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SPX Corporation (NYSE:SPW)

January 18, 2012 8:00 am ET

Executives

Jeremy W. Smeltser - Chief Financial Officer of Flow Technology and Vice President of Flow Technology

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

Patrick J. O'Leary - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Unknown Analyst

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

John G. Inch - BofA Merrill Lynch, Research Division

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

Deane M. Dray - Citigroup Inc, Research Division

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Christopher J. Kearney

So good morning everyone. Thanks for joining us this morning for our annual investor presentation. Before we begin, let me point out the cautionary language regarding forward-looking statements. Unless specifically noted otherwise, the 2011 estimates in this presentation are the same estimates that we presented on November 2. They are presented for comparison purposes and are not intended to update or confirm earlier estimates. We plan to present the actual results for 2011 on February 16. The appendix we've provided has reconciliations for all non-GAAP financial measures referenced here today.

So here is the agenda for this morning -- somewhere. I promise you we have it. There it is. There's the agenda for this morning. Patrick O'Leary, our current CFO; and Jeremy Smeltser, our future CFO will be presenting along with me today. As we announced last week, Patrick plans to retire this summer. Patrick has played a major role in our executive leadership team for more than 15 years. It's hard to believe, Patrick. We have tremendous respect for Patrick and his accomplishments. You've been a key architect and an invaluable partner to me in developing and executing the transformation of our company. In addition, he has disciplined approach to financial management and capital allocation, ensured financial strength for the company throughout his tenure. And his personal commitment to developing leaders has created a strong, diverse global finance organization at SPX. His passion, integrity and strength of character will leave a lasting impression on the company. So Patrick, thank you.

Jeremy Smeltser, who many of you know, will be transitioning into the CFO role over the next 6 months. Jeremy has been with SPX for 10 years, that's also hard to believe, and is currently the CFO of our Flow Technology segment.

Scott Sproule, in the back of the room -- Scott, raise your hand -- is also with us today. Scott is currently our VP Finance and will be taking over for Jeremy as the CFO of our Flow segment.

And as always, the constant Ryan Taylor is our Director of Investor Relations and is here with us today as well.

So I will begin this morning with a review of the strategic development of our company. For those of you less familiar with SPX, it's important to understand the significant transformation we've achieved over the past several years. Patrick and I have been part of the senior leadership team since 1997. Our strategy at that time was to diversify the company into higher growth markets and expand our international exposure.

We accomplished this by executing a number of acquisitions while also divesting legacy automotive and other non-core businesses. When I became CEO in 2004, we narrowed the focus of our long-term strategy to 3 core markets. We experienced strong growth as a result of this strategy in the years leading up to the recession. In 2009 and in 2010, we prudently managed our business, focusing primarily on operational improvements, strategic acquisitions and maintaining liquidity.

A key focus of our long-term strategy has been expanding our Flow Technology segment. This is highlighted by APV and ClydeUnion, both defining acquisitions for our Flow segment and for the company. Today, we believe the earnings potential for the company is as healthy as it has ever been, due in large part to the strategic actions we have taken, as well as our continuous improvement effort.

Over the past year, we've made significant progress in advancing our long-term strategy in each of our core businesses. The acquisition of ClydeUnion expands our position in global power and energy markets, increases our presence in emerging regions and greatly enhances our pump technologies. It also creates another global platform within our Flow segment.

We continue to have very good success expanding our food and beverage business. We estimate that our food and beverage revenue grew 27% last year, reflecting the benefits of our acquisition strategy and localization efforts.

In our power infrastructure businesses, we completed the construction phase of our large power transformer plant expansion and have begun production in the new facility. In addition, we recently formed a joint venture with Shanghai Electric to enhance the competitive position in emerging markets for some of our thermal products. We'll discuss this joint venture in more detail later this morning.

In our Vehicle Service Solutions business, we acquired Teradyne Diagnostics business in 2011. This acquisition has already had a positive impact on our results. And as we do just about every year, we introduced several new vehicle service products that we expect to provide incremental revenue streams for this business over the next few years.

Looking at our business on a pro forma basis, including ClydeUnion, our 2011 estimated revenue was about $6 billion and concentrated in 3 areas: our Vehicle Service Solutions business accounted for 15% of total revenue; 37% of our revenue was from sales into infrastructure markets; and Flow Technology, which is the foundation of the company, represented 42% or $2.5 billion of our total revenue.

We now have 3 distinct platforms within Flow Technology that have scale and global capabilities. Our Flow Technology support critical needs of modern societies with a concentration in food and beverage, power and energy and industrial markets. The growth rate in these markets has been higher in emerging regions of the world, driven by new infrastructure investment and the expanding middle class.

In the mature markets, we expect growth to be influenced largely by the significant need to upgrade or replace aged infrastructure. Government regulation and growing concern about protecting the environment play an important role in determining how these needs are met.

The primary focus of our long-term strategy is to continue expanding our Flow business, and we believe there are many attractive acquisition and organic opportunities to do so. In addition, we expect to make investment -- to continue to make investments in our infrastructure and vehicle service businesses just as we have done in the past years.

Underlying our end market strategy, we're also driving key initiatives to improve our business and expand customer relevance. We continue to emphasize expanding our geographic presence with a focus on localizing capabilities to support regional demand.

Innovation is also a key initiative. Through our Innovation Council, we're driving a cultural shift at SPX to cultivate new ideas and technologies that meet new market opportunities.

With respect to continuous improvement, we remain focused on lean principles in all aspects of our organization. As part of our lean journey, we're migrating common support functions to regional shared service centers. We have also significantly reduced the number of internal operating systems over the past several years, and we're promoting the SPX brand to increase awareness and leverage our global scale. This initiative has been very successful in our Flow business, particularly in Asia Pacific.

Our focus on geographic expansion has been one of the key growth drivers of our business. As we globalize, we broadened our business and improved our potential for future growth. Today, we have operations in more than 35 countries, with over 50% of our revenue coming from outside North America. This expanded global presence has been an important factor in our revenue development. We estimate that last year, 29% of our revenue was from sales into emerging markets compared with only -- to only 14% in 2005. Our emerging market revenue has nearly tripled since 2005, and we estimate it exceeded $1.7 billion last year. Including ClydeUnion, more than half of our emerging revenues is related to Flow Technology.

Going forward, we believe many of our businesses will continue to experience growth opportunities from investment in emerging markets.

So now let's take a look at the key development of one of our core business -- core businesses, excuse me, beginning with Flow Technology.

We initially entered into the flow market with niche product lines we acquired as part of the General Signal and United Dominion transactions. Subsequent bolt-on acquisitions broadened the product offerings and provided a foundation for us to develop Flow under Don Canterna's leadership.

In 2005, we chose Flow as a strategic focus for long-term growth. Since then, approximately 85% of our total acquisition capital has been invested in Flow assets. APV was acquired in 2007 and created a global platform in the food and beverage market that we have since enhanced with several acquisitions.

ClydeUnion creates a global platform for Flow in power and energy and marks the next step in our strategic development of this segment. And we see additional opportunities to expand Flow's industrial markets as well.

This slide illustrates the significant progress we've made in developing our Flow segment. We have expanded Flow's scale, customer relevance and global capabilities, which has had a positive impact on how we're perceived in the marketplace. We are strategically positioned as a leading global supplier of highly engineered flow components and process solutions.

We have a well-branded end market profile -- excuse me, a well-balanced end market profile with close to $1 billion of annual revenue in each of these markets. And we think there are still plenty of attractive opportunities to continue to expand our Flow business in the future, both from an organic and an acquisition perspective.

Looking specifically at our opportunities in the global food and beverage market, we estimate that more than 2/3 of new market capacity is related to demand for dairy-related products. Dairy prices are increasing as there is not enough supply to meet the escalating demand in developing markets. This is driving investment by our customers in new manufacturing capacity, and we're seeing this in our order trend.

The emerging middle class is demanding more dairy products, particularly in China where there is an increased focus on product safety. We expect to continue to see this higher level of demand in emerging markets.

One of the fastest-growing dairy markets is dry infant formula. On a global basis, this market is expected to grow over 6% annually, with a higher growth rate in emerging markets. Population growth is driving demand for more baby foods, and there is a growing opportunity for us to serve this market, particularly with our drying and evaporative technologies.

The acquisitions of Gerstenberg, Anhydro and Murdoch have broadened our system capabilities into powders, fats and oils and increased our ability to take advantage of these market opportunities. We have the capabilities to provide a full-line dairy system that can process raw milk into multiple dairy products.

With our increased process engineering capabilities, our order pipeline for large-scale products has expanded both in number and in scope of opportunities. And we've seen strong growth in this business as our customers increase their capital spending on new facilities.

Over the past 18 months, we've received several orders that utilize a combination of our technologies. In the fourth quarter alone, we received 4 such orders, totaling more than $130 million. These new orders are a testament to our expertise in dairy processing systems, as well as our ability to deliver highly engineered custom solutions in a market that is increasingly technology-driven.

