SPX Corporation Q2 2009 Earnings Call Transcript

Jul.29.09 | About: SPX Corporation (SPXC)

SPX Corporation (SPW) Q2 2009 Earnings Call July 29, 2009 8:30 AM ET

Executives

Jeremy Smeltser – VP of Finance

Chris Kearney – Chairman, President and CEO

Patrick O'Leary – EVP and CFO

Analysts

John Baliotti - FTN Equity Capital Markets

Jeff Sprague - Citigroup Investments

Dean Dray - SBR Capital Markets

Shannon O'Callaghan - Barclays Capital

Nigel Coe - Deutsche Bank Securities

Jeffrey Beach - Stifel Nicolaus & Company, Inc.

Operator

Good day, everyone, and welcome to the SPX Corporation second quarter 2009 results conference call. This call is being recorded.

At this time I'd like to turn the call over to Vice President of Finance Jeremy Smeltser. Please go ahead, sir.

Jeremy Smeltser

Thanks, [Cecelia]. Good morning, everyone. Thank you for joining us.

With me on the call this morning are Chris Kearney, Chairman, President and CEO of SPX, and Patrick O'Leary, our Chief Financial Officer.

This morning's call is being webcast with a slide presentation which can be accessed on our website at www.spx.com in the Investor Relations section. This webcast will be available until August 12th. You may wish to follow along with the webcast as we reference the detailed information on the slides. Please note that this slide presentation also includes supplemental schedules which provide reconciliations for all non-GAAP financial measures referenced today. Our earnings press release was issued earlier this morning and can also be found on our website.

Before we continue I would like to point out that portions of our presentation and comments are forward-looking and subject to safe harbor provisions. The 2009 guidance and targets we discuss today are on a GAAP basis from continuing operations, and also please note the risk factors in our most recent SEC filings.

At this time I'd also like to announce that during the second quarter we rotated a few of our key finance leaders into new positions. As part of this change I have been reassigned as the Chief Financial Officer of our Flow Technology segment. As such, I will not be participating on our quarterly earnings calls going forward. Ryan Taylor, who most of you know and who has done a wonderful job managing IR for SPX over the past three and a half years, has been promoted to Director of Investor Relations and will take my place on earnings calls going forward. Scott Sproule has taken over my role on the finance operations side as VP of Finance. Scott has most recently been the Chief Financial Officer in our Test and Measurement segment.

With that, one last time I'll turn the call over to Chris.

Chris Kearney

Thanks, Jeremy, and good morning, everyone. Thanks for joining us on the call. We appreciate the great work that Jeremy has accomplished as our Vice President of Finance, and we're pleased to have his leadership now in our Flow Technology segment. And we're also glad to welcome Scott back to corporate and to his new position, and we look forward to his contributions.

I'll begin the call today with an update on the global economic environment and how it's impacting our business. I'll then discuss the consolidated results for the quarter before Patrick reviews the segment results and our expectations for the rest of the year.

The global economy continues to be challenging and, as we said on the Q1 earnings call, the majority of our end markets have been impacted by the recession. Geographically, the U.S. and European markets are down significantly from last year in terms of results and new orders. In comparison, developing economies - China, South Africa and Russia - have been generally positive for our businesses.

Our short-cycle financial results continued to decline year-over-year in Q2; however, in many of these businesses the sequential orders are stabilizing. In our longer-cycle project businesses quoting activity remains strong. There is underlying demand for projects that our customers are actively discussing with us; however, final order placement for many of these projects continues to be delayed.

With the diversity and global nature of our businesses, we believe that there will be different inflection points for improvement in each of our end markets. This timing is difficult to predict, however, and we do not expect recovery to occur in 2009 for most of our end markets.

Despite the challenges we're facing as a result of the recession, we're still focused on our long-term strategy. We're working to expand our three core markets in developing regions and to develop new technologies that better serve our customers needs. We made good progress on our restructuring initiatives during the first half, and we're beginning to see the positive impact of our actions. Many of the actions we've taken are permanent changes that better align our cost structure with our revenue streams and increase our future flexibility. We continue to manage prudently through this recession and we believe that we're positioning SPX to be in a strong competitive position when our end markets recover.

Looking at the results for the second quarter, total reported revenue was $1.2 billion, a 21% decline from last year. Organic revenues were down 15%, largely due to declines in our short-cycle businesses. Sales for tools and diagnostics were particularly weak, declining more than 30% year-over-year.

Foreign currency translation was a 6% headwind to reported revenue, primarily due to the stronger dollar against the euro.

Segment income decreased 34%, to $136 million.

Q2 segment income margins were 11.4%, down 230 points from a year ago but towards the top end of our target range. The primary drivers were the organic revenue decline, a less-favorable project mix in our Thermal segment, and foreign currency headwinds. These items were partially offset by benefits realized as a result of the cost reduction actions we have taken to date.

Earnings per share from continuing operations were $0.80, down 52% year-over-year. Lower segment income as a result of the revenue decline was the main driver, decreasing earnings by $0.83 year-over-year.

