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SPX (NYSE:SPW)

Q3 2013 Earnings Call

October 30, 2013 8:30 am ET

Executives

Ryan Taylor

Christopher J. Kearney - Chairman, Chief Executive Officer and President

Jeremy W. Smeltser - Chief Financial Officer and Vice President

Analysts

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Nigel Coe - Morgan Stanley, Research Division

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

Julian Mitchell - Crédit Suisse AG, Research Division

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Scott R. Davis - Barclays Capital, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 SPX Corporation Earnings Conference Call. My name is Sheena, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Please proceed, sir.

Ryan Taylor

Thank you, Sheena. Good morning, everyone. Thank you for joining us. With me on the call this morning are Chris Kearney, our Chairman, President and CEO of SPX; and Jeremy Smeltser, our Chief Financial Officer. Our earnings press release was issued earlier this morning and can be found on our website at spx.com. This morning's call is being webcast with a slide presentation that can be accessed in the Investor Relations section of our website.

The webcast will be available until November 13. I encourage you to follow along with the webcast as we reference the detailed information on the slides. And in the appendix, we have provided reconciliations for all non-GAAP financial measures included in today's presentation. Portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. And please also note the risk factors in our most recent SEC filings. And with that, I'll turn the call over to Chris.

Christopher J. Kearney

Thanks, Ryan, and good morning, everyone. Thanks for joining us today. As we've stated throughout the year, our primary focus is on operational improvement and reducing our cost base. I'm pleased with the continued progress we've made towards these commitments in the third quarter.

We reported $1.40 of earnings per share, which exceeded our guidance range of $1.20 to $1.30 per share. This included $0.12 related to businesses we discontinued in the quarter. On a continuing operations basis, Q3 EPS increased 39% over the prior year, driven by our capital allocation actions, cost reduction initiatives and improved operating execution. In aggregate, our segment income margins expanded 70 points over the prior year and 140 points sequentially, highlighted by improved performance at our Flow and Industrial segments. We had a strong free cash flow quarter and are on track to end the year with approximately $625 million of cash on hand. Additionally, our backlog increased 3% sequentially, driven by an increase in large project awards for oil and gas pumps and food and beverage systems in our Flow segment.

Strategically, we're transitioning to a new operational alignment designed to drive continued improvement in our performance and strengthen our foundation for future growth. During the quarter, we also made good progress on our restructuring plans and identified additional actions that we expect to execute in the fourth quarter that will further reduce our cost base. Additionally, we committed to a plan to divest certain non-Flow businesses and began reporting them as discontinued operations. These businesses were previously reported within our Industrial segment. Combined, they're targeting just over $200 million of sales this year at about a 15% operating profit margin. We expect to complete these divestitures within the next 12 months and intend to reduce our leverage and repurchase additional shares with the net proceeds. Divestitures of non-Flow businesses continue to be a key part of our strategy as we increase our focus on our Flow platforms.

We have provided this next chart to help you bridge our Q3 performance against the targets we published on July 31. On a comparable basis to our guidance targets, revenue was lighter than expected due to timing of revenue recognition at both our ClydeUnion and our transformer businesses. Segment income was near the high end of our range, and we exceeded our target range for margins and earnings per share.

We exceeded the midpoint of our EPS guidance by $0.15 due primarily to segment income near the high end of our expectations and discrete tax benefits. The businesses we moved to discontinued operations reported $51 million of revenue, $8 million of operating profit and $0.12 of EPS in the quarter. Our guidance targets are based on continuing operations. As such, we've revised our full year targets to exclude $0.42 of earnings per share from the discontinued operations. Jeremy will go through our updated financial targets in detail later on the call.

Looking now at our third quarter results from continuing operations. Revenue declined 2.6% over the prior year to $1.1 billion, primarily due to lower sales at our Thermal segment as expected. Segment income increased 4% to $130 million and margins increased 70 points to 11.3%. The increase in profitability was driven by improved operating performance at our Industrial and Flow segments. We also benefited from cost reductions related to our restructuring actions.

Looking at our restructuring plans. Through the first 9 months of the year, we've recorded $25 million of restructuring expense, including $7 million in Q3. We have another $10 million of restructuring cost planned for Q4. For the full year, we now expect to record $35 million of restructuring expense. That's $5 million or $0.09 per share higher than our previous target. In aggregate, we now expect our 2013 restructuring actions to reduce our global headcount by approximately 700 employees and result in annualized cost savings of about $35 million.

The Q3 actions were primarily focused on integration efforts at ClydeUnion and the transition to our new operational alignment. At ClydeUnion, we continue to focus on reducing the cost base in Europe and in North America. As part of our cost reduction and integration strategy, we're in the process of closing one of ClydeUnion's North American manufacturing facilities. We believe ClydeUnion's remaining footprint has sufficient capacity to absorb this facility closure and also support future growth as we improve productivity at each location.

