SPX Technologies, Inc. (SPXC) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the SPX Corporation First Quarter 2011 Earnings Conference Call. My name is Annika, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Please proceed.

Thanks, Annika, and good morning, everyone. Thank you for joining us. With me on the call this morning are Chris Kearney, our Chairman, President and the CEO of SPX; and Patrick O'Leary, our Chief Financial Officer. This morning's call is being webcast with a slide presentation, which you can access in the Investor Relations section of our website at spx.com. The webcast will be available until May 18, and we encourage you to follow along with the webcast as we reference the detailed information on the slides. We have included supplemental schedules in the appendix of today's presentation, which provides reconciliations for all the non-GAAP financial measures we discuss today. Our earnings press release was also issued this morning and can be found on our website. Before we continue, I would like to point out that portions of this presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings. The Q1 results and the 2011 guidance numbers that we discuss today relate to continuing operations. And with that, I'll turn the call over to Chris.

Thanks, Ryan. Good morning, everyone. Thanks for joining us on the call. We continue to experience meaningful growth in emerging markets, as well as very strong demand and sales growth in our early-cycle businesses. As expected, headwinds related to our late-cycle power businesses are partially offsetting this growth in the first half of the year. We are encouraged, however, by indications that demand in our key power markets is gradually improving. As the year progresses, we expect our financial results to improve and to deliver significantly better results in the second half of the year. Looking at the first quarter. Our financial results were in line with the top end of our guidance expectations. Revenue increased 11% over last year, and earnings per share grew 31%. We were encouraged by the development of our backlog, which increased 4% sequentially. This reflects strong order trends in our flow market and continued positive order development in the U.S. medium power transformer market. We completed 2 strategic acquisitions in the quarter and are pleased to welcome the employees of Teradyne Diagnostics Solutions and B.W. Murdoch into the SPX family. Combined, these businesses generate more than $50 million of annual revenue. We believe the strategic impact of these businesses will be greater than their relative size. The key investments we're making this year are all going as planned. This includes the transformer plant expansion, the China manufacturing campus and our increased focus on innovation. And we've raised our 2011 EPS guidance by $0.05 to reflect a modest net improvement in our full year outlook. The composition of our Q1 revenue and earnings this year is very different than last year, particularly at the segment level. This dynamic is illustrated by the first quarter organic revenue results. On a consolidated basis, organic revenue increased 6%. We reported organic growth of approximately 20% in our Test and Measurement and Flow Technology segments. In contrast, organic revenue declined in our Thermal and Industrial segments, which primarily served late-cycle power markets. As the year progresses, the comparisons for these 2 segments will become less challenging. In the second half of this year, we're targeting organic growth in all 4 segments. From a geographic perspective, sales into Europe increased 12% year-over-year. This growth was broad based across each segment. In the Americas, revenue increased 9%. In Asia Pacific, revenue in 3 of our 4 segments grew by more than 25% year-over-year in the quarter. As you may recall, during Q1 2010, revenue in our Thermal segment benefited from China's stimulus for power generation projects. As expected, Thermal's revenue into China declined sharply in Q1 this year. Despite this decline, consolidated sales into emerging markets increased 17% year-over-year and accounted for 25% of total Q1 revenue. Africa and the Middle East grew 38%, driven by increased production related to the power projects in South Africa. Sales into India, although still modest, doubled year-over-year and we're seeing strong order development in India. Looking at our ending Q1 backlog. The backlog increased 4% sequentially to just over $3 billion. Our Thermal segment backlog was flat sequentially, at $1.6 billion. The book-to-bill for Thermal was approximately 1x in the quarter, more than double Q1 last year. Strong order trends continued in our Flow segment. The backlog for Flow increased $59 million, up 7% sequentially and 37% from a year ago. The Industrial segment backlog grew $44 million or 12% from the end of the year. This was driven primarily by continued volume growth in U.S. power transformer orders. This is the third consecutive quarter of growth in our transformer backlog. It increased 15% sequentially and is now up 35% year-over-year. Market pricing for transformers was stable but remained at a low level. However, we have seen several positive factors that we believe indicate pricing will increase as the year progresses. Patrick will provide more detail on the transformer business later on the call. With respect to the tragic events in Japan during the quarter, they did not have a material impact on our Q1 results. We did, however, adjust our full year guidance to reflect potential downside to the year. Annual sales into Japan are about 1% of our total revenue. We have a small footprint in Japan that supports our Flow Technology and Test and Measurement segments. Based on indications from our local customers, we expect our Flow sales to be modestly less than we had anticipated prior to the tsunami. We don't have any manufacturing in Japan and we don't currently expect any significant impact on our supply chain. Looking at the broader implications for nuclear power generation. Less than 3% of our annual revenue is related to this market. In total, we have approximately $185 million of nuclear orders in our ending Q1 backlog. This is split about evenly between our Thermal and Flow segments. These orders are expected to be delivered over 2011 and 2012. Our most significant nuclear order in the backlog is for squib valves that we're supplying to Westinghouse for the new AP1000 plants it is building in the U.S. and in China. Indications from Westinghouse have been that the timing of these projects will not be impacted by the events in Japan. In our Thermal segment, we were awarded a contract in the early part of this year to replace the heat exchanger at a nuclear power plant in Germany. This contract has been delayed while the government reassesses the life extension of its older nuclear power plants. In contrast, subsequent to the tsunami in Japan, we were awarded a contract in Switzerland, valued at more than $20 million to replace the heat exchanger in a nuclear power plant. Generally speaking, we expect future orders for nuclear to experience heightened funding and approval challenges. If the reaction to the event in Japan ultimately reduces future investment in nuclear power generation, we're well-positioned to benefit from alternative investments in natural gas, coal and solar power generation. Our updated guidance reflects the impact from these events. It also includes the favorable impact of currency rate changes and the recent acquisitions. Later on the call, Patrick will provide more detail on the most significant changes to our EPS guidance. We're now targeting 2011 earnings per share to be between $4.25 and $4.55 per share, with a midpoint of $4.40 per share. Our free cash flow guidance remains at $220 million to $260 million, representing over 100% conversion of net income at the midpoint. Looking at the balance sheet. At the end of Q1, we were still in a strong cash position with $372 million of cash on hand at the end of the quarter. This is down about $80 million from year end due primarily to investments in working capital. In addition, we invested $47 million on the recent acquisitions, modestly less than 1x the acquired revenue. Total debt was $1.2 billion. Our key debt ratios were stable quarter-to-quarter, with debt-to-cap at 35% and gross debt to EBITDA at 2.1x. We remain in a solid financial position and believe we have sufficient flexibility to make strategic investments as opportunities arise. We believe there are attractive acquisition potentials in each of our 3 core markets. And with that, I'll turn the call over to Patrick.

Thanks, Chris. Good morning, everyone. I'll begin this morning with earnings per share. As Chris mentioned, EPS was up 31%, but the composition of our Q1 earnings vary quite a bit from last year. Segment income growth in our Flow and Test and Measurement segments increased EPS $0.26 year-over-year. This more than offset an $0.18 segment income decline in our Thermal and Industrial segments. This decline primarily related to our power businesses, specifically power transformers and dry cooling systems. In our Industrial segment, we recorded an $0.08 gain for an insurance recovery related to a product liability matter. We recorded a charge to operations for this matter in our prior year period. Please note that this benefit was anticipated in our Q1 EPS guidance. Currency and a lower effective tax rate were other notable positive EPS drivers year-over-year. Stock compensation was the most significant headwind. As compared to Q1 2010, the increase in stock compensation expense reduced earnings per share by $0.09, and this was a $0.04 headwind versus our guidance. On a consolidated basis, we reported $1.2 billion of revenue for the quarter, up 11% from the prior year. This was about $30 million better than we had expected, primarily due to favorable currency rates. Organic revenue grew 6%. Acquisitions contributed about $30 million of revenue or 3% growth and currency was a 2% benefit in the quarter. Segment income was better than expected at $115 million, 8% above our midpoint estimates and also 8% better than the prior year. Q1 segment margins were 9.5%, down 30 points from last year but mostly, better than we had expected. The lower margin related primarily to lower pricing on transformer shipments and reduced revenue from dry cooling systems. This offset steady margin improvement in our Test and Measurement and Flow segments. Looking at the results by segment, beginning with Flow. Flow reported $456 million of revenue in Q1. That's up 29% from last year. Organic revenue increased 18%, driven by strong sales growth into the food and beverage and power and energy markets. Food and beverage is the largest market for our Flow segment and we continue to see steady improvement in our food and beverage order trends. Revenue for the nuclear squib valves was a key driver of the growth in power and energy sales, our sales of components into the oil and gas, and power generation markets also increased. And we also saw steady growth in industrial markets driven by aftermarket and replacement sales. From a regional perspective, sales into emerging markets grew by 35%. Sales into Europe also increased 35% and sales for North America grew 24%. The 2010 acquisitions increased revenue by 8% and currency with a 3% benefit. Segment income increased 37% to $56 million. This was nearly 1/2 of the consolidated segment income for the whole company. Margins increased 70 points to 12.4%. Flow margins improved 100 points when you exclude the 30 points of acquisition dilution. Leverage on the organic growth and a favorable sales mix drove the margin improvement. Flow's backlog was $848 million at the end of Q1. That's up 7% sequentially and 37% over last year. This is a record level of backlog for the Flow segment. In Q1, we saw strong replacement demand for food and beverage components. We are encouraged with the quoting activity for new capital investment. However, system orders have not yet fully recovered. We saw an increase in demand for oil and gas processing equipment, which was positively impacted by higher oil prices. Industrial market demand was steady, with notable order improvement in our marine and mining markets. We are very encouraged by the development of our Flow backlog and our visibility to revenue for the remainder of 2011 is very good for this point in the year. Moving on to the Thermal segment. Q1 revenue was $325 million. That's down 8% year-on-year. Organic revenue declined 10% and currency with a 2% benefit. As you may recall, orders for our power generation technology was soft in the first half of 2010. We are realizing the impact of that weakness in the reported revenues for the first half of this year. Revenue across most of our power product lines decreased organically in Q1. As previously mentioned, we had a sharp decline in dry cooling revenue in China. This was also the primary driver of the reduced profitability. Segment income was $21 million in the quarter, down 33% and margins was 6.5%. We expect the financial results of this segment to improve sequentially this year and are targeting a return to organic growth in the second half. As a reminder, the quarterly results for this segment, including the backlog development, can be volatile due to the large project nature of the business. This quarter, however, Thermal's backlog was stable sequentially at $1.6 billion. This includes a modest benefit from currency. Thermal's book-to-bill in Q1, although it's just under 1x as compared to 0.5x last year, a significant improvement. In line with our expectations and broadly speaking, demand increased modestly across U.S. and European utility customers in the early part of the year versus what we experienced in 2010. The majority of new orders were less than $10 million and demand was focused primarily on evaporative cooling systems and heat exchangers. We also received 4 replacement orders in Europe at older power plants that are more than $10 million each. Although the timing of order placement is difficult to predict for this segment, we are encouraged with the quote and bid activity we are seeing globally for large-scale power projects, particularly in emerging markets. Looking at the first quarter results for Test and Measurement, our revenue was up 22% to $249 million. Currency was a modest benefit year-over-year. The majority of the growth was organic. Organic revenue grew 20%. This is the fourth consecutive quarter of strong double-digit organic growth. It was driven primarily by increased sales to OEMs and their dealers. We also had modest growth in the aftermarket for vehicle service. Revenue grew by double digits in all major geographic regions. Sales into India and Asia Pacific increased by more than 20%. Segment income increased 46% to $20 million, and margins improved 130 points year-over-year to 7.9%. The margin improvement was due primarily to leverage on the organic growth. We completed the acquisition of Teradyne's Diagnostics Solutions business in Q1. We expect this acquisition to be modestly accretive to earnings this year. In our Industrial segment, we reported $169 million of revenue in Q1, that's down 3% from last year. Organic revenue declined 4% and was partially offset by acquisition growth. The organic decline was due primarily to reduced year-over-year volume and pricing on transformer shipments. This decline more than offset strong double-digit growth in sales of crystal growers, hydraulic tools and communications intelligence technology. Segment income was $17 million and margins were 10.2%. Our Power Transformer business reported low single-digit margins, down significantly from Q1 2010 margins, which were in the mid-teens. This decline was partially offset by the organic growth in our other industrial businesses, as well as a $6 million insurance recovery that I mentioned. The backlog for this segment increased $44 million, up 12% sequentially. We had strong order demand across all businesses in this segment during Q1, with sharp backlog increases in our hydraulic tools and communications technology businesses. The most notable backlog growth was in our Transformer business which increased 15% sequentially and is now up 35% versus the prior year. Transformer demand in the U.S. market has been significantly stronger than it was a year ago. However, pricing in the open market, which bottomed in the second half of last year, remained at trough levels through Q1. Volume and price are highly correlated in this market due in large part to capacity constraints. In the previous upturn, after a few quarters of volume increases, pricing began to strengthen. In the 3 years that followed, our transformer revenue more than doubled and our operating margins gradually increased. In Q1 of this year, our Transformer backlog increased for the third consecutive quarter, a strong indicator that the next investment cycle is underway. We have a leading position in the U.S. medium power transformer market. Our lead times appear to have extended faster than the broader market and are now between 8 and 12 months. We have built the majority of our capacity for 2011 and are now taking orders for 2012. With lead times extending up to a year and demand at a high level, we plan to be more selective on new orders. We are very encouraged by these trends and believe this business has a very positive medium to long-term outlook. Moving on to free cash flow. Consistent with our historical experience, we reported a cash usage in the first quarter. We reported a net cash investment of $52 million. Our primary investment was in working capital, particularly in our short-cycle businesses that experienced strong organic growth in the quarter. We also invested $16 million in capital expenditures and $10 million in restructuring. For the year, we're targeting about $240 million of free cash flow. This is net of the elevated CapEx spending of $150 million. Now I'll review our updated 2011 financial targets, before I turn the call back over to Chris. In Q2, we expect consolidated year-over-year revenue growth of 10% to 15%. We expect the top line increase to be driven by our Flow and Test and Measurement segments. We are targeting single-digit organic growth with about 3% to 4% growth from acquisitions. Currency is expected to be about a 5% benefit to the quarter. We are projecting $133 million to $138 million of segment income, up 18% sequentially, but at about the same level as Q2 2010. Similar to Q1, we expect a segment income decline at Thermal to offset the aggregate growth of our other segments. Our Q2 EPS guidance range