Restructuring expense for the period was about $0.30 per share, somewhat less than we had targeted, and $0.23 more than Q2 of last year. Our execution on actions in Europe was better than anticipated, reducing the projected restructuring costs. In addition, timing delays have shifted some actions that were planned for Q2 into the third quarter.

Our June 27th balance sheet was generally in line with the end of the first quarter. We had $435 million of cash on hand at the end of the second quarter, slightly higher than the end of Q1.

Total debt was $1.5 billion and net debt was just over $1 billion.

The year-over-year decline in segment income has decreased our trailing 12 month EBITDA. As a result, our leverage ratios have increased to 1.5 times on a net debt basis and 2.1 times on a gross basis. This puts our gross leverage ratio modestly above our target range. We expect to be back in the target range later this year. In this economic environment our current focus is to maintain our liquidity.

Our backlog at the end of Q2 was $3.3 billion, up 4% from the first quarter. From an organic perspective the backlog declined 1%. This was offset by foreign currency fluctuations, which increased the value of our backlog by 5%. The biggest currency driver was the South African rand. Our ending Q2 backlog in South Africa was valued at $830 million, up from about $720 million at the end of Q1 with no significant new orders.

Our focus on expanding in developing regions of the world has had a positive influence on the development of our backlog over the past few years. That trend continued during Q2. For the first time in many years we received a wet cooling system order in Russia. In total, we have $17 million of Russian orders in our Thermal segment backlog and we're bidding for future orders.

China's commitment to expand its power generation capacity and the Chinese government's stimulus plan are benefiting our customers and driving new orders for us. In the first half of 2009 we were awarded six contracts to provide dry cooling systems for new power plants. These contracts totaled more than $160 million.

We expect to convert about $1.3 billion of the current backlog to revenue during the second half of 2009. This represents roughly 50% of our targeted revenue over the last six months. The remaining revenue is expected to be generated primarily by our short-cycle businesses.

During Q2 the sequential decline in order rates for most of our short-cycle markets flattened, giving us more confidence moving into the second half of the year. We still face challenges in the second half, though, and thus we have reduced our revenue expectation for 2009 across our key end markets.

Construction timing for a few large projects in our Thermal backlog has been delayed into 2010. To reflect these delays we reduced our 2009 revenue expectations into the power and energy market to a decline of 5% to 7%.

We expect our sales into the tools and diagnostics market to be down between 25% and 28% this year. This reflects increased softness in our daily OE business in Europe during Q2 and the dealership closures and other challenges in the U.S. market.

And in our food and beverage end market we continue to see capital investment decisions being delayed. We've seen some key customers in this market cut their capital spending budgets by as much as 30% year-over-year. As a result, we now expect our food and beverage equipment revenue to decline between 10% and 13% in 2009.

Based on these changes we now expect an organic revenue decline of between 11% and 13% across our businesses in 2009.

In addition to revising our revenue expectations, we also discontinued a small product line in our Industrial segment in Q2. The product line had annual revenues between $15 and $20 million and is now being reported in discontinued operations. We've lowered our EPS guidance to reflect these changes. Our revised 2009 earnings per share guidance range is $4 to $4.30 per share, a decrease of about 10% from our previous midpoint guidance.

We continue to target restructuring expense of $75 million this year. That's roughly $1 per share and it's included in our guidance. It represents nearly 25% of our expected earnings for 2009. If you exclude the expected restructuring expense, our EPS guidance would be $5 to $5.30 per share, a decrease of about 19% from 2008.

Despite the challenging economic conditions we're facing, we're focused on achieving over 100% conversion of net income. We expect improved working capital performance on a lower revenue target and lower cash tax payments as a result of the reduced net income. As such, we're maintaining our cash flow guidance of $230 to $270 million.

We're responding to the organic revenue declines across our businesses with aggressive restructuring actions. Across all four segments our businesses have planned actions; however, 75% of our targeted expense is focused evenly on our Test and Measurement and Flow Technology segments. This is consistent with where we are experiencing the largest revenue declines.

Through the first half of the year we recorded $35 million of restructuring expense, nearly half related to cost reduction actions in our Test and Measurement segment. In Q2 we began to see significant benefits from these actions, as the Test and Measurement profitability more than doubled from Q1 on only slightly higher revenue.

We expect to see a greater impact from restructuring savings across all four segments during the second half of the year, especially in Q4, and we're also evaluating the need for additional actions later this year that could increase our targeted full year expense.

And with that, I'll turn the call over to Patrick.

Patrick O'Leary

Thanks, Chris. Good morning, everyone. I'll begin with an analysis of the Flow segment.

Flow reported second quarter revenue of $396 million, down 26% from last year. Foreign currency reduced revenue 9%. Organically, revenue declined 17% versus Q2 last year. Consistent with the first quarter, the organic decline was caused by weakness in the majority of our Flow end markets, including the dehydration, industrial, mining and food and beverage markets. These declines offset growth from sales into the oil and gas market.

