SPX Technologies, Inc. (SPXC) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 1 2012 SPX Corporation Earnings Conference Call. My name is Sharon, and I'll be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Please proceed.

Thanks, Sharon. Good morning, everyone. Thank you for joining us today. With me on the call this morning are Chris Kearney, our Chairman, President and CEO of SPX; Patrick O'Leary, our current Chief Financial Officer. And as a reminder, Patrick is retiring later this summer. Jeremy Smeltser is also on the call this morning. Jeremy is currently transitioning from his role as Flow Technology CFO and will assume the Corporate CFO duties starting in Q3 after Patrick's retirement. Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is being webcast with a slide presentation, which can be accessed in the Investor Relations section of our website. The webcast will be available until May 16. And I encourage you to follow along with the webcast as we reference the information on the slides. In the Appendix, we have also provided reconciliations for all non-GAAP financial measures that we included in today's presentation. Portions of our presentation and comments today are forward looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings. And with that, I'll turn the call over to Chris.

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call. As you know, 2012 is a year of transition for our company as we focus on executing many significant strategic actions. The investments we're making to transform the company had a dilutive impact on our Q1 financial results. However, we expect to see a positive benefit from these actions over the balance of 2012 and beyond. We believe these actions will allow us to leverage the positive trends we're seeing across many of our key end markets. I'll begin this morning with a strategic update and look at the trends in our key end markets. Patrick and Jeremy will then provide a detailed analysis of our financial results. Looking first at ClydeUnion. As expected during the quarter, we took aggressive actions to address the operational execution challenges that ClydeUnion faced prior to our acquisition of this business. One key area of focus was supply chain. As part of this process, we made a significant working capital investment in the business to accelerate component supply. A large portion of the working capital was funded by the seller in accordance with the final purchase agreement. In addition to the working capital investment, we implemented a new flatter organizational structure, and we’ve begun to streamline the factory execution. ClydeUnion's Q1 sales were below our expectations, and their business results were dilutive to the quarter. However, we expect significant improvements over the remainder of the year. Q1 order trends were strong, driven by an increase in aftermarket orders. And the initial customer response to this acquisition has been extremely positive. With ClydeUnion, we now have a foundation to build out the power and energy platform within our Flow Technology segment. The integration is well underway, and we continue to be very encouraged by its growth potential. Later on the call, Jeremy will provide details on ClydeUnion's Q1 performance and the status of the integration. In Q1, we also acquired Seital, a leading global supplier of separation technology for a purchase price of $28 million. Separation technology is an important component in food and beverage processing that we had previously outsourced. With the acquisition of Seital, we now have in-house capability to integrate separators into our system designs. This acquisition also enables us to participate in the aftermarket for this product. Additionally, we believe our global flow resources and capabilities significantly enhance Seital's growth opportunities. Our Power Transformer business is on track to ship the first unit out of its expanded large power facility in the second quarter. We expect to see production at this facility ramp up as the year progresses. Our joint venture with Shanghai Electric is off to a good start. It booked its first order in Q1, and we're seeing very strong quoting activity in Q2 for dry cooling systems in China. The sale of Service Solutions is pending regulatory approval. We expect this transaction to be completed near the end of Q2 or in the third quarter, and we've reclassified the business to discontinued operations in Q1. From a capital allocation perspective, we completed the first phase of our share repurchase program and anticipate executing the remainder of the program in 2012 after the sale of Service Solutions is completed. The strategic actions we're executing this year are directed at narrowing our focus, improving our earnings potential and strengthening our financial position. By the end of this year, we're projecting to have over $1.4 billion of liquidity that will provide us with significant flexibility to generate shareholder value. The strategic actions we're executing strengthened our position in key flow and infrastructure markets, which we believe have very good long-term growth potential. We're also seeing near-term benefits as these actions have improved our ability to leverage the positive market trends we are currently experiencing. In our flow markets, we continue to see strong growth in our food and beverage business. Q1 orders in this market increased 16% year-over-year, driven by strong component demand in the Americas and Asia Pacific. We continue to see increased order activity as a result of leveraging our combined systems offerings. In Asia Pacific, we're seeing significant investments by local dairy manufacturers, who are expanding capacity to meet rising consumer demand for dairy products. For example, in Q1, we were awarded a contract worth approximately $40 million by Bright Dairy in Shanghai. When completed, this Dairy is expected to be one of the largest fresh dairy and yogurt plants in China. In oil and gas markets, demand has been focused on upstream processing and transportation, as the high price of oil continue to support our customers' growing capital investments. And in our industrial flow markets, investments continued to be concentrated in emerging markets where demand was particularly strong for industrial mixers. In our Power Transformer business, replacement demand in the U.S. remains robust. The overall pricing environment is improving, and industry lead times are extending. Our lead times remain between 8 and 12 months, and we continue to be selective on new orders, as we have now essentially filled our capacity for 2012. In February, the U.S. Department of Commerce issued a preliminary ruling in favor of an anti-dumping petition filed against Korean transformer manufacturers. As a result, tariffs have been imposed on Korean imports in the range of 21% to 38%. This has had a positive near-term impact for domestic suppliers, including our business. Looking more broadly at global power generation. This market generally remained stable in Q1. We continue to see very competitive dynamics in emerging markets where most of the new investment is taking place. We believe our strong relationships with Asian EPC firms will continue to benefit us in these markets. In developed markets, capital spending by our utility customers has continued to be on an as-needed basis. This is true for both new capacity and retrofits. New-build opportunities are limited and have been focused on natural gas and solar projects. We participate in both of these markets. And in Q1, we were awarded contracts in the U.S. to supply dry cooling for both a new combined cycle plant and a new solar plant. From a regional perspective, in Q1, our emerging market revenue grew nearly 40% year-over-year and accounted for 31% of our total revenue. This was driven by organic growth and by the acquisition of ClydeUnion. Excluding the impact of ClydeUnion, our sales to Asia Pacific increased 20% over last year, and sales into the Americas were up 7%. Europe was the only region where we experienced reduced volume as sales declined 9%. This was due primarily to lower sales of power equipment in our Thermal and Flow segments. Looking at our ending Q1 backlog. The backlog increased 5% sequentially to just over $3.1 billion. Our Thermal segment backlog increased 7%, and Flow's backlog was up 6%. The backlog in our Industrial segment declined modestly, as we continue to be selective in taking new Transformer orders. Patrick and Jeremy will provide backlog details by segment later on the call. And at this time, I'll turn the call over to Patrick to review our Q1 financial results.

Thanks, Chris, and good morning, everyone. I'm going to begin with earnings per share. Looking at consolidated EPS, in total, our first quarter earnings per share was $0.26. This includes $0.09 of earnings per share from discontinued operations. Discontinued operations include Service Solutions' operating income, related transaction fees and interest expense on the debt we plan to repay with the sale proceeds. EPS from continuing operations was $0.17 per share. This includes a net dilutive impact of $0.06 related to the strategic actions Chris discussed. On this chart, we have provided a breakdown of the strategic items that impacted our earnings per share. The total dilutive impact of the ClydeUnion acquisition was $0.19 in the quarter. This includes $0.10 of purchase accounting charges, $0.06 of financing and transaction costs and a $0.03 operating loss. We also encouraged $0.05 of unabsorbed start-up costs related to the expansion of our large power transformer facility, in line with our expectations. These items were partially offset by an $0.18 gain recorded to recognize the value of the assets transferred in conjunction with the formation of the Shanghai Electric joint venture. Looking at the year-over-year EPS comparison from continuing operations. Q1 EPS from continuing operations was $0.17 per share versus $0.37 per share in Q1 last year. As previously communicated, our Thermal segment income declined $0.14 year-over-year, reflecting bottom-of-the-cycle performance in the power generation businesses. The impact of a warm winter season also reduced the sales volumes and profitability of our comfort heating businesses. And the $0.06 of dilution from the strategic actions I just described also reduced year-over-year EPS. Looking at the consolidated results for the quarter. Revenue increased 18% over the prior year to about $1.2 billion. Acquisitions contributed 13% growth, primarily from ClydeUnion. On an organic basis, revenue increased 7% with all 3 segments reporting organic growth. Currency was a 2% headwind year-over-year. Purchase accounting adjustments related to inventory and backlog step-up charges at ClydeUnion were $7 million in the period. Excluding these adjustments, segment income declined 15% to $89 million. This decline was largely due to a reduced profitability in our Thermal segment. We also recorded $4 million of start-up costs associated with our transformer facility in the period. Our segment income margin declined to 7.6% as it was impacted by these items, as well as about 100 points of dilution from acquisitions. Looking now at the results by segment, beginning with Thermal. Thermal reported $321 million of revenue in Q1, down 2% from the prior year due to a modest currency headwind and the transfer of our China dry cooling business to the joint venture with Shanghai Electric. Organic revenue increased $6 million or 2% year-over-year, driven by increased revenue in South Africa, which offset declines in the Americas and Europe. In the U.S., sales volumes declined for our boiler and comfort heating products, as demand was reduced by the unusually warm weather. Segment income was $10 million, and operating margins declined to 3.2%. Profitability in this segment was impacted by a decline in higher-margin retrofit projects in the U.S. and reduced sales of heating products. The backlog for our Thermal segment increased 7% from year end to over $1.1 billion. The increase was driven equally by organic growth and currency benefits. As Chris mentioned, market dynamics for our power generation businesses remained stable globally. We saw a modest pickup in the quarterly order run rate with elevated orders coming from the United States. Most notably, we were awarded a $40 million contract to supply a dry cooling system for a combined cycle plant being built in Virginia. We anticipate future opportunities for growth in this market as U.S. utilities look to add base-load capacity to offset the pending retirement of aged-coal facilities. Moving onto our Industrial segment. As a reminder, the results for this segment now include our GFI and Radiodetection business units that were previously reported in the Test and Measurement segment. All prior periods have been restated. In Q1, our Industrial segment reported $217 million in revenue, up 6% year-over-year. Organic revenue increased 7%, driven primarily by increased volume of Power Transformer shipments. The Transformer business reported more than 30% organic growth for the second consecutive period. We also had double-digit growth in sales of hydraulic and communication technologies. Segment income was $26 million, and operating margins were 11.9%. This includes the $4 million of start-up costs associated with the transformer expansion that I mentioned. In Q1 2011, this segment benefited from a $6 million insurance recovery. Excluding the benefit from this recovery, the underlying profitability in this segment increased year-over-year, led by a strong first quarter performance in our communications businesses and the increased transformer volume. The backlog for the Industrial segment declined 3% quarter-to-quarter. The decline was mostly due to the Q1 revenue execution. Broadly speaking, we are seeing positive order trends across the businesses in this segment. Looking specifically at the Transformer business. The backlog in this business remained flat sequentially, despite over 30% revenue growth in each of the last 2 quarters. On this chart, you can see the quarterly dynamic between backlog, lead times and revenue. The backlog has been building steadily since the middle of 2010. This reflects the recovery in volume and a modest improvement in price. Our lead times remained between 8 and 12 months. We are basically sold out for 2012 and are now taking orders for delivery in 2013. Replacement demand in the U.S. is robust, and our volume of medium power transformer orders is close to peak levels. As such, we are in a position to be very selective on new orders. Assuming demand remains at the current level, we would expect to end the year with a higher priced backlog. With our current lead times, there is close to a year lag between orders and shipments. As such, any increase in the price on new orders this year will not be reflected in the reporting results until 2013. Pricing in the overall market is improving. However, as we've indicated previously, full priced recovery has historically taken 2 to 3 years. With that, I'll turn the call over to Jeremy to review the results for Flow.