is $0.80 to $0.90 per share, down about 15% from last year at the midpoint. We expect the decline in Thermal segment income to be a headwind of approximately $0.22 to last year. This is due to fewer global power projects. In particular, we do not have the same magnitude of attractive retrofit projects that we executed in Q2 last year. We also have 2 notable headwinds below the line. Interest expense is expected to be about $6 million higher, a $0.07 reduction to earnings. This is in part due to the bonds we issued in the second half of 2010. It also includes a onetime noncash charge of about $0.03, related to a potential refinancing. During Q2, we plan to refinance the remaining portion of our credit facility. And we are targeting about a $0.06 increase in restructuring expense in Q2 this year, focused primarily on continued integration of the global footprint in our Flow segment. We anticipate earnings to increase sharply in the second half of this year compared to the first half. The increase is expected to come primarily from our Thermal and Flow segments. We feel confident about this increase given the backlog in these 2 segments. We expect our Thermal revenue to increase by more than 35% in the second half of the year as compared to the first half. This is primarily due to project timing. About 2/3 of the remaining full year revenue target for Thermal is a backlog that is scheduled to be converted to revenue over the balance of this year. We also expect a significant improvement in Thermal's profitability due to an increase in retrofit projects and historical seasonality. In Flow, we project revenue in the second half of the year to increase about 10% over the first half, nearly 50% of Flow's remaining 2011 revenue target is in the Q1 ending backlog. We also expect stock compensation expense, which is concentrated in Q1, to be $0.16 per share lower than the second half of the year. Looking at the full year targets by segment. These targets reflect the Q1 results, acquisitions and updated expectations for the remainder of the year. In our Flow segment, we have increased the revenue growth target to 15% to 20%. This is a $60 million increase that reflects the Murdoch acquisition, our favorable currency rates and a modest increase to our organic growth expectations. We also increased the target margin range for Flow to 13.2% to 13.7%. For Test and Measurement, we raised our revenue target by about $100 million. We now expect 2011 revenue to grow between 13% and 18% over the prior year. In the revised revenue target, we have increased the organic growth expectation for Test and Measurement, reflecting the Q1 growth and continued strong order trends. We have also layered in the Diagnostic Solutions acquisition and the benefit from currency. The margin targets for Test and Measurement is 8.7% to 9.2%, unchanged from our prior estimates. In our Thermal segment, we are now targeting annual revenue growth between 3% and 8%, to reflect the benefit from currency changes. Our organic expectations were unchanged. We reduced Thermal's margin target slightly from 10.1% to 10.6%. And our projections for the Industrial segment did not change. On a consolidated basis for 2011, we are now targeting just under $5.5 billion of revenue, with the mid- to high-single-digit organic growth. Acquisitions are expected to increase revenue by about 2%. Our updated guidance assumes exchange rates in early April. And based on these rates, we project currency to benefit revenue by about 3%. We are targeting segment margins to be between 10.8% and 11.3%. Our EPS guidance range is now $4.25 to $4.55 per share. This represents about a 22% year-over-year increase. We expect to convert approximately 107% of net income into free cash flow, even with the elevated capital spending. There were several underlying changes in our full year EPS guidance that netted to the $0.05 raise, the bridge on this chart highlights the primary increases and decreases. In aggregate, improved organic expectations, favorable currency rates and the acquisitions increased our EPS guidance to $0.38. This was mostly offset by reduced expectations in relation to events in Japan, as well as headwinds from some items below the segment income line. We believe we've taken a conservative approach with respect to our revised expectations in Japan and the broader nuclear market. We took $0.13 of related earnings out of the EPS guidance. Below the line, stock compensation expense is $0.10 higher in the updated guidance. This is due primarily to the increase in our stock price over the past few months. I'd like to remind you that our EPS calculation is very sensitive because of the low share count, $1 million of net income equals about $0.02 of EPS. Certain factors could occur in 2011 that may impact our EPS and free cash flow guidance. On this chart, we have listed what we believe to be the most likely potential impact and uncertainties at this time. With that, I'll turn the presentation back to Chris for closing remarks.

