SPX Technologies, Inc.
Q4 2013 Earnings Call Transcript

Published: 12 Feb 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2013 SPX Corporation Earnings Results and 2014 Guidance Conference Call. My name is Tracy, and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I'd like to turn the call over to Mr. Ryan Taylor, