SPX Technologies, Inc. (SPXC) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 SPX Corporation Earnings Conference Call. My name is Tasha, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Please proceed.

Thanks, Tasha, and good morning, everyone. Thank you for joining us. With me, as always, 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 that can be accessed in the Investor Relations section of our website at spx.com. This webcast will be available until November 16. I encourage you to follow on with the webcast as we reference the detailed information on the slides. We have also included supplemental schedules in the appendix of today's presentation that provide reconciliations for all non-GAAP financial measures that we discuss today. Our earnings press release was issued this morning, and it can also be found on our website. Before we get started, I would like to point out that portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please note the risk factors in our most recent SEC filings. The financial data that we discuss today generally relates to continuing operations. And additionally, some of the earnings per share numbers, including our Q3 2011 earnings that we discuss this morning, are on an adjusted basis. And with that, I'll turn the call over to Chris.

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call. We're pleased with our third quarter results and, in particular, with our earnings per share and margin performance. Adjusted EPS was $1.21 per share, up 9% over last year and above the top end of our guidance range. The profitability in our Test and Measurement segment improved significantly, and was the primary factor for our EPS coming in higher than our guidance. Test and Measurement reported 65% year-over-year increase, and segment income and operating margins improved 370 points. Excuse me, operating margins improved 370 points to 11.5%. We’re very encouraged by the segment's improved margin performance. On a consolidated basis, revenue increased 8%, driven largely by growth in emerging markets. Our emerging market revenue increased 29% over last year and accounted for 1/3 of our consolidated revenue. Our Flow Technology segment continued to experience strong broad-based revenue growth. In total, Flow's revenue increased 20% year-over-year, including 16% organic growth, and Flow's operating margins were 13.3%, up 180 points from Q2. As we expected, growth in Flow and Test and Measurement was offset by the results in our power-related businesses, which declined year-over-year, reflecting the impact of delayed recovery in late-cycle power markets. From a strategic perspective, we signed an agreement to acquire CLYDEUNION Pumps, a leading global supplier of pump technologies utilized in oil and gas processing, power generation and other industrial applications. This acquisition is consistent with our long-term strategy and will increase our Flow Technology capabilities. We expect this to be a defining acquisition for us as it will establish a second global platform within our Flow segment. We have successfully arranged the financing for the acquisition under our current credit facilities. Patrick will provide more detail on the financing and an update on the acquisition later in the call. So with that as a backdrop for the quarter, let's look at the details. Beginning with the consolidated results for the quarter, revenue increased 8% to $1.4 billion. Organic growth was 4%, driven by the Flow segment. Currency was a benefit of 3% versus last year, and acquisitions contributed 1% growth. Our segment income margin was 11.3%, down 90 points versus last year due primarily to declines in our late-cycle power businesses. These declines were partially offset by the strong and unexpected margin performance at Test and Measurement. From a geographic perspective, we experienced revenue growth across all major regions. Sales in the Asia Pacific increased 8%, and sales increased 7% in both Europe and in the Americas. Emerging markets continue to be very important to our overall revenue development. As I mentioned, our emerging market revenue increased 29% over last year to about $450 million, representing 33% of our total company revenue. This growth was concentrated in our Flow Technology segment, where sales grew sharply in China, the Middle East, Eastern Europe and South America. Looking at our ending Q3 backlog. The backlog was $2.8 billion, down 9% sequentially. Over half the decline was due to strengthening of the U.S. dollar, particularly against the South African rand and the euro. In total, currency movements reduced the value of our backlog by 5% or $150 million. Organically, the backlog declined 4%, driven by our Thermal segment. Generally speaking, we did not experience any significant changes to the order activity in our key end markets during Q3. Demand for our -- demand in our short-cycle Flow and Test and Measurement products continued to be very strong. Order trends in our Power Generation and our Power Transformer businesses were incrementally better than previous quarters. However, these markets continue to be highly competitive, and pricing remains challenging. Based on quoting activity and projects in the order pipeline, we do anticipate that our order trends in these businesses will gradually improve over the next 12 months. Looking at our EPS guidance for this year. We've revised our full year model to reflect the third quarter results and our updated expectations for Q4. Note that our guidance assumes exchange rates from late October. For the full year, we've narrowed our guidance range to $4.35 to $4.55 per share. By narrowing the range, we've raised the midpoint of our earnings per share guidance to $4.45. So at this time, I'll turn the call over to Patrick.

Thanks, Chris. Good morning, everyone. I'll begin with earnings per share. Reported third quarter earnings per share was $1.19 and on an adjusted basis, EPS was $1.21. The adjusted EPS excludes $0.41 of net tax benefits and $0.43 of charges related to the pending CLYDEUNION acquisition that were recorded in the period. During the quarter, we elected a method of reporting federal income taxes that will allow us to utilize our existing foreign tax credits within the carry-forward period. This was the primary driver of the tax benefits recorded in the quarter. In relation to the CLYDEUNION acquisition, we recorded a $0.39 charge on the other expense line of our income statement, which reflects a net decrease in the fair value of foreign currency protection agreements that we put in place to hedge a portion of the purchase price, which is denominated in pounds sterling. From the inception of these foreign currency hedges to the end of Q3, the U.S. dollar strengthened against the pound by approximately 5%. If the current exchange rate prevails, we would expect to record a gain in the fourth quarter. We also recorded $0.04 of deal-related costs associated with the CLYDEUNION acquisition. These costs were recorded in corporate expense. On an adjusted basis, third quarter earnings per share increased 9%. Consolidated segment income declined by $0.02. However, the year-over-year contribution varies greatly by segment. Flow and Test and Measurement each contributed $0.15 of year-over-year EPS growth. This improvement was offset by a $0.25 decline in Thermal segment income and a $0.07 in our Industrial segment. Our effective tax rate for the quarter on an adjusted basis was 30%, consistent with the first half of this year, however, down from 35% in the prior year period. The adjusted tax rate was a $0.09 benefit to earnings per share, and net other items were a $0.03 benefit. Moving on to our segment results, beginning with Flow Technology. Flow reported $528 million of revenue for the quarter, up 20% over the prior year. Organic revenue grew 16%, and currency was a 4% benefit. Flow's food and beverage systems business continued to grow sharply, with revenue up 50% year-over-year. This growth reflects our customers’ investment to expand capacity in emerging regions, where demand for processed foods is very strong. Revenue from systems continues to increase as a percent of Flow's total sales. In Q3, systems revenue accounted for 23% of Flow's revenue as compared to 18% in Q3 last year. Component sales also increased double digits, up 13% on a global basis, with growth across each key end market for Flow. From a geographic perspective, sales into Asia Pacific grew 41%, driven by increased sales of plate heat exchangers and mixers into Industrial market applications. Higher revenue from food and beverage systems was also a key growth driver in this region. Sales into EMEA were up 17%, mostly due to increased sales of food and beverage systems and components. And the Americas reported 8% revenue growth, highlighted by progress on our nuclear squib valve contract with Westinghouse. Segment income increased 20% over last year to $70 million, driven by the organic growth. Margins were 13.3%. That's up 180 points from Q2 and flat versus last year. We are encouraged by the sequential margin improvement. However, leverage on the organic revenue growth in components was moderated in part by the increased percentage of lower margin systems revenue. As we described in September at the Analyst Day presentation for Flow, margin dilution has been a byproduct of our acquisition strategy and focus on growing our systems business. The contribution margin on systems revenue was lower than the segments average gross margin. However, by expanding our installed base systems, we're ultimately growing our future aftermarket opportunities. This year, we are experiencing very sharp growth in our systems business, where revenue increased 77% through the first 9 months. For the full year, we estimate that our sales of food and beverage systems will grow to approximately $500 million. This growth highlights the revenue synergies we're achieving through the integration of the acquired food and beverage technologies. As a result of this growth, we estimate the systems revenue will account for about 25% of Flow's total segment revenue this year. This is a significant shift from prior years. Flow's food and beverage business is concentrated in dairy processing, and we are seeing very robust demand in dairy markets, particularly in Asia Pacific. We also have opportunities to expand our systems business in other niche markets. Earlier this week, we completed the acquisition of e&e, a leading global supplier of dry powder processing, serving the global coffee and extract markets. Much like our previous acquisitions, we expect to leverage e&e's technologies with our broader systems offering and global capabilities. We're very pleased to welcome e&e to SPX. Our increased capabilities, again, is the opportunity to participate in more complex projects that have a higher contract value than we have historically participated in. As an example, at the end of Q3, we were awarded a contract valued at over $30 million to establish an infant formula plant for a dairy coop in New Zealand. This is a significant win for us and further validates our acquisition strategy in food and beverage. When completed, the new plant will convert fresh milk into powder formula for export, primarily to China and other emerging markets in Asia and the Middle East. We will be responsible for constructing the entire facility, as well as designing and installing all the technologies needed to operate the plant. This automated system will utilize our APV wet and our Anhydro dry technologies. Murdoch, which we acquired in the first quarter, is based in New Zealand and will contribute its dairy engineering expertise and provide on-site project management. And as you may know, New Zealand is one of the world's leading exporters of dairy products. We're very opportunistic about future opportunities in New Zealand market, as well as the global infant formula market. Looking at Flow's backlog. At the end of Q3, Flow's backlog was about $900 million. That's up 17% from last year. Systems orders now account for about 35% of the backlog. In addition to the 16% organic revenue growth in the period, Flow's backlog also grew organically by 3% quarter-to-quarter. This increase was offset by currency. Broadly speaking, Flow's order volume remained at a high level during the third quarter across all key geographies and all end markets. Global demand for food and beverage components and systems continue to increase year-over-year. In the oil and gas markets, demand remained strong particularly within pipelines, and we also saw an increase in demand for plate heat exchangers across marine and other industrial applications, particularly in Asia. Heading into Q4, we have more visibility to revenue than we had at the same time last year. About 80% of Flow's estimated Q4 revenue was in the ending Q3 backlog as compared to about 70% at the same time last year. Moving on to Thermal. The Q3 results in our Thermal segment were largely in line with our expectations. Thermal reported $434 million of revenue in Q3. It's down 1% from the prior year. Organic revenue declined 4%. This was mostly offset by currency, which was a 3% benefit. The organic decline was primarily due to lower sales of dry cooling systems, particularly into China, as well as lower sales of heat exchangers into Europe and the U.S. These declines offset an increase in the backwarded [ph] cooling system sales. Segment income was $41 million, and operating margins declined to 9.4%. The decline in profitability was largely due to a lower margin project mix, as well as the organic volume decline in heat exchangers. Thermal's ending Q3 backlog was down 18% sequentially. Currency changes reduced the backlog by 7%, primarily due to the weakening of the South African rand and the euro during the quarter. On an organic basis, the backlog was down 11%. This partially reflects continued execution on the 2 large projects in South Africa. It also reflects the late recovery in our late-cycle power markets. Despite the decline in our backlog, orders have been remarkably consistent this year at just under $300 million per quarter. Year-to-date, Thermal orders are up 1% versus last year despite fewer large project awards. We continue to maintain discipline with regard to project selection, as pricing and terms, the large long-cycle projects continue to be very competitive, particularly in Asian markets. In the U.S. and Europe, our traditional markets, order activity remains depressed. Opportunities in these markets remain at a very low level, and our customers' willingness to invest continues to be restrained by the uncertainty of future regulations. Based on order intake through Q3, it is reasonable to assume that reported revenue in this segment will decline next year. Having said that, we are actively quoting on some very large dry cooling projects that could have a meaningful impact on Thermal's 2012 outlook. Moving on to Test and Measurement. Revenue for the quarter was $256 million, up 12% year-over-year. Organic revenue increased 5%. Diagnostic Solutions acquisition contributed $11 million or 5% growth, and currency was a 2% benefit. The organic revenue growth was driven primarily by increased OEM sales highlighted by sales into China, mostly related to dealership expansion. Global aftermarket sales also increased versus last year. To remind, our revenue in this segment is driven largely by new vehicle introductions and the increasing electronic complexity of vehicles. Although the growth rates are moderating, demand remains at a high level and the outlook for new vehicle introductions indicates demand for our products could remain strong over the next few years. The strategic development, investments and innovation and improved cost structure in our Service Solutions business have us well positioned to meet our OEM customers' needs. Segment income for the quarter was $29 million, up $12 million over last year, a 65% improvement. Incremental margins were approximately 40%, and reported segment income margins improved 370 points to 11.5%. Several factors contributed to the margin improvement, including leverage on the organic revenue growth, sourcing savings and accretion from the Diagnostic Solutions acquisition. We have been focused on improving the profitability in this segment, and we're encouraged by the Q3 performance. We are targeting a similar result in Q4. Looking at our Industrial segment. Our reported revenue decreased 8% to $170 million. The revenue decline was organic and concentrated in the power businesses. As part of the expansion of our facility in Wisconsin to increase our capacity to supply large power transformers, there is additional opportunity for us to improve our medium power capacity as well. In conjunction with the large power expansion, we have reconfigured the existing plant layout and processes to improve the efficiency and flow of the plant. This process temporarily slowed production in Q3. As such, we shipped a lower volume than we did in the prior year period. Order volumes however, remained very strong, and the plant is running at near capacity as we move into 2012. Sales of solar crystal growers also declined in Q3 due to project timing. Our earliest cycle business, hydraulic technologies, continued to experience strong organic growth. Sales increased by more than 20% over the prior year period. Segment income was $16 million, and operating margins were 9.5%. The reduced profitability was primarily due to a decline in organic revenue, as well as $3 million of costs related to the expansion of the transformer facility. The large power facility expansion is progressing and we expect it to be substantially complete at the end of the year. The ending backlog for the Industrial segment was $490 million. That's up 37% over the prior year and down about 1% from Q2. The Transformer backlog increased by double digits quarter-to-quarter, primarily due to an increase in medium power transformer orders. The aggregate backlogs across the [indiscernible] declined sequentially, primarily due to project timing. Looking specifically at the U.S. transformer market, we continue to see strong order volumes driven by robust replacement demand for medium power transformers, consistent with the first half of the year. We now have visibility to transformer shipments into the third quarter of 2012. Our lead times remain between 8 months and 12 months, and we continue to be selective in terms of order acceptance. With lead times at this level and continued strength in the order volume, we are anticipating in more direct negotiations and less in the open-market bid process. As such, we have seen a gradual but moderate increase in the average contribution margin for orders taken over the past 2 quarters. Compared to this time last year, our medium transformer backlog is healthier with a much higher volume and somewhat better contribution margins as we head into 2012. Turning now to our updated guidance for 2011, beginning with our Q4 targets. For the fourth quarter, we're targeting total revenue to increase 11% to 15% versus Q4 2010 to about $1.5 billion. 70% of the estimated revenue was in the backlog at the end of Q3. Nearly all of the revenue is expected to be organic with all 4 segments contributing, Flow and Industrial, each targeting double-digit organic growth. Acquisitions are expected to contribute 1% revenue growth. Segment income is targeted between $185 million and $200 million, and we expect Q4 margins to increase to about 13%. Our EPS guidance for Q4 is $1.75 to $1.95 per share. At the midpoint, this represents more than 60% growth versus last year's Q4 adjusted EPS. Increased segment income is expected to be the primary driver of the earnings growth. As you can see on the bridge, we are targeting $0.45 of additional segment income in Q4 this year. We expect all 4 segments to contribute to the earnings growth, with Flow and Test and Measurement expected to make the biggest year-over-year improvements. We're targeting a lower level of special charges for the quarter, which should benefit earnings by about $0.17 per share, and net other items are expected to benefit earnings by $0.10. This is primarily from lower pension expense and a modestly lower tax rate. Looking at the full year, we're targeting revenue of approximately $5.5 billion, up 11% to 12% over the prior year. Organic revenue growth is expected to be 7% to 8%. Acquisitions account for about 2% growth, and currency is a 3% benefit in our updated model. We're targeting segment income to be near $600 million with margins around 11%. The estimated full year tax rate in our updated model is slightly less than 30%. Our adjusted earnings per share guidance range, as you heard, is now $4.35 to $4.55 per share. We have included a complete detailed model to the midpoint of this guidance range in the appendix. We did not change our free cash flow guidance for the full year. We expect free cash flow to be between $220 million and $260 million. In Q3, we made good progress toward the full year cash flow target with $80 million of free cash flow generated. This was net of $31 million of investment in capital projects, most notably the expansion of our transformer facility. We are forecasting strong free cash flow generation in Q4 this year, in line with our historical performance. For the fourth quarter, we're targeting free cash flow to be between $175 million and $215 million. Our balance sheet was relatively unchanged quarter-to-quarter. We had just under $400 million of cash on hand at the end of the quarter. Total debt was $1.2 billion, 4% lower than Q2. Our debt to cap remained 35%, and our leverage ratios came down 1 point with gross leverage at 2x, and net at 1.4x. We're in good financial shape and are well positioned for acquisitions. As you know, in August, we entered into an agreement to acquire CLYDEUNION Pumps. Subsequently, we executed an amendment to that agreement. Under the amended agreement, the purchase price payable at closing is GBP 565 million or approximately $900 million. The amended agreement also provides a potential earnout payments up to GBP 185 million or approximately $300 million, and it's based on CLYDEUNION's actual EBITDA performance. We intend to fund the acquisition with bank borrowings and cash on hand. We recently completed the financing structure for this acquisition. Under the umbrella of our current credit facilities, we have arranged 2 additional term loans with an average annual interest rate of less than 3%. The new loans will include a $300 million 18-month term loan that we expect to pay down with free cash flow we generate over the next 4 to 5 quarters. We also have arranged a $500 million 5-year term loan. The required payments on these loans do not begin until 2013 and are weighted towards the latter years of the term. Only 5% of the total loan is due in 2013 and 15% due in 2014. From a regulatory perspective, we have received antitrust approval from the U.S. and Norway, and we are currently working through approval processes with China and the French Ministry of Defense. Completion is targeted for Q4. We expect to incur normal purchase accounting adjustments in the initial months of our ownership, including the impact of converting from IFRS to U.S. GAAP accounting standards. With that, I'll turn the call back to Chris for closing remarks.

Thanks, Patrick. Expanding our Flow Technology segment is a key part of our long-term strategy here at SPX. Including the pending acquisition, 85% of our acquisition investments since 2005 has been focused on building our Flow business. We have strategically expanded Flow in attractive long-term growth markets that we believe have above-average growth potential, particularly in emerging parts of the world. We've had very good success with acquisitions in the food and beverage business, and we look to continue that success in the most recent acquisition of e&e. The CLYDEUNION acquisition will significantly expand Flow's power and energy business, and it marks the next step in our strategic development. We intend to run CLYDEUNION as a distinct business unit next year, as we acclimate it to U.S. reporting requirements and our operating initiatives. Over time, we believe there are also attractive bolt-on acquisitions in the power and energy industry that can increase Flow's customer relevance in these markets. On a pro forma basis, our Flow Technology segment will represent more than 40% of SPX's total revenue and about 50% of our segment income. Acquiring CLYDEUNION will also increase our global presence, particularly in emerging markets. We're very pleased to be adding another quality business to SPX, and we believe that CLYDEUNION will continue to perform well under Don Canterna in senior leadership in the Flow segment. So in summary, we're pleased with our results for the third quarter, which included 8% revenue growth and 9% adjusted earnings per share growth. Our third quarter performance was highlighted by continued growth and improvement in our Flow Technology and our Test and Measurement segments. Sales in the emerging markets increased 29% and now comprise 1/3 of our total revenue. In the fourth quarter, we're focused on the strong operating execution and achieving the financial targets we discussed this morning. From a strategic perspective, we're committed to executing actions that create value for our shareholders and further define our long-term vision for SPX. The pending CLYDEUNION acquisition is the next defining step for our company. We believe CLYDEUNION is a high-quality business, and we look forward to welcoming CLYDEUNION into the SPX family here in the near future. During the upcoming weeks, we'll be reviewing our financial plan for 2012. We plan to communicate our expectation for next year to investors at our annual guidance meeting in January. So that concludes our prepared remarks for this morning. And at this time, we'll be happy to take your questions.