Thanks, Patrick. In summary, we are pleased with the operating performance and financial results in the quarter, particularly in our Flow Technology and Test and Measurement segments. We continue to expand our business in emerging regions, supporting the infrastructure, development in power, food and beverage and vehicle service markets. Our backlog increased 4% sequentially and order trends in most of our end markets are moving in a positive direction. We're encouraged with the broader global economic trends and we're seeing positive signs in the order activity of our late-cycle businesses. The cyclical recovery of our U.S. Power Transformer business appears to be underway and we anticipate a return to growth in that business in the medium to long term. We are excited about the recent acquisitions. We're evaluating additional strategic actions and have sufficient financial flexibility to continue to make investments as opportunities arise. That concludes our prepared remarks. And at this time, we are ready to take your questions.

[Operator Instructions] Your first question comes from the line of Shannon O'Callaghan with Nomura.

Can we talk a little bit more about what you're seeing in Thermal, kind of both in China but then some of the other markets? I mean, first on China, with the decline in volume, which I know you expected, I'm just curious if you're seeing any change competitively in China as the book of volume to go after is reduced. You guys have sort of stabilized the competitive situation in recent years in China. Is there any change there? Is anyone getting any more aggressive now that the volumes are a little lower there?

It's really no different than we've reported over the last several quarters, probably the last couple of years, Shannon. The competitive landscape hasn't really changed. We do have local competitors on the scene. We think we'll continue to be a major player in China. We have seen a slowdown in the quoting activity as the stimulus impact has abated in Japan. Longer term though, we still see it as an attractive market, and I think the need for buildout of additional power-generating capacity in China is great. As we've said in the past, I think as we look forward, that's not going to relate only to coal opportunities, but I think nuclear and other forms of renewable energy in China. And we're actually excited about that opportunity because as you know, we serve all those markets.

And you're going to see India develop as a very important market for us. There is a significant amount of quoting activity for large-scale power projects in that market. As you know, we're really sort of starting up in that market. And so we're learning how to do business in India. We are working on localization of the products and establishing relations. And obviously, some of our relationships with existing Chinese EPCs and other broader global EPC relationships continue to be positive. And as I think we discussed on our last call, we continue to see Korean EPC is very active in the Middle East market and we continue to quote on opportunities there.

Yes, and the final piece to that, that I would add, Shannon, is that we're also encouraged by the increased quoting activity we do see in the retrofit business both in the United States and in Europe. And so while we saw this trough in Q2, our expectations, as Patrick mentioned in his remarks, are that we're going to see significantly greater revenue growth in Thermal in the second half of the year. And beyond that, we are encouraged by the order activity and the opportunities that we see both in developing regions and in retrofit opportunities.

And do you think that the retrofit in developed markets, I mean, is it starting to get more of a cadence to it that you can believe in instead of just kind of a few one-offs here and there?

Yes, I would describe the volume of activity going on as being significantly different than we've seen over the last couple of years. As you know, these projects take longer to develop and the timing of them is sometimes difficult to predict. But the activity that we're seeing and the opportunities that we're involved in do encourage us.

Yes, frankly, being able to maintain a book-to-bill of around 1 in Thermal without the large-scale power project is actually very encouraging and an indicator that the broader power market is starting to show some signs of firming up.

Your next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: I just wanted to talk about the Thermal margin. So you're -- where are you exiting the year kind of second half? Does that imply kind of a low double-digit margin in the second half of the year that you're guiding to?

Yes, exactly. As you can see that, you can back into that from the updated segment guidance that we gave. Historically, if you look back over the last 2 or 3 years, the first quarter margins for Thermal are in fact seasonally weak. But the primary drivers are the factors that we discussed on the call. C. Stephen Tusa - JP Morgan Chase & Co: Right. And so when we kind of head into next year, what are some of the mix dynamics if you're talking about a better cadence of orders in U.S. and retrofit, maybe getting through some of the tougher projects you're seeing here in the first quarter. Should we view this first quarter margin as kind of a baseline rate seasonally for next year? Or are you seeing more profitable projects as you kind of move into next year?

No, I think you're going to see more profitable projects. Because one of the fundamental differences is a dearth of large-scale dry cooling projects in terms of orders being placed. And I think, logically, that is going to pickup as the next 12 to 24 months goes on. And we're going to move back to a more normal margin level. So we're not changing our long-term expectations for the segment. And I do think, as we start picking up some larger scale orders in emerging markets and certainly as we get back to a more normalized level of retrofit. Logically, if there is a continued lack of investment in large-scale projects, we should see our replacement orders rising. We mentioned a few on the call today, the nuclear order in Switzerland. But there is strength developing in the replacement market in the United States and Europe. And so from a quoting point of view and this also applies to Flow on the system side, from a quoting point of view, things look very good. We still have not gotten to the point where people are pulling the trigger on placing the orders. But logically, that will come. C. Stephen Tusa - JP Morgan Chase & Co: Your South Africa backlog was obviously down quarter-over-quarter, right?

Yes.

Oh, yes. I mean, we're basically working off those projects. C. Stephen Tusa - JP Morgan Chase & Co: So then you can obviously back into a nice -- in the rest of the world, that must have implied a pretty nice sequential bump in orders there?

That's right.

Exactly.

Your next question comes from the line of Scott Gaffner with Barclays Capital.

Well, I guess, we can officially call SPX a flow company now. 50% operating profit.

We'll make [indiscernible] very happy.

But you did mention in Flow that the systems orders I think were still a little challenged. Could you maybe give us a little bit more detail there what you're seeing?

Well, I mean, I wouldn't describe them as challenged. If you look at the quoting activity, they call that front log in the Flow group, the quoting activity and the potential projects of scale is actually very encouraging and to some extent, that is building because of the lack of placement of large orders. And so I think on a forward look, given the organic growth we developed and still developing the backlog with relatively smaller orders, I think the same dynamic is there, as we discussed in Thermal, that there is sort of a building demand for large-scale projects. And I do think that, that will open up, particularly, you can tell from the results that we had very strong food and beverage and power dynamics in Q1. And so I think as the year goes on, you're going to see some larger scale orders in Flow.

Across the entire platform, I would describe the activity as robust. I think across all end markets, certainly in the component part of it, but to Patrick's point, very encouraging signs on the systems side.

So are the larger scale projects, I mean, are those mostly in the oil and gas markets or are we seeing some of those in food and beverage as well?

Yes, all across the markets, particularly in food and beverage.

Okay. And then just in the emerging markets there. I know historically or recently sort of the global companies have been taking you into the food and beverage markets in the emerging markets. Are you seeing any demand locally there for your products?

