with approximately 73% expected to be recognized within 12 months and 86% within 24 months.
Material changes and management commentary
- Revenue growth was driven mainly by the Ingénia, ASPEQ and TAMCO acquisitions, alongside organic Detection and Measurement growth. HVAC organic revenue declined, particularly in heating products, amid an unseasonably warm winter and comparison with prior-year sales supported by elevated backlog.
- Ingénia contributed $12.5 of quarterly revenue and $0.6 of net income. Its reported contribution included $3.3 of acquired-intangible amortization and $0.9 of inventory fair-value step-up charges; SPX also incurred $2.3 of acquisition-related costs.
- Interest expense rose as average debt balances and effective borrowing rates increased following acquisition financing. Other expense included a $4.2 loss on an equity security’s fair value, compared with a $3.6 gain in the prior-year quarter.
- SPX recorded $0.6 of restructuring charges, primarily severance, and said it expected no significant future charges under actions approved by March 30. The quarter had one fewer day than the prior-year comparable period; management said the impact was not practicably estimable.
- No specific full-year earnings or revenue guidance was provided in the supplied filing text. Management noted that businesses tend to be stronger in the second half, and heating businesses are generally stronger in the third and fourth quarters.
Risks, contingencies and unusual items
- SPX paid $9.0 in Q1 to settle a former-representative dispute following a jury ruling against a Detection and Measurement business. The payment had been accrued at year-end 2023.
- DBT’s South African project settlement resolved claims with MHI, including claims against SPX as guarantor, but DBT has a remaining payment obligation of South African Rand 480.9, reported as $25.5 at March 30, 2024 and due in September 2024. Certain disputed subcontractor balances remain subject to an uncertain liquidation process.
- A seller in the ULC Robotics acquisition seeks $15.0 plus potential interest and legal fees in a breach-of-contract claim. SPX does not consider a loss probable but says a loss is reasonably possible.
- Recorded liabilities for claims and other matters totaled $38.7, including environmental accruals of $24.1. SPX cautioned that estimates, insurance or indemnification may prove insufficient and that retained liabilities from prior dispositions may change.
- SPX identified potential impairment exposure if ASPEQ or Ingénia do not achieve forecasts; the acquired assets’ fair values currently approximate carrying values. Purchase accounting for Ingénia and certain other acquisitions remains preliminary.
- Management identified risks including cyclical end markets, customer capital spending, competition and pricing, supply-chain and raw-material costs, fixed-price project overruns, acquisition integration, cyber and intellectual-property risks, environmental and other contingencies, geopolitical conditions, and severe weather. Geopolitical conflicts had no significant adverse Q1 impact, and management did not expect current related raw-material exposure to be material.
Most important facts for investors to verify
- Whether organic HVAC demand, particularly heating-product sales, stabilizes after the warm winter and prior-year backlog comparison.
- Whether Ingénia, ASPEQ and TAMCO meet operating forecasts and deliver expected integration benefits, given acquisition-related costs, amortization and goodwill exposure.
- Debt reduction, interest costs, revolving-facility availability and covenant compliance following acquisition financing; also confirm the September 2024 DBT settlement payment.
- How much earnings growth is supported by ongoing operations versus the unusually low tax rate and stock-based compensation tax benefits.
- Developments in the ULC claim, environmental matters, retained disposal liabilities and preliminary acquisition valuations.
- Backlog conversion and timing of the $141.4 remaining performance obligations; these measures do not guarantee future revenue or earnings.