Segment income was $49 million, down 30% year-over-year, and segment margins declined 80 points, to 12.2%. The gross margin performance for Flow has been solid. Q2 gross margins were 35%; that's up from 33% year-over-year and sequentially. However, our SG&A increased 22% of sales versus 19% in the year ago quarter. We expect the restructuring actions planned for the segment over the balance of the year to address this. Year-to-date, segment margins are 12.5%; that's up 120 points year-over-year. And for the full year we're targeting margins to improve 130 to 180 points.

Flow's ending Q2 backlog was $648 million. Organically, the backlog declined 5%, offset by a 3% foreign currency benefit. Order rates in our short-cycle components business were generally weak; however, in line with Q1. And, as Chris mentioned, the decline in order rates is flattening. Excluding the large nuclear order received in Q1, orders were down about 3% sequentially.

Large project activity in our food and beverage market continues to be delayed as customers have reduced capital budgets in light of the current economic environment. Some projects we had expected to receive orders on during the second half now appear to be on hold at least until 2010.

For the full year we have reduced our revenue expectations and are projecting a decline of between 16% and 18% from 2008. This includes about a 6% foreign currency headwind with an organic revenue decline in the double digits.

Moving on to the Thermal segment, our revenue for the quarter was $369 million. That's down 10% from Q2 last year. Foreign currency reduced reported revenue by 6%. Organic revenue declined 4%. Increased sales of rotating and stationary heat exchangers supporting power generation were offset by a decline in higher-margin dry cooling system sales. The revenue mix had a negative impact on profitability, resulting in a 40% decline in segment income. Segment margins of 7.5%, down 360 points versus last year, however up from 6.3% in Q1.

Based largely on dry cooling projects and our backlog and the seasonality of the heating businesses in this segment, we expect a more profitable mix of revenue during the second half of 2009 as compared to the first half. For the full year we are expecting revenue to decline 1% to 3%, primarily due to foreign currency translation. Organic revenue is targeted to be flat. And we are targeting full year margins between 10% and 10.5%.

The Thermal backlog grew 10% between Q1 and Q2, 7% from foreign currency and 3% organically. Orders were solid in the period.

As Chris mentioned, China has been a good market for us this year, particularly for our cooling equipment business. In Q2 we received four dry cooling system orders for new coal-fired power plants in China.

In the Netherlands we were chosen to provide electrostatic precipitators and airfree heaters for a new coal-fired power plant; that's a $40 million project.

And in the United States we were awarded a contract valued at more than $30 million to design two natural drop cooling towers and install the towers' internal heat transfer system at New England's largest coal-fired power plant. These towers will help the power station reduce its water usage in order to comply with an EPA mandate specific to that site.

Our Test and Measurement segment endured another significantly challenging quarter, which included the bankruptcy filings by GM and Chrysler and the immediate closure of nearly 800 Chrysler dealerships in June. We expect no impact to our balance sheet from these bankruptcy filings. While we had anticipated these events in our previous guidance, they nevertheless had a significant impact on the U.S. auto market.

Q2 reported revenue was $208 million, down 35% from the prior year. Organic revenue declined 29% and foreign currency fluctuations reduced revenue by 7%. The organic decline was driven by continued stress on global vehicle OEMs and their dealership networks. Global aftermarket sales were also down year-over-year.

We have been aggressively restructuring this segment in response to the evolving industry transformation. In the first half of 2009 we reduced the headcount in Test and Measurement by 343 employees. We recorded nearly $16 million of restructuring expense related to this segment through June. The majority of the restructuring so far has involved rationalizing our U.S.-based operations. These cost saving actions had a positive impact on our Q2 results as segment income and profit margins more than doubled over the Q1 performance to $13 million and 6%, respectively. We have additional restructuring actions planned for the second half of the year that will focus on further integrating our global operations.

For the year we expect revenue to decline between 27% and 29%, with segment margins between 6% and 6.5%. The organic revenue decline is expected to be about 25%. We do believe that we will see the bottom of this market in 2009. We expect the bankruptcies at GM and Chrysler to be the beginning of the recovery for our U.S.-based business. In 2009 GM, Ford and Chrysler combined to make up on 15% of our revenue target for Test and Measurement.

We continue to successfully execute our strategy of expanding our partner relationships with European and Asian OEMs. In 2009 we expect that three of our top five Test and Measurement customers will be European-based. We continue to develop these relationships and believe we are well positioned to be successful coming out of this recession.

In May the U.S. government issued new fuel efficiency and emissions standards that will drive innovation and new vehicle launches. This should be a significant positive driver for our business in the longer term.

Although the past two years have been extremely challenging for our Test and Measurement segment, we believe we have significantly improved our competitive position and are poised for growth when the global auto industry rebounds.

Moving on to our Industrial segment, for the second quarter Industrial reported revenues of $221 million, down 8% from Q2 last year. Organic revenue declined 7% and foreign currency reduced reported revenue 1%. The organic decline was caused primarily by a decrease in sales of hydraulic tools and equipment that serve a number of global infrastructure and industrial markets. That business declined nearly 40% in the quarter. Our segment income was $47 million, down 14% year-over-year.

Margins for the period were 21%, down 130 points from a year ago but still a solid absolute performance. The Q2 results benefited from execution of the year end backlog in our transformer business.

As we move into the second half of the year our reported results will begin to reflect the decline in transformer orders that began in Q4 last year. We are expecting year-over-year revenue declines to exceed 35% in the third and fourth quarters of 2009. For the facility we're forecasting revenue to be down 23% to 25%, with margins between 19% and 19.5%.

The backlog declined 13% from Q1 to $404 million. Transformer orders in Q2 were generally in line with Q1 both in terms of dollars and units; however, pricing has become increasingly competitive as capacity in the supply base frees up. Based on the order levels and pricing trends in the first half of this year, we're expecting 2010 revenue in our transformer business to decline at least 25% from 2009 reported revenue, with particularly difficult year-over-year comparisons in the first half of the year.

Our joint venture with Emerson Electric called EGS has also been impacted by the recession. In the second quarter we reported equity earnings of $6 million. That's down more than 50% from last year. For the year EGS is expecting revenue to decline more than 20% from last year. Our target for equity earnings in 2009 is $30 million. That's down about 35% from last year and represents about 10% of our 2009 estimated pre-tax income.

Moving on to free cash flow, we generated $32 million during the second quarter versus $23 million a year ago. This included about $30 million of CapEx and $14 million of restructuring spend. Through the first six months we reported a net cash usage of $18 million. Historically our free cash flow performance has improved as the year progresses, with the majority of our annual cash flow generated during the second half. We expect 2009 to follow the same historical pattern and we expect to meet our full year free cash flow target of between $230 and $270 million. This represents about 120% conversion of net income.

As you know, our target range for gross debt to EBITDA is 1.5 to 2 times and, as Chris mentioned, this ratio was 2.1 times at the end of Q2, modestly above our target range. When levered above 2 times we focus available capital on debt reduction. When levered within the target range we expect capital investments to target strategic acquisitions and/or return capital to shareholders. Our net leverage is only 1.5 times and we expect to have sufficient cash balances to bring our gross debt to EBITDA below 2 again before year end. In this economic environment our current focus is to maintain our liquidity.

In closing, let me briefly review the revised assumptions for our full year and our third quarter EPS guidance.

For the full year we're targeting total revenue of about $5 billion; that's down about 16% from last year. We expect foreign currency to decrease reported revenue by about 4% and organic revenue to be down 11% to 13%.

Segment margins are targeted between 12% and 12.5%.

As Chris mentioned, restructuring expense for the year is expected to be $75 million.

Our 2009 midpoint EPS guidance is $4.15 per share, a decrease of about 36% year-over-year. This assumes July exchange rates, a 33% tax rate, and just under 50 million shares outstanding. A detailed model for the midpoint of our EPS guidance range is available in the appendix of this presentation.

As I mentioned, our free cash flow guidance is $230 to $270 million and includes $65 to $85 million of cash restructuring and $90 to $100 million of capital spending.

Looking at the third quarter, we expect reported revenue to be down 16% to 20%. Segment income is targeted to be around $145 million; that's down 30% from last year. And segment margins are targeted to be between 11.5% and 12%.

Our EPS guidance for the third quarter is $0.75 to $0.90 per share. This includes between $25 and $30 million of restructuring expense versus $4 million in Q3 2008.

It is typical for the fourth quarter to be our highest earnings quarter of the year. On average for the last three years Q4 has accounted for 36% of our annual earnings per share. This year we expect it to account for a higher percentage primarily due to the timing of restructuring expense and related savings.

We expect Q4 restructuring expense to be between $10 and $15 million. That's about $0.20 per share lower than our Q3 target. Additionally, we expect the majority of the restructuring savings in 2009 to be realized in the fourth quarter.

We also have specific revenue projects in our backlog that are expected to impact Q4; most notably, we have a higher concentration of dry cooling projects and OE program launches planned for the fourth quarter this year. And the power projects in South Africa are ramping up as we move into the second half of the year. There remains some risk that these projects could get delayed, however, we do not believe that risk is significant.

Certain events could have an impact on our guidance, including changes in macroeconomic trends that influence our organic revenue, foreign currency translation, and raw material costs, the timing and execution of restructuring actions, capital allocation decisions that could result in acquisitions, disposals or additional share repurchases, and a change in our effective tax rate.

With that I'll turn the call back over to Chris.

Chris Kearney

Thanks, Patrick.

Although Q2 was another challenging quarter, our balance sheet is strong and we're pleased with our free cash flow generation in Q2. Orders for most of our short-cycle markets are stabilizing and our presence in developing markets is helping us to sustain a quality backlog.

We made good progress on our restructuring initiatives during the quarter and we're seeing the positive impact of our actions. We expect to see increased benefits from the restructuring efforts as the year progresses, particularly in the fourth quarter.

