SPX FLOW Reports Fourth Quarter and Full Year 2018 Results; Journey to High-Performance Culture Continues in 2019

PRNewswire 5-Feb-2019 6:30 AM

CHARLOTTE, N.C., Feb. 5, 2019 /PRNewswire/ -- SPX FLOW, Inc. (NYSE:FLOW) a leading provider of process solutions and flow control technologies, today reported results for the quarter and full year ended December 31, 2018 and issued 2019 full year guidance. 

"In 2018 we made great progress on our journey to transform SPX FLOW into a high performing operating enterprise, highlighted by strong execution of our high-value product line strategy, the implementation of 'Pathway to Excellence' as our business operating system and an infusion of highly talented leaders into our operational and commercial teams. Our progress was underscored by 5% organic revenue growth, 19% growth in adjusted EBITDA and 200 points of operating margin expansion versus the prior year. I want to thank all of our global team members for their hard work, contributions to our 2018 success and on-going dedication to serving customers," said Marc Michael, President and Chief Executive Officer.

"We are focused on growing our highest margin product lines and exercising discipline in project-related businesses where our emphasis is enhancing performance. As a result, we expect to see a favorable shift in margin performance as we move into the second half of 2019 and into 2020. In contrast, we are planning for a lower level of project related revenue, specifically in our food and beverage systems business where our selective approach contributed to a (32)%, or ($114) million, reduction in orders last year. This reduction was specifically concentrated in large dry dairy process applications, a portion of the market where we have methodically decreased the company's exposure and plan to adjust our cost structure accordingly in 2019. Going forward, we will maintain our capability and technology in dry processing and remain committed to delivering on our commitments to customers."

"Looking at 2019, we entered the year with steady end markets, improved backlog and a business operating system that enables us to effectively manage our global operations. We are targeting underlying organic revenue growth of 1% to 3% to offset a decline of ~$40 million of organic revenue in our food and beverage systems business. On a consolidated basis, we expect to drive 100 points of segment income margin expansion on flat organic revenue. Excluding the restructuring expenses related to discrete strategic actions, adjusted EPS guidance is $2.40 to $2.75 per share and adjusted EBITDA is expected to be between $245 and $265 million, up 7% at the mid-point on a comparable basis to 2018. Net of investments in capex, new product development and restructuring, we expect free cash flow conversion in the range of 100% to 120% of net income and intend to remain prudent on capital allocation with $50 to $75 million earmarked for further debt reduction in 2019."

"It is still early in our journey to achieve high-performance and we recognize our path is not linear as we execute our long-term strategy. Our global team is committed to establishing a winning culture and aligned to the key initiatives we are emphasizing to drive sustainable, profitable growth and outsized margin expansion over time. Our key initiatives are focused on increasing productivity, reducing lead times and accelerating working capital turns while we continue to invest for growth in our high-value product lines and aftermarket business. Given our progress over the past three years, I am confident in our future and believe 2019 will be an important turning point on our journey," concluded Michael.

Fourth Quarter 2018 Overview:

• In the fourth quarter 2018, the company reported a net loss per share of $0.64 which included $0.88 per share of tax losses primarily related to U.S. tax reform measurement period adjustments and other discrete tax charges, asset impairment charges of $0.34 per share and certain restructuring charges of $0.08 per share.  Excluding these items and on a comparable basis to management's guidance, adjusted earnings per share were $0.66.
                                    
• Backlog decreased (4.5)% due to foreign currency translation, which negatively impacted backlog by (3.9)%, and an organic decline of (0.6)%.  The organic decline reflects management's strategy to focus order growth on higher value product lines and reduce its exposure to large project orders, specifically in food and beverage dry dairy systems where backlog declined ($66.1) million, a (6.6)% organic impact to the consolidated backlog.  Across the rest of the business, backlog grew $59.7 million, a 6.0% organic increase to the consolidated backlog.  This growth was concentrated in higher margin product lines.
                                                 
• Orders declined (11.3)% with currency a (2.9)% negative impact and organic orders down (8.4)%, or ($47.4) million.  The organic decline reflects a lower level of food and beverage system orders, partially offset by healthy order growth of 5.6% in the Industrial segment.
                                                        
• Revenues grew 1.7%.  Organic growth of 5.1% was offset partially by a (2.9)% currency headwind and the adoption of the ASC 606 revenue recognition standard, which negatively impacted revenues (0.5)% as compared to the prior year.   The organic revenue growth was led by 13.3% growth in the Industrial segment and 6.2% growth in the Food and Beverage segment.  In contrast, organic revenue in the Power and Energy segment declined (6.3)% in the quarter.
                                                         
• Segment income was $63.5 million, up 8.4% versus the prior year and segment income margins expanded 70 points to 11.8%. The increased profitability was driven by leverage on the organic revenue growth described above.
                                                    
• Operating income was $30.9 million, or 5.7% of revenues, and included asset impairment charges of $14.6 million related to certain assets in the Food and Beverage segment, and restructuring charges of $4.5 million, of which $3.5 million related to the company's strategy to reduce its exposure to large dry dairy systems. 
                                                    
• Excluding the impairment and restructuring charges related to the company's strategy to reduce its exposure to large dry dairy systems noted above, adjusted operating income* was $49.0 million, or 9.1% of revenues, up 80 points year-over-year on a comparable basis.
                                                               
• Net cash generated from operating activities was $57.6 million and capital expenditures were $8.2 million, resulting in free cash flow* of $49.4 million.

