SPX Technologies, Inc. (SPXC) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 SPX Corporation Earnings Conference Call. My name is Ann, and I'll be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to your host for today's call, Mr. Ryan Taylor, Director of Investor Relations. Please proceed, sir.

Thank you, Ann, and good morning, everyone. Thank you for joining us on the call this morning. With me today are Chris Kearney, our Chairman, President and CEO of SPX; and Jeremy Smeltser, our Chief Financial Officer. Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is also being webcast with a slide presentation that can be accessed in the Investor Relations section of our website. This webcast will be available until November 14. I encourage you to follow along on the webcast, as we reference the detailed information on the slides. In the appendix of the presentation, we have also included reconciliations for all non-GAAP financial measures referenced today. Portions of our presentation and comments 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 today. We especially want to welcome everyone in the Northeast and hope that you and your families are all safe. Our third quarter revenue increased 7% over the prior year to more than $1.2 billion. This was lighter than we anticipated though due to continued challenges in the economic environment in Europe and areas of softness in Asia Pacific, as well as customer and execution delays on some projects at ClydeUnion. Our consolidated segment income and margin was in line with our target and was highlighted by year-over-year improvement in the legacy margins at our Flow segment. 2012 is a year of strategic transition for our company, and we've made progress on several actions that are intended to narrow the focus and improve the earnings potential of our business. I'll begin this morning with a brief strategic update. Beginning with the ClydeUnion integration. Sales have grown about 20% year-over-year through the first 3 quarters and are at record level -- a record level for the business. However, several of the projects that were acquired -- in the acquired backlog have proven to be more complex from a technical standpoint than what ClydeUnion has traditionally experienced. This has impacted the overall profitability of the business, as about 15% of the revenue this year has been at no margin. Looking specifically at the Q3 results. Sales were $126 million, about $25 million lower than our expectations. About half of the shortfall was due to customer delays on some key OE and aftermarket projects. Additionally, we had other project delay due to bottlenecks in the assembly and test process at 2 facilities. ClydeUnion's third quarter operating margin improved 120 points over Q2 to 5%. This was partially driven by restructuring savings, as we're now benefiting from the 5% headcount reduction that was completed during Q3. Although the pace of improvement this year has not been as quick as we anticipated, we are encouraged with the sequential increase in profit. On the commercial side, we continue to see positive feedback from our customers regarding ClydeUnion's pump technologies, and we remain disciplined with respect to new orders. Underlying the financial results, there has been a lot of positive change at ClydeUnion this year, and we believe the operating improvements that are underway will significantly benefit ClydeUnion's performance and profitability going forward. Looking at our strategic actions in power infrastructure. The ramp-up at our expanded power transformer facility is progressing. We have now taken 34 orders for large power units and are on track to ship 15 this year. We've also had good progress on new orders in our joint venture with Shanghai Electric, which has now been awarded 5 dry cooling projects at a combined value of over $70 million. Moving onto the sale of Service Solutions. As you know, we received European regulatory approval in Q2 and are awaiting U.S. approval. We anticipate the final U.S. regulatory requirements will be satisfied within the next few weeks and the sale to close by early December. As a reminder, we estimate the after-tax proceeds from this sale to be about $1 billion. After receiving the proceeds from the sale of Service Solutions, we estimate our available liquidity will be approximately $2 billion. Looking at our near-term capital allocation plans, as we’ve said previously, we plan to allocate $350 million to debt reduction and $275 million to share repurchases. Specifically, we intend to repay the $300 million term X -- and term X loan and $25 million of term loan A. This will address all of our 2013 debt maturities. We also plan to reduce our short-term borrowings by at least $25 million. Once this is accomplished, our total debt will be reduced to about $1.8 billion with more than 60% at a fixed rate, and we will not have any significant debt repayment obligations until the second half of 2014. With regard to share repurchases, as you may recall, we announced a 10b5-1 trading plan in Q1. Under this plan, we repurchased about 1 million shares for $75 million in the first half of this year. Once we receive the proceeds from the sale of Service Solutions, Phase 2 of this plan will be triggered, which allows for an additional $275 million of share repurchases. Assuming recent pricing, this would equate to approximately 4 million shares or 8% of our outstanding base. After these planned debt reductions and share repurchases, we estimate available liquidity of about $1.3 billion, and we will evaluate additional capital allocation options as we plan for 2013, consistent with our disciplined methodology. Moving onto our Q3 organic revenue development. On a consolidated basis, organic revenue declined to less than 1 -- declined less than 1% year-over-year. Our Industrial segment reported 8% organic growth, driven primarily by our power transformer business. Flow reported its seventh consecutive quarter of organic growth with a 1% increase over Q3 last year. As expected, the growth rate has moderated sequentially due to tougher comparisons in addition to the macroeconomic challenges in Europe. At Thermal, organic revenue declined 6% year-over-year, reflecting an ongoing lower level of project business. From an end market perspective, beginning with Flow, on the component side of food and beverage, we saw a modest slowdown in the order run rates during Q3. However, the absolute level of demand remained high. On the systems side of food and beverage, we're executing several large projects this year, and the level of new order opportunities remains healthy. We're tracking several potential dairy projects in Asia Pacific and Europe, as well as a few very large coffee projects. That said, we've seen a delay for new orders, as customers have been deferring large capital investments. As our customers finalize their 2013 capital budgets, we believe we could see an uptick in new order activity over the next few quarters. In the oil and gas market, demand remained robust, particularly in the U.S. where we continue to see a strong demand for pipeline valves. In contrast, power generation markets remain soft. In Flow's industrial markets, order rates for our mixer and dehydration equipment were steady in the U.S. In Europe, demand remains sluggish across industrial end markets, particularly for plate heat exchangers. Moving on to our power transformer business. In early September, we hosted an investor event at our transformer facility in Wisconsin. The presentation from that event is available on our website. If you haven't had a chance, I encourage you to review it, as it contains detailed information on our business, as well as the U.S. transformer market. Overall, not much has changed since we gave that presentation. Replacement demand remains at a high level, and pricing is steady. Our lead times are also steady at 8 to 10 months for medium power units and about 12 months for large power units. Looking now at power generation. Order activity in this market remains stable, however, at a low level and highly competitive. Power generation orders in our Thermal segment are up 9% year-over-year through September. And as I mentioned earlier, our joint venture in China has been awarded $70 million of dry cooling projects this year. Looking at our third quarter ending backlog. In total, the backlog was down 4% sequentially to $2.8 billion. This includes a 2% benefit from currency. Each segment reported a sequential backlog decline. Based on our recent end market and backlog trends as well as the uncertain macroeconomic conditions, we've taken a more cautious approach to our fourth quarter and full year 2012 expectations. For Q4, we're now targeting about $1.4 billion of revenue. Approximately 85% of this revenue target is represented in our ending Q3 backlog. As Jeremy reviews our Q3 financial results, he will also discuss our Q4 targets by segment. And at this time, I'll turn the call over to Jeremy.