During the third quarter, we also announced a new operational alignment designed to improve our performance and more closely align our Flow businesses with the end markets they serve. As part of this transition, we created 2 new positions. David Kowalski was promoted to President of Global Manufacturing Operations and Ross Skelton was promoted to Chief Commercial Officer. I believe these positions are key to driving a unified approach to operational excellence, innovation and commercial strategy across all of SPX.

At our Flow segment, we aligned our internal reporting units to Flow's key end markets. Tony Renzi is now President of Flow's Power & Energy platform. Marc Michael is President of Flow's Food & Beverage platform. And David Wilson is President of Flow's Industrial platform. This is a natural step in the evolution of our Flow segment and was designed in conjunction with our succession planning for Don Canterna.

After 16 years of service, Don retired from the company in Q3. He played a major role in building SPX, and we have tremendous respect for Don and his accomplishments. Under his leadership, our Flow segment grew significantly and is well positioned to deliver improved financial results going forward. In addition, his disciplined approach to operational excellence and his personal commitment to leadership development built a strong team within our Flow segment. Each of the newly promoted leaders has been a key part of our leadership development program for several years and reports now directly to me. They have transitioned seamlessly into their new roles.

Looking now at the trends across Flow's end markets. Q3 marked a record order quarter for Flow with orders up 21% year-over-year. We won several large and medium-sized food and beverage projects, including a $40 million award for an infant formula plant in Europe and a $26 million award for an ice cream plant in Asia Pacific. Demand for food and beverage components remained steady during the quarter. In power and energy, ClydeUnion had a strong bookings quarter for OE pumps, including 3 large orders related to upstream investments in the North Sea. These new awards are in line with the discipline we have instilled in the order acceptance process. In North America, we continue to see strong demand for pipeline valves. The trends at Flow's industrial markets remain mixed. During the quarter, we saw increase in demand for our dehydration technologies. However, this was mitigated by continued weakness in mining and plate heat exchanger markets.

Looking at our power-related markets. Not much has changed during the quarter. In the U.S. power transformer market, replacement demand remained at a high level in terms of volume. Industry lead times were stable quarter-to-quarter. Pricing was also stable and remained competitive. In the current market environment, we continue to focus on improving the overall productivity and throughput as we grow into the expanded capacity at our power transformer plant in Wisconsin.

In the U.S. and European power generation markets, demand remained steady. In these regions, regulatory uncertainty, flat electricity demand and fuel source changes continue to impact investment decisions. Through the first 9 months of the year, excluding South Africa, we've seen a 5% increase in the backlog for our Thermal segment. We view this as incrementally positive but not as an inflection point for power generation.

So on a consolidated basis, book-to-bill in the period was just over 1x and our Q3 orders were up 13% over the prior year. In total, our backlog increased 3% quarter-to-quarter. The backlog growth was driven by the large project awards in our Flow segment, along with strong bookings for fare collection systems in our Industrial segment. At Thermal, as I mentioned, the core backlog increased 5% through the first 9 months of the year. We continue to have a solid execution on the 2 large power projects in South Africa. The backlog for that region was down to $165 million at the end of Q3.

Jeremy will discuss financial results and backlog trends at each segment in more detail. And at this time, I'll turn the call over to Jeremy.

Jeremy W. Smeltser

Thanks, Chris. Good morning, everyone. I'll begin with earnings per share. Our EPS guidance range for the quarter was $1.20 to $1.30 per share. On a comparable basis, we reported $1.40 of EPS, $0.15 better than the midpoint of our guidance. These results included $0.12 of EPS from the businesses we moved to discontinued operations in the period. We exceeded our expectations primarily due to a $0.07 benefit from discrete tax items and a $0.05 benefit from segment income, which came in near the high end of our target range. On a continuing operations basis, we reported $1.28 of earnings per share, up 39% over the prior year period.

Looking at the year-over-year growth drivers. Segment income increased $0.10 per share, as growth in Flow and Industrial offset the expected decline in Thermal segment income. Equity earnings increased $0.04 driven primarily by our EGS joint venture with Emerson Electric. And as a result of our capital allocation investments, the lower share count and lower pension expense combined to increase EPS by $0.20. Net other items were a $0.03 benefit.

Looking at the segments, beginning with Flow. Flow reported $652 million of revenue for the quarter, up modestly over the prior year. Organic growth was driven by increased sales of components into the oil and gas markets in North America, Europe and the Middle East. This growth was offset by lower sales of food and beverage systems. Last year, we reported $28 million of revenue related to 3 large dairy projects in Asia Pacific. There were no projects of this size that contributed to Flow's Q3 2013 operating results.

Segment income increased 6% over the prior year period to $83 million. Operating margin increased to 12.8%, up 80 points year-over-year and up 260 points sequentially. The margin improvement was driven by cost savings from restructuring actions and improved operating performance, particularly at ClydeUnion. We are very encouraged by ClydeUnion's performance in the quarter. ClydeUnion's revenue increased 4% over the prior year to $132 million. More importantly, operating margins increased to nearly 10%, up sharply on both a sequential and year-over-year basis.