We'll now move on to the power infrastructure business. 10 years ago, we had very little exposure and essentially no presence outside of North America. Through several strategic acquisitions, we have significantly broadened our presence in global power markets. The Marley and Balcke-Durr acquisitions have given us a global offering of diverse cooling solutions. We've complemented this offering with large-scale heat exchangers and pollution-control systems in EMEA and in the United States.

In North America, we're a leading provider of medium power transformers and have expanded our transformer facility in Wisconsin to increase our capacity to supply large power transformers to this market. We estimate our power and energy businesses generated more than $13 billion -- excuse me, I wish, $1.3 billion of revenue last year with more than 50% of the sales coming from outside North America.

Our primary technologies include power transformers, cooling systems, large-scale stationary and rotating heat exchangers and pollution abatement solutions. We supply various forms of these technologies into many types of traditional and alternative power generation facilities. We're well positioned to benefit from new or retrofit investments in traditional natural gas and coal, as well as nuclear, solar and geothermal.

Looking now at some market data for the expected investment in power generation. In its 2011 World Energy Outlook, IEA estimates that $4.5 trillion will be spent globally on power generation infrastructure during the current decade. The majority of this investment is expected to occur in China, Western Europe, North America and India. The IEA predicts this level of investment is necessary just to meet the rising electricity demand and replace age capacity. We believe several factors have restrained near-term power investments, including the uncertain economic situation in Europe and the slow growth expectations in the United States.

The post-Fukushima impact on nuclear power and the EPA rulings in the United States have also had an impact on investment decisions. The lack of growth in our traditional markets has been evident in our order trends over the past 18 months. However, we believe the long-term outlook for power investments looks promising, particularly for natural gas and solar power in developed markets; and for coal, natural gas and nuclear power in emerging markets, specifically Asia-Pacific and the Middle East.

A more immediate opportunity for growth is in the power transformer business as evidenced by the increased demand that we've seen in the United States' transmission and distribution market. Over the past year, we've seen increased demand and modestly better pricing in power transformer orders. Because of this, we're targeting double-digit growth in our transformer revenue in 2012.

This demand is driven primarily by the need for utilities to replace aged infrastructure in the grid. We estimate the average age of transformers in the United States is over 35 years. This is a critical age as risk for failure increases significantly after 25 years of service, and the average engineering life of a transformer is between 30 and 40 years.

The life of a transformer can vary considerably, depending on the conditions such as severe weather and the level of maintenance performed over the lifetime of the transformer. The IEA estimates that more than 10% of the U.S. transmission and distribution infrastructure will be 40 years old by 2015. And by 2025, nearly 40% of the grid will reach the end of its engineering life.

About 2/3 of the investment in the U.S. T&D market expected to address replacement needs, a majority of which is expected to be in distribution. This data supports our view that the U.S. power and transformer market presents an attractive opportunity for our business in the medium to long term.

Looking at our third key business, Vehicle Service Solutions. Over the past several years, we have transitioned this business from a North American supplier of specialty service tools to a global business supporting nearly every aspect of service readiness. We've made significant strategic investments to increase our capabilities and expand our global customer base. We now have established relationships with nearly all the major OEMs worldwide.

In doing so, we've increased our international revenue, offsetting to some extent the decline we've seen in the U.S. market from dealership consolidations. We've substantially reduced our U.S. cost structure by consolidating our footprint to reflect changes in the automotive landscape.

The acquisition of Teradyne's Diagnostics business has had a positive impact on our business already as it has enhanced our global capabilities and expanded our relationship with certain key OEMs. Last year, our estimated revenue in this business exceeded $900 million, with about 40% coming from sales outside North America. And we're very encouraged by many positive factors that are driving growth in the global vehicle service industry as we enter 2012.

To gain perspective on our market opportunities, it's important to have a good understanding of our key product offerings, which are illustrated on this chart. We are a leading global supplier of diagnostic equipment, repair tools and technical information. Vehicle OEMs and their dealerships make up the majority of our customer base in this market. As new models are being designed, we work in close collaboration with the engineering groups of individual OEMs to help determine the best way to service the vehicle. We then engineer and manufacture the necessary diagnostics and tools to optimize repair efficiency for dealer technicians.

In the aftermarket, we provide high-level diagnostic tools used to make repairs that are common across many different vehicle makes and models. The primary revenue drivers for our business are new vehicle introductions, increasing electronic content on vehicles and changing regulations. We are also benefiting from dealer expansion in China.

OEMs today are competing for global market share like never before. Innovation aimed at developing the next generation of vehicles is at the core of this competition. Heightened regulations around emissions, safety and fuel economy are key drivers for new car development. Global auto makers are poised to deliver new platforms into the marketplace as they compete for market share.

Over the next few years, many of the key OEMs are expected to launch several new models. As an example, the top 3 Japanese OEMs are each expected to replace more than 50% of their sales volume with new vehicle launches in 2012 and 2013. Over the next 4 years, the cumulative industry replacement rate is expected to be over 100%. That's an average replacement rate of 25% per year, an increase from prior years.

As OEMs compete for share on a global basis, they want to work with a global partner to assist their dealers in service readiness. We work in close collaboration with OEMs to engineer custom diagnostic and service tools that dealers use in their service shops as soon as they start selling a new model.

The globalization of our business has enabled us to become key partners to OEMs as a supplier of diagnostic tools and service equipment. And we continue to invest in this business to improve our position.

So to conclude my opening remarks, we feel very good about the transformation of our company and the significant progress we've made to develop our core businesses. We believe our earnings potential is as strong today as it's ever been, and we plan to pursue strategic actions to add value to our company and for the benefit of our shareholders. We have leading market positions in key markets that we believe will provide growth opportunities over the next several years.

And so now I'll turn it over to Patrick to take you through our growth expectations for 2012.

Patrick J. O'Leary

Thanks, Chris. Good morning everyone. Before we discuss 2012, I'll provide a brief overview of our reporting segments and an update on Q4 2011.

We report these financial results of our business in 4 segments. For those of you new to SPX, these next 2 charts are a good reference point to understand the makeup of our segments by market.

The business developments that Chris described have relevance to each of our segments. Flow is our largest segment at 42% of last year's pro forma revenue. The power infrastructure businesses are reported in our Thermal and Industrial segments, and Service Solutions generates the lion's share of the revenue in Test and Measurement.

Looking at Q4 2011, our existing EPS guidance range for the fourth quarter is $1.75 to $1.95 per share. Based on our review of the preliminary results for the quarter, we expect to report EPS towards the bottom end of the guidance range, which represents 55% growth year-over-year. We also expect to report EPS on an adjusted basis to exclude costs associated with the ClydeUnion acquisition, as well as certain gains and losses not previously anticipated in the guidance. These items are currently under review and as such, we are not in a position today to accurately predict the amount or timing of these gains and losses.

As a separate matter today, we are disclosing 2 specific operational items that we expect to impact Q4 segment income. Currency rate fluctuations during the quarter reduced our segment income by about $4 million, a $0.06 headwind to our guidance. Of greater impact, we now expect to record a charge of approximately $0.20 a share in our Thermal segment, related to certain projects in South Africa that are now in a loss position. These projects are for labor related to the fabrication of boiler pressure parts for the Medupi and Kusile power stations. The aggregate value of these projects is approximately $90 million and represents less than 10% of SPX's total scope on the Medupi and Kusile power stations.

The loss relates to a significant overrun in labor hours versus the initial contract estimates and incremental cost due to project delays. We expect the Q4 charge will sufficiently account for the losses over the balance of these impacted projects.

The other projects related to South Africa remain profitable and are tracking at or above our target margin. We plan to report Q4 2011 financial results on February 16, and we will provide more details at that time.

So turning now to the closing backlog. We ended 2011 with a $3.1 billion backlog, which reflects strong revenue conversion in Q4, as well as the addition of ClydeUnion's backlog, which was $500 million at the end of the year. Sequentially, the total backlog increased 14% as the acquired backlog more than offset a 3% organic decline and a 2% decline from currency.

From an aging perspective, we expect about 75% or $2.4 billion of the backlog to be converted to revenue this year. This represents approximately 39% of our 2012 revenue target, which is very comparable to last year. As a reminder, we estimate that 2/3 of our total revenue is generated from short-cycle orders.

So looking now at our 2012 expectations. We are targeting consolidated revenue to grow between 9% and 14%. This includes 11% to 12% acquisition growth and 1% to 5% organic growth, offset partially by a 3% currency headwind.

We are targeting revenue growth in 3 of our reporting segments, driven by double-digit growth in Flow and Industrial Products. As expected, we are targeting a decline in Thermal's revenue between 9% and 14% in 2012. This is consistent with our comments on the Q3 earnings call and includes an organic decline of 5% to 10% and a currency decline of approximately 4%.