Our financial position is strong and we have ample liquidity. We intend to maintain our liquidity given the uncertainty in the global economy. Although the current environment is challenging, we're confident that our long-term strategy has us well positioned in the right markets for growth around the world. We continue to manage prudently through this recession and we're positioning SPX to be in a stronger competitive position when our end markets recover.

So thanks again for joining us on the call and at this time we're happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Baliotti - FTN Equity Capital Markets.

John Baliotti - FTN Equity Capital Markets

Just Chris or Patrick, can you update us in terms of the annual benefits restructuring? Have you revised that given the progress you've made year-to-date in terms of the annual savings you expect from it?

Patrick O'Leary

No. As you know, our businesses have targeted restructuring of about $75 million. It is quite volatile quarter by quarter, as you see in the earnings guidance, but particularly concentrated in Q2 and Q3.

The payback for that is about 12 to 18 months and obviously, based on the actions that we took at the end of last year, in Q1 and Q2, there is a skew to the restructuring savings in the back end of the year, as I mentioned in the remarks, with a significant difference between the level of restructuring expense between Q3 and Q4 - that's about $0.20 benefit to Q4 - and in terms of savings about $0.10 in Q4. But in terms of the overall level of activity, the absolute dollar amount hasn't changed.

If you look at the spending on some of the projects we executed in the first half, the actual run rate of spending is a little bit lower than we had expected for the same projects, but in terms of our guidance or restructuring for the year, it's not changed.

John Baliotti - FTN Equity Capital Markets

Okay, so in terms of the traction you still feel about the same - your total traction out of the spending, you still feel the same way about it?

Patrick O'Leary

Yes, we do. I mean, really, when you look at it, John, it's primarily headcount reduction and so we have a very high level of confidence in the savings that will result from it.

John Baliotti - FTN Equity Capital Markets

If we switch over just thinking about customer behavior, obviously a lot of companies are talking about that we haven't seen a pickup yet, and I don't think that's surprising. But I think you'd mentioned possibly on the last call that, with respect to material pricing, you were seeing a little bit of maybe some fishing around in terms of bid activity or quote activity on industrial because of the pullback in raw material prices and it might have been stimulating some interest.

Between Industrial and Thermal, is that trend continuing?

Chris Kearney

That may be having some impact, John, but I think the more significant impact is just customers reducing their CapEx budgets and seeing the impact of that roll through the year. That's particularly true in our food and beverage business; it's part of Flow.

We have seen some re-quoting of the front log that relates to changing raw material prices, but I wouldn't view it as terribly significant.

Patrick O'Leary

You know, I mentioned the gross margins in the Flow segment in the prepared remarks. Actually, if you step back from the whole business, John, pricing is having remarkably little affect on the aggregate business, perhaps with the exception of the transformer business. If you look at the impact of pricing on overall revenues, we really assess it as insignificant thus far.

Operator

Your next question comes from Jeff Sprague - Citigroup Investments.

Jeff Sprague - Citigroup Investments

Patrick, could you just be specific or remind us on what the total expected restructuring savings are for '09 and the carryover benefit from those actions in 2010?

Patrick O'Leary

Yes. In terms of the total actions, I mentioned about $75 million -

Jeff Sprague - Citigroup Investments

Not the [inaudible], Patrick - benefits.

Patrick O'Leary

In terms of the restructuring benefit, it's about a 12 to 18-month payback for the aggregate expense, as I said, predominantly headcount. In terms of individual quarters' benefits, really $0.10 more in Q4 than the other segments.

Chris Kearney

And we've seen some of it manifest itself in the improved Test and Measurement margins already obviously, Jeff, in Q2. But those restructuring actions, you'll recall, actually started earlier in 2008.

Patrick O'Leary

We have experienced material savings in Flow and Test during the first half of the year, but frankly, those savings have been overwhelmed by the sharp declines in volume. The majority of the restructuring savings is expected to come in the second half of the year.

Jeff Sprague - Citigroup Investments

And there is or is there not some meaningful incremental carryover into 2010 given the timing of the '09 actions?

Patrick O'Leary

Yes, there is. We do expect substantial incremental savings for 2010 concentrated in the first six months of the year.

Jeff Sprague - Citigroup Investments

And then just on transformers, so when you stir it all together transformer sales for the year you think will be down how much?

Patrick O'Leary

20% to 25%. We showed the overall impact in the Industrial segment in the numbers that we put out.

If you actually take the overall impact that we're seeing and assuming sort of a continued run rate of orders, it will put the business at around $250 to $300 million. And if order rates remain stable as the rest of this year progresses, we're clearly looking at a difficult first half comparison in 2010, but then it should level out.

Jeff Sprague - Citigroup Investments

The $250 to $300 million is the annualized run rate in the second half?

Patrick O'Leary

Yes.

Chris Kearney

That would be more of a 2010-type of number, Jeff, based on current conditions.

Jeff Sprague - Citigroup Investments

And then just on pricing itself, clearly it's getting weaker. I think you had indicated down 10% to 15% or so on the first quarter; certainly that's been kind of the body language in the trade. Is that kind of where things are tracking or are they slipping lower than that?

Patrick O'Leary

It's varying by project and size of project, Jeff. In terms of the overall market we're seeing pricing that's more like 2006 levels. If you actually look at the run rate of the business, overall it's kind of a 50% decline in orders year-on-year, which has almost cut the size of the business in half.

Operator

Your next question comes from Dean Dray - SBR Capital Markets.

Dean Dray - SBR Capital Markets

Just to follow up on Jeff's questions on the transformers - and you'd given this data point last quarter - what was the sequential order decline in transformers?

Patrick O'Leary

Basically, there wasn't a sequential decline, as I said in my remarks; sort of the trend in orders was similar between Q2 and Q1. And so that's what we're using to project the numbers that I just gave Jeff.

Dean Dray - SBR Capital Markets

Okay. And then, Chris, in your opening remarks you talked about the long-cycle quote activity as being strong, but seeing orders delayed. Can you just flesh out those comments and what the expectation is for the second half?

Chris Kearney

Yes, sure, Dean. As I said in my opening comments, what we're seeing is in the Thermal segment construction timing for a few of the large power projects being delayed in 2010, so that's impacting the second half of the year and caused us to reassess the overall power and energy market decline for the year, the 5% to 7%.

In the tools and diagnostics end market we're looking at that market being down 25% to 28% this year, and we're seeing increased softness in the daily OE tool business in Europe, particularly, and so that's impacting the second half of the year.

And then in our food and beverage end market, a lot of activity there in terms of the front end, but we're seeing capital investment decisions being delayed and it's reflecting a consistent trend that we're seeing in the industry where capital expense budgets in our customer base are being dropped pretty significantly and on average we're hearing as much as 30%.

So it's really those three areas where we're seeing things not develop or things being moved in 2010.

Dean Dray - SBR Capital Markets

Great. And if I could just sneak one last one in, the comment within Industrial on the hydraulics business, you expected after a 40% decline this quarter that you thought that that might be moderating as the year progresses. What's that based on? Is there quote activity that would show some of that moderation?

Chris Kearney

Yes, I think it's really, Dean, based more on a more consistent order trend over the last three to four months, so basically it declined slowly and then kind of flattening out in orders overall book to bill.

Dean Dray - SBR Capital Markets

Any market share changes?

Chris Kearney

I don't think so substantially, no.

Patrick O'Leary

No, not based on what we see. In fact, I was going to say that that is a business that we look to as a leading indicator for us partly because of the broad global industrial markets that it serves.

Dean Dray - SBR Capital Markets

That's PowerTeam, right?

Patrick O'Leary

PowerTeam is one of the brands in the business, yes.

Chris Kearney

Hydraulic Technologies.

Operator

(Operator Instructions) Your next question comes from Shannon O'Callaghan - Barclays Capital.

Shannon O'Callaghan - Barclays Capital

You gave some color on your expectations in transformers next year; I wonder about some of the other segments, if you have any thoughts. You mentioned delays of some Thermal things pushing into 2010 from '09 and then stabilization in short-cycle here. Give any thought on some of the other segments looking out to 2010?

Chris Kearney

Yes, in our Thermal segment, one of the consistently steady markets for us has been obviously, Shannon, in the developing markets. We've seen a nice steady flow of dry cooling tower orders in the Thermal segment out of China. We've got the business backlog in South Africa that's been developing which we'll start to realize in a small way at the end of the year, but much more significantly into 2010. So the developing markets continue to hold steady backlog or drive a steady backlog in that business.

I think as we move into 2010 we'll have to see what happens in terms of the developed markets in the U.S. and in Europe, and as those markets recover that will just supplement what we're seeing in terms of steady activity in developing markets.

Shannon O'Callaghan - Barclays Capital

How about any thoughts on Flow and Test and Measurement?

Patrick O'Leary

In Test and Measurement we are starting to see more discussions around platform changes. Obviously, as we go into next year there could be a significant change in the number of vehicles available, a dramatic change in potential activity from almost a hiatus at Chrysler, GM and Ford to more electric vehicles, smaller vehicles, Fiat coming into the U.S. market. And so we do see more activity across the board in terms of potential and so that, coupled with the restructuring actions is actually making us fairly optimistic about the end of 2010 and going into 2011 with respect to the overall environment.

Flow is kind of a mixed bag. There's a lot of front log and some of that is probably from compression whereas these orders are delaying the amount of activity that is under open discussion in some places is actually increasing. In terms of this year we really don't expect much change, but logically, based on the state of these projects in terms of engineering and discussion, these are fairly substantial projects. Certain parts of the market are really down substantially. Mining is a good example. Based on what's happened to overall raw material costs - with the exception of gold, where we have a number of projects in the second half - that market is very quiet.

So I would, say, again there some of the bigger projects that we'd originally anticipated for the second half of this year now look like 2010 projects.