The margin improvement was driven by reduced SG&A cost as a result of the restructuring actions, as well as a higher mix of aftermarket revenue. Aftermarket sales contributed over 50% of total revenue in the quarter. We continue to make progress executing the distressed contracts and the acquired backlog at ClydeUnion. During Q3, we recorded $5 million of revenue related to these contracts and now have only $10 million remaining in backlog. As we've executed the acquired backlog, we have been disciplined with respect to new orders at ClydeUnion.

Flow's Q3 orders were up 21% year-over-year in the third quarter and the backlog increased 6% sequentially to $1.4 billion. As Chris mentioned, we saw an increase in OE pump orders at ClydeUnion, as well as an increase in food and beverage system orders. Looking at Q4, Flow is targeting revenue of about $740 million, which represents low single-digit growth over the prior year. Sequentially, the revenue increase is expected to be driven by a seasonal uptick in aftermarket sales, particularly in oil and gas. Fourth quarter margins are expected to increase sequentially and year-over-year to around 13.5%. That is within our long-term margin target range.

Moving on to the Thermal segment. As expected, Thermal's revenue was down 14% year-over-year to $324 million. Organic revenue declined 12% and currency was a 2% headwind. The organic decline was partially due to the expected rampdown of the large projects in South Africa, where revenue was down $22 million over the prior year. Additionally, we had a retrofit project in the U.S. last year that contributed $21 million of revenue. There was no comparable project in the Q3 2013 operating results for Thermal. Segment income was $22 million and margins were 6.7%. The reduced profitability was driven primarily by the organic revenue decline and the lower mix of retrofit sales. These headwinds were partially offset by cost reduction actions and improved execution.

Looking at the sequential analysis for Thermal. We continue to execute well in the South African backlog, which declined to $165 million. Excluding South Africa, Thermal's backlog has increased quarter-to-quarter and is now up 5% from the end of 2012. For Q4, we are targeting revenue to be between $350 million and $375 million with margins around 9%. On a sequential basis, these targets reflect the historical seasonality of the segment. The primary seasonal driver is winter demand for our short-cycle personal comfort heating products. We also expect sales of evaporative cooling equipment to increase sequentially given the increased backlog. On a year-over-year basis, we expect Q4 revenue to decline by about $80 million. This is primarily due to the rampdown of the South Africa projects and lower boiler sales. As you may recall, last year's Q4 results benefited from an incremental $20 million of boiler sales related to Hurricane Sandy relief efforts.

Moving on to Industrial. As a reminder, the results for Industrial now exclude the businesses that were moved to discontinued operations in Q3. For the remaining businesses, revenue increased 11.5% year-over-year to $170 million. Organic revenue grew 11% driven by increased sales of fare collection systems and power transformers. We had very strong leverage on the sales growth. Segment income increased by $8 million, up 45% over the prior year and margins improved 340 points to 14.5%. The margin expansion was driven by the increased sales of higher-margin fare collection systems, as well as improved execution at our power transformer business.

Sequentially, the backlog has increased steadily since the end of last year. The ending Q3 backlog was $328 million, up 8% quarter-to-quarter. The backlog increase was driven by very strong order intake for fare collection systems. The backlog at our transformer business also increased sequentially. We expect these 2 businesses to be key drivers of higher revenue and profitability in the segment during the fourth quarter. For Q4, we are targeting about $235 million of revenue with margins increasing to about 17%, reflecting the higher mix of fare collection systems.

Now I'll move on to our financial targets for Q4 and full year. On a consolidated basis, we are targeting Q4 revenue to be flat to down 4% versus last year. We expect very strong organic growth at Industrial and modest organic growth at Flow. This is expected to be offset by the revenue headwinds I discussed in our Thermal segment. For segment income, we are targeting $168 million to $178 million with margins around 13%, up about 80 points year-over-year. We expect to record about $10 million of restructuring expense in Q4 with the majority related to the continued cost reductions at ClydeUnion that Chris mentioned. Our fourth quarter guidance range for EPS from continuing operations is $1.73 to $1.88 per share. This represents double-digit growth over the prior year. Note that we are using 46 million shares outstanding and a 26% effective tax rate in our Q4 earnings model.

For the full year, we have updated our segment targets to reflect the Q3 results, our fourth quarter expectations and the discontinued operations. For Flow, we are projecting revenue to be flat to the prior year with margins increasing nearly 100 points to around 11.5%. We reduced Flow's organic revenue target, reflecting slower revenue recognition at ClydeUnion. At Thermal, we now expect revenue to be down between 9% and 11% with margins at about 6%. We reduced Thermal's organic revenue target due to customer-driven delays on timing of evaporative cooling projects that are in the backlog. And at Industrial, we are targeting 11% to 12% revenue growth with margins improving 250 points to around 15%. The revenue growth and margin expansion this year is being driven by the transformer and fare collection businesses.