The margins at Thermal are expected to decline to about 8.5%. We are targeting margin improvement in our Test and Measurement and Industrial segments. And in Flow, we are targeting margins between 11.5% and 12%, reflecting about 100 points of margin dilution from the ClydeUnion acquisition.

So on a consolidated basis, we're targeting over $6 billion of revenue, with segment income margins between 10.4% and 10.9%. Our initial EPS guidance range is $4.70 to $5.10 per share. This represents about a 13% increase from the bottom of our 2011 guidance range.

Free cash flow is expected to be between $240 million and $280 million, approximately 100% conversion of net income. The key EPS drivers are illustrated in the bridge here from the low end of our 2011 estimate to this year's guidance range. Due primarily to a weaker euro, currency rates are a $0.23 headwind to our 2012 guidance. As you know, about 18% of our revenue is converted from the euro.

Excluding the ClydeUnion acquisition, we are targeting $0.25 to $0.65 of improvement from segment income driven by Flow, the transformer business and Test and Measurement. This growth is expected to more than offset the decline in Thermal segment income.

EPS accretion on ClydeUnion is expected to be approximately $0.30, and Jeremy will provide more details on this estimate. Other items net to about a $0.05 EPS benefit.

I'll walk you through the other items on this slide, which shows our complete detailed midpoint EPS model for 2012. Corporate expense is targeted at about $100 million. This is slightly lower than last year. This is offset by pension expense, which is modestly higher year-over-year at $39 million.

Stock compensation expense is $43 million. That's about the same as last year. And as a reminder, more than 50% of our stock compensation expense is recognized in the first quarter. We have modeled restructuring charges flat year-over-year at $25 million.

Looking at equity earnings, we're targeting a 30% increase to $39 million. That's a $0.13 benefit to EPS. We expect strong revenue growth and improved operational performance from our ETS joint venture to be the primary driver of this growth.

Interest expense is expected to be about $119 million. This reflects the 2011 refinancing and the debt associated with the ClydeUnion acquisition. We are using a 28% tax rate. This is lower than last year due to a number of factors, but in large part, to increased earnings in lower tax jurisdictions.

We are estimating 52 million shares outstanding in 2012, and this brings us to our 2012 EPS midpoint guidance at $4.90 per share.

We expect Q1 to be particularly challenging this year due to the decline in segment income in our Thermal segment. In addition, we expect start-up costs associated with our transformer facility to reduce Q1 profitability.

We also recorded a $6 million or $0.08 gain in our Industrial segment in Q1 last year, related to an insurance recovery. Due to these factors, we expect declines in the segment income at Thermal and Industrial to offset expected improvement across the other segments.

Looking at our consolidated targets for Q1, we expect revenue growth of about 15% year-over-year, driven primarily by acquisitions. We're targeting single-digit organic growth, and currency is expected to be about a 3% headwind in the quarter. We are projecting $100 million to $107 million of segment income, with margins of approximately 7.5%.

Our Q1 EPS guidance range is $0.20 to $0.35 per share, and this assumes a neutral to slightly accretive impact from ClydeUnion. Currency changes and large project timing could obviously have an impact on our actual results.

Q1 is traditionally our weakest quarter. We have historically had stronger earnings in the second half of the year due primarily to the seasonality of our businesses, and we expect our quarterly earnings in 2012 to follow this historical pattern.

I'd like to remind you that our EPS calculations are very sensitive because of the low share count. $1 million of net income is about $0.02 EPS. Our EPS guidance is the result of a bottoms up forecast, and it represents our best estimate based on what we know at this time.

Certain factors could occur in 2012 that may impact our EPS and free cash flow guidance. And on this chart, we have listed what we believe to be the most likely potential impacts and uncertainties at this time. We obviously intend to update our guidance, as we have in the past, as we report our quarterly earnings throughout the year.

Jeremy Smeltser has worked directly for me during the past 10 years in various senior finance roles, including his current role as Chief Financial Officer of our largest segment, Flow Technology. He is extremely capable and has demonstrated a high level of financial skills, strong ethics and proven leadership. He also has an intimate knowledge of our businesses and the industries we serve. He's highly respected, and I am confident he will be a strong CFO for SPX going forward.

I feel extremely privileged to have been a member of this team for the past 15 years, and I am totally committed to ensuring a seamless transition of my responsibilities to Jeremy. And at this time, I'll pass the baton for the capital allocation piece of the presentation.

Jeremy W. Smeltser

Thanks, Patrick. Good morning everyone. A lot of familiar faces in the room. It's great to be back with you.

I am obviously fortunate to have worked closely with Patrick and to have him as my mentor. I look forward to the opportunity and challenge of living up to the high standard of excellence that he has established here at SPX.

I'll begin my comments this morning with a closer look at our free cash flow expectations. We estimate 2011 adjusted free cash flow will be between $220 million and $260 million. This excludes all acquisition-related free cash flow and the purchase of ClydeUnion's Glasgow facility for approximately $40 million. The purchase of this facility occurred in December, concurrent with our acquisition of the business.

For 2012, we are targeting free cash flow of $240 million to $280 million or approximately 100% conversion of net income, as Patrick mentioned. This assumes capital expenditures of approximately $130 million, including around $20 million for ClydeUnion.

Our free cash flow expectations also include about $25 million of restructuring and global pension contributions of approximately $55 million. We anticipate our free cash flow to follow our historical seasonal pattern of being weighted to the second half the year.

This is a good time to review our debt structure as we've had some change over the past year. In Q2 of last year, we entered into a new 5-year syndicated credit facility to refinance our revolver and bonding facilities that were due to mature in 2012. And in Q4, we drew down a $500 million Term Loan A and a $300 million Term Loan X to finance the acquisition of ClydeUnion. The current all-in interest rate on our revolver in term loans is less than 3% per year, and approximately 57% of our debt is at a fixed rate.

Our next significant debt repayment obligation is in 2013 when the Term Loan X reaches maturity, and this is consistent with our intent to delever after completing the ClydeUnion deal. Given the balanced debt maturities over the next 6 years and our low cost of debt, we believe that we are in a very stable position.

We've had a consistent and disciplined approach to capital allocation, and we expect that to continue. Maintaining a strong balance sheet and financial integrity with regard to capital allocation is a priority. Looking at our methodology, we use gross debt to EBITDA as key metric in determining how we allocate capital.

We have expanded the top end of our target leverage range from 2x to 2.5x. We believe this change better reflects our capital allocation decision-making process, particularly in the current economic environment with an expectation of increasing EBITDA and a continued low-cost debt.

It also reflects our intent to effectively use available foreign cash balances for strategic purposes, which is an inherently more tax-efficient use of capital. When gross leverage is above 2.5x, we plan to use available capital for debt repayment, and we'll consider non-leveraging strategic acquisitions using cash on hand. When gross leverage is below 2.5x, we will evaluate available capital for use on strategic acquisitions and share repurchases, as we have in the past.

As of the end of 2011, we estimate gross and net leverage ratios were approximately 3x and 2.3x, respectively.

The covenants of our credit facility are calculated based on net leverage. And with our anticipated 2011 net leverage of less than 2.5x, we are comfortably within our post-acquisition net leverage covenant of 3.5x, which will return to our normal leverage covenant of 3.25x after 4 quarters. Through a combination of debt repayment and increasing EBITDA, we expect 2012 year-end gross leverage to approach the target range.

We're in a strong cash position at the end of 2011, with an estimated $537 million of cash on hand. That figure is after the $40 million purchase of the ClydeUnion facility in Glasgow.

From a liquidity perspective, we expect almost $1.2 billion to be available at the end of 2012. We pay a dividend of $1 per share, which is about a $52 million annual cash commitment. With our committed bank financing and our expected 2012 liquidity, our financial position and flexibility remains strong, enabling us to continue to execute on future strategic opportunities.

Now we will take you through an analysis of each segment with more detail on the key drivers for 2012. I'll present Flow Technology, and then Patrick will present our other segments. Let's start with a review of the ClydeUnion acquisition.

ClydeUnion is based in the United Kingdom with approximately 2,000 employees worldwide. Its primary products include centrifugal and reciprocating pumps. It also provides aftermarket repair services on a global basis.

ClydeUnion has 25 aftermarket service centers worldwide and 8 manufacturing facilities, including local manufacturing in Brazil and India. Its sales are well balanced across the world, with excellent penetration in emerging regions.

About 50% of its revenue is from sales into emerging markets, and the business has a good market presence in China, India and the Middle East. This acquisition expands our position in global power and energy markets, increases our presence in emerging regions and greatly enhances our pump technologies.