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

I know you guys are still working through the closing on CLYDEUNION, but is there any additional color you could provide on the amendments you made to the purchase agreement there?

Yes, sure, Shannon. We amended the agreement to better align the timing of our purchase price payments with CLYDEUNION's revised 2011 projections and those protections include estimated revenue of about $580 million and estimated EBITDA of approximately $80 million. And under the amended agreement, we've agreed to pay about $900 million at closing, and we'll have earnout opportunities in the aggregate of about $300 million based on CLYDE's (sic) [CLYDEUNION] actual EBITDA performance.

Okay. So you update that based on the change in their EBITDA?

Right.

Okay. And then in terms of the emerging markets, can you just talk through a little bit, I guess, how you're thinking about China and some of the emerging market across the segments? I mean, you had really good emerging market growth in the quarter, and Flow was really strong there, but China sounds tough with Thermal. So maybe just -- and you've been trying to grow Thermal into some other emerging markets, so maybe run through how you're thinking about China across the segments or maybe some of those other key markets.

Yes, when we -- if you go back to 2005 and the repositioning strategically of the company, Shannon, you think about these broad end markets that we viewed at the time as very attractive, and I think that strategic move has been validated over time in terms of how businesses have grown. A big part of that was when we looked at those broad markets, China and other emerging markets we believed presented a great opportunity for growth across all of our businesses. We saw a period of enormous growth in Thermal in the China market. Thermal will continue to see China as a very important rather Asia Pacific market, as a very important market and opportunity for growth going forward. But now, Flow, Test and Measurement and other Industrial businesses have experienced the same thing. And you saw in this quarter the growth in Asia Pacific and specifically China for Flow and specifically, with respect to our food and beverage business, was pretty significant, even dramatic. And so, I think that underscores the importance of China and the importance of the broader emerging market initiatives of the company going forward. And I think as you've seen, that developed over the past several years, I think that strategy has really been validated.

And you can see in the Test and Measurement results, we have a significant number of Chinese OEM customers that haven't been very significant in the aggregate, but having made the investment in those relationships and the infrastructure and engineering support, we're finally starting to see a leverage on those investments come through in the results. And as you can also see from some of the larger orders we're taking in food and beverage, there's a very significant demand developing in China for powdered milk products, for baby food and for other food additives, and we expect that to continue to be the case. And we are floating on some Chinese dry cooling thermal orders in Q4 as well.

Yes, and I think it's also important to remember, Shannon, we tend to do this a lot here too because much of the success we've had in Thermal in China has related to dry cooling. We tend to overlook the opportunities in other parts of our Thermal segment, particularly with respect to MSRs, to filter products and things like that. And so, those opportunities still exist and we have to remember that opportunities in Thermal in China are beyond only dry cooling. We think there's a lot of other opportunities there as well.

Your next question comes from the line of Nigel Coe with Morgan Stanley.

I just want to dig into the earnouts on CLYDEUNION. I don't think it seems such a large contingency based on performance. What was the rationale to putting so much on 2012 EBITDA? It seems like that share is a pretty big chunk.

If you look at how they're building their business, they are really reengaging their customer base. Orders and sales are up very strongly. And so, what -- they are at a point in their business development where the business is developing rapidly, and that kind of model works very well with matching the purchase price against actual future EBITDA performance.

So that cuts down on the potential for amortization upfront?

It does although we have to do an overall estimate of what we think are the likely outcome will be and then go through the formal valuation process that will drive actual numbers. And obviously, by the time we close and give guidance, we'll give a better idea of what our actual allocation to identify the intangibles will be.

Okay. And then, the EBITDA that will trigger that payments, can you give us some color on that?