And, frankly, for the short-cycle in that business it really is too early to say. Again, in the dehydration market and a few other markets, there's some signs that sequential orders are flat at this reduced level of activity, but I think it's way too early for us to call a likely behavior in short-cycle for 2010.

Shannon O'Callaghan - Barclays Capital

Russia and India are kind of getting added to the list of international markets in addition to South Africa and China. Can you fill out a little bit more what you're seeing there and what you think the potential is?

Chris Kearney

If you go back over the last four years, Shannon, and consider how we have shaped the business around these three platforms, clearly a big part of our strategy was establishing a greater presence in some of these developing markets because of the opportunities we saw really across all three markets and especially in power and energy infrastructure and in food, beverage, dairy process equipment.

And so I think we've made great strides clearly in China in all three platforms and are steadily growing our businesses there. Even in Test and Measurement, where we're struggling through tough years in the United States and Europe, we're actually seeing our business grow in the Asian market and I think we're establishing a much better position there.

As we went through our growth planning cycle this year we had even greater focus and more discussion around opportunities in Russia and in India. We think there's great opportunity for our business there and we're focused on better establishing ourselves to get a toehold in those markets, focusing on making sure we have the appropriate resources there to be able to execute on those opportunities. But as you can see from the order we just got in Russia, we think that is the beginning of a good market development opportunity there and we're equally bullish on opportunities in India, really across all three of those broad markets.

Shannon O'Callaghan - Barclays Capital

You mentioned the possibility of some more restructuring late in the year. Can you give some kind of order of magnitude of what you're thinking about and then, as you think into next year, how much more stuff could there be to do?

Chris Kearney

No, it's difficult to do that. I think it would be fairly incremental to what we've got out there right now. I don't anticipate that any additional actions would be significant relative to what we've already done, Shannon, but I think what's important for us is that in this environment we're being thoughtful, diligent, focused in terms of the restructuring actions that we're taking now to better position the entire company for the upturn in the economy. And so we want to make sure that we're being as thorough as we can about that so that we can get the tough actions behind us and be better positioned when things improve.

Operator

Your next question comes from Nigel Coe - Deutsche Bank Securities.

Nigel Coe - Deutsche Bank Securities

Patrick, it sounds like you don't want to get too granular with the cost saves in 2010, but if I can just run through some math with you. If you gain $0.10 [inaudible] in 4Q, it implies $0.30; in 2010 it's [inaudible] at least. And then if I then layer in the second half actions, it sounds like $0.50 might be a good [inaudible]. Is that about the right number?

Chris Kearney

I think, Nigel, that number could be in the ballpark, but the reality is that the timing of these actions continues to shift at times and so we're a little hesitant to be specific on quarter by quarter and that could continue in the second half of the year, which is why we're not getting overly specific.

And then as you think about modeling 2010, there are so many other variables out there right now that it's kind of a lone data point that we're a little hesitant about being overly specific on.

Nigel Coe - Deutsche Bank Securities

I agree. And then on the pricing [inaudible] - pricings [inaudible] challenge at [inaudible] but can you make some comments [inaudible] the portfolio?

And heat exchangers seems to be a decent story right now, but are you seeing pricing pressure there as well?

Patrick O'Leary

With respect to pricing stemming from material, obviously in the overall market there is a perception and a reality that certain raw materials have come down dramatically in price. The fact is that most of the steel we're using is higher end steel, electrical-grade steel, and really I would describe our experience over the last three months as remarkably stable.

And so if you look at the entire business, the dollar impact is really remarkably insignificant - less than 1%. And so if you look at our first six months' performance at a gross margin level, it's not significantly different than a year ago, with the gross margin still holding variously between 29% and 31%. And so overall pricing pressure and pricing changes does not appear to be a significant impact really for any of the businesses.

The only place I could see a change in the top line directly from pricing of any significance is what we're experiencing in the transformer business.

Nigel Coe - Deutsche Bank Securities

So that 1%, Patrick, that includes the deflation at [inaudible]?

Chris Kearney

It's across the board.

Nigel Coe - Deutsche Bank Securities

And then if you look at the second half Industrial margins, obviously coming off a little bit from the first half performance - no surprise there - but is that second half run rate a decent proxy for 2010?

Patrick O'Leary

It should be.

Operator

Your next question comes from Jeffrey Beach - Stifel Nicolaus & Company, Inc.

Jeffrey Beach - Stifel Nicolaus & Company, Inc.

First, looking out at this stimulus spending. It looks like we haven't seen any dollars yet in the electrical utility sector, but it appears that a lot of momentum is building for 2010. Would you expect to see - which is probably not in your expectations - but expect to see a lot of pickup in transformer business if this spending does materialize in 2010/2011 and, if so, as this backlog shrinks and your delivery times shrink, can you get a benefit from that in 2010? What's your delivery times?

Chris Kearney

First of all, Jeff, on the stimulus question, we don't anticipate a significant impact - speaking specifically now of the U.S. market, which I assume you are - we don't see a significant impact from our government's stimulus spending here in the United States.