From an end-market perspective, 52% of ClydeUnion's sales are into the oil and gas market and 39% into power generation. Also has niche positions in water, marine and mining. About 60% of its revenue is longer-cycle sales of pumps, driven primarily by customers' capital investment decisions. Lead times on our original equipment sales generally range from 6 to 24 months. Growing the installed base of OE creates an attractive aftermarket opportunity as there is typically about a 25-year service period on original equipment that starts within the first year after installation.

Aftermarket service and spare parts sales represent about 40% of ClydeUnion's revenue base. This is shorter-cycle business that is less cyclical than the OE sales, and lead times made in aftermarket range from 2 weeks to 3 months.

We completed the acquisition about 1 month ago and are very pleased to welcome ClydeUnion's employees into the SPX family. The final purchase price was GBP 500 million. As I mentioned, we financed the initial payment with the 2 new term loans that have a current annual interest rate of below 3%.

The purchase agreement includes a potential earn out of up to GBP 250 million based on ClydeUnion's 2012 EBITDA, as defined in the purchase agreement. The EBITDA threshold for the earn out is GBP 47.5 million. We will pay an additional 10x 2012 EBITDA earned in excess of GBP 47.5 million.

As we've mentioned previously, ClydeUnion's performance in the second half of 2011 was not at the level expected when we initially announced the transaction in August. There are a number of factors that impacted their actual results, including significant currency headwinds, political unrest in North Africa and the Middle East impacting the oil and gas portion of the business in its seasonally important fourth quarter, and a number of customer and supply chain delays impacting backlog conversion.

As you've seen, we have adjusted the upfront purchase price consistent with the actual performance of the business. Based on the final purchase agreement, we are now assuming $20 million of intangible amortization in our accretion calculation. Including this amortization, we are targeting net operating profit of $45 million to $50 million in 2012.

The interest expense and debt service fees associated with financing the transaction are estimated to be about $25 million in 2012. Based on these assumptions and a 28% tax rate, we are expecting approximately $0.30 of EPS accretion in 2012. And on a cash EPS basis, we expect to be about 2x as accretive at approximately $0.60.

These figures do not reflect the expected purchase accounting adjustments related to inventory and backlog step-up charges. We will recognize these charges throughout the year, and they will be included in our earnings results. However, for guidance purposes, we intend to treat them as an adjustment to our EPS and segment income figures.

Although ClydeUnion's 2011 results were not as originally expected, the business continued to grow in 2011 with revenues up over 7% year-over-year and a strong backlog entering 2012. ClydeUnion's year-end backlog was just over $500 million, with between 80% and 90% of that backlog expected to be shipped in 2012.

Our market expectations for the business in 2012 include a relatively strong oil and gas market on a global basis and continued weakness in the OE power generation market. Overall, the frontlog in the businesses is strong, and those factors along with improved operating execution on the shippable backlog as we get into the business and begin integration, lead us to an approximate 35% revenue growth target in 2012. From a margin perspective, we are targeting just over a 10% operating profit before the incremental intangible amortization.

While ClydeUnion has had a strong focus on developing the front end of its business, and by that I mean a focus on innovation, engineering and expanding its revenue stream, we believe we can have a strong impact on elevating its operational performance, which has room for improvement.

Our teams have been on the ground at ClydeUnion since December 26, and we expect to make significant progress on integration this year. Specifically, we see opportunities to leverage the global supply chain, reduce cycle times and expand the localization initiative to our global footprint. Over time, we expect to achieve about $20 million in synergies, which are not included in our 2012 estimates.

Looking at our total Flow Technology business today, including ClydeUnion, we are a leading global supplier of process equipment with about $2.5 billion of annual revenue. Our core strengths include product breadth, global capabilities and the ability to create custom engineered solutions for diverse flow processes.

We offer a variety of highly engineered components that make up the core of the process technology involved in a modular or fully integrated system. We have grown our global capabilities significantly and now have a very well-balanced geographic profile that is further enhanced by ClydeUnion.

We serve customers that require highly engineered flow products, and we are well positioned across 3 broad end markets. We believe these markets offer attractive, long-term organic growth prospects, as well as numerous attractive acquisition possibilities. Our game plan is to continue to build on what we've accomplished and further develop global scale and customer relevance in these markets.

We sell to a very diverse customer base that includes many very well-known brand names. Our global footprint enables us to support our customers as they expand in emerging markets. As we localize content and capabilities around the world, we are also gaining local customers in these regions.

Our Flow Technology offering has evolved in recent years. We have transformed our business from a component-based regional supplier to a global provider of full-line systems with aftermarket service capabilities. Today, about 30% of Flow's annual sales are for fully integrated or modular skid systems, including ClydeUnion's OE pump skids.

About 70% of our total sales are for component and aftermarket services. This is a significant shift from 5 years ago when we were about 90% components and 10% modular systems.

Now let's take a look at our Flow segment by end market, beginning with food and beverage. We estimate total food and beverage sales were about $940 million last year. About 50% of those sales related to dairy products, where we have seen particularly strong demand. Our historical customers include large multinational food and beverage manufacturers.

Under our regional management structure, we have increased our relationships with many local customers, particularly in Asia Pacific. Well-known dairy products made using our equipment include Danone's Activia, Yoplait yogurt and Kerrygold butter. We also participate in many other food and beverage categories.

As Chris mentioned, we've seen significant benefits from our acquisition strategy in food and beverage, particularly as it relates to our system offerings. This diagram of a butter process system exemplifies how many of our acquired technologies work together. In this illustration, you can see the Bran & Luebbe dosing equipment and Waukesha Cherry-Burrell positive displacement pumps. These technologies were acquired with United Dominion back in 2001.

You also see several APV components, including plate heat exchangers and mixing equipment. However, the core technologies involved in the butter process are contributed by Gerstenberg Schröder, one of our more recent acquisitions.

And here is another process example that shows the combination of APV and Gerstenberg technologies. This is a low-fat margarine process, and the key equipment in this process is the crystallization and pasteurization technologies supplied by Gerstenberg.

Integrating technologies has increased our relevance with customers over the past year. Revenue in our systems business increased an estimated 60% last year. Although the contribution margin on systems revenue is lower than the segment's average gross margin, by expanding our installed base of systems, we are ultimately growing our aftermarket opportunities.

We are seeing very robust demand in dairy markets, particularly in Asia Pacific. We also have opportunities to expand our systems business in other niche markets.

In Q4, we completed the acquisition of e&e, a leading global supplier of dry powder processing serving the global coffee and extract markets. Much like our previous acquisitions, we expect to leverage e&e's technologies within our broader systems offerings and global capabilities.

Our increased capabilities have given us the opportunity to participate in more complex projects that have a higher contract value than we have historically participated in.

This chart illustrates some of the significant orders we have received for dairy systems supporting our customers' expanding capacity needs around the world. We had a record order quarter in Q4, featuring 4 contracts that in aggregate totaled over $130 million in value. Three of these awards came late in the year, and we just announced them yesterday.

One of the new orders is for a large food and dairy manufacturer in Europe and features multiple technologies from SPX that will enable the customer to meet rising demand for its popular dairy products and its strict sustainability goals.

Another order is for a milk powder processing facility, capable of operating 24 hours a day, 7 days a week and featuring an innovative design that helps curb emissions. The third order, for a customer in Asia, calls for a fully integrated system, complete with mixing, infusion, evaporation and drying for processing of consumer nutrition products. We are very encouraged by our development in food and beverage and expect to see growth continue in this part of the business in 2012.

And we believe we have a similar revenue synergy opportunity in Flows Power and Energy business. Combining ClydeUnion with our legacy products has improved our competitive position in this space, and we are particularly interested in the opportunity for growth in the oil and gas markets. Including ClydeUnion, we estimate that Flows Power and Energy business had just over $800 million of sales last year. Over 50% of this revenue was concentrated in the oil and gas market. We now serve this market globally, with particular strength in the U.S. and the Middle East and good presence in other emerging markets. We also sell several flow technologies that are used in various forms of power generation.

Now let's take a closer look at ClydeUnion's products, starting with oil and gas. ClydeUnion has a strong reputation for supplying reliable pumps that are critical throughout the oil and gas process and are used in some of the world's most demanding applications. In upstream processes, ClydeUnion provides a variety of centrifugal and reciprocating pumps that are used in both offshore and onshore oil extraction and production, as well as the transportation and storage of oil. Its pumps are also used in very challenging subsea and downhole extraction environments.

In the downstream process, ClydeUnion provides an extensive product offering used in oil refineries, gas production plants and offshore oil platforms and pipelines. ClydeUnion's pumps are also used throughout most types of power generation, and it has a large installed base of critical process pumps in both nuclear and conventional power. Its portfolio includes centrifugal and reciprocating pumps which are highly engineered and configured to order. Key applications include boiler feed, cooling water, heat recovery and general process pumps.