Thanks, Chris, and good morning, everyone. I'll begin with earnings per share. EPS from continuing operations was $1.05 in Q3. Looking at segment income, Flow reported an increase of $0.11 per share. This includes $800,000 or $0.01 of purchase accounting adjustments related to backlog step-up charges for ClydeUnion. The growth in Flow was more than offset by Thermal segment income, which declined $0.15 year-over-year. Our effective tax rate in Q3 2012 was 19% due to a handful of discrete tax items that benefited the rate by approximately $7 million. The underlying tax rate was 27%, and in our long-term planning process, we are using a tax rate between 26% and 28%. On a consolidated basis, we reported $1.25 billion of revenue in Q3, up 7% versus last year. Acquisitions contributed 11% growth. Currency was a 3% headwind, and organic revenue declined less than 1%. Segment income margins were 10.8% or 100 points lower than the prior year. This was due primarily to dilution from the ClydeUnion acquisition. Excluding ClydeUnion, consolidated margins were down 30 points, as margin declines in our Thermal and Industrial segments offset an increase in Flow's legacy margins. Looking at Flow's results for the third quarter. Flow reported $649 million of revenue, up 23% over the prior year period. Acquisitions contributed $139 million, a 26% increase. Organic revenue grew 1%, and currency was a 4% headwind. The organic growth was driven by execution of large-scale food and beverage systems in Asia Pacific, as well as strong component sales into the oil and gas market. This growth was largely offset by continued weakness in Europe, as well as lower revenue on the nuclear valve project with Westinghouse that is nearing completion. Excluding purchase accounting adjustments, Flow's segment income increased 13% over last year to $79 million. Legacy margins improved 70 points to 14% on increased pricing and operating improvements primarily concentrated in the U.S. The Q3 margins also reflect better performance in our European factories, partly due to savings from previous restructuring actions. ClydeUnion's third quarter results were 180 points dilutive to Flow's overall margins. Looking specifically at ClydeUnion, Q3 revenue was $126 million, up 22% year-over-year. This was about $25 million less than we had anticipated due to the customer and testing delays Chris mentioned. The operating margin related to these delayed projects is greater than 20%. Excluding purchase accounting adjustments, actual operating profit for the quarter increased to $6 million or 5% of revenue. This reflects benefits from the restructuring savings and operating improvement projects. From an EPS perspective, including associated restructuring costs and interest expense, ClydeUnion's Q3 results were neutral. We expect fourth quarter revenue to benefit from the Q3 project delays, as well as an increased amount of aftermarket sales. For Q4, we are targeting at least $150 million of revenue with operating margins at 10% or better. Based on these targets, we expect at least $0.15 of EPS accretion in Q4. And for the full year, we now expect ClydeUnion's aggregate impact to be neutral to earnings per share. Moving on to the backlog for Flow. In total, Flow's ending Q3 backlog was $1.4 billion, down 3% from Q2. The 2 primary drivers of the backlog decline were our execution on the large dairy systems and a 3% reduction in ClydeUnion's backlog. At ClydeUnion, aftermarket orders remained steady. OE orders, however, have declined in the short term. We don't view this as market-related but rather as a result of our increased discipline on new orders and focus on delivering the legacy backlog. Overall, we are pleased with the quality of orders taken at ClydeUnion this year and remain encouraged by the end market trends. In aggregate, Flow's book to bill in the quarter was 0.9x, reflecting the end market trends Chris discussed earlier. Looking at the fourth quarter for Flow. We are targeting revenue to grow 23% to 33% year-over-year to between $695 million and $745 million. Segment margins are expected to improve sequentially to between 13% and 14%, primarily driven by ClydeUnion. And as a reminder, we had a very strong margin performance in Q4 last year due in part to the nuclear valve project that is now substantially complete. Moving onto our Thermal segment. Thermal reported $381 million of revenue in Q3, down 12% over last year. Currency was a 4% headwind, and organic revenue declined 6%. The organic decline was due to lower revenue from cooling system and heat exchanger sales, partially offset by increased revenue from the large power projects in South Africa. Segment income was $30 million or 7.9% of revenue, up 400 basis points from the first half run rate. The year-over-year decline in