Well, we're not in a position to do that right now, and we'll -- we hope to get this thing closed by the end of the year, Nigel. And then, when we then give our guidance in January and hopefully have the close behind us, we'll be able to talk about everything in greater detail as we look forward to 2012.

Fair enough. And then, obviously, we've seen a better trend towards breaking up similar conglomerates in the last 12 months, Tyco, and I see positivity is the value in their flow business. Your Flow business is now with half the revenue base. I mean, are you at least even considering or thinking about along those lines?

Well, we're not going to speculate in terms of future transactions but what I will tell you is this, and I made this point in my comments this morning, with CLYDEUNION, 85% of our acquisition capital has been focused on Flow. And we have been very successful, I believe, building out that platform. We've been very thoughtful about addressing the key end markets. The success that we've seen in the growth of our food and beverage business as we put together acquisitions like APV, Gerstenberg, Anhydro, Murdoch, and now e&e, I think speaks for itself. And so, we now we see this opportunity to create another very relevant global platform in the oil and gas, power and energy area with the acquisition of CLYDEUNION. Beyond that, there are other acquisitions, as I mentioned, that could help other acquisition opportunities that could help support the growth in that area, which we likewise see as very attractive, and likewise, attractive opportunities and broader industrial applications. And so, I think what we tried to do and what we've done successfully is be consistent about the execution against our message with respect to that strategic development. I think we've been prudent about those decisions. We've been timely when opportunities arise both on the acquisition and divestiture side of the business. And -- but it's a dynamic process, and we'll continue to be thoughtful, and we have the company, I think, in the position that from the perspective of our balance sheet and our financial strength, we're in a position where when those opportunities arise and as they develop, we can execute against them.

Your next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Just on the Thermal backlog, how much of that is for delivery in 2011 and then '12? I know it's going to be in the 10-Q, but I thought I'd ask you.

In -- I'm sorry, in 2011? C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Well, yes.

About 40% of Thermal's Q3 backlog is expected to be converted to revenue next year, and that's down from about 46% at the same time last year. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And for -- and then for the fourth quarter, for the rest of this year?

About $70 million.

About 70. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay, so it's in line with the rest of the company. And then just curious, you guys had talked about in your 10-K, you had South Africa backlog at $758 million. You now have that in this slide at $740 million, or is that just Medupi and Kusile, has there been like a restatement there or is that -- do you reclassified something with regards to the South Africa backlog?

No, not that I'm aware of. The biggest impact on the South African backlog is FX, FX changes. We have taken some additional small -- additional orders in that power business, and that could be the rest of the difference. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. It's only $18 million. I'm just curious as to the number.

See the slide in today's presentation, break out Thermal backlog between the 2 South African projects, Medupi and Kusile, and then all other backlog. And if you look, the Medupi and Kusile backlog is actually down to close to a $500 million. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: What I just meant for Q4 2010, it's a different number than what you guys had in your 10-K.

That's correct, and that's driven by the execution this year and also the change in exchange rates, particularly the rand. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Oh, okay, got you. And then one last question. Just on Industrial, pretty strong margin sequentially despite kind of the flattish revenues, was there anything in there, is that a mix? Is that some of those projects coming through? Is that a mix impact? What's the impact on margin?

; I mean, it is a -- we had strong sequential margins pretty much across all of the product lines. The Communications Technologies business is doing extremely well, obviously very profitable at the margin. But really, it's margin strength across most of the businesses, and you can obviously tell with the Q4 guidance that we expect our strength there to continue. And then you all see in our prepared remarks, we had specific comments about hydraulic technologies and a few of the other businesses. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Right. And then one last question. Just on Thermal, you talked about it being down next year, which shouldn't be too much of a surprise in the order flow. Magnitude, is that -- to just a range, is that -- could that be down double digit or are we talking about something a little bit more moderate at this stage, assuming that you need [indiscernible] some of these projects?

Revenue, as you can see now, has been -- what I would say on that though is looking at Q4, we're quoting on a number of projects between $20 million and $100 million. Obviously, the outcome of these project awards is binary and so, the business will continue to have this uneven development with very large order awards affecting it. So the actual first indication for 2012 will obviously give the guidance meaning. But looking at our expectations for South Africa next year which, let's say, are somewhere around $240 million plus a run rate of orders of about 300 a quarter, you can kind of get to where a 10% decline in the revenue is not an unreasonable scenario.

Your next question comes from the line of John Inch with Bank of America.

It would be worth mentioning as we roll into 2012 set up, there's 2 or 3 outlier analyst on your consensus, but have you forecast up over 40%, so just pointing that out. Okay, can I ask you on Aerospace? You called out aerospace being a little bit softer. What exactly was that, Chris or Patrick, and is it just lumpiness? Can you just talk about the product outlook?

It's really just lackluster demand for military components.

It's military, right?

Yes.