Fourth Quarter 2018 Results by Segment:

Food and Beverage

Note: The commentary below is compared to the prior year period.

• Backlog decreased (14.7)%, including a (3.8)% negative impact from currency and an organic decline of (10.9)%.  The organic decline was due to the reduction in systems backlog previously mentioned, offset partially by double-digit growth in component and aftermarket backlog.
• Orders declined (25.6)%.  Currency was a (3.2)% headwind and organic orders declined (22.4)%, or ($52.5) million.  The organic decline was due to a lower level of system orders as two large dry dairy orders awarded in Q4 2017 and totaling $72 million did not repeat. Partially offsetting the decline was a mid-single-digit increase in component and aftermarket orders.
• Revenues declined (1.1)%.  ASC 606 drove a (4.3)% decline in revenue and currency was a (3.0)% headwind.  Organic revenue* growth was 6.2%, driven by execution of large system projects in backlog and increased aftermarket service sales, offset partially by a decline in component deliveries into North America.
• Segment income was $22.4 million, up 0.9% versus the prior year and margins expanded 20 points to 11.5%.

Power and Energy

Note: The commentary below is compared to the prior year period.

• Backlog increased 0.8% as organic growth of 4.4% was mostly offset by a negative impact from currency of (3.6)%.  The organic backlog growth was driven by a higher level of pump and midstream valve orders. 
• Orders decreased by (5.7)%.  Currency translation negatively impacted orders by (2.3)% and organic orders declined (3.4)% due primarily to timing of midstream valve orders in North America. 
• Revenues decreased (2.7)%.  ASC 606 benefited revenue by 6.1% and currency was a (2.5)% headwind.  Organic revenue* declined (6.3)% on a lower level of valve and pump shipments, partially offset by increased aftermarket sales.
• The increase in segment income and margin was driven by the increase in aftermarket sales noted above.

Industrial

Note: The commentary below is compared to the prior year period.

• Backlog increased 2.8% as organic growth of 7.4% offset a (4.6)% negative impact from currency.  The organic growth was concentrated in the mixer, hydraulic tools and pump product lines, partially offset by a reduced level of heat exchanger backlog.
• Orders grew 2.6% as organic growth of 5.6% offset a (3.0)% negative impact from currency translation.  The organic order growth was broad-based across all product lines, led by double-digit order growth for hydraulic tools.
• Revenues grew 8.5%.  Currency translation and ASC 606 negatively impacted revenue by (3.1)% and (1.7)%, respectively.  Organic growth was 13.3% with growth across each product line, led by double-digit organic growth in mixer shipments. 
• Segment income increased 18.5% to $26.3 million and margins expanded 110 points to 13.4%.

Full Year 2018 Overview:

• Orders declined (1.5)% including an organic decline of (2.2)%, or ($46.8) million and a currency benefit of 0.7%.  On an organic basis, orders for food and beverage systems declined (31.9)% or ($114.1) million, reflecting the company's selectivity in dry dairy systems.  This decline more than offset organic growth of 3.8%, or $67.3 million, in aggregate across the rest of the business, concentrated in the company's highest value product lines and aftermarket businesses.
• Revenues grew 7.1% including the impact of ASC 606 and foreign currency translation which benefited revenue by 1.4% and 0.7%, respectively.  Organic revenue* grew 5.0% with growth across all three segments, led by 8.5% growth in Industrial, 4.9% growth in Power and Energy and 1.6% growth in Food and Beverage.
• Segment income and margin were $241.3 million and 11.5%, up 22.8% and 140 points versus the prior year. The increases in segment income and margin were primarily driven by the organic revenue growth mentioned above, cost reductions and lower incentive compensation expense.
• Operating income and margin were $168.4 million and 8.1%, an increase of 41.4% and 200 points versus the prior year, driven primarily by the increase in segment income noted above and, to a lesser extent, a reduction in corporate expense and restructuring charges.  This was partially offset by impairment charges of $14.6 million, related primarily to certain assets in the Food and Beverage segment.
• Restructuring charges were $8.4 million in 2018, compared to $14.4 million in 2017. 
• Excluding $18.1 million of impairment and restructuring charges related to the company's strategy to reduce its exposure to large dry dairy systems, adjusted operating income* was $186.5 million, or 8.9% of revenues, up 180 points year-over-year on a comparable basis.
• Other income (expense) was ($5.5) million as compared to $1.3 million in the prior year period primarily driven by foreign currency losses as the U.S. Dollar strengthened against certain foreign currencies, primarily the Angolan Kwanza.
• Diluted net earnings per share were $1.03 and included:
• Tax charges of $0.87 per share, primarily related to U.S. tax reform measurement period adjustments and other discrete tax charges;   
• Impairment charges of $0.34 per share; and
• Restructuring charges of $0.08 per share.
• Excluding the items noted above, adjusted earnings per share* were $2.32 and adjusted EBITDA* was $239.0 million, up 19% year-over-year.
• Net cash from operating activities was $105.6 million and included $12.9 million of cash outflows for restructuring activities.  Free cash flow* was $80.1 million and included the net cash from operating activities and $25.5 million in capital expenditures, which increased 31% year-over-year.