profitability was due primarily to the reduction of higher-margin dry cooling revenue in China and retrofit projects in the U.S. Thermal's total backlog declined $69 million or 7% quarter-to-quarter to $890 million. About 1/3 of the backlog decline was due to execution on the large power projects in South Africa. The core backlog declined $44 million to $520 million at the end of Q3. As Chris mentioned, the power generation market remains sluggish, with new and retrofit activity remaining at or near cyclical lows. However, our orders have been quite stable over the past 8 quarters, averaging approximately $300 million per quarter. Q3 orders were in line with this average. Excluding the South Africa projects, Thermal's book to bill over the last 12 months was 0.9x. For the fourth quarter, we are targeting Thermal's revenue to decline about 10% year-over-year to between $400 million and $415 million. This is due to a lower amount of power project activity, particularly for large-scale heat exchangers. In addition, we are targeting a low-single-digit year-over-year decline in sales of our personal comfort heating products. Demand for these products is seasonally strong in Q4. However, our sales have historically been influenced both positively and negatively by severe or mild winter weather. These products are sold primarily through distributors who have taken a cautious approach to stocking their inventories this year. This is likely due to the warm winter season last year. For the total segment, Q4 margins are expected to be between 9.2% and 9.7%. This is flat to down versus the prior year due to the lower level of expected revenue. At our Industrial segment, third quarter revenue increased 8% organically to $220 million. The revenue increase was driven by our power transformer business, which reported strong double-digit organic growth on higher volume and modestly better pricing. Increased sales of aerospace components and hydraulic technologies were also drivers of the organic growth. This growth was partially offset by a decline in higher margin sales of fare collection systems and communication technologies. Segment income was $26 million or 11.9% of sales. The segment margin performance was impacted by the change in sales mix. In particular, the strong organic growth in the transformer business was dilutive to the segment margins. The backlog at our Industrial segment has remained relatively stable this year. At the end of the third quarter, it was $481 million. The backlog for our transformer business increased 6% over Q2. This was partially offset by a decline in our backlog for solar crystal growers, given the macro difficulties in that particular end market. Looking at the fourth quarter targets for Industrial. We are targeting revenue to grow 4% to 8% over the prior year to about $260 million. This growth is expected to come primarily from increased sales of power transformers and aerospace components. We are targeting segment margins to be between 13.5% and 14%, an increase of about 100 points over the prior year period. Sequentially, the key drivers are expected to be increased sales of power transformers and fare collection systems. This should have a favorable impact on segment margins through leverage of the transformer business and the increased mix of higher margin fare collection revenue. On a consolidated basis for Q4, we are targeting revenue to grow 8% to 12% to about $1.4 billion. Acquisitions are expected to be the primary driver of the revenue growth. We are targeting $160 million to $175 million of segment income with margins between 11.9% and 12.3%. Special charges are estimated to be between $5 million and $10 million, and shares outstanding are estimated at 50 million. Our updated full year targets by segment reflect the third quarter results and our revised fourth quarter expectations. For Flow, we have lowered the revenue range to the bottom end of the prior target and narrowed the margin range. This reflects our updated targets for ClydeUnion. At Thermal, we’ve tightened the revenue range and reduced the margin target about 100 points based on what we've experienced in Q3 and also due to our reduced sales expectation for the personal comfort heating products this winter. And for our Industrial segment, we reduced the midpoint revenue target by $40 million and lowered the margin target by about 50 points. This reflects the Q3 results and continued timing delays on new orders for our communication, fare collection and solar businesses where we've seen projects slip into 2013. On a consolidated basis, our full year revenue is now targeted to grow between 11% and 12% to approximately $5.1 billion, and we expect segment income margins to be about 10%. With that, I'll turn the call back over to Chris for closing remarks.