Is the outlook going to change much? Is it significant?

Honestly, I don't think so. I think it's going to continue to be predominantly a military-based business. It is varying quarter-to-quarter. There are projects we had a period of time was very strong refurbishment business, so it's going to be somewhat lumpy quarter-to-quarter, but I would characterize the overall demand environment as flattish.

As the global economy slows, are you within any of your segments seeing a shift or change with respect to, say, large project timing? It doesn't appear to be the case, say, within the Flow business. But I'm just wondering what -- maybe because you're still late cycle, you wouldn't have expected to see the impact of that, maybe if you could put a little bit of a context around your European businesses, that would be helpful as well.

You really kind of have to split our business up into sort of short cycle and late cycle to talk about that. If you look at how we behave historically, obviously, we're 2/3 short cycle. The businesses where we would normally look at them as lead indicators, like hydraulic technologies, sort of broad-based global business with a lot of different end markets, and the more Industrial side, the Flow, that's where we'd normally see our first indications of change up or down. And frankly, our shortest cycle business of all is the Test and Measurement segment. And you can see from both the Q3 results and our expectations for Q4 and the backlog being sustained despite significant organic growth execution in the shortest cycle businesses, we're not seeing a significant change in demand. I would characterize maybe the overall environment as slowing growth. And then, if you switch over to the longest cycle businesses, we really saw 2 major things there. Obviously, the Transformer business where we're seeing what I would describe frankly as robust demand, but pricing malaise are continuing. That business looks like it's at the early stages of a recovery going into 2012 based on double-digit increases in volume over a period of time for mostly replacement distribution transformers and, obviously, we've got a large power activity on the side. And then with respect to the largest, obviously, the Thermal segment, we're also at low-cycle demand for our historical large markets, which are Europe and the U.S., and you will know what the reasons for that are. So that business continues to be sort of I would say at the trough. And as we said on the call, it has remarkably stable orders. I mean, it doesn't actually feel like that business has been -- had flat orders year-to-date, 2011, and 2010 up, but that's the reality. Where we are getting strong quoting activity in the large projects is the Middle East and, frankly, that's kind of across the board. And there are decent-sized orders coming up in the U.S. We have one nice order for dry cooling in Q3, $50 million for solar project. So there, I would say in the emerging market, definitely, orders to be had but a very competitive environment, which is what you'd expect given the fact that the traditional markets are still lackluster.

And then, Patrick, the outlook for Thermal, perspectively down last year, what about India and some of the inroads that you had been trying to make there, how does that factor into that equation? And if India really sort of begins to take off, is that more of a '13 event or I mean, how should we think about that?

Well, this is Chris, John. India is clearly still a very important target for us for development. And in the power-related business, specifically Thermal, we are in the second year of our joint venture with Thermax, which has gone -- has got very well. What is proven to be a bit more challenging in India for us is the engineering and redesign of products to match them specifically for that market so that we can be competitive. We believe that we can. We think in Thermal, there is clearly significant opportunity for us, again, beyond just talking about dry cooling but in the other Thermal components, filters, rotary heat exchangers and things like that. And so, as a growth opportunity for us in Flow is likewise attractive. I would describe India for us this way, I would say attractive opportunity, and in terms of positioning ourselves in the market, it has been a bit of a challenge in terms of the engineering redesign with respect to products. But I'll tell you that we've made great progress there. And so, we're focused on that and see it as a continuing and steady growth opportunity for us.

And order magnitude for this year, we expect to sell $40 million to $50 million worth of products into the Indian market.

That's just in Thermal, right, Patrick?

No, across the company.

Across the company. Okay.

Your next question comes from the line of Sheila Kahyaoglu with Credit Suisse. Sheila Kahyaoglu - Crédit Suisse AG, Research Division: As we think about the earnings outlook for 2011, how should we model the margin? Can they hold up this like double-digit sales declines or is there any sort of cost productivity benefits we could see? And just a second question on Thermal, it sounds like the M&A will be continued to be focused on the Flow business. But given the ongoing organic declines, can we see some acquisitions in Thermal or maybe a mix shift out of nuclear and coal?

So on the margin front, I mean, you're going to continue to see significant quarterly volatility based on the project mix. We are expecting better margins in the Thermal segment in Q4 from an improved mix of dry cooling projects. So at this point, it's very difficult to give a margin estimate for 2012. We certainly don't want to piece mill 2012, but we will give some guidance on it at the January meeting. I would expect that the segment will continue to have this fairly wide range of margin performance depending on the project mix. And obviously, we do expect at some point that we would see elevated demand in these markets. Last year, we had more shorter execution rebuilt projects and obviously more dry. The outcome of -- we are actually expecting elevated orders in the Thermal segment in Q4. And so, the outcome of that front log will really determine finally what we view likely outcome for 2012. So that's it pretty much.