As we've said in the past, the spending in the stimulus package as it directly relates to our major platforms relates more to next generation alternative fuel energy development projects, and so from an R&D perspective we will benefit to some extent from that stimulus, given some tailwind and assistance to us, in doing what we're already doing and that is developing more energy efficient products and developing equipment that will support alternative energy production facilities. And then we'll get some slight benefit in terms of transportation testing in one of our Test and Measurement businesses.

In developing markets like China, where the stimulus spending by that government is really directly targeted at building new infrastructure or replacing infrastructure, that we have had a very significant benefit from and I believe we'll continue to as we move forward, as that infrastructure gets built out.

But in this country the stimulus spending in the Recovery Act was not directly targeted at replacing what we know is a very aged infrastructure; it is developing next generation alternatives. So we don't see that having a significant impact on us going forward.

Patrick O'Leary

With respect to throughput of transformers, we can put a transformer through a plant in less than a quarter. What actually happens when the market is at its peak we end up typically quoting based on capacity about a year out and at the bottom of the market more like three to four months visibility?

And so clearly, if there were a change in demand for transformers, we are operating at half capacity going into next year and have significant flexibility and ability to provide relatively fast turnaround in response to any change in the market.

Jeffrey Beach - Stifel Nicolaus & Company, Inc.

You mentioned India and I see they've got a goal of pretty sizeable spending on generation and they're getting quite a bit of money from the World Bank and other sources. Are there any large specific projects that are already kind of in development right now that you could see materialize in the next 12 to 18 months?

Chris Kearney

There are none that I can speak of specifically in terms of projects that are in development clearly, but as those opportunities do develop, we'll certainly be talking about them.

When we look at the market broadly, though, Jeff, it really does play into our sweet spot in terms of the businesses that we're in and the opportunities that we're attempting to pursue in that market are real ones. I think there's a good opportunity for SPX to enjoy business development in India really across the three major platform - in power and energy infrastructure for sure; in food, beverage, dairy processing; and in our Test and Measurement business as we align ourselves with OE producers in India.

Operator

Your next question comes from Jeff Sprague - Citigroup Investments.

Jeff Sprague - Citigroup Investments

I just wanted to come back to a couple things, just first on restructuring. You did indicate that most of it is people, which we're seeing, obviously, a lot of that given the recessionary environment, but there's also increasingly a lot of discussion about structural manufacturing footprint changes at companies and I just wonder how much of that you're doing? Are you actually taking capacity out of the company in places?

Chris Kearney

Yes, that's a great question, Jeff, and we have made significant structural changes to the business.

As I said before, our focus is on taking this opportunity to properly align our company to support revenue growth in regions where it's occurring and in total since the beginning of 2008 we've actually closed or plan to close 16 facilities, mostly within our Flow and our Test and Measurement segments. So we obviously think that a significant portion of the structural changes that we're making will have long-term benefits for the company.

So what we're trying to do in the short term obviously is to reduce costs in the near term in response to changing market conditions, but in the long term we think these actions are better designed to align the company's operations with where, as I said before, where we anticipate the future revenue stream to come from and to give us better flexibility in the future.

Jeff Sprague - Citigroup Investments

And I just also want to follow up on the Flow margins. They were down actually on kind of flat sequential revenues. I would have guessed kind of with the ostensibly low-hanging fruit that still remained in APV that the margins would be grinding higher there. Patrick, you mentioned higher SG&A. I'm wondering if that's just a ratio to declining sales.

Patrick O'Leary

It's just timing. I also tried to mention if you look at the first half the margins have actually improved. And clearly, we are expecting them to improve for the whole year. That's primarily based, again, on timing of certain restructuring actions.

And so although the margins were down 80 points in Q2, I still actually see that as an okay performance relative to 17% organic decline. And if I look at the overall margin level of the Flow segment in relation to what we're expecting at the top line, the benefit we're getting from Phase 2 and Phase 3 APV restructuring clearly will help us going forward.

It is somewhat frustrating, obviously, to see the substantial restructuring actions that we've taken there largely speaking neutralized by volume declines in the short-cycle and delays in some of the large projects, but, again, these are real structural changes that will benefit us in the long term when these margins stabilize.

Jeff Sprague - Citigroup Investments

I know it's getting more difficult to in a granular sense separate APV from the rest of Flow, but I would presume, then, we're looking at APV margins that are still probably kind of mid single digit kind of territory?

Chris Kearney

Overall I would say, Jeff, you're right; it is getting more and more difficult and I think that will continue to be the case as we head into 2010. The margins I would say for the year are probably going to be in the high single to low double-digit range by the time we close out Q4.

Jeff Sprague - Citigroup Investments

With no more questions in the queue then we're going to close the call. Thanks, everybody for your time. Ryan and I will be in the office all day for any further questions, so thanks and have a great day.

Operator

That does conclude today's conference, ladies and gentlemen. Again, we appreciate your participation today. Have a wonderful day.

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