Thanks, Patrick. Flow reported $628 million of revenue for the quarter, up 38% over the prior year. Acquisitions contributed $133 million of revenue or 29% growth. This was primarily from ClydeUnion. On this chart, we show Flow's Q1 results with and without ClydeUnion. I'll review ClydeUnion's performance separately in a moment. Looking at Flow, excluding the impact of ClydeUnion, organic revenue increased 10% with growth across each key end market. Our food and beverage system revenue increased 19% year-over-year, driven by new dairy plants we are supplying in Asia Pacific. Total sales in Asia Pacific grew 42%, where we also saw increased sales of plate heat exchangers and dehydration equipment into Industrial market applications. In the Americas, sales increased 17% driven largely by strong demand for oil and gas and food and beverage components. Overall, a weak quarter for us in Europe where sales declined 7% year-over-year. Excluding ClydeUnion, Flow segment income was $55 million or 10.4% of revenue. Margins were down 150 points over the prior year period due primarily to the reduced sales volume and weak operating results in Europe. Our performance in Europe reflects specific manufacturing challenges that we expect to be isolated to the first quarter. Improvement initiatives are in place to address these challenges, and we also have restructuring actions planned for Q2 that are designed to benefit our overall operating structure in Europe. ClydeUnion reported $125 million of revenue and a $2 million operating loss in the quarter. That's before the purchase accounting charges. This had a dilutive impact of 250 points to Flow's consolidated segment income margin. Looking at the total backlog for Flow. The backlog increased 6% sequentially to over $1.5 billion. This was primarily driven by organic growth along with modest benefits from the addition of Seital’s backlog and also currency. We had very strong demand for food and beverage and oil and gas components during the period that was reflected in the Q1 organic growth, and you can also it see it here in the backlog. In total, our component backlog increased 7% quarter-to-quarter. This should have a positive impact on our Q2 revenue mix, as average lead times on component orders are typically less than 3 months. Our system backlog also increased 7%, highlighted by the $40 million dairy contract we received from Bright Dairy at Shanghai. We continue to see a good order pipeline for food and beverage systems and have already been awarded another large system in Q2. This contract is valued at over $30 million, and it’s for the design and installation of a cheese plant in Germany. Looking at the Q1 results for ClydeUnion. ClydeUnion reported $125 million of revenue, up 24% year-over-year, however, lower than we had anticipated due to supply chain constraints and other throughput challenges. As I mentioned, the business had an operating loss of $2 million prior to the $7 million of purchase accounting charges. Its backlog increased 4% sequentially to $530 million. The increase in ClydeUnion's backlog was a function of strong order intake and also the execution challenges that existed in the business prior to the acquisition. Some of the execution challenge related to working capital. Since the date of acquisition, we have invested about $70 million of working capital into the business. $40 million or about 60% of this investment was funded by the seller in accordance with the final purchase agreement. $18 million of the cash infusion was necessary to unlock the supply chain, as material shortages contributed to delays in backlog execution. The remainder is invested in inventory and receivables, and we expect that to unwind as the year progresses. Overall, we are pleased with the progress that we've made in the first 90 days, addressing the working capital needs and operational bottlenecks that we inherited. Although it will take us a little longer than originally anticipated to improve productivity, we believe the actions we've taken to date are already having a positive influence on the business. Taking a closer look at the integration and some of the improvements we've already made. As planned, we took steps in Q1 to streamline the management structure in a way that provides clear direction and accountability. We are also in the process of evaluating potential restructuring actions that would benefit 2012 and beyond. On the commercial side, we implemented multiple price increases. We have also implemented our contract approval process to drive discipline and order acceptance. We are realigning the sales team in Q2 to increase customer intimacy and support major projects for both our EPC and end-user customers. On the operational front, as I've already discussed, the Q1 working capital investment has unlocked the supply chain. We began to see improvements materialize late in Q1 and believe it will have a meaningful impact on our backlog execution in Q2. We are integrating the global supply chain and implementing our lean approach. SPX operational excellence personnel have been deployed to all 8 manufacturing sites. We have already had some small wins and have increased productivity, and we have identified several opportunities for future improvement. In addition to these changes, we implemented an approval process aimed at reducing discretionary spend. From a commercial perspective, the customer response to this acquisition has been even more positive than we anticipated. We have already received customer inquiries as to what additional SPX products can be purchased with ClydeUnion Pumps. And we are working on developing our approach to multiproduct offerings for our oil and gas and power generation customers. ClydeUnion’s orders continued at a strong level in Q1. On a year-over-year basis, its orders increased 7%. Over 70% of our revenue forecast for the remainder of this year is in the ending Q1 backlog, giving us good visibility to achieving our 2012 revenue target of about $600 million, which we expect to translate to approximately $0.30 of EPS