SPX Corporation (SPXC) — Q1 2022 Form 10-Q
Business context and period: The filing covers the three months ended April 2, 2022. SPX Corporation reported two continuing-operations segments: HVAC and Detection and Measurement. Transformer Solutions, sold in October 2021, and certain wound-down businesses are reported as discontinued operations.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $307.1 million | $287.2 million |
| Gross profit / margin | $104.0 million / 33.9% | $104.4 million / 36.4% |
| Operating income | $11.4 million | $25.0 million |
| Continuing-operations income | $13.0 million; $0.28 diluted EPS | $23.0 million; $0.50 diluted EPS |
| Net income | $11.4 million; $0.25 diluted EPS | $26.8 million; $0.58 diluted EPS |
| Continuing-operations operating cash flow | -$48.6 million | $23.1 million |
Revenue increased 6.9%, reflecting acquisitions, partly offset by organic revenue decline of 2.5% and an adverse 0.5% foreign-currency effect. Gross margin contracted 2.5 percentage points. Operating income fell 54%; continuing-operations income fell 43.5%. The prior-year net income comparison also included income from discontinued operations, while Q1 2022 discontinued operations recorded a net loss of $1.6 million.
Segments: HVAC revenue rose 10.0% to $193.1 million, but segment income declined 31.8% to $15.2 million and margin fell to 7.9% from 12.7%. Detection and Measurement revenue rose 2.2% to $114.0 million, while income declined 25.0% to $15.0 million and margin fell to 13.2% from 17.9%.
Liquidity, debt, and cash flow
- At April 2, cash and equivalents were $262.8 million; total current assets were $815.5 million and current liabilities $393.9 million.
- Total debt was $242.7 million, including $239.6 million of term debt. Available revolving-credit capacity was $438.2 million; the company reported compliance with credit covenants.
- Cash and equivalents decreased $126.5 million during the quarter. Continuing-operations investing cash outflow was $43.9 million, including $41.8 million for the ITL acquisition; financing cash outflow was $11.0 million.
- Operating cash use reflected project-receipt timing, higher purchases of raw materials and components, and a $9.0 million payment related to transferring postretirement life-insurance obligations.
Changes, outlook, and material risks
- Management attributed margin pressure to COVID-related absenteeism, supply-chain delays, labor shortages, higher input and transportation costs, and lower manufacturing-cost absorption. Lower sales of high-margin communication technology products also reduced Detection and Measurement profitability. Cincinnati Fan acquisition amortization added $4.7 million of HVAC expense.
- Management said it was actively managing these pressures and expected their potential impacts to diminish as 2022 progressed. No numerical full-year guidance was provided. The filing notes that results are typically stronger in the second half and that heating businesses are seasonal.
- Backlog increased year over year: HVAC $263.4 million versus $168.4 million; Detection and Measurement $153.1 million versus $109.0 million.
- Other income included a $4.4 million gain from revaluing an equity security; other operating income included a $0.9 million reduction in estimated ECS acquisition contingent consideration.
- Asbestos-related claims are a significant exposure: recorded claim liabilities were $604.5 million and related insurance recovery assets $521.2 million at quarter-end. The company cautioned that assumptions about claims and insurance recoveries may change and could materially affect results, financial position, or cash flows.
- DBT remains involved in South African power-project disputes. The company recorded no revenue for DBT’s claims against MHI and no loss for MHI’s claims, but said outcomes could materially affect future results and cash flows. It also disclosed $28.9 million paid on bond demands for which DBT seeks reimbursement, and a remaining $2.0 million bond that could be called.
- Disclosure controls were not effective at quarter-end due to a previously identified material weakness involving controls over asbestos-related insurance recovery assets. Remediation was underway but not yet considered complete.
- Other cited risks include supply-chain and labor constraints, inflation and fixed-price contracts, geopolitical developments, competition, acquisition integration, and environmental and other contingencies. The Russia/Ukraine conflict had no significant first-quarter impact; management was monitoring raw-material availability.
Investor verification priorities
- Track whether supply, labor, and cost pressures ease and whether margins recover, especially in HVAC.
- Assess the persistence of organic revenue declines and the contribution and profitability of acquired businesses.
- Monitor operating cash conversion, inventory growth, acquisition spending, and cash balances.
- Review progress in remediating the asbestos-related control weakness and the adequacy and recoverability of asbestos insurance assets.
- Follow developments in DBT/MHI disputes, bond exposures, and retained liabilities from discontinued operations.