Moving on to EPS. Note that our guidance is on a continuing operations basis. Our updated guidance excludes $0.42 of earnings per share now reported as discontinued operations. It also reflects $0.09 of increased restructuring expense. At the midpoint, these are the only significant changes to our earnings per share guidance for the full year. We are now targeting earnings from continuing operations to be between $3.80 and $3.95 per share. As a reminder, our full year model assumes 46 million shares outstanding and a 21% all-in tax rate. For long-term modeling purposes, we are using a tax rate between 24% and 26%.

I'll finish with an update on our financial position and capital allocation. We ended the third quarter with $491 million of cash on hand, up $138 million from the end of Q2. We generated $141 million of free cash flow in the period, a significant increase over the prior year. Our free cash flow performance improved across all 3 segments, highlighted by strong working capital performance at Thermal and Flow. For the full year, we are now targeting adjusted free cash flow between $250 million and $280 million. Gross debt remained essentially flat at just under $1.7 billion. While we have a flexible capital structure, our gross debt-to-EBITDA is at about 3x, and this is above our target range of 1.5x to 2.5x.

Looking at capital allocation. As a reminder, we committed $450 million to capital allocation actions this year, including the $250 million voluntary pension funding that we completed in Q2 and $200 million of share repurchases. We repurchased $145 million of shares in the first half. During Q3, we did not repurchase shares due to divestiture activity. We do, however, expect to complete the remaining $55 million of share repurchases in the fourth quarter.

Looking at our projected liquidity. We are targeting about $200 million of total free cash flow in Q4. After completing the share repurchases and paying our dividend, we expect to have about $625 million of cash on hand at year end, and we expect additional liquidity in 2014 from the sale proceeds of the discontinued operations. Based on these projections, we have sufficient financial flexibility as we move into next year. With reduced EBITDA as a result of the divestitures, we intend to use a portion of our available liquidity to reduce debt and leverage towards our target range. We also intend to repurchase additional shares to mitigate a large portion of the earnings dilution from these divestitures. The amount of the debt reduction and share repurchases will be determined once we know the exact amount of net proceeds to expect from these asset sales. We will also evaluate additional capital allocation actions based on our disciplined methodology.

Given the high level of liquidity, I want to take a moment to remind you of our capital allocation methodology. We utilize our strategic planning processes to evaluate future revenue and earnings expectations. This enables us to project future EBITDA and cash flows. Based on these projections, we formulate our internal valuation of the company. Our top priorities are to maintain our target capital structure and fund our dividends. After satisfying those priorities, our goal is to invest capital in the highest risk-adjusted return opportunities that are available to us. We use EVA models to evaluate all of our capital allocation opportunities. This includes organic investments, strategic acquisitions, share repurchases and increases to our dividend. With respect to acquisitions, as we previously stated, we are not allocating capital to acquisitions in the near term. Our near-term objectives remain focused on operating improvement, reducing leverage and returning capital to shareholders.

Taking a brief look at our capital allocation history. In aggregate, over the last 9 years, we've deployed over $6 billion of capital. About half has been returned to shareholders through share repurchases and dividends, a total of $3 billion. We have invested close to $2 billion on acquisitions and reduced our total debt by about $1 billion. As you can see, we raised over $4 billion of capital through divestitures. These proceeds funded a large portion of our allocated capital and unlocked value for our shareholders. We have redeployed the proceeds from asset sales into higher growth investments, as well as opportunistic share repurchases. As a result of this approach, we have significant liquidity to continue building a stronger SPX and add customer relevance in our strategic end markets.

This concludes my prepared remarks. And at this time, I'll turn the call back over to Chris.

Christopher J. Kearney

Thanks, Jeremy. So the actions we're taking this year are now expected to benefit earnings per share by approximately $1.10 on an annualized basis. About $0.65 of this benefit is assumed on our EPS target for this year with an incremental $0.45 of benefit expected to be realized in 2014.

Our top priority is improving the operational performance across all of our businesses. Building out the progress we made on this front in the second quarter, Q3 segment margins improved 140 points sequentially and 70 points versus the prior year. The benefit of our restructuring and integration actions began to materialize in our Q3 financial results. And we're executing additional actions that are intended to reduce our cost structure going forward.

We're targeting double-digit EPS growth in Q4, driven by our capital allocation actions and improved margin performance. We remain in a solid financial position with $625 million of projected cash on hand at year end, as well as expected divestiture proceeds. As I mentioned in my opening remarks, divestitures continue to be a key part of our strategy as we move towards a pure-play flow company.

So that concludes my prepared remarks. And at this time, we'll be happy to take questions.

Question-and-Answer Session

Operator

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

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Chris, on the better ClydeU margins, I mean, finally the nice snap there. I mean, maybe a little more color on what you finally saw show up there. I mean, I know a lot of it was the restructuring you did last quarter. But maybe a little more color on what benefited you this quarter, and then just talk about the additional restructuring you're talking about doing there in 4Q. And what's left to do to get that business kind of where you want it?