accretion. This assumes year-over-year revenue growth of 30% to 40%, which reflects ClydeUnion's market share gain, as well as the overall industry growth. Looking beyond 2012, we expect the revenue growth rate to moderate closer to the end market growth rate. In summary, we are pleased with the progress we have made on the integration to this point. We understand that this is a process that takes time and a lot of effort by our employees. And we are encouraged by the initial customer response and the growth potential for Flow's power energy platform. Turning now to free cash flow and capital allocation. Our free cash flow is historically very strong in the fourth quarter. And in the first quarter, we typically reported cash usage. In Q4 last year, we generated $219 million of adjusted free cash flow. This included a benefit from working capital of about $100 million. In Q1, we reported a net cash investment of $215 million. This includes ClydeUnion's cash impact, which accounted for a little more than 25% of the total. Our primary investment was in working capital. We have now had 2 consecutive quarters with elevated organic revenue growth. The timing of the working capital investment needed to support this growth was concentrated in Q1. A portion of this investment related to project timing in some of our large long-cycle businesses. We do expect the working capital to unwind and benefit our free cash flow performance over the balance of the year. In addition, we invested $22 million in capital expenditures, made pension contributions of $14 million and also made income tax payments of $17 million during the quarter. Looking at our capital allocation expectations and projected liquidity for 2012. Our ending Q1 cash balance was $337 million. We are targeting approximately $350 million of free cash flow from continuing operations over the next 3 quarters. And we expect the after-tax proceeds from the sale of Service Solutions to be approximately $1 billion. Upon completion of the Service Solutions sale, we plan to commit $350 million to debt reduction, including the early funding of our 2013 debt maturities and to delever into our target gross leverage range of 1.5 to 2.5x EBITDA during 2012. We completed the first phase of our share repurchase plan in April. In total, we have already repurchased about 1 million shares at a total price of $75 million. Phase 2 will be in effect following the completed sale of Service Solutions and allows for repurchases of $275 million. Depending on the price of the stock, we expect to repurchase an additional 3 million to 4 million shares this year. We are projecting our year end diluted share count to be between 47 million and 48 million shares. After these actions, we expect to have over $1.4 billion in liquidity, and we'll evaluate additional strategic acquisitions and share repurchases consistent with our capital allocation methodology. This chart describes our approach to capital allocation. At the end of Q1, our gross-to-net leverage ratios were 3.2x and 2.8x, respectively. We expect to approach the target range later this year through a combination of debt repayment and increasing EBITDA. When gross leverage is below 2.5x, we shift our capital allocation focus to strategic acquisitions and share repurchases. Moving on now to our Q2 and full year financial targets. In Q2, we are targeting revenue to grow 12% to 17% year-over-year to about $1.3 billion. Most of this growth is expected to come from acquisitions. Organically, we expect low-single digit growth, and currency is forecasted to be a 3% headwind. We are targeting strong revenue growth in our Flow and Industrial segments that we expect to be partially offset by a double-digit year-over-year decline in Thermal's revenue. Segment income margins are targeted to be between 9.1% and 9.6%, down about 100 points over the prior year due to acquisition dilution and reduced Thermal segment margins. We are also targeting $10 million to $15 million of restructuring actions in the quarter. These actions are expected to be concentrated in our Thermal and Flow segments. In our earnings model for Q2, we are using a 28% effective tax rate and a share count of 51 million. This reflects the 1 million shares repurchased to date but does not assume any additional share repurchases. For the full year, we have updated our segment targets to reflect the Q1 results, acquisitions and changes in our outlook. For the Flow segment, we have increased the revenue growth target 2 percentage points to 35% to 40%. This includes the revenue expectation for Seital and currency rate changes. We reduced Flow's margin target 30 points to between 11.2% and 11.7%. This reflects the impact of the Q1 margin performance. For the Thermal segment, we now expect revenue to decline between 7% and 12%. This is modestly better than our previous target due primarily to currency rate changes. We reduced Thermal's margin target 60 points to between 7.6% and 8.1%. This reflects the Q1 performance, as well as continued competitive dynamics in the power generation markets. And for the Industrial segment, we increased the revenue target 3 percentage points to between 10% and 15%. The margin target for Industrial is the same as our previous target at 13.2% to 13.7%. We have also updated our consolidated pro forma modeling targets. As a reminder, this framework assumes the annualized impact of the debt reduction and share repurchases that we plan to complete in conjunction with the sale of Service Solutions. For the total company, we increased our full year revenue target range by $100 million to about $5.3 billion with currency being the primary driver. And we reduced our segment margin range 40 points. We now expect consolidated segment margins to be between 10.5% and 11%. On a pro forma basis, we expect annual interest expense to be approximately $105 million. And we're using a diluted share count of just over 47 million shares and an effective tax rate of 28%. That completes our financial analysis. And I'll turn the call back over to Chris now for closing remarks.

Thanks, Jeremy. Looking at the key trends across our business, we are optimistic about our growth potential for the remainder of this year, as well as the medium term. As we integrate ClydeUnion, we expect to realize revenue and cost synergies. We also expect to capitalize on the strong trends in the oil and gas markets as we build out this platform. In Flow's food and beverage business, we expect new plant investments in emerging markets, as well as aftermarket opportunities in our expanding installed base to fuel future growth. We believe the next investment cycle in the U.S. transmission and distribution market is underway, and our Power Transformer business is well positioned to benefit from this. And over time, our Thermal segment will benefit from cyclical recovery in the global power generation market. Our long-term annual tax rate is now 28%, and we expect our share count to be further reduced with the 2012 share repurchases. And both of these will contribute greater EPS leverage on future operational growth. So in summary, we are in a year of transition, with our focus firmly on executing the strategic actions that are in process. Our highest priority this year is successfully integrating ClydeUnion. We expect to see a positive benefit from all of our strategic actions over the balance of 2012 and beyond. We believe these actions will allow us to leverage the positive near and long-term growth trends that we're seeing in many of our key end markets. We're in a strong financial position, and we believe our future earnings potential is as high as it's ever been. So that concludes our prepared remarks. And at this time, we'll be happy take your questions.

[Operator Instructions] Your first question comes from the line of Nigel Coe at Morgan Stanley.

Just to get into the ClydeUnion operational issues in 1Q. You maintained the $0.30 accretion for full year. Is that because you had a buffer against these kind of contingencies or on a higher revenue number? Or did you catch up on the margin over the balance of the year?

Nigel, I think it's a combination, actually. We do expect to catch up as the throughput improves, and the revenues will come. Obviously, you've seen the backlog. And I think it's also an important note that the Q1 orders were up year-over-year, which is a good thing. And it was a strong order quarter in what is seasonally a fairly light order quarter for the business historically. So we've seen some decline in the amortization expectations from our original targets for that number. But that's mostly been offset by what we expect from a restructuring perspective, as I mentioned in the prepared remarks. So it's really about lowering the breakeven point, getting some of these lower-margin to no-margin revenues through the process and getting more from a quarterly revenue perspective, which will drive leverage in the OP.

Okay. And I know you mentioned on the backlog -- obviously, the backlog trends are quite impressive. But how is the pricing trending in the backlog?

Yes, it's improving. As we mentioned, we have implemented some price increases, and we've also changed the order approval process, which not -- includes the terms and conditions, but also pricing discipline. So it is getting better. I think some of the more complex orders that were taken 12 to 18 months ago have been some of the major issues that the business was experiencing at the time that we acquired it. And I think we'll get through those here over the first couple of quarters of ownership, and we'll put those behind us.

Okay, great. And if I can have 2 more quick ones, if I may. You've got pretty good visibility on industry transformer trends in regards to the open-market pricing. Where do you sense industry lead times are right now for -- within medium voltage?

Yes. This is Chris, Nigel. We see them stretching out as well, which is -- as all of us have come to understand the cycle to this business very well is obviously an encouraging sign for the recovery of that market. So the trends that we're seeing there in the open market are more positive.

Okay. And then you mentioned on the 2013 debt takedown, how much of that $350 million do you anticipate to apply into that high-cost debt maturing in '13?

That will go to our Term Loan X primarily, Nigel, which is a floating rate debt that's at a lower level.

Basically, the $350 million will take out all of our near-term maturities for 2013, and the Term Loan X is effectively -- was an 18-month term and is effectively getting prepaid.

Your next question comes from Steve Tusa, JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: On the Industrial side, the margins there were strong. Are you seeing any kind of [ph] improvement from the leverage? I know the price is really not a factor, but the leverage in transformers? Or is that kind of a mix issue around the other businesses in the segment?

Well, one of the strongest factors was the communications technology business in Q1. Obviously, from what we've shown you on the Transformer business, we are -- we're at the inflection point where the second half of this year is going to be much stronger. So modest improvement in terms of the contribution of the Transformer business. And obviously, for large power, we are at the point where we're ramping that up. And we will start to absorb the costs in that plant towards the end of the year. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. So that margin improvement is still on the come there in the back half. And then, just on Thermal, clearly, good orders there. How much visibility do you now have on the year? I guess you're thinking now you're kind of looking into 2013 with the lead times in that business?

Yes, that's right, Steve, as you know, that's a long-cycle business. What does encourage us is that when we look at Thermal orders in Q1, we've seen orders modestly improve both on a sequential and a year-over-year basis. We're likewise encouraged by having gotten the first order from our Shanghai Electric joint venture and more encouraged by the opportunity and the activity that's going on in China and the broader Asia Pacific market. So we're happy that we've made that combination. We think that will support the business by creating greater opportunity going forward, but it is longer cycle. So even if we continue to see better order activity through the course of the year, that's a 2013 impact. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Does kind of the success of JV in China lead you believe that maybe that business would be better served and that there would be more value created by hooking it up, not just the China side, but the rest of the business hooking it up with somebody else?

Well, we're always looking for ways to improve the businesses. And as you know, we have some significant, although less formal relationships, with other Korean EPCs. So those have worked very well for us, not only in the Asia Pacific market, but outside that market, both in the U.S. and in South America. So one of the ways that we have strategically improved that business is through those kind of partnerships. And we're going to continue to look for ways to add value to that business and to create more value for our shareholders. But what I will tell you is that, with respect to that market and the underlying dynamics, both in terms of new power development opportunities and emerging markets and the replacement dynamic in the U.S. in Europe and the move towards more gas and combined cycle plants in the United States, I think the long-term drivers of that business are still very attractive. And I think, along the way, we're going to continue to find ways to position that business to make it even better.

And we are adding more products to the Shanghai Electric JV. As you know, it's limited right now. And we're also being invited to bid along with Shanghai Electric on some projects outside of China. So we'll report out as that relationship develops. There's an interesting -- very interesting front log, and we'll continue to report what's going on with the business side of that because the accounting, as you know, will be below the line.

And one other thing, Steve. I'll tell you that one of the collateral benefits to having acquired ClydeUnion and now having created a much larger global platform in power and energy and in oil and gas in our Flow segment is that we're finding that there are interesting cross-segment opportunities between the businesses, just as a result of our having acquired that business, so that's another interesting twist. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: [indiscernible] What's the book value for the Thermal segment? Is it very low?

Yes, it is fairly low from the purchase price of, particularly, Balcke-Durr and related assets that we purchased effectively out of the Babcock bankruptcy.

Your next question comes from the line of Shannon O'Callaghan, Nomura.

So just on ClydeUnion. So if I look at the $0.09 sort of dilution in the first quarter, how did that compare to what you guys would've initially thought? And what explains the delta? I mean, maybe a little more color on the supply-chain bottlenecks and exactly what happened there. And then how do we kind of walk from the minus 9 to the plus 30? I mean, does it come back quickly in 2Q? Or is it more later in the year?

Sure. So we expected to start the quarter that we would be neutral to may be slightly accretive with Clyde in the first quarter. And that delta really is represented by the revenue shortfall. I think if you go back to our original expectations, it was about $40 million of incremental revenue that we expected. And right now, what I would tell you with the mix of revenues coming through, which is probably 1/3, a little bit light on the aftermarket side, so I’d say it’s about 1/3 aftermarket. We're probably running gross margins in the 20% range. And so you can kind of do the math to quickly get you what our original expectations were. As it relates to the timing of recouping that and getting to the $0.30, I think what I would expect is a build each quarter sequentially for the rest of the year. I think we'll see improvement in Q2. I think it's prudent to be a little bit cautious about that, given the delays we saw in Q1, but we have a lot of actions in place. And we're confident that as the year progresses, we'll get at those throughput issues, and we'll start seeing the revenues that you are now seeing in backlog.

Okay. And then on sort of the core Flow business -- sorry, the margins were down 150 bps there. Can you talk about, I guess, geographically sort of what you're really seeing? And also, what's the payback on sort of -- or their improvement timeline on getting that turned around?

Sure, and it's a similar story from a timing perspective. I expect we're going to see improvements immediately in Q2. But consistent with what you saw in 2011 with some of the seasonality and mix in the flow of products, I do expect the second half margins to be quite a bit higher. And I think you saw that in 2011 with margins in the 13% range in Q3 and 15%-plus in Q4. Specifically, on the Q1 issues, they were very much focused in Europe. The Americas were actually up from an organic perspective, as I mentioned, and margins. Asia was relatively stable on the margin side. But in Europe, as I mentioned, sales and margins were down in the quarter, despite relatively steady end market demand. And this is primarily driven by 2 locations, where we experienced what we expect to be fairly short-term operational execution issues. Now the primary issue that we saw centered around our European heat exchanger plant where we have experienced a shift in demand to larger, more complex capital orders. And execution in both the engineering and manufacturing areas on these projects has been below our expectations. And as a result, we've made management changes and a number of process changes that we expect to show improvement beginning in Q2. Obviously, we're not pleased with the core Flow margins at 10.5% in the quarter. We are encouraged by what we did in the second half of 2011 and still believe long term, the 13% to 15%, including ClydeUnion, is the right target for the business.

Your next question comes from John Inch, Bank of America.

The tax rate guidance, just as a bit of a housekeeping upstart, the 28%. Your tax rate in this quarter was 62%. I think it’s at 28%, or are you giving us a pro forma number as if this quarter was 28% on the core?

It's really a onetime issue relating to the Shanghai Electric joint venture. The goodwill that we have signed, which significantly reduced the reported gain, was not tax deductible.

Okay. But I mean -- I'm just trying to understand though. So are you -- you said 28% tax guide, assuming that this quarter was 28% or that the tax rate's going to have to drop below 28% in the upstart [ph]?

Yes, it's pro forma, excluding the Shanghai Electric gain for the year, John.

So if you're modeling this business long term, 28% is the rate you should be using, and the Q1 rate is really anomalous.

Yes, got it, okay. Is business in Europe overall getting better, worse or is it stable?

I would say in Flow, specifically, we'll start there, John. It's, as I just mentioned, it's pretty stable. It's steady. It's about where we expected year-to-date from an order perspective in total, not at the growth level that we're seeing in either the Americas or Asia. In Thermal, orders were, again, relatively stable. They were decent in the quarter. You saw the backlog changes in the prepared comments, so that kind of really covers it. It's not as strong as what we're seeing in emerging or -- emerging markets or the Americas, but relatively steady.

How are you feeling about ClydeUnion’s ops, as you’ve kind of gotten into some of the plants and so forth? And in particular, maybe you could sort of contrast it -- maybe this is a question for Chris. Maybe you can contrast it with APV.

Sure, I'm happy to, John. It's -- we got exactly what we bargained for. And it is a simpler line of attack to bringing this performance up with respect to ClydeUnion than it was with respect to APV. APV was a much more complex business with a much more complex global footprint. And so the challenges there were greater. What we anticipated with respect to ClydeUnion is what we got. And that is an opportunity to improve and streamline the supply-chain issues and to improve and simplify and lean out the plant execution issue. That's kind of it in a nutshell. And as we said when we bought the business, that's what we do very well. And so we've identified the issues. It was probably more intense in Q1 just because the growth of the business remains so significant. And so it's imperative that we concentrate, particularly on those 2 issues and fix them, and that's why we have been as aggressive as we have in Q1. So I think the way we described it and the challenges we expected we would have with respect to making it a better business are exactly what we thought they would be. And we're -- we've got them identified and seeing progress already to Jeremy's points in his prepared remarks. So great business. The growth in that business is -- on its own organically, it's quite attractive to us. And what we have seen, as Jeremy also commented and I did as well in my remarks, is that the customer response to us owning the business has been quite good. And what customers are seeing is an opportunity to spend more broadly across SPX because of the other opportunities that we bring, which I think gives us a competitive advantage with that business.

Just lastly, Chris, I want to go back to the portfolio issue. A number of your businesses would appear to be attractive to potential buyers. And I'm thinking as you continue to focus your strategy around Flow, how should we think about the prospects of further divestitures? And perhaps offset with additional Flow deals like Seital?

Well, what we've said consistently in the past and what I'll say again today, John, is that we have been very clear and consistent with respect to our strategy for growing this business. And that is simplifying it and growing it around Flow. The opportunities that we identified in the Flow universe when I came into this job at the end of 2004 have not changed. And that is these are big global markets, and they're fairly fragmented around the world. And so we have identified and executed on opportunities to grow this business, the Flow business, through those acquisitions that we have, I think, demonstrated a good track record of integrating very effectively and buying good quality businesses and getting a great value exchange for our shareholders. Our focus going forward is to continue down that path and to continue to grow our Flow business. And with respect to the other businesses in the company, they are all very good businesses. And the Industrial businesses are contributing very nicely. And in Thermal, we think, as I mentioned in response to a previous question, we think the underlying dynamics there are great. We think the strategic things we've done in that business make it a better business and will help develop more business for us going forward, specifically the strategic partnerships that we've created with Shanghai Electric and others. And -- but as we look at the rest of the portfolio, we have been very disciplined and focused in recognizing opportunities to improve SPX as we've gone along, and we're going to continue to do that.