Actually, we have. And what we've seen recently like in the past couple of years is an inflection really where we're seeing business shift to the indigenous suppliers, homegrown customers, particularly in places like China. So you're exactly right. It's our global customers that took us there and that we continue to provide. But we've developed similar relationships and significant relationships with indigenous suppliers as well. So the business model is really playing out as you would hope it would, as you establish your toehold in those markets and grow your business. So we're pretty pleased.

All right. Thanks a lot. I appreciate it.

Your next question comes from the line of Julian Mitchell with Crédit Suisse. Alexander Virgo - Crédit Suisse AG: It's Alex Virgo for Julian. Just a quick one on the Japan impact, it seems pretty high. I was just wondering if you can give a little bit more color around that $0.13?

I mean, basically, about 1/2 of that $0.13 relates to Japan. The other 1/2 relates to the broader nuclear issues that we discussed. And so that really reflects about the 1% revenue that we talked about. Alexander Virgo - Crédit Suisse AG: Okay. Great, thanks. And then the second question was just on the Thermal retrofit quoting activity. I think you call out lower Thermal margins in the second half because retrofit is decreasing. But then, you're talking about retrofit quoting well for the second half. I just wanted to talk about that.

Right. I mean, basically, a lot of this -- if you go back to last year, we had a significant number of projects. Some of them actually come up at fairly short notice. And obviously, the plant may be shut down or have reduced activity during the retrofit project. So there are performance incentives for speed to get the plant back online. So it really is just timing within the year and the comparison between one year and the previous year.

Your next question comes from the line of Scott Davis with Morgan Stanley.

I wanted to talk a little bit about Flow and following up a bit on Scott's questions. I mean, when you think about the positive mix effect that you had this quarter and maybe you can talk about that mix in the backlog a bit. But is this generally driven by higher commodity prices, not just oil and gas, but really food?

No, I wouldn't really describe it that way, Scott. I think it's the realization of an expected demand that's been there for a while, that was just slow to recover. And I think, it's just more than anything, reflective of economic recovery, which is occurring at a different pace in different parts of the world. As you know, a lot of that business for us in the replacement -- or excuse me, in the component part is the replacement business. What we saw, being slow to recover were the systems and particularly, the big systems opportunity and now, that's starting to get some traction. And the interesting thing is that we're seeing that recovery virtually across all the end markets.

I mean, it's a high-end metals market because of the sanitary nature of the food and beverage market. And so if you look at the last few years, surcharging for inflation is well developed in the market. And as you track our gross margins, you can see that we do successfully pass-through price increases in this market. But really, in line with the inflation in the core materials. So the demand is very strong, and it's primarily, at this point, components-driven with a lot of small systems. And obviously, the business is very well-positioned against emerging markets, where we expect to see continued strength in food and beverage.

Okay, that makes sense. And just keeping on the theme of higher commodity prices, I mean, this is not going to be the first summer where we've had $4 gas. But nonetheless, it's -- there is kind of a potential shock to how people think about driving their cars. I mean, does that -- I know traditionally, you guys haven't been a SAR [ph] play, but does the fact that maybe people drive less this summer or there's a bit of a shift to buying smaller cars versus trucks, we saw that in the most recent SAR [ph]. I mean, does this impact the buying behavior of your guys in, I mean, I know it's more developed markets, but does it...

Not significantly. We are primarily an OEM-related service business for OEMs and their dealers for diagnostics, typically around 60-plus percent. And the drivers of the demand are really new vehicles and rollout. And then as you look globally, there's different dynamics in different parts of the world. So I would say that the overwhelming drivers are product proliferation and increased electronic content. And that while other factors do impact the performance of the business, I think the next 2 years, it's going to be more about new vehicle rollouts, electric vehicles and new technologies around air conditioning and other areas.

Okay, makes sense. Thanks, I'll pass it on.

Your next question comes from the line of Ajay Kejriwal from FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co.: Just on the Thermal guidance for the second half, you talked about order activity having picked up globally. Maybe talk about how much visibility you have on the second half based on the backlog you already have. You have a pretty sizable backlog. So on the revenues and margins for the second half, what's the confidence level?