Christopher J. Kearney

Yes, sure. We're happy obviously with the progress that we've made and now seeing those efforts bear fruit. So if you go back to the first half of the year, in the first half, ClydeUnion was essentially breakeven, excluding the $5 million of charges that we recorded in Q1 on the legacy backlog. And we think now that the cost reductions that we've affected Union's cost basis, and that's evidenced by the sequential margins. And on the order front, we're very encouraged by the order intake and we believe we're building a higher-quality backlog than the one certainly that we acquired. So our focus on ClydeUnion this year has been on integrating it and improving the return profile. The 2013 restructuring actions that are specific to that business, as we've mentioned now several times, are expected to result in a headcount reduction of about 400 people and that one facility closure here in the U.S. So again, as evidenced by our Q3 performance, Shannon, I think the restructuring actions, the discipline on new order acceptance are clearly driving the margin improvement that we saw in Q3. And our goal going forward is to continue to improve their annual operating margins to 10% or better. And we're expecting them to be around 10% for the second half of the year. And based on end-market dynamics, particularly in oil and gas, we think there's great potential for revenue growth and an opportunity to leverage the actions that we've obviously taken so far. And again, as I mentioned, the orders we're taking this year have been higher quality and lower complexity, so we feel good about the business that's coming in, and particularly, the nice OE orders that we're seeing related to those North Sea projects that we talked about. So I think as we go forward, continue to be diligent in terms of improving the cost structure, getting the benefit of the restructuring that we've done and maintain a good balance of revenue mix between OE and aftermarket orders, which I think is critical to the success of the business going forward. But obviously pleased with the progress that we've made and reported on Q3, and I think more opportunity going forward.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay, great. And then just on the free cash flow, I mean, your guidance actually up a little bit on free cash. I assume that though actually removes the cash from the businesses going away. So I mean, it was much stronger in the quarter and looks better for the year. Can you just go through a little bit more? I mean, you mentioned some working capital improvements. I mean, how much of this is unusual catch-up from the ClydeU issues? And how much of it is sort of sustainable free cash strength?

Jeremy W. Smeltser

Yes. I mean, I do think it's sustainable. I think last year was an anomaly for us. I expect us to get back into 100% conversion as the gold standard or better frankly with some of the noncash expense that we have. I think if you look at the guidance change, we did remove cash flow from the discontinued businesses, which was about $15 million. Our capital spending in the budget came down a bit, you'll notice, in the reconciliation slides, which is just a couple of discrete projects moving to the right. But the working capital performance, particularly in Q3, was strong across the businesses, and we expect that to continue into Q4.

Operator

Your next question comes from Nigel Coe.

Nigel Coe - Morgan Stanley, Research Division

Yes. I might have missed it, but can you just lay out which businesses you discontinued? And yes, they seemed like pretty good margin operations, so I'm just wondering what drove these to be kind of at the forefront of your non-Flow asset disposals.

Christopher J. Kearney

Well, obviously, we can't speak to the specific businesses while it is in process. And we'll obviously and clearly talk about it in more detail as those transactions complete. And as I said in my comments, Nigel, we expect that to happen certainly within the next 12 months. But what I can say generally is it's a logical continuation of our focus on building the company around the Flow businesses. And as in the past, I think we've been opportunistic and successful in terms of finding opportunities to divest those businesses that are noncore to that strategy. And as we've said all along, we think the businesses in that Industrial segment are all great businesses and are successful in the various niche markets that they serve. And what we're doing there is consistent with everything we've done in the past. And as those transactions get completed, we'll talk about them in more detail.

Nigel Coe - Morgan Stanley, Research Division

Okay. And Chris, you mentioned the proceeds, the full processes to release debt and also to buy back more stocks. So it sounds like there's a bias towards returning capital to shareholders rather than acquisitions. And I'm wondering about, as you go through this portfolio rationalization, does that bias remain?

Christopher J. Kearney

Well, I think clearly that's what our focus is on the short term. And I think there is -- there's clearly a need, an opportunity for us to mitigate the dilution from the sale of these assets. And we can do that through a combination of debt reduction and share repurchases. But in the short term, that's clearly where our focus is with respect to capital allocation.

Nigel Coe - Morgan Stanley, Research Division

And then Jeremy, on the 4Q guidance, the share count of 46 million, that's about 1 million higher than the 3Q share count. I'm just wondering why that is.

Jeremy W. Smeltser

I think that's actually just the dilutive impact of shares coming in year-over-year, Nigel. But I can give you a more specific answer after I look into it.

Operator

Our next question from the line of John Baliotti.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Chris, it's nice to see continuing trends in power transformers, and obviously fare collection's helping. I was wondering, could you talk about the trends, kind of what the mix looked like in terms of the transformers, maybe large, medium and kind of where you sit in terms of your utilization of the facilities?