Yes, the other thing, just to finish up on that, Sheila, this 2011, I would describe as an unusual year with respect to the decreased number of opportunities in the rebuild area, in the developed markets of Europe and the United States. Those come on shorter notice, that they can tend to be impactful in terms of how they contribute to margin in that segment. So again, it gets back to the project nature of the business, the fact that it isn't linear, that's a little more difficult to project. So a significant rebuild opportunity in that segment or 2 or 3 can and significantly move the margins in the business. With respect to M&A opportunities, as I've mentioned a couple of times both in the prepared remarks and then in response to questions this morning, we have focused most of our acquisition investment in the Flow segment, and we've indicated we believe there are other very attractive opportunities there. That's not to preclude investment in other parts of the business. And so -- but the focus and we believe the clear opportunities are in Flow moving forward. Sheila Kahyaoglu - Crédit Suisse AG, Research Division: And also just on the emerging markets, a little bit more color on the order trends. Can you give us some -- can you quantify what sort of change you're seeing quarter-over-quarter in China and maybe Brazil? They've seen some slowdown specifically in Automotive? Can you give us some color on the order trends [indiscernible]?

We're not seeing any slowdown in Automotive. If you look at the overall developing markets and how it's impacting us, our growth rates there really for 9 months have been quite extraordinary. They've been anywhere from 20% to 25%, up as high as 40% depending on the product line. I think we will continue to see very robust development of our food and beverage systems business, driven by particularly dairy, dairy demand. The Test and Measurement business is really kind of coming in to its own and there's 2 things going on there: One is the indigenous OEM is consolidating and improving their capability and building out a service network; and then obviously, for the European and domestic luxury cars and mainstream OEMs building their look-alike dealer capability. And so, I really think for us, while the macroeconomic data is showing a slowing growth rate, we're actually not seeing that in the way our demand is developing and I think the reason for that is the niches and the technologies that we're providing are being well received. And then, obviously, in Flow, there is this different dynamic of we build system capability, and there's a significant opportunity for us now to bring these technologies and bid on projects we weren't qualified to bid on before because we didn't have the full array of technology.

Your next question comes from the line of Ajay Kejriwal with FBR Capital markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Just first maybe on CLYDEUNION, so you've updated the revenue and EBITDA estimates there but then have also highlighted a couple of tailwinds with maybe lower amortization. And the interest expense there looks like you've gotten the financing at less than 3%, so lower than your initial expectations. So maybe with the puts and takes, is it fair to say that your initial accretion estimates for next year, they are in line or slightly ahead?

I mean, we'll update our accretion estimates in January for CLYDEUNION. It is fair to say that from the accretion model we published, the interest expense is significantly lower. The rate on that $800 million term line is 2.65 out of shoe, which is about $10 million. But obviously, there's many moving parts here that are dependent on a third-party evaluation, purchase accounting and timing of the close, but I certainly think that the estimates that we gave previously are still reasonable. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Good. And then on that transformer plant, the charges there, it sounds like there was onetime, but maybe should we expect any bleed into the fourth quarter or that was all in the third quarter?

We're in the process of ramping up the plant. The plant will be constructed on time. And so, I think it's likely -- we're not going to operate this plant -- the live part side of the plant in that capacity next year. We've got 12 large power orders so far. That's about 2/3 of what we planned for next year. So the actual development of the business is going fine. We're going to have to go through the ramp-up and the execution phase, so we gave a startup cost estimate for the full year of around $10 million, and I think between the changes that are going on, that's still a reasonable estimate, Ajay. Some of that is obviously embedded in the Q4 guidance that we've given. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it. One more maybe on Test and Measurement, so obviously, nice performance there, but maybe talk about how much of that's related to -- there was some push out from the second quarter into the third quarter, and then what's the expectation going forward in that business with respect to program rollout and penetration?

Well, it's consistent and steady. We're in a period of time in that business where we're seeing a pretty significant recovery obviously, Ajay, and it's pretty much progressing as we expected that it would. When you look at the opportunities in that business with respect to new platform rollouts, new environmental regulations affecting the air-conditioning business, for instance. And just the way we position that business globally, the way we have helped improve the operating performance of the business through the significant restructuring that we've done over the last several years, the much better focus and execution on the pricing end of that business, all of those things together have really culminated in that business, really moving into a nice sweet spot. And so we think that the performance this year is clearly outstanding and we think the opportunities with respect to new business and new platform rollout, as I mentioned, over the next several years in that business should be pretty attractive.

And we expect the near-term performance to continue to build on the kind of performance you saw in Q3.

At this time, we've actually ran out of time on our call. We have to conclude here. Unfortunately, we still have several analysts that are in the queue that didn't get their chance to ask questions. So for those of you that are in the queue, I'll be around all day and we'll try to talk to you shortly after the call so we can get your questions. So with that, we thank, everybody, for their time this morning and we will talk to you soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, and you may all now disconnect. Good day.