Our legacy power and energy products include a variety of specialty valves and closures focused on niche applications in oil and gas processing and power generation. As you may recall, we also designed and are supplying the critical nuclear squib valve for Westinghouse's AP1000 nuclear plant, which has recently been approved by the NRC. Our products are very complementary to ClydeUnion's pump offerings, and we think there will be good revenue synergies when we combine these products offerings for our customers. For example, in upstream oil processing on offshore platforms, ClydeUnion supplies seawater injection pumps that work in conjunction with our legacy chemical injection pumps and filtration products. In midstream processing in the oil pipeline, ClydeUnion supplies pipeline booster pumps that work in combination with our legacy pipeline valves and pipeline filtration products.

Moving on to Flows Industrial Process business. Last year, we recorded about $740 million of revenue from sales into diverse industrial process equipment markets. This is up about 17% year-over-year. We have niche positions in mining of minerals, chemical processing and marine and shipbuilding markets. Our industrial business is well-balanced globally, and we have experienced very good organic growth in most regions. We see long-term potential to develop these niche positions through acquisitions as we have in the food and beverage and power and energy markets. We have market-leading products focused on mixing and blending, heat exchange and dehydration. Many of our industrial technologies help enhance plant productivity and optimize efficiency. Demand for our products in these markets typically follows GDP and industrial utilization trends. In addition, we monitor metals pricing, marine and shipbuilding trends and manufacturing PMI to forecast expectations.

Looking at the total segment backlog, at the end of 2011, Flows backlog was about $1.4 billion, up 81% from last year. This includes the addition of ClydeUnion's backlog. Organically, the backlog increased about 16%, driven largely by the development in our food and beverage orders. Broadly speaking, Flows order volume remained at a high level during the fourth quarter across most geographies and end markets. Global demand in the food and beverage market remained strong as did demand in oil and gas markets. One area where we did see signs of slowing was in selected short cycle component orders in Europe. We have factored this into our 2012 expectations and continue to closely monitor European markets as we move through Q1.

Heading into 2012, we have more visibility through revenue than we had at the same time last year. About 44% of Flows estimated 2012 revenue was in the year-end backlog as compared to 33% at the same time last year. In 2012, we are targeting 33% to 38% revenue growth for Flow, with revenue increasing to over $2.7 billion. The majority of this growth is expected to be from the 2011 acquisitions. Organically, we are targeting mid- to high single-digit growth driven by continued expansion in emerging markets, particularly in our food and beverage and industrial businesses. Currency is expected to be a 4% headwind.

Looking at the margins, we are targeting margins to be between 11.5% and 12%. This includes about 100 points of dilution for ClydeUnion. As I mentioned, our 2012 targets do not include inventory and backlog-related purchase accounting adjustments, which we intend to call out when we report our quarterly results. We expect the margins of the legacy business to remain essentially flat to 2011 as the forecasted growth in our food and beverages business is likely to offset margin improvements driven by volume leverage. We have modestly reduced our long-term margin targets for Flow to between 13% and 15% to reflect the positive developments in our systems business and the addition of ClydeUnion.

That wraps up my comments on Flow. At this time, I'll turn the presentation back over to Patrick.

Patrick J. O'Leary

Thanks, Jeremy. As you can see, there's lots of positive momentum in the Flow segment. I'll continue on first with our Thermal segment. Thermal is expected to report sales of about $1.6 billion in 2011 with -- in 2012 rather, with 49% of the revenue concentrated in North America, 20% in the Middle East and Africa and 19% in Europe. Power Generation is the primary end market for this segment, representing about 2/3 of thermal sales. We are a global provider of thermal heat and transfer technologies and pollution control systems. The nature of this business is long cycle and project oriented. It is worth noting that about 1/3 of this segment's sales relate to short cycle products that are used in HVAC and industrial markets. The majority of this revenue is generated in the U.S. We have seen steady growth in this part of thermal during 2011.

As we've indicated previously, part of our strategy in this segment is to develop strategic relationships with Asian EPC firms. We recently entered into a joint venture with Shanghai Electric. We are the minority partner in the joint venture with 45% ownership. We view Shanghai Electric as an excellent strategic partner. It is one of the leading Chinese EPC firms and is well established as a key participant in China's power market. We believe this partnership enhances our position in China and increases our opportunities for growth in other markets as Shanghai Electric expands internationally. We are licensing our dry cooling and MSR technologies to the joint venture for which we will receive a royalty. SPX will continue to manufacture dry cooling components in our China factories and will be the exclusive supplier of these products to the JV. The joint venture has exclusivity to projects in China and will also participate in certain emerging regions, including India. Our portion of the JV earnings will be recorded on the equity earnings line in our income statement. We have modeled about $1 million of equity earnings for this JV in the 2012 guidance. We expect to record a gain on this transaction in either Q4 2011 or the first quarter of this year, but this gain is not included in our EPS guidance.

Thermals ending Q4 backlog was down 35% year-over-year, and book-to-bill for 2011 came in at about 0.7x. About 10% of the backlog decline was due to changes in currency rates. The organic backlog decline reflects our execution on the 2 large projects in South Africa and delayed recovery in our late cycle power markets. Orders in Q4 were just over $300 million, consistent with the order trend that we saw through the first 3 quarters of 2011. Certain bids for dry cooling orders that we participated in were either delayed into 2012 or we did not find the pricing and terms and conditions acceptable. We continue to maintain discipline with regard to project selection as pricing and terms for large long cycle products continue to be very competitive. In the U.S. and Europe, our traditional markets, order activity remains depressed. About 60% of the ending backlog is expected to be converted to revenue this year. That's lower than previous years.

Looking at our financial targets for 2012, we're targeting revenue this year to be between $1.4 billion and $1.5 billion, down 9% to 14% from our 2011 target. Organic revenue is expected to decline between 5% and 10%, and currency is about a 4% headwind. Segment margins are targeted to between 8.2% and 8.7%, slightly lower than the 2011 margin target, which has been updated to reflect the Q4 contract charge that I mentioned earlier. We expect the power generation market to remain challenging in 2012. Based on the competitive dynamics in emerging regions and the expectations for a slow recovery of our long cycle business, we have lowered the long-term margin targets with Thermal to be between 8% and 10%. We will continue to assess the cost structure of this segment with respect to the overall market environment. We will also continue to evaluate further appropriate restructuring and strategic actions within this segment.

Moving onto the Industrial segment. This segment comprises niche businesses that are among the leaders in their respective markets and have attractive profitability and cash flow characteristics. 77% of the revenue in this segment is domestic. And the most meaningful end market is the U.S. transmission and distribution power market, which accounted for approximately 34% of last year's revenue. We are a leading U.S. supplier of power transformers. This cyclical business is the primary driver of the financial results of this segment. In addition to power transformers, we sell hydraulic technologies that are used to construct infrastructures such as bridges, rail systems and wind farms. We are a leading provider of high-tech communication technologies for various applications, and we also have niche businesses that serve the aerospace and semiconductor industries.

We have a leading position and a long history in the U.S. medium power transformer market. Our customers are primarily public and private utilities. They recognize our transformers for quality, reliability and technical support. The transformers that we manufacture are uniquely designed for the requirements of each customer and substation. On average, we use a design less than 2x. Historically, volume and price have been highly correlated in this market due in large part to capacity constraints. In the previous upturn after several quarters of volume increases, pricing began to steadily improve. The trends we've experienced over the past year are very similar to our experience in 2004 and 2005, and the volumes have been very strong and pricing has moderately improved. We believe the positive trends we've experienced in this market over the past year are solid indicators that the next investment cycle is in fact underway. It is important to note, however, that full recovery in this business has historically been gradual and taken about 2 to 3 years.

To capitalize on this next investment cycle, we have expanded our transformer facility in Wisconsin to increase our ability to produce larger power units for the North American power grid. The construction is complete, and we have begun production. You can see pictures of the expansion on this chart. On the commercial side, we have now received orders to supply 19 large power transformers, and we expect to begin shipping units in the first half of this year. We plan to gradually ramp up production to ensure that we meet the high quality standards our customers expect. In light of this, our plan assumes that we do not fully absorb the startup cost of this facility in year one. And we expect a net dilutive impact to segment income of around $10 million this year. That equates to about $0.14 per share. We expect modest EPS accretion next year as we increase production, and we are targeting $0.40 of annual EPS contribution when we reach our full capacity.

The ending backlog for the Industrial segment was $477 million. That's up 33% over the prior year and down about 3% from Q3. The transformer backlog increased 42% year-over-year due to the increased demand for medium power transformers, as well as the new large power orders. Looking specifically at the U.S. transformer market, we have visibility to transformer shipments into the third quarter. Our lead times remain between 8 and 12 months, and we continue to be selective in terms of order acceptance. With lead times at this level and continued strength in the order volume, we are participating in more direct negotiations and less in the open market bid process. As such, we have seen a gradual but moderate increase in the average contribution margin for orders taken over the past few quarters. As a result of our decision to be selective, our order volume for medium power transformers was down somewhat sequentially in Q4.