Christopher J. Kearney

Sure. What I would tell you, John, is that we are still largely a medium power transformer provider. And we had a plan, as you know, to ramp up our large power facility. And what we've said was that in 2014, 2015, we expect that facility to hit stride with respect to the capacity that we had targeted in that facility when we made the capital investment. And what I would tell you, John, is that we're right on track for doing that. I think there's been really great focus in the transformer business, frankly led by Dave Kowalski and his team to really focus on improving operational performance, being more efficient, being better from a complete engineering standpoint. So I think that we've seen a more elongated recovery in this cycle than we have in past cycles, and we talked about that a lot. But with the focus that we have internally on improving those operations and with the volume that's flowing through the factory in both medium and large power, with the focus in the right place where we've had it, even at prices obviously below where prices were in the last peak, we think we can get better performance out of that business, and hopefully, better performance over a longer, sustained period of time. Medium to long term, we still like the dynamics of that business in that market a lot because we think the demand is there by virtue of the aged infrastructure and the need to continue to replace that. But right now, we're focused on being more competitive and more profitable as we get that volume through the factory. So still mostly largely medium power, but in large, ramping up right on schedule with where we expect it to be.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

So that bodes well long term because if you're not obviously, and there's no reason to expect you to be fully utilizing the facilities and pricing is probably still somewhat early in its traditional ramp, given the progression already, that's a good sign that after this quarter.

Christopher J. Kearney

Yes, we think so. We absolutely think so. And we think we'll continue to improve this year. There's opportunity out there. It's a competitive market. But as I indicated and Jeremy as well, we're seeing pricing stable. We're seeing volume remain steady. And in that environment, we think we can do better and we think the business can do better and we think we can be very competitive but still see better margins as we are seeing out of the business.

Operator

Our next question comes from the line of Jeff Sprague.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just back to the divestitures. I'm just a little confused on your posture. If you didn't want to disadvantage yourself in the sale process, I would think you'd just kind of sit on these and not put them into discounts [ph] until you've got something. The bankers and employees are going to know what assets are for sale, so I'm not sure why you won't share that with us at this point.

Christopher J. Kearney

Yes. Well, there's a competitive process around those assets, Jeff. And there's obviously a judgment to be made as those processes begin and where we see indications with respect to our determining them to be noncontinued -- or discontinued businesses going forward. And so that will play out over time. It's just not in our best interest to be talking about that or about those businesses specifically while that process is going on. But it will unfold over time and become clear.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Right. So it's not as if you just decided you want to sell them and we're starting today. There's been a process that's been going on at least through the quarter, which...

Christopher J. Kearney

There's been a process that's been ongoing. And we're clearly in a position where we believe it's the right thing to do to discontinue them.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Right, got it. And just on share repurchase, you do have some additional flexibility, and it sounds like you want to replace some of this dilution with share repurchase. What is your posture on maybe getting a little running start, if you will, and getting in some of the divestiture proceeds to kind of mitigate the dilutive impact?

Christopher J. Kearney

Right. Well, we've got $55 million remaining from our prior commitment, which we expect to continue and to execute here in the short term. And then with respect to the cash that we project to be available to us from our continuing operations, and in addition, the cash of these asset sales, we will have additional -- in a better position to know what those net proceeds are, we'll be in a better position to determine what additional share repurchases we would want to do.

Jeremy W. Smeltser

Yes. I think we're in stage one of our planning process, Jeff, for next year. And as that continues and we see how the cash flow develops, that will be happening at the same time as our strongest cash flow quarter here in Q4 is happening. So we will look at potentially accelerating potentially doing additional. And as is always the case, if we raise that target, we will make a public announcement so that everybody is aware at the same time.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Great. And then just finally for me, Jeremy, you laid out in the slides some of the carryover tailwinds on the actions into 2014. And pension is not one of them. Maybe there's not a tailwind per se on your funding actions, but can you give us any color on what other tailwinds you possibly expect because of asset performance or changes in discount rate? Is there anything here that we should be aware of into 2014?

Jeremy W. Smeltser

Yes. I mean, what I would say is the more traditional metrics that you'd be looking at to look for pension tailwind really don't apply now at this point now that we are funded to the level that we are. So the contribution we made earlier this year got us to 100% funded or a little bit better now frankly on an accounting basis. And with that, what we will do is be more conservative on the asset side and potentially look to, over time, move some of those liabilities off the books. And so the expense that you see in 2013 frankly represents our service cost on the pension side. And I think it should remain stable as we go forward. If we expect that to change significantly, we'll come out. But I wouldn't be looking for additional lower pension expense year-over-year in 2014.

Operator

Your next question comes from the line of Julian Mitchell.

Julian Mitchell - Crédit Suisse AG, Research Division

Yes. I just wanted to focus on the Flow Tech margins because, I guess, all the EBIT growth year-on-year seemed to be at Clyde. So the margins within Flow, excluding Clyde's, are sort of flattish and SG&A was up a decent amount year-on-year. So I just wondered what -- if you could talk about the margin trends x Clyde there.