2019 Full Year Guidance:

• Revenues expected to be down (3)% to (1)% year-over-year:
• Assumes a currency headwind of ~(2)%, or ($40) million
• Organic revenues of (1)% to 1% in total:
• Expect a ($40.0) million decline in Food & Beverage revenues driven by a decline in large dry dairy systems
• Targeting 1% to 3% organic revenue growth across the rest of business
• Earnings per share of $2.20 to $2.55:
• Includes $15 to $20 million of restructuring expense
• Assumes an effective tax rate in the range of 28% to 30%
• Free cash flow in the range of $105 to $125 million, including investments of:
• $30 million in capital expenditures; and
• $15 to $20 million in restructuring payments
• Capital allocation of $50 to $75 million towards debt reduction

2019 Adjusted Full Year Guidance:

• Adjusted EPS of $2.40 to $2.75 and adjusted EBITDA* in the range of $245 to $265 million:
• Includes ~$5 million of annual run-rate restructuring expense
• Excludes $10 to $15 million of restructuring expense related to discrete strategic actions

OTHER ITEMS

Debt Repayment:  During Q4 2018 the company made voluntary prepayments of $60.0 million on its term loan.  These payments, coupled with the required principal payments, reduced the outstanding principal balance of the term loan to $140.0 million.

Form 10-K:  The company expects to file its annual report on Form 10-K for the year ended December 31, 2018 with the Securities and Exchange Commission on February 5, 2019. This press release should be read in conjunction with that filing, which will be available on the company's website at www.spxflow.com, in the Investor Relations section.

About SPX FLOW, Inc.:  Based in Charlotte, North Carolina, SPX FLOW, Inc. (NYSE:FLOW) innovates with customers to help feed and enhance the world by designing, delivering and servicing high value solutions at the heart of growing and sustaining our diverse communities. The company's product offering is concentrated in rotating, actuating and hydraulic technologies, as well as automated process systems, into food and beverage, industrial and power and energy markets. SPX FLOW has approximately $2 billion in annual revenues with operations in more than 30 countries and sales in more than 150 countries. To learn more about SPX FLOW, please visit www.spxflow.com.

*Non-GAAP measure. See attached schedules for reconciliation from most comparable GAAP measure. Management believes these Non-GAAP metrics are commonly used financial measures for investors to evaluate our operating performance for the periods presented, and when read in conjunction with our consolidated financial statements, present a useful tool to evaluate our ongoing operations and provide investors with metrics they can use to evaluate our management of the business from period to period. In addition, these are some of the factors we use in internal evaluations of the overall performance of our business.

Management acknowledges that there are many items that impact a company's reported results and the adjustments reflected in these Non-GAAP measures are not intended to present all items that may have impacted these results. In addition, these Non-GAAP measures are not necessarily comparable to similarly-titled measures used by other companies.

(1) Organic revenue growth (decline) is calculated on a constant currency basis and excludes the net impact related to the adoption of the ASC 606 revenue recognition standard.

Note: Net leverage is as defined by the company's credit facility.

Certain statements in this press release are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. Please read these results in conjunction with the company's documents filed with the Securities and Exchange Commission, including its annual report on form 10-K for the year ended December 31, 2018. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Actual results may differ materially from these statements. The words "expect," "anticipate," "plan," "target," "project," "believe" and similar expressions identify forward-looking statements. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  These statements are only predictions. Actual events or results may differ materially because of market conditions or other factors, and forward-looking statements should not be relied upon as a prediction of actual results.  All the forward-looking statements in this press release are qualified in their entirety by reference to the factors discussed under the heading "Risk Factors" in the company's most recent Form 10-K and in any other documents filed by the company with the Securities and Exchange Commission that describe risks and factors that could cause actual results to differ materially from those projected in these forward-looking statements. These risk factors may not be exhaustive. Further, the company operates in a continually changing business environment and cannot predict new risk factors that may arise as a result of these changes.  In addition, estimates of future operating results are based on the company's current complement of businesses, which is subject to change. Statements in this press release speak only as of the date of this press release, and SPX FLOW disclaims any responsibility to update or revise such statements.

Investor and Media Contacts:
Stewart Honeycutt, Investor Relations Manager
704-752-4472
investor@spxflow.com

Barrett Brown, Communications Manager
704-752-4662 
communications@spxflow.com

(1) Amounts in the 2018 periods relate to the rationalization of a Food and Beverage Segment business

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SOURCE SPX FLOW, Inc.