Compared to this time last year, our medium power transformer backlog is healthier with a much higher volume and somewhat better contribution margin as we head into 2012. We do believe that pricing will continue to improve gradually during this year. In 2012, we are targeting 10% to 15% revenue growth for the industrial segment. This is all organic. This growth is expected to be driven primarily by the trends in our power transformer business that I just described. We are targeting segment income margins to increase about 100 points or better to about 10%. We have expanded the long-term margin target for this segment to be between 15% and 20% to reflect the cyclical nature of the transformer business and our expansion into the large power market.

Now switching gears to our non-power related segment, Test and Measurement. Our estimated 2011 revenues for this segment are about $1.1 billion, just under 60% of the revenue is from sales into the Americas, with just over 30% into the EMEA region and slightly more than 10% in Asia Pacific. We report our vehicle service business, a service solutions in this segment. It comprises 85% of the revenue for Test and Measurement. We also report 2 niche businesses in this segment, both with very attractive profitability.

Service solutions is a global supplier of diagnostic equipment, repair tools and technical information. Breaking down Service Solutions revenue by customer, you can see that sales to OEMs and their dealers account for close to 2/3 of the business. And a little more than 1/3 of the revenue is from sales into the aftermarket. We have relationships with virtually all major global OEMs. In recent years, we've had very good success expanding our relationships with key Asian OEMs. Although we offer a fully integrated approach, our experience with each OEM varies as they tend to take a different approach to service readiness. We offer flexibility and global capabilities, and that gives us a competitive advantage in the marketplace. And in the aftermarket, we sell our products through retailers, national accounts and mobile distributors.

As the electronic content on vehicles has increased, our business model has evolved to a greater mix of diagnostic electronics and information services. We estimate over 50% of last year's sales were for diagnostics and services. The level of research and development needed to keep pace with the electronic complexity of vehicles today is now a key competitive advantage for SPX. Europe has already enacted a law effective this year, which requires newly designed vehicles for sale in Europe to use a new refrigerant. Ultimately, we expect this to become mandatory on new vehicles in the U.S.A. as well, as the EPA is very focused on reducing vehicle emissions. As part of this transition, every service location is going to need a new AC testing unit to service this refrigerant. We expect it to take up to 3 years for most service garages to transition to this new refrigerant. We believe we're very well positioned to participate in this transition and expect to generate over $200 million in sales of this product over that period.

So looking at our expectations for 2012. We are targeting low to mid-single-digit organic revenue growth. We expect this to be driven primarily by increased new vehicle launches, aftermarket growth and our own new product launches. Currency is expected to be a 3% headwind. Segment margins are expected to increase to about 11% this year, primarily due to leverage on the organic growth. This is within the low end of our long-term target range.

And with that, I'll turn the presentation back to Chris for some closing remarks.

Christopher J. Kearney

Thanks, Patrick. So to summarize then, we're targeting double-digit earnings growth per share and revenue growth this year. Broadly speaking, our 2012 guidance reflects our views of continued above average growth in emerging markets, a slow growth United States economy and a cautious outlook on the economic environment in Europe. We continue to focus on our operating initiative to drive ongoing improvement in our businesses. Overall, we think our growth estimates for 2012 are appropriate given our end market views, the level of execution involved with the integration of ClydeUnion and the startup of our transformer plant. We're excited about the strategic investments that we've made, and we think they'll yield meaningful growth opportunities for the company. We made considerable progress in advancing our long-term strategy in 2011. Flow Technology is clearly the foundation of the company, and we continue to evaluate strategic actions to further improve our business and to create value for shareholders.

So that concludes our prepared remarks. And at this time, we'll open the meeting for questions, and please wait until either Moe [ph] or Jennifer comes around with a microphone -- excuse me, Ginger. Right here, Ginger, please.

Question-and-Answer Session

Unknown Analyst

Cliff Ransom [ph]. Two questions, please. In your planning process, what is your expectation on EPA action with respect to coal plants and what impact it will have? And then as a second question, please. Can you talk to us please about how you apply lean to your acquisition integration process?

Christopher J. Kearney

Sure. In response to the first question, Cliff, in the short term, we don't see it having significant impact, and we really haven't modeled it. Long term, increased regulation on all forms of power production, we think, works for our company because that's what we do. We can help reduce emissions and create better efficiencies in power plants. And so the focus on increased regulation of those facilities, I think, is certainly a good thing for what we do at SPX. But short term, I don't think it's going to be terribly impactful. We haven't modeled it.

And with respect to your question on lean, lean is fundamental to our culture at SPX. And it's fundamental to what we do, not only for our manufacturing operations, but to all of our support organizations as well. And so when we buy companies, for instance, like ClydeUnion, one of the opportunities we think we have there, and we've talked about this consistently, is to improve efficiencies in their manufacturing facilities by quickly applying our lean approach to those facilities. And we think that's where some of the synergies lie, and the opportunities for improvement in production lie. Jeremy, would you add anything to that with respect to ClydeUnion?

Jeremy W. Smeltser

Just perhaps, obviously, that it's beyond manufacturing. It goes all the way up into the due diligence process from an organizational and planning perspective on integration. And then also, it's very important first 90 days of an acquisition integration. One of the most important things is alleviating bottlenecks and focusing the teams on the short list of things that are most impactful to kick off and get momentum into the integration. And that's certainly the planning that is going on right now.

Christopher J. Kearney

Jeff, there's a mic right here.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Chris, 2 questions. Interesting on the list of possible negatives to earnings that dispositions would be on the top of list with all the macro and project uncertainty that's out there. Could you maybe address what you're thinking there to some degree? And I guess somewhat related to that, even after doing this very large deal, your liquidity is something like 33% of your market cap. So maybe also some thoughts on what the bolt-on pipeline looks like?

Christopher J. Kearney

Yes, we think the bolt-on pipeline looks good across our businesses and particularly in Flows, as we mentioned today, Jeff. The thing that drove us to grow that business hasn't really changed. If you look at the 3 major platforms within the Flow segment, Food and Beverage Processing, Oil and

Gas, Power and Broad Industrial, we looked at those end markets back in 2005 as they applied to Flow. And we looked at what we did in that segment and realized that what we provide is high-end, high-value engineered solutions and processes into all 3 of those broadly defined end markets. And so we thought there was an opportunity to continue to grow that business in an industry that we viewed as rather niche, and I think we validated that strategy. We think the opportunities exist going forward in all 3 of those broadly defined end markets to continue to grow that business. And with respect to the rest of the portfolio, what we said all along is that we continue to evaluate all parts of our business on a regular basis. That's part of our strategic process, and we like the businesses we have. We think the broad market drivers that apply to Flow apply likewise to the other 2 parts of our business. And so for that reason, we think they're attractive and they have attractive futures whether they're in our hands or in someone else's. But what we've done consistently over time is that we, I think, have fairly evaluated each of our businesses and made decisions about what the best strategic outcome and future is for those businesses and if it's somewhere else, it's somewhere else. And if it is, then we reapply the proceeds and grow the remaining parts of the business. And with respect to liquidity, we are in good shape and we do have -- even after ClydeUnion, we have a nice opportunity to continue to invest and grow our businesses.

Jeremy W. Smeltser

Our disposition has always been on that list, by the way.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

So it's not alphabetical or anything, and it's kind of interesting that it's up at...And then just one point of clarification, just on the Q4 being at the lower end, that includes the South African charge and currency but is excluding some other items that you're cleaning up.

Christopher J. Kearney

Exactly. Is Shannon around here?

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

Yes, Chris, so on these labor costs overruns on the Thermal side, you guys have had a pretty good string of years here without any real callout kind of issues. Can you just give a little more color on that and your comfort that it's contained?

Christopher J. Kearney

Yes, sure. So first of all, it represents a pretty small percentage, as we said in the prepared remarks today, of the total South African contract, so less than 10%. And what's different about it, Shannon, is that all other aspects of that contract in South America are things that we typically do and have done, and that is we designed and engineered the systems and then we build them. And then we put them in place, either directly or through third parties. What's different about this aspect of the contract is that we're providing just labor to do another aspect of that contract that we typically have not done in the past. And I think the issue that arose has to do with properly or not properly scoping the project upfront and identifying staffing needs. And I think, frankly, that's just a communication issue that occurred. It's a lessons learned opportunity for us but clearly, to your point, something that's unusual for us. And it's unusual because it's a very different process than we typically do.

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

And then just one on Flow. You have this issue of the success you're having in the systems business kind of capping the core margin improvement in Flow and you're determined that creating this longer-term aftermarket opportunity. I mean, when do you think that crossover point is when you can start to sort of expand the core flow margins?