Jeremy W. Smeltser

Yes. I think where we're still seeing margins below where we would expect them to be is in the systems business. We had a lower volume level in Q3, as we mentioned, globally in food and beverage systems. So that's the key driver. I think the North American operations continue to operate at a steady, very high level. We've started seeing some level of improvement in the EMEA operations. But APAC in food and beverage systems are where we're not seeing an increase in margins at this point. So that's probably the key variable that you're missing.

Julian Mitchell - Crédit Suisse AG, Research Division

Got it. And then just looking at the backlog at Flow, a lot of talk around sort of systems wins and orders in food and beverage and so forth. How do you think that's affecting the margins looking out? Or is the sense that even within the systems, you're also seeing kind of better margins in your backlog now?

Christopher J. Kearney

Yes. Well, part of what's going on in the systems business, Julian, is analogous to the focus we've taken on the front end of the business in ClydeUnion in terms of the order selection process and terms and conditions around those contracts and obviously, ultimately pricing. As that business has matured, we've grown it pretty rapidly. As that business has matured, we have gotten better focus frankly around the sweet spots with respect to our technology and our abilities. And as we have been more disciplined about the process in that business, much like ClydeUnion, we have -- I think, we're getting a better quality of input in terms of the orders that we're taking.

Julian Mitchell - Crédit Suisse AG, Research Division

Great. And then lastly, on the Thermal business, it sounds like most of the extra restructuring is happening within Flow, but the Thermal top line continues to fall. And I guess, next year, you have another big drop in the South Africa business. Is this sort of -- is there any sort of shift on the Thermal cost reduction because you're seeing the backlog stable x South Africa? Or what's happening there?

Jeremy W. Smeltser

A couple of different things. And you really do have to think about South Africa separately from the rest of the business. So on South Africa, we have plans in place and have for a while [indiscernible] Africa as the project progresses and the volume ramps down. And so we'll continue to do that. We've had some of that this year. We'll likely budget for some of that again next year to be ahead of that revenue decline. On the rest of the world, we've obviously had a lot of change in the business already over the last 2 quarters. We continue to make some changes in the structure in Q3 and in Q4. And I would expect again that pending how the Q4 order profile comes across, there could be additional actions for next year. So I think we certainly have exhausted all opportunities. It will certainly be, in my mind, revenue-driven.

Operator

Our next question comes from the line of Nathan Jones. Ladies and gentlemen, my apologies. We seem to have an issue with the Q&A section of the call today. [Operator Instructions] Our first question now comes from Nathan Jones.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

First, I'd like to talk a little bit about capital allocation there. You're looking at the $0.42 of earnings from discontinued operations, which is roughly 10%. 10% dilution there, 10% share repurchase would imply 4 million, 4.5 million shares. Is that kind of the right way to think about how you're thinking about offsetting the dilution from discontinued ops?

Jeremy W. Smeltser

I wouldn't, Nathan. I'd really think that it'll be -- that decision, in particular, will be based on the proceeds from those asset sales on a net basis. And also as I mentioned, starting with remaining at least leverage-neutral, so there'll be some debt reduction there. So just based on the proceeds, it's actually likely that these actions will be somewhat dilutive to EPS on a net basis on an annual basis. But that is not the primary focus we have right now. We're certainly more focused strategically on moving towards the Flow side of the business.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Fair enough. I wonder if you could give some more color on kind of the changes that you've had in the operational alignment, 3 new end-market focus groups within Flow, a President at global manufacturing, a Chief Commercial Officer. Can you talk about kind of what their roles are and how you expect that to improve operations, improve the bottom line, improve the [indiscernible] line?

Christopher J. Kearney

Sure, I'd be happy to, Nathan. So if you think about the growth of the Flow segment and how outsized it has become relative to the rest of the company, there has been sort of a natural growth progression along the 3 verticals, right? So power and energy, food and beverage and Industrial. And when you look at those 3 end-market platforms within Flow, they are of relatively equal size with great opportunity to grow. As we have grown the Flow business over the past 10 years, and we have grown it through acquisition and natural organic growth, we had developed a regional structure for that business that we felt like wasn't an efficient way to directly connect with our customers and frankly coordinate our operations around the globe. And so what seemed more natural for us was to organize these 3 businesses globally with the customer and the end market in mind. And then with Ross Skelton overlaying the entire company now as the Chief Commercial Officer, he can help coordinate strategies and customer activity across those 3 verticals. And likewise, David Kowalski, I think, can take a global and more universal view towards the manufacturing operations around the world, and instead of compartmentalizing decisions about how we achieve efficiency in those operations, do it on a more global basis. And so we thought that we were at a point in our evolution around Flow where it made sense do that. And we clearly had developed the leadership talent to be able to do that. And as I mentioned in my comments, in my opening comments today, that was a natural succession plan that we had behind Don's retirement. And so the folks that we've got in all those jobs are tried, true, developed. The end-market leaders have all had great global experience. And Dave is a terrific manufacturing guy, and I think will drive a lot of continued improvement in a more even way across the business. And likewise, I think what Ross will help us get to is avoiding the sort of silo effect that can typically happen, and I believe actually did happen in some of the old segment structure approach that we had.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just one more, if I can get it on Clyde. You talked about delayed revenue recognition at Clyde and in transformers. And I think you specifically said that transformers was customer-driven delays, but you didn't say what it was at Clyde. Are they also customer-driven delays? Or is there -- there's been some execution issues on some discrete projects or anything that's delaying that revenue recognition?