Thanks, Jeremy. In summary, as we've said all year, this is a year of transition as we focus on executing several strategic actions. We continue to make progress on these actions and expect them to have a positive contribution to our financial performance during Q4 and beyond. We anticipate the final U.S. regulatory requirements for the Service Solution sale will be satisfied within the next few weeks and the transaction to close by early December. Shortly after completing this transaction, we will execute the planned debt reduction and begin the second phase of our share repurchase plan. We expect to be in a strong financial position as we enter into 2013 with flexibility to evaluate additional capital allocation decisions. That concludes our prepared remarks. And at this time, we'll open the phones for questions.

[Operator Instructions] And our first question comes from the line of Nigel Coe with Morgan Stanley.

So obviously, the storm appears top of my mind. I'm just wondering, historically, when you have these big weather events that impact utilities, how does it impact scheduled replacements of transformers? How does the damage to the existing infrastructure impact? I mean, can you just give us some color in terms of what you've seen in the past?

Sure. With respect to our transformer business, Nigel, as you know, it's a very long cycle business, and the replacement dynamics in that industry are already very, very strong and get further enhanced as years go by. And so I think that events like this probably don't help the power providers in terms of stress on the system, and so eventually, I think that these kind of things create further incentive for replacement. But again, the impact to us and our business isn’t short term. These are products, as you know, with longer cycle times and lead times. And -- but it makes a difficult situation already -- it's already difficult -- more difficult. And the aged infrastructure in the power grid is probably most significant in the Northeast anyway. So I think it just -- it puts some additional stress on the system.

Okay. And then on Service Solutions, it sounds like you become a bit more definitive in terms of when you expect that deal to close. I mean, can you just maybe talk about what gives you the confidence to actually go out there and say early December is the time frame?

Well, we've been working through this regulatory process through the year, and just given where we are and what we know at this point, what we expect is the process to be completed over the next few weeks, and it will close by early December.

And our next question comes from the line of Mike Halloran with Robert Baird. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: So let's start with ClydeUnion. Could you just talk about the -- some of the pushbacks that you're getting with the technology and the complexity of the technology? How long of an issue will that be in terms of resolving? Is there -- are there more of these things in the backlog that can get pushed out as a result of trying to get things -- get the mix right there? And then just talk a little bit also about the pricing and the backlog if you don't mind.

Sure, Mike. Thanks. I would say there isn't really pushback on the technology from an external perspective. It's really more about getting through the engineering design and manufacturing process. And I would say that the majority of that is behind us. As Chris mentioned, about 15% of the revenue year-to-date has been represented by projects of that nature. We have an additional piece of backlog in front of us, a good portion of which will be delivered in Q4 based on what we see, but some will certainly trail into next year. The majority though will be behind us this calendar year, and we should have a nice tailwind from that going into 2013.

Yes. And I would also add in terms of the improvements that we focused on, Mike, this year, from a supply chain perspective and just from a lean operating perspective, and in addition to that, the 5% restructuring that we effected in Q3, all of those are having a positive impact on the business. And to Jeremy's point, some of the difficult contracts that we inherited, we'll work our way through most of that through this year. And then I think things will be better for us in 2013 for sure. We have taken a much more disciplined approach to OE orders, and I think that discipline will help the process there, and I think it'll make the future look in the business more positive. So it takes time to work through it, but we're pleased with the progress that we're making, a lot of hard work on the part of our Flow management team, but we're starting to see that pay off. And we're feeling good about the impact of that as we turn into 2013. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: That makes sense. And as I guess to that point, when you think about the lowered expectations on the ClydeUnion side, you guys talked about how some of these push-outs were of the higher margin variety. And so when you think about what drove the downside to those original expectations, how much of it was just contracts getting pushed out versus uncovering a little bit more internally and a little bit more heavy lifting that needs to be done in the near term?

Yes. It was about half and half, Mike. And on the customer delays, what we’ve really seen there is also a mixed bag, but in general, I would describe it as somewhat process as it relates to getting LCs in place and/or cash deposits where with a lot of the places that we ship these pumps into, we demand LCs or cash up front, and the other part being where customer just, frankly, particularly on the nuclear projects, aren't quite ready for the pumps. And there's delays in their inspections to get deliveries on those in some of the legacy contracts. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: Makes sense. And then last one for me, you guys talked a little bit about customer pushouts on the food and beverage side. Maybe you could expand that a little bit more broadly to the overall Flow platform and with Thermal and talk about whether you're seeing any delays from a customer standpoint given the environment.

Yes. What I would first say, Mike, is that the front log activities I mentioned in my comments, I think, is still very attractive to us. So there's a lot of activity in the food and beverage business around the world that's obviously very attractive to us. And so there will be quoting activity going on as we move forward. What we're just seeing is some of those customers pushing out and delaying those projects. It doesn't change our view of that market and the opportunities that it presents for us going forward. I think in some cases, it's just things moving to the right a little bit.

Our next question comes from the line of Julian Mitchell with Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I guess, firstly, the visibility in the non-transformer piece of Industrial, you called out sort of fare collection and comm tech specifically. Could you talk a little bit about just more generally the non-transformer businesses, how the orders are trending in the different segments and maybe give a little bit of color on how big the margin differentials are across those different businesses?

Well, there is a mixed bag, Julian. This is Jeremy. There is a bit of mixed bag of margins across the pieces of the business. And in our presentation in Waukesha, from a relative size perspective, you can see exactly the revenue size of each business. And from a visibility perspective, on our shorter-cycle businesses, we've seen demand be relatively steady. I think we -- around the middle of the year, and this particularly I would be pointing at the hydraulic technologies business and our radio detection business, which are kind of lead indicators from an economic perspective. We did see some signs of slowing around the middle of the year, which had some impact on Q3. But interestingly enough, in the latter part of the quarter, we started to see an improvement there. So we feel decent about that. We usually forecast that business as kind of a run-rate basis. For the rest of the businesses, generally speaking, where there are some higher margins, and I called out, specifically, the communication technologies businesses and fare collections, and they're the project-based type businesses, but they're short lead time projects. And so customer delays can have a pretty significant impact on a quarter -- actually, during a quarter. So that's what we faced over the last 90 days or so. And I think it's had us be more cautious on the Q4 forecast given the overall macro uncertainty and really thinking that those projects are being pushed into 2013. The good side of that is that we're not losing any of those projects, and we're still in the conversations with the customers. The bad side is it does have an impact on the margins. Julian Mitchell - Crédit Suisse AG, Research Division: Great. And then just secondly, I just wanted to get a sense of your thoughts more broadly on pricing overall. I mean, Thermal, you’ve still got a tough top line outlook. Flow, things have decelerated a little bit on the order intake side. Just wanted to know if pricing had started to weaken in any business areas.

Well, let's just go by segment. This is Chris, Julian. Let's just go by segment. So in Flow, while we may experience some project delays or orders moving to the right, what I'd tell you is that the pricing has been fairly stable in that business. We're not seeing anything significantly different. In Industrial, the big driver there, obviously, is transformers, and we've talked a lot about that during the course of the year. And what we've said is that the backlog continues to build. Lead times continue to -- have stretched out during the course of the year. Pricing has modestly improved and has maintained a stable state as we move from Q2 to Q3. Thermal is where we've seen, in our power-related businesses, just a more competitive environment. We've talked about that on the new equipment side, particularly in developing markets. There has been dearth of replacement business or retrofit business in our Thermal business in the United States and in Europe. That’s had significant impact on the margins in that business, and so that's really impacting things more than anything. The competitive nature for the new buildout and developing markets is competitive as we've described it really over the last couple of years, and that hasn't really changed. So I guess my broad takeaway from that is thermal has been challenged just because of where we are in the cycle of that business and not a lot of retrofit activity going on in the developed markets. But across the rest of the business, I would describe it as pretty stable.

And our next question comes from the line of John Baliotti with Janney Montgomery.

Jeremy, maybe -- you talk about in the third quarter for Industrial the combined impact of fare collection, communications and transformers. I was wondering, it looks like there's going to be -- that sort of reverses itself in the fourth quarter. Is there a way to kind of put those in -- separate the -- into 2 buckets in terms of what the impact was for those pieces in the third quarter and kind of how you see that changing in the fourth quarter?

Well, let me try to describe it this way, John, and see if it gets at answering your question. So from Waukesha perspective, year-over-year, strong organic growth. But so for year-over-year margin perspective, not particularly helpful to the margins at this point in the cycle for the overall segment. But what my comments were earlier trying reference is that sequentially from Q3 to Q4, we expect a nice improvement in revenues, which should leverage nicely to margins overall. On the fare collection systems communication side, those businesses just come at much higher margins on their projects than do where we had strength, in Q3, in particular, the precision components business. I mean, difficult to quantify exactly, but if you look at the first half margins and think about that mix, that's more consistent with what we'd expect to see in Q4 than what we saw in Q3.

Okay. And then with respect to Flow in terms of ClydeUnion, is there anything additionally that from an operational standpoint that you're doing in addition to what you’d laid out originally? Or is -- or are things pretty much now on track and you're just kind of running the operations better?

Well, I think we are improving the operations, John. I think we have to keep reminding ourselves that we’ve owned this business for not quite a year yet. And so I think the expectations that we’ve put on ourselves in terms of improvement are high, and they should be. And what I would tell you is that the progress we're making in terms of improving the efficiencies of that -- of those operations around the world within ClydeUnion and affecting the supply chain synergies that we believed were there, I think are all on track. I think the restructuring has helped. And I think in terms of our approach to the front end of the business and the discipline that we've talked about in terms of the order intake process will likewise be beneficial to that business going forward. So I think if you look at where that business has performed sequentially during the course of the year, it's gotten better and better and better each quarter, and we expect it to be better yet in Q4. So I would tell you that we are on track. It's never easy. It's a lot of hard work. But I think the things that we're doing are the right things. And I think the business is showing very steady sequential improvement, and we expect that to carry into 2013.

So Chris, overall, you'd say that the heavy lifting is pretty much behind you there, and it's just some tweaking going along?

Oh, I think there's still -- I guess the people who are actually doing it, John, would not like me to characterize things as heavy lifting being over. They view that as a challenge every day. I think a lot of the fundamental change that we’ve tried to engineer is taking effect and will start to occur more naturally in their businesses. We've seen -- we focused obviously particularly on the factories in Europe and our large facility here in the United States. And I think what Don and his team would tell you is they're very pleased with how the people in the business have embraced the change and accepted that as a positive influence on the business. And so I think the cultural shift that occurs when we acquire businesses and integrate them and perhaps change to improve the approach to manufacturing is taking effect, and I think that momentum is going to carry us into next year.

And our next question comes from the line of Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Just on ClydeUnion, you guys did -- actually, the margin there was okay in the context of where the revenue came in. Would you guys have been at 10% had you hit the revenue target for the quarter at ClydeUnion? Or maybe you could just give us some visibility on where you would have been if that revenue had kind of shift in the quarter.

Yes. I don't think we'd have been at double digits. But we probably would have been in the high-single digits, Steve. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Right. And so we can think about that, that kind of move from, I guess, if I have the numbers correct -- I don't even have internet here, so I have barely looked at the presentation -- but I guess, you're going from $125 million to $150 million revenues third quarter to fourth quarter, 5% margin to 10% plus margin, that's I think kind of leverage in the 30% to -- kind of the 30% range. Is that how we should think about incremental drop-through on revenue if you continue to get growth?

Well, it's probably a little bit lighter than that sequentially because we do have some more benefit from the restructuring savings. But it's a fair way to think about it probably heading into 2013 as you think about some of the lower-margin projects dropping off in the second half of next year. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And then on Thermal, I mean, that -- the backlog, down again even on the core side. I mean, how much worse can we get in that business? And how come -- did -- have margins -- do you think margins have kind of stayed on the floor here? I mean, every quarter, it just seems to get worse and worse. At what time do you really kind of reevaluate being in that business altogether?

Well, I think, first of all, as we said in the prepared remarks, Steve, while we view that industry at the low point in the cycle, we nonetheless have averaged $300 million of orders over each of the last 8 quarters. And so it has been stable. I think the biggest difference in terms of margin in that business is, as I mentioned in response to a previous question, and that is the low level of activity in retrofit -- and the retrofit business, Steve, which drives, as you know, much higher margins in the business and can be very impactful in terms of how the business performs. When we look at that business long term, the dynamics are great. It's -- there is a great need for rebuild and retrofit in the developed markets, and there's going to continue to be a lot of activity in the developing markets. And so in the developing markets, we've tried to position ourselves strategically to get a better share of that, and I think we have. I think the Shanghai Electric joint venture has proven that with 5 dry cooling orders out of the chute here for more than $70 million. And I think other relationships that we’ll have in those markets with other key players will bear fruit for us as well. It's just at a tough point in the cycle. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And then one final question for you. I guess, the visibility here has been pretty weak. I mean, I know it's a choppy market but there -- but there's a lot of things that you kind of pushed to the fourth quarter. I mean, how confident are you that these revenues come in the fourth quarter? I mean, why, if they're delaying stuff in the end of the third quarter, would they suddenly kind of shift this stuff and pull it into the fourth quarter? I mean, is -- given all the macro that's going on out there and all the cross currents through year end, I mean, why doesn't this push into the first half of next year or even the second half of next year? What gives you the confidence around this stuff getting done in the fourth quarter?

Sure, Steve. Yes. I think -- and I want to differentiate a little bit. On the order delays front, that really is more orders in our longer-cycle business. So it's not about Q4 so much there, probably with the exception of the handful of projects I mentioned with customer delays in ClydeUnion, which were more delays around the actual deliveries. Back to the prepared remarks, 85% of our Q4 forecast is in backlog, and so in my mind, as is usual for us, Q4 is more about execution than it is about the new order run rate. And if we see a slowdown or continued weakness, as we described earlier in the call, that's probably more about 2013.

And our next question comes from the line of John Inch with Deutsche Bank.

First, Jeremy, are you assuming a 27% tax rate for the fourth quarter?

Well, obviously, we don't have EPS guidance out there, so I don't have one specific. But the longer-term rate of 26% to 28% is what we're using in all of our models right now.

Right, but there's no event that you foresee that would deviate the fourth quarter from that rate. Is that correct?

Well, always difficult to predict any discrete items, John, because they come with regulatory changes and/or the closing out of a state or a country audit in Europe or somewhere in Asia that can have an impact. And the other item out there, obviously, is what we have hanging out there in the U.S. If there is some miracle in Q4 around things like extending the R&D credit, which I probably don't expect in the next 60 days, but it could have an impact on the year.

Okay, that's fair. Jeremy, you also mentioned your shorter cycle businesses, hydraulics, radio detection, actually -- I don't know if I would call it improvement or what you said, but basically showed some signs of, I guess, at least stability toward the end of the quarter. Was that in the U.S.? Or can you give a little more color around what actually happened in those businesses?

Sure. Yes. I mean, I think what we saw was an okay start from an order perspective to the quarter in July. This is kind of broadly speaking. August was very slow for us from an order perspective, again pretty broadly speaking interestingly enough. But September improved from August, not at first half run rates but improved. And even early in October, we're seeing run rates at the September type of level. So it's not really U.S. focused. It's in Europe as well. Back to our comments though, John, just to clarify, that's really about it being steady versus seeing a major quarter-to-quarter improvement. That's not at all what I'm saying.

No, but if the U.S. were heading into a recession, theoretically those short-cycle businesses on the Industrial side would still exhibit further deterioration on [indiscernible]...

Yes, and that's fair, and that's not what we saw late in the quarter and early in Q4.

Yes, okay. Chris, I want to go back to the question Nigel raised with respect to transformers and the storm. I hear your point about this being kind of -- there’s a lot of long-cycle drivers in these industries, but there were a lot of transformer blowouts. Why doesn't this storm provide a more meaningful catalyst for industry pricing? That's -- because clearly, you're sort of sold out anyway. We're just waiting for the pricing to kick in. Why can't this -- based on your experience historically, why can't this event actually be helpful to that equation more than you're sort of describing?

Well, I think there certainly can be drop-in orders that can result from something like this, John. I mean, we're talking about a discrete part of the country and how that impacts a very broad North American market. And so I -- it certainly doesn't have a negative impact on business. And I think I correctly characterized it as just yet one additional incentive to -- that will drive replacement in an infrastructure that's already critically aged. And so it's just the nature of these products, as you know, is that there are long lead times, and even if it does help push the order process, and it well may, we won't feel the impact to that for probably the next 10 to 12 months, depending on what the pacing of that is. It's -- it just -- for me, it underscores why the age and the state of the T&D grid in the United States is critical. And I think that in periods of low growth or recession, when the -- when electricity demand actually drops as we saw it drop post-recession and then recover slowly in the United States, I think it does create a -- potentially create a sense of -- a false sense of comfort in terms of excess capacity in the grid. And when the economies recover or when severe weather events like this occur, I think it underscores the critical nature that we have with respect to that grid and creates yet an additional imperative for replacement. So the unfortunate consequence of a weather disaster like this is that it does underscore that, and it certainly is not a negative impact on our business. I just tried to be careful about characterizing that as having any kind of a short-term impact.

No, I understand. Just lastly, Chris, the $1.3 billion of available liquidity after you've executed on your share repo plan, post-Service Solutions and the debt repayment, you sort of implied that this was available liquidity, presumably to focus on M&A opportunities in '13. I'm just wondering because of tax changes, you've already seen various holders want to divest of their properties or their stock ownership or whatever in advance of potential tax changes next year. If you actually do get Service Solutions done within your time frame, why not possibly -- I mean, couldn't you execute on deals before year end if people are willing to sell? Are there any of those sorts of opportunities that could come to fruition?

Well, look, our capital allocation process, as you know, John, is dynamic. It's ongoing. It's focused. It's disciplined. And what we've said is with respect to the projected available liquidity, post-Service Solutions and post-debt reduction, post stock repurchase completion, we will still have ample liquidity. And with that liquidity, we'll apply the same disciplined process of capital allocation, looking at potential acquisitions that are sensible and support the strategic imperative we have here, debt reduction, share repurchases, all of those things, and we'll apply that process and make the decisions that we believe are in the best long-term interest of the company and its shareholders.

And our next question comes from the line of Jeff Sprague with Vertical Research.

Could we just touch on Thermal and the South African backlog and your confidence level on that getting delivered as expected with all the kind of economic and social turmoil going on there?

Yes, sure, Jeff. I mean, that project has been proceeding pretty much on schedule. I mean, we've dealt with some execution challenges last year, as you know, and have made some changes that have addressed those. But with respect to the general pace of those projects, we're tracking pretty much where we expected to be this year as we did last year and believe we will next year as well. So we'll get through next year with another significant piece of revenue recognized on that project. And then as we get through 2013, it does start to tail off. But no, we see no reason why it shouldn't continue on track.

Yes. I'd say, Jeff, there are always, in projects of that magnitude, changes in schedules and timing. And we'll -- as part of our annual planning process that we're going through as we speak here, we'll update you all exactly on the expected revenue trends, not only of 2013 but of the rest of the cycle of that project in January when we give guidance so that you know exactly what we're expecting to see. And I think Chris is right on. I mean, at this point in time from a project perspective, there's no major changes. There's no major changes expected.

I was wondering if also you could give us a little help thinking about backlog conversion to revenues and the price impact associated with that. In other words, we know there was negative price in backlog with Clyde. That's flushing through. We know you've raised price a couple times since the deal closed. Maybe some sense of how much higher prices and backlog today versus what's being recognized in revenue, and the same thing, if you could, on the transformer side?

Yes. I mean, I'll start with Clyde. That's really focused, again, on the OE side of the business. And the problems in the OE portion of the backlog that we inherited were not across the board in OE. They were really more in areas where they were expanding outside of their comfort zone from an engineering and manufacturing perspective if you go back to 2010. So I think my comments earlier in response to a question or probably the right way to think about it is, as I've said before, around $125 million, give or take, of the $500-or-so million of backlog, $530 million I believe, that we purchased is what I'd call kind of troubled low to no margin backlog. And then we would expect during the first half of 2013, that will be behind us. Historically, margins in the OE side of the business, there's been a pretty significant range, but probably a good proxy to use would be in the 15% to 20% range depending on the project.

Okay, versus the 0 that you inherited and...

For a portion of it, right.

Yes, exactly. And then on the transformer side, I don't think, relative to the very, very bottom, price has come up a lot, but it has come up some. Is your comment on transformer price you're -- what you're seeing in orders or revenues? And could you just give a little distinction between those 2?

Yes, the comment was on revenues that were delivered in Q3. So year-over-year, there's modestly better pricing. As we talked about in Wisconsin, pricing this year has been pretty stable. Though it's elevated from last year somewhat, it's pretty stable. And as I look back and kind of map out the cycles and overlay them on top of each other, that's still kind of what we would expect based on the point in the cycle that we're at right now.

And our next question comes from the line of Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Just a quick follow-up. I think John brought up a good topic of the tax changes, and we've seen a lot of companies do special dividends in the last couple of -- or a few companies do special dividends. Given you guys have all this ample liquidity, given you don't have -- I mean, your share count is getting lower by the day. It's going to be pretty low once you complete this buyback. I mean, is there any thoughts of doing a significant special dividend with some of this cash to book before year end after you close the Service Solutions?

Well, I'll tell you this, Steve. We review our capital allocation options and process on a regular basis with the board, and that discussion includes share repurchases and dividend policy and all that. We do it on an annual basis. We'll do it again as we prepare our 2013 plan and talk about it at the end of the year with our board and review all the options that we have. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. But I mean -- so you're saying you're not going to really review before year end, which means that you're not going to be able to get it -- if you were to decide to do something like that it wouldn't -- you wouldn't get it in before any kind of tax changes.