Christopher J. Kearney

Yes, it's hard to predict because a couple of things are going to happen, Shannon. Not only are we creating aftermarket component opportunities, but as we continue to produce these pretty sophisticated systems, we leverage the engineering investment. So if you think of these dairy processing systems, in many cases, these aren't things that are designed from scratch from the first time. There are designs that are replicated in other applications. And so when we do that, we can leverage the engineer expense. So my expectation is that over time, in addition to creating the aftermarket component opportunity, you're also improving profitability on those same systems as you replicate them over time. And so you have some efficiencies that are gained as a result of that experience. Jeremy, would you add anything to that?

Jeremy W. Smeltser

Yes. And I'd say, to follow up on the conversation we had in Copenhagen on this topic where we spent a lot of time is that the growth in that systems business has been quite large and quite quick. And I think directionally, we've achieved as we head into 2012 at around going back to the chart, around 30% of revenue, give or take. We've kind of achieved that new balance. And I doubt that we will see, pending any developments on the acquisition side, a significant further change beyond 2012 in that mix.

Christopher J. Kearney

Why don't we get Deane then we'll move to the other side of the room?

Deane M. Dray - Citigroup Inc, Research Division

I'd like to get some more color on the Shanghai Electric joint venture, and first, why now? You've been selling directly into China for a number of years. So what has changed competitively? What does Shanghai Electric bring you in terms of either technology or relationships and the clarification on the exclusivity into China?

Christopher J. Kearney

Sure, sure, Deane, good question. I've talked a lot, Deane, as you know about trying to change the equation in that business so that we could -- our intention has been to develop strong strategic relationships with key EPCs around the world so that we can change the bidding dynamic. What we can do now with Shanghai Electric that we couldn't do before is that when we partnered with them as a joint venture partner going into a project, we can go in with Shanghai Electric to a power plant opportunity, for instance, in China, and be part of offering of full front-end solution and help scope and design and frankly, price the package as we go in as opposed to being one of the many on the back end bidding for that same work after the scope of the project has already been identified. So we think it changes the dynamic. We think it also helps us sharpen our focus in terms of innovation by having a close relationship now with a major EPC, not only in Asia Pacific, but with the growing presence around the world that we can identify where the real opportunities are to innovate and create value for the company that way. So I think it will take time for that to develop. But I think the relationship is a good one, and I think the relationship that we've established with Shanghai Electric is perhaps a model for other key relationships. So that's really the theory behind it. In terms of the territory, it's focused primarily on China and broader Asia Pacific, India as well, because Shanghai Electric does have a significant presence in India. And for the most part, the rest of our business around the globe is not changed. But we would have an opportunity to participate with Shanghai Electric, the right to participate with Shanghai Electric in opportunities in other parts of the world, if we chose to do so.

Deane M. Dray - Citigroup Inc, Research Division

I might have missed this but the P&L impact on the joint venture, what's the top line impact as this now goes into equity line.

Patrick J. O'Leary

There was a modest decline in the backlog as a result of this transaction. And so what the gain that we will record here relates to is really the market value of what we're contributing. And so based on the 2011 performance in the dry cooling business in China, it's not significant. What would happen now is that, that business of all projects going forward and the projects we're working on would transfer into the JV. And as I mentioned in the opening remarks, we put $1 million into equity earnings on the model that you see there today.

Christopher J. Kearney

John has a question.

John G. Inch - BofA Merrill Lynch, Research Division

Jeremy, you called out ClydeUnion customer and supply chain delays. Could you just expand on that, maybe scope it out in terms of the financial impact? And what sort of gives you guys the confidence at least from our perspective as outsiders, you've been insiders that Clyde really hasn't been just kind of dressed up for sale just given the much slower growth trajectory you're realizing this year?

Jeremy W. Smeltser

Sure. First of all, I think as you look at the backlog, you can see that the level of volume that we expected for 2011 essentially sits in backlog when you combine that with where they actually ended up from a revenue perspective for the year. I think the customer and supply chain issues are 2 very different situations that we've lumped into the same explanation. On the supply chain side, the business has grown dramatically and they have been participating in more global projects than ever before. And they've had a number of difficulties in expanding their supply chain, including in their own project management, in their factories really to accommodate that growth. And so they had a number of internal shipping delays that have been something we have experienced in previous acquisitions, and I think we have a lot of experience in remedying those situations. On the customer side, the major delays are really around the nuclear side. And I think that's still a post-Fukushima issue in the market where, particularly in China, a number of those projects have been delayed and the customers have been delaying when those pump squibs are shipped and ultimately when they have to pay for them. So those are part of our revenue expectations for 2012.

John G. Inch - BofA Merrill Lynch, Research Division

And you think the nuclear does show [ph] in '12 as part of your expectations then?

Jeremy W. Smeltser

We do, and that's consistent with our internal experience on the squib valve projects on the AP1000 plant as well.

John G. Inch - BofA Merrill Lynch, Research Division

And then could you guys scope out your food and beverage business in China a little bit, perhaps on the dairy side? How big is it? And you hear all these headlines about tainted milk and other issues in China. I mean, really, how big could it be if you look out a few years? What are the sort of the barriers to the business? I mean, you're doing really well, but it clearly could be a big driver. What are your thoughts there?

Jeremy W. Smeltser

Yes, I'll start and maybe Chris can finish. But from my perspective, I think the population will drive the overall size of that market for us, population growth and continued expansion of the middle class. And so as we announced yesterday, one order in Asia Pacific, I mentioned in the prepared remarks that, that is around the dairy side. That market is very strong for us, and a big portion of that 60% revenue growth in systems in 2011 and the backlog growth that you saw on the flowchart is driven by that systems business. And more than half of that growth is in Asia Pacific, in China and New Zealand in particular. I expect we'll continue to see that in 2012 as both global and local food manufacturers catch up pace with that consumer demand. And I think from our perspective, we've been building the local content, both from an application engineering and actual system engineering perspective, to be able to meet that demand in the future. So I think it's got a long road ahead of it.

Christopher J. Kearney

Yes. And I would just add, John, that with respect to the health concerns, that's frankly one of the key drivers of the business in China. It's a recognition of a need for better regulation and better control in that industry. And of course, that's what has been driving our -- in large part, the growth of our business in China, the recognition of exactly the point that you just made.

John G. Inch - BofA Merrill Lynch, Research Division

[Question Inaudible]

Christopher J. Kearney

It's -- well, I can tell you this, that our penetration with respect to Western customers is quite significant because as you know, the way we got our toehold in that market was really following our big Western customers into that market, so you think of people like Kraft and Nestlé and Danone and PepsiCo and Coca-Cola and others. So we've gotten into that market by following our customers there and replicating the same systems they have in other parts of the world in developed markets. What's happened since then is that we've gained additional and significant penetration with respect to indigenous suppliers in that market who are now getting into production in a bigger way, but they're being driven by the same kind of standards and health concerns that brought their foreign competitors into the market. Is that fair, Jeremy? Okay.

Let's go to this side.

Unknown Analyst

One question for you but before that, a comment. This has been a terrific presentation in terms of both information and also very concise. And if more of them were like this, I think we would be a much happier lot so good job.

Christopher J. Kearney

We appreciate it. We did not even plant that comment. That was...

Unknown Analyst

Well, the question for you was on -- in the power side. It seems as though on the thermal front, there's an OE problem. There's an original equipment issue. On the transformers side, it seems to be more of an aftermarket business. Is there -- am I missing something here? Does the OE have an aftermarket capability? Is there a regional or a geographic issue with the thermal? I'm just trying to get sort of a handle on power overall and how you...

Christopher J. Kearney

Sure, sure, happy to do that. You're absolutely correct. With respect to transformers, it is essentially an aftermarket replacement business and to the extent of 80% to 85% of that businesses is aftermarket. And the dynamics that are driving growth in that market are clearly the aged infrastructure, both in transmission and in distribution. And so that has historically driven that market. And the other thing to make very clear is that the transformer market is a North American market for us, so it's not outside the United States. So it's more limited in terms of its geographic scope but significant in terms of the breadth of the opportunity just giving the age dynamic with equipment.

On the Thermal side, it's both. It's OE and it's replacement. What's really changed in that business over the last couple of years and what's still different going into 2012 is that the replacement dynamic has changed dramatically. So we're not seeing a number of retrofit projects in both U.S. and the United States driven by a number of factors, sluggish economy, slow growth, not seeing the kind of rising electricity demand that we had seen leading up to the recession and then, I think, just general concern among energy producers regarding future regulation and choice of power forms. And so that's created a bit of a pall on the OE part of that business in terms of new production. So that's had a significant effect in Europe and the United States. In the developing markets where new capacity is coming on and there are large build projects, the dynamic there is predictable as a result of what I've just described in Europe and the United States, and that is you have more suppliers chasing fewer projects now in emerging parts of the world, which has created a more competitive price dynamic. We view that as a temporary phenomenon because if you look at the IEA data that we cited today, the opportunities for long-term growth -- medium and long-term growth in that industry and as it affects our Thermal business, we think are still very promising. We think we're just at an unfortunate point in that cycle. And so what we've done is what we've done across our broader business during recessions, we're coming out of recessions and that is focusing on reshaping the business, looking for the kind of strategic alliances that we think will build the business for the future like we've done with Shanghai Electric. So hopefully, that addresses your question in terms of the difference between the 2.