Your next question is from the line of Julian Mitchell, Crédit Suisse.

This is Jon Shaffer with Crédit Suisse. Just a quick question on Thermal. Have you seen any change in the competitive landscape from power, especially given sluggish outlook for Western coal power demand and maybe some rising Chinese competition?

Well, the competitive dynamic, as we've described it, Jon, has become more intense where all the new project activity is, and that's primarily in the developing markets around the world. And so that's led us to make these strategic changes, specifically our joint venture with Shanghai Electric, which we think positions us better to be more competitive in that market. In the United States and in Europe, for the last 6 to 8 quarters, it has been, at the bottom of the cycle, very stable. What we're seeing this year is encouraging in terms of modestly better quoting activity and 2 sizeable projects that we recently got here in the United States that we mentioned on the call today encourage us. We're also encouraged by the fact that this is the best order quarter we've seen in a while, modestly speaking. But sequentially and year-over-year, it is modestly better. And so we see some positive signs. In the United States specifically, there is a turn towards, obviously, towards more gas-fired plants, away from coal. We've recognized that trend clearly. And from an innovation perspective, we have focused our efforts on positioning ourselves to capture more of that opportunity, and I believe that we will. So we understand where the trends are going, and I think from a strategic standpoint, we're positioning the business appropriately.

The next question from Jeff Sprague, Vertical Research.

Just back to capital allocation, Chris, and M&A. I mean, your comments on Flow are pretty clear and, I think, well understood. The company does obviously have a lot of balls in the air though right now. I mean, what is your appetite or desire to do something else significant this year? Should we think about this as more of getting ClydeUnion done, we're looking at stuff into new year, or just what kind of frame of reference would you give us on that?

Yes, very fair question, Jeff. Let no one be confused. Our first order of business this year is to integrate and improve ClydeUnion, and we will. And that is the most important thing that we have going on. So we've got the Service Solutions sale pending. We've got ClydeUnion and, to a smaller extent, Seital. But our focus, primary focus and job #1 is to get those businesses integrated because that's the most important challenge we have, and we're not confused about that.

And I was just wondering on South Africa for Thermal, can you give us an update on the backlog burn, kind of the revenue profile? Is anything changing there?

Nothing's changed significantly.

And on Transformers, when we think about -- I believe it was your comment, Patrick, that things look better in the back half. Can you give us just some way to get our head around that? Maybe revenue -- price and revenue this quarter versus what it might look like as you exit the year, some just texture on the whole pricing and backlog dynamic?

Well, if you look at the chart that we included in this presentation and go back to the last peak, our comments on volume are pretty clear. So the difference between what you see on that chart we presented today for the last couple of quarters and that last peak is, frankly, all pricing. And so I think you're going to see pricing ramp up fairly steadily. There is very strong demand, unit demand from the U.S. utilities. We are seeing more quoting activity from effectively displaced Korean suppliers, where we're being asked to quote. And so we do expect to see better pricing in the backlog at year end, assuming we continue to see the kind of demand that we've been seeing. We're pretty confident that the lead times in the rest of the industry have come up fairly well in the last 2 quarters, but we still expect this to be a recovery very much like the last one, which is, from here on, pricing recovering to historical peak levels over a 2- to 3-year period.

And can you just, finally for me, just any update on just kind of the order intake on large transformers? Obviously, you're trying to modulate your own production and not stumble on anything here in the ramp. But what are you thinking about for the unit ramp into the back half and into next year?

Yes, we're essentially sold out for what we have planned to do this year. And we have been careful and selective about those opportunities in large power, Jeff. We just had -- I guess, 2 weeks ago, 3 weeks ago, we were in Wisconsin for the grand opening of the facility and -- which looks terrific by the way. And we were very impressed by how many of our customers attended that. And so Patrick and I were there and had a chance to meet with a lot of the customers and to dialogue with them. And everything we heard from the customers up there supports and validates the business proposition that our people managing that business made to us when they came to us and asked to make the investment. And that is there is a very strong need for domestic production. And the relationship our people at Waukesha have with their major customers is really pretty impressive. I think that we’ll -- the plan for ramping that facility is a very reasonable one. We'll get it ramped this year. And I think the opportunity to add more work to that plant in the years after is actually very encouraging.

This is Ryan Taylor. Sorry for those that are waiting in the queue, but we're out of time on the call, so I apologize to those folks. I will be around all day as usual. So if you need to follow up, please feel free to call me. And we thank everybody that joined us for the call today, and we'll talk to you soon.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.