I mean, I don't think that's likely, Steve. I mean, I think if you look at how we've described our capital allocation methodology over time, it's not been inclusive of that. And I -- to remind everybody, we are sitting at a leverage level that is higher than our long-term targets from a gross basis at around 3 versus where we'd like to be at probably 2.5 in the interest rate environment we're in today. So I just don't -- I don't consider that a likely short-term use of capital.

Our next question comes from the line of Shannon O'Callaghan with Nomura.

Can you just help us with some of these 4Q kind of margin run rates in terms of their sustainability into the first half, I mean, of next year? So ClydeUnion has 10% plus, meaning you have some favorable aftermarket mix there, I think, but also some still bad backlog. So is that sort of a good real rate? Or is it getting some help? And then same thing with Industrial with fare collection. That stuff can be pretty lumpy. Does that take a step down and we move back down on margins before we go higher maybe? Just a little help there.

Sure. I mean, on Clyde, I would say that the aftermarket mix in Q4 will be most likely the best of the year, and historically, it's kind of always been that way for ClydeUnion in Q4. So I would expect that to be, sequentially into Q1, a headwind for them. We do have the restructuring savings that will benefit Q1 like it will Q4, but at the same time, we'll still have trailing difficult backlog in Q1 and probably even a little bit into Q2. So I hope that gives some color. I don't expect that 10% run rate to be a good starting point for Q1 specifically. And then obviously, we'll give you more specific details in January when we meet to go through the full 2013 plan. For the Industrial businesses, I would expect transformers to continue to be at a high level based on the backlog and it being up again in Q3. But the mix in the rest of the businesses, to be honest, Shannon, will be determined by Q4 orders and even somewhat into Q1 if you think back to my earlier comments on the call about how quickly some of that project business turns. So that still remains to be seen.

Okay. And then just a little bit maybe on cash flow, I mean, it's been tough, and there've a number of kind of items and project things rolling through there and all the ClydeUnion supply chain stuff. I mean, when do you think you're going to get back to normal on cash flow? And is that any different from what it's been historically?

Yes, it’s a very fair question, Shannon. We turn positive on cash flow in Q3 but still negative year-to-date. We are expecting to be positive for the year but not at the level of conversion we historically have been. And most of that, frankly, is due to ClydeUnion as we talked about a lot in the first half of the year. And given the continued delays in some of those projects from a revenue perspective, I would expect that to unwind more in 2013 than in late 2012. I really think, pending obviously the planning process that we're still going through, as I look kind of big picture into 2013, I do think we return back to more of our normalized level of free cash flow conversion. And obviously, from my perspective personally, I'm always pushing the company to be at 100% or better. We'll give you specific numbers on what we think in January, but there's no major items that I see dragging 2013 cash flow like we've had in 2012.

And our next question comes from the line of Nathan Jones with Stifel, Nicolaus. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: If I could just go back to ClydeUnion again, surprisingly, you talked about the complexity of the projects that are running through revenue at the moment and them getting outside of their comfort zone in terms of engineering. Is this a situation where you need to add technical capabilities like engineering or you need to add more test facilities? Or do you need to stay away from these highly complex projects? Or how are you thinking about that?

Well, one, Nathan, I think we've talked about discipline and being more selective in terms of the opportunities we take. That's certainly something we're doing on the front end of the business. And -- but with respect to what we do to deal with the complexity of these projects on -- particularly on the OE side going forward, I think much of it is just, frankly, better coordination between the functions that we have focused on doing and to the extent -- standardizing processes and approach to these things and then improving on the back-end manufacturing processes and test facilities. So I think it's a combination of all of those things. I think we understand it pretty well and, certainly, better today. And I think we've got our arms around what we need to do to fix the business, and we're actually effecting that change in the business right now. So I think it's front-end selection. It's coordination between the functions, i.e. engineering, product managers, operations, all those things. And then it's making sure that the facility flows well and is streamlined and that we've made proper investment in the equipment we need to get the things through there. So I think all of that's part of it. And I think the other part of it is just in terms of managing customer relationships in terms of expectations on delivery times, and that all goes into how the contract is structured.

Yes. I would add, Nathan, I mean, I think the execution of this backlog, although challenging, certainly has been good for the business as it relates to learning going forward on these projects and being able to deliver them better. And I'd also say specifically to your question on the test facilities, we have some great test facilities in the business. I do think there will be some investment over the coming couple of years to upgrade and update, but I don't think it'll be material to our overall capital allocation process. I mean, I think it's just natural course of the growth level that the business is seeing. As we talked about 20% plus year-to-date, we want to make some investments there and streamline for the future, but it's not going to move the needle on the overall company.

I can tell you, Jason -- Nathan, excuse me, when I was over there for -- I did a town hall. I guess it was a couple of months ago in Glasgow. I spent some time with the folks out there and toured the facility, and the change and the improvement on the shop floor in terms of how things flow is pretty palpable. And I'll also tell you that in all the key facilities within Clyde, we now have embedded our lean operation experts who help leading the change around the business, so a lot of good things going on. I think we're starting to see the benefit of that. We clearly saw it in the results in Q3. We expect we'll see it to a greater extent in Q4. But it certainly is getting better.

This is Ryan Taylor. We're out of time for the call today, but we really appreciate the participation and attendance on the webcast and the phone call today. I'll be available in the office for the usual to answer any follow-up questions that you might have. So with that, we thank you for joining the call, and this ends our call for today. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.