Steve?

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

Just first a question on kind of strategic priorities. We look at this ClydeUnion deal and obviously a big deal, and the estimates have been revised down twice, even in core thermal for whatever reason, whether it's systems or components, the leverages, just not been that good. And the longer-term targets that we maybe had expected after APV of 16% look like they're not really going to be achievable at this stage of the game. You have $1 billion of debt maturity that you have to do something about over the next 2 years and then another $1 billion a year after that -- very senior respected CFO leaving the company. Why are we even talking about deals right now and bolt-ons? Why aren't we just kind of putting the gun down and just executing on what we have in front of us, which seems to be a decent long-term late cycle organic story? Is there something defensive -- did you have to do this Clyde deal? Are there deals that you have to do because of competitive pressures or are all of these by choice?

Christopher J. Kearney

First of all, Steve, what I would tell you is we've not for a second lost our discipline, the discipline that we've applied over the last 7 years. We've been very, very focused and faithful to our disciplined capital allocation process, and we'll continue to do that. With respect to ClydeUnion, we do expect that we will naturally delever from that and make significant progress on that as the year goes on. And I think, if you look at our projected leverage by the end of the year and cash availability and consider that over that period of time, there may be different forms and sizes of acquisitions that will continue to strategically move that business forward. I think there are things that we have to continue to think about, and I think there are things that we logically can, given our financial position. So we are committed to moving that business forward, and we're committed to supporting appropriate investment in our other platforms. I think we have the wherewithal to do that. I'd also tell you that with respect to Flow, if you look at some of the acquisitions that we've done over the past couple of years like Gerstenberg, Anhydro, Murdoch, those are not big dollar acquisitions but they paid off for us enormously because what we were able to do was put those technologies together and leverage huge opportunities. So if you look for instance at the dairy systems opportunities that we talked about this morning and the huge contracts we've gotten in the last quarter and in December, frankly, those would not been possible without putting those pieces of the puzzle together with respect to Gerstenberg, Anhydro and Murdoch on top of the APV acquisition. And they've really been key and very strategic and very well-bought assets that have made us a significant player in that business. And so I think we have to continue to look at all of our businesses that way. We have said, and we did say at the beginning when we acquired ClydeUnion, that we would be focused on debt reduction and moving back to our target range. We're committed to doing that, but we think we can do that in a fairly short term.

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And then just on the...

Christopher J. Kearney

Patrick, do you have...

Patrick J. O'Leary

Yes. I mean, I don't think margins should be the sole driver. I mean we were very niche-y in all 3 Flow markets, and customer relevance is important. And our customers, as you can see, are demanding more and more turnkey systems. And so our capability is important. And so if you look at APV, it has actually exceeded the acquisition targets that we set forth. And if you look at the core business, it's performing very well. Today's systems business is tomorrow's aftermarket. And as you know, we have margins above 20% in the U.S. components business. So it's a question of creating balance. But the driver of earnings per share is the absolute dollars we've generated, and the power market represents that same opportunity. And so we try to be very transparent about the mix of the margin. But margin dilution from acquisitions and/or margin dilution from an accounting convention around allocation of value to identified intangibles, you do have to look through that to what is the cash return on the cash investment that we're putting up. And we feel very good that our decision-making is actually around economics, and we try to be very transparent about the components of the market.

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

Right. Just -- but Clyde has been guided down. It seems like some of that is cash-related, not just all accounting.

Patrick J. O'Leary

And that's fair.

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

And then just 2 quick ones, just on the businesses. Thermal, when would you expect the Thermal book-to-bill to hit one, not necessarily because of an order pickup, but because of the revenue decline? And then in Transformer, what is the difference between your kind of first quarter or whatever you want to call it, first half margin? And then what do you expect your -- what's the embedded kind of exit rate in Transformer margin as you leave the year?

Jeremy W. Smeltser

I'll start perhaps on the Thermal side. The difficult part of the particular equation as far as book-to-bill would be the South African revenue stream kind of continuing off without -- I guess I would say that I would expect, excluding South Africa, we're about there at this point is the way I would see that...

Patrick J. O'Leary

I mean, we've got a very steady -- if you look at the decline in the backlog, the actual core business outside of South Africa has actually had remarkably steady orders for the 4 quarters of last year and so for the segment in the, say, $1.2 billion range. And included in this year's revenue execution in Thermal is about $200 million -- a little over $200 million of South Africa revenue. So the actual business itself is stable. The issues are as Chris described them, which is that the investment that will ultimately be necessary in the U.S. and Europe is not taking place partially for political reasons and partially for overall economic reasons. So I don't think you should blindly look at the backlog there. I really think you should look at the core business and the market drivers, and you shouldn't forget, as I try to point out, that a decent chunk of the Thermal segment is, in fact, not related to cooling towers in Asia.

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

[Question Inaudible]

Patrick J. O'Leary

And then the -- that $10 million of dilution on large power that I referred to really is somewhat skewed towards the first half and particularly the first quarter, so it kind of levels off. We will switch to accretion next year. If you look at our longer-term expectations for large power when the factory is running, it actually equates to about a 15% return on sales, which is below peak performance in the business. I think it's premature for us to give an exit margin on the medium power transformer.

Christopher J. Kearney

I think so as well though. It's probably fair to say, if you think about the timing -- well, going back to 2011 when we started talking about a building contribution margin in the backlog and the lead times in the business at 9 to 12 months that we would probably see a build during the year from Q1 to Q4 in the neighborhood of a couple of hundred basis points is the way I would think about it right now. Although the plant or the backlog for the plants still will be filled out here in the first half of the year for Q4. So some of that will be remaining -- remain to be seen by the market.

Do we have a question here?

Unknown Analyst

Just a question away from the power businesses. Just on the Test and Measurement organic. I think it looks like what you guys have represented 2012, 2013 replacement rates for vehicle is about pretty balanced. You just did 11 organic in Test and Measurement. Now you're seeing low single digits. Just want to tie up that concept, why the deceleration?

Christopher J. Kearney

Sure. I mean a couple of things I'd say. One is that Test and Measurement is our shortest cycle business, and it is somewhat seasonally skewed away from Q1. It is true that the market backdrop is excellent, but we're coming off a very high organic growth performance. And so I think, as you look at how that business is developing, it is on a curve to return to pre-recession levels. There are some very strong drivers. We talked about the AC, for example. The speed at which that is adopted by different OEMs and then ultimately, the aftermarket is difficult to predict. We did have some OEMs start the process going into this year. So I would say that for what we've experienced in the last 6 quarters, very strong organic growth that our guidance is appropriate for a very short cycle business.

Unknown Analyst

Understood. And then just on the comment on divestitures. I mean, just the way you guys have represented slides, it looks like the Industrial segment does have a little bit of the smaller businesses, 1s or 2s there. Would that be the area of most focus for divestitures going forward?

Christopher J. Kearney

Yes, I don't think it's fair to draw those conclusions. I think, first of all, what I would tell you is that over the time that I've been in this job, which is over the last 7 years, we have sold a number of businesses that we deemed to be non-core to the strategy. The businesses that we have left, the niche businesses that are in the Industrial segment are all good businesses, attractive margins, good free cash flow, solid niche positions in the market that they're in. So we are not in a panic to do anything with respect to those businesses. What I would tell you with respect to all the assets that we have and all the businesses is what I said in response to an earlier question, and that is that as we move our strategy forward and look at the logical consistent ways that we're going to continue to grow this company, if that leads to opportunities for us to divest assets and it's in the best interest of the shareholder and it's in the best interest of that business going forward, we've demonstrated our ability to do that in -- on a timely manner.

Unknown Analyst

And just the last question is on the 28% tax rate guidance. It's lower than the 31%, I think, you're going to do this year, lower than about 31%, 32% you have done. Just any comments will be helpful.

Patrick J. O'Leary

Sure. Well, one that you're probably aware that almost every developed country other than United States is lowering is corporate tax rate. And so as we have globalized the business, we've moved into lower tax jurisdictions, and that the organic growth in the emerging markets is also higher as a result of the dynamics that we've talked about today. We are now actually in a position where we can use foreign tax credits where we weren't before based on the way the company was developed in the U.S. leverage loan market. So the primary dynamic is, in fact, lower tax jurisdictions and our ability to get foreign tax credit against them. And that 28% is a sustainable long-term rate, and that's the rate you can feel comfortable modeling going forward.

Christopher J. Kearney

Did we miss anybody out there? Well, if there's nothing further, we want to thank you again for being here and look forward to seeing all of you during the course of the year. Thanks very much.

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