Jeremy W. Smeltser

I think it's a combination, Nathan, of those 2 items. And I would say that on the execution side, it's really about timeliness versus additional cost. So we're not terribly concerned about those projects and we expect them to come out and be shipped over the coming couple of quarters.

Operator

Your next question comes from the line of Scott Davis.

Scott R. Davis - Barclays Capital, Research Division

Couple [ph] nitpicky questions here, and then more of a big picture. But have you commented at all on the tax base of the assets that you put in discontinued ops? I mean, are we talking about major tax leakage here? Or has this stuff largely already been written down? I mean, not written down, but the sell price probably equates somewhere around value.

Jeremy W. Smeltser

Yes. I mean, we haven't talked specifically about book or tax basis in the assets, Scott, and we won't until we close. But it's fair to say that on the Industrial side of the company that we have some fairly low basis out there. And also, as you think about the tax rate, the North America -- Industrial segments, primarily North America, and so those businesses typically have a higher tax rate as well.

Scott R. Davis - Barclays Capital, Research Division

Okay. And that's helpful. And then when you think -- and this is for you, Chris. I mean, when you think about the last several quarters, you more aggressively said moving more towards a pure-play flow company. What do you think is the right timing for us to think about when will SPX be a pure-play flow company? I mean, if I had to make an observation, I'd say it seems like it's taking a little longer than many of us would have thought to sell some noncore assets here in what seems to be a fairly liquid M&A environment. So what is the timing that you think makes the most sense for us to think about you moving towards that? And I guess, another kind of obvious question is what does your largest shareholder want you to do? I mean, we know you have a fairly involved large shareholder, and so they may have a view of their own, too. So maybe you can help us understand that.

Christopher J. Kearney

Yes. Well, first of all, Scott, I mean, we've made, I think, great strides during the time certainly that I've been in this job in terms of moving the company largely towards becoming a flow company so that now it represents more than half the company's total revenue and more than 60% of the company's earnings. We don't have a timetable. We tried to be opportunistic, as we have found opportunities both on the acquisition side and opportunities on the divestiture side. And I think if you look at the track record with respect to divestitures, I think the prices that we've been able to get for those noncore assets and the return for our investors, I think, has actually been quite good. But I think we've been pretty disciplined about that process. I don't disagree that the environment for selling assets is good and witnessed by the fact that we've got assets in play right now. And we've stated a commitment to continue that effort around building a pure-play flow business. And with respect to shareholder reaction, I think the shareholder reaction to the strategy across the board from the top on down has been good. I think when you see the earnings development of our Flow business over the last 7 or 8 years, I believe it validates the strategy. And when we look at the growth opportunity for those 3 vertical platforms around the world, we're absolutely committed and convinced that, that is the place to be. And in the short term, we think there's an opportunity to really get better improvement -- or excuse me, to get better performance out of those businesses. And I think over the last 2 quarters, you've seen the result of our commitment to get there. So I can't tell you a timeframe, but what I can tell you is that we're committed to the strategy and we'll be consistent with that strategy going forward.

Scott R. Davis - Barclays Capital, Research Division

Okay, that's fair. And then last, when you think about Thermal, once South Africa rolls off, is there a risk that you're going to have to take a goodwill write-down to reflect maybe the new realities of that business?

Jeremy W. Smeltser

I'm not sure I follow the question, Scott, as it relates to South Africa.

Scott R. Davis - Barclays Capital, Research Division

Well, I mean, is there a potential impairment in asset base, I should say, if you -- once those revenues roll off and there's not a big enough backlog to back-fill, I mean, I would assume that you're going to have some excess equipment or plant equipment sitting around that you might have to get rid of.

Jeremy W. Smeltser

Yes. I mean, based on the current environment, I don't see that as a significant risk. I mean, if things change dramatically from where we expect them to be, it's something we would have to look at. But I don't see that as a major risk. This is obviously a project we have had in our backlog for a long time. We've been planning for it. The assets have been discrete. Some of our customers actually have funded some of the investment that we've had to make. And those projects have been profitable and recovered what we've invested many times over. So we feel pretty comfortable.

Ryan Taylor

This is Ryan. We're actually at our time limit for the call, a little bit past actually, so we're going to have to cut it off here. I apologize to those that are still in the queue. But I'll be available throughout the day to answer any follow-up questions that might be necessary. We appreciate everybody's time, and thanks for listening.

Operator

Thank you for joining today's conference. This concludes the presentation. And you may now disconnect, and have a good day.

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