Well, as I mentioned in my remarks on the call, we've got about 2/3 of the revenue in the backlog. And so looking at the quoting activity they have, looking at the strength that we're experiencing in the evacuative [ph] market and don't forget also, in that segment, we also have some seasonal short cycle businesses that are very profitable in the latter part of the year, particularly Q4. Those businesses mostly, related to the U.S. heating and commercial markets. So I think, in terms of how we feel about Thermal, it's obviously our highest visibility segment by nature. But they've had an excellent track record in the last 2 years of executing on the projects in the backlog. And actually, certainly, the last year in Q1, probably executing slightly ahead of our forward targets. So we feel very good about the second half, first half dynamic, understanding that nobody likes a back-end loaded plan. Ajay Kejriwal - FBR Capital Markets & Co.: Yes. And then maybe switching to Transformers. Lead times have stretched to now 8 to 12 months. Are you seeing any shift in the amount of business you do directly with customers as opposed to market bids?

Yes, that's actually a pretty important inflection point in the development of the cycles in the business. And we mentioned, I think Patrick mentioned in his comments this morning that with lead times stretching out in the plant is filling up for this year and taking orders into next year, we are in a position to be more selective about the orders that we take. And so I think we are at that inflection point.

Yes, we're taking more than 50% of our orders from direct interaction with the customers. Ajay Kejriwal - FBR Capital Markets & Co.: And that goes to your comment that pricing should increase later this year, right?

Exactly.

Exactly. Ajay Kejriwal - FBR Capital Markets & Co.: Good. And any impact from tornadoes in the south? A lot of damage to the transmission infrastructure. Is that any opportunity for you?

We haven't become aware of that directly. We have experienced the impact of the hurricane -- excuse me, the tornadoes in Alabama at our EGS joint venture with Emerson. We have a facility in the joint venture in Alabama that was pretty severely damaged and is impacting their year. But from a customer perspective, I would imagine that we would see an impact, but we haven't heard of that directly yet.

Your next question comes from the line of John Inch with Merrill Lynch.

It's Elana Wood. I'm wondering did you take any orders for large transformers in the quarter? And if you did, how much did they add to the backlog, the sequential backlog?

We did actually. I think the last call, we mentioned that we had our first 2 large transformer orders in the backlog that would be produced at the new facility. We now have 5 and some active quoting activity on some other opportunities.

Less than $10 million to the Q1 backlog, Elana.

Okay, thank you. Do you have any updates within Test and Measurement on your electric vehicle opportunity? And maybe any new program wins or any new relationships?

Well, we did talk -- I think, publicly, we've talked about not only the Chevy Volt but the Daimler Smart car both in the United States and in Europe. So those are 2 very big opportunities. But we see this as a very interesting market opportunity longer term for the company. I think a lot will develop as those products continue to develop and as their performance continues to improve and extend. And we think we're in a pretty nice position because of the unique relationship we have globally with key OEs and their dealers all over the world to be able to step in and be a key provider. So I think we're off to a good start with the programs that we have, and we think there's other opportunity for us.

Okay. And then I just have 2 below-the-line questions. It looks like you reduced your full year guidance for equity earnings in EGS by about $5 million. So has the outlook deteriorated over the last couple of months or I'm just wondering what was driving this?

Well, the tornado comment that Chris just made, we also experienced a fire at the South Milwaukee foundry in the joint venture and that impacted the service delivery somewhat. And the development of revenue in our Brazilian acquisition has not moved as fast as we'd hoped. And all of those items are reflected in the updated guidance.

Okay. And then just lastly, other corporate expense this quarter of $31 million. It seems like it's a lot higher year-over-year. I'm just wondering if there's anything material, anything notable to call out?

Yes, there is. There's 1 item there, Elana. It's deferred compensation expense. We actually increased at about $3.7 million or $3.8 million. It's offset completely by the earnings on the deferred comp accounts, which is now shown below the lines. So really, if you take the increase in the corporate cost for that, it is completely offset by a credit in other income. And then, the rest of it, really just reflects the elevated spending that we have for our innovation projects that we talked about at the guidance meaning and also, our investment in infrastructure in India.

Great, okay. Thank you so much.

At this time, there are no further questions.

Great. Thanks, Annika. We appreciate everybody's participation in the call this morning. Thank you for logging in. And if you have any further follow-up questions, I'll be in the office. This is Ryan Taylor. I'll be in the office the rest of the day to chat with you. So thanks again. And we'll talk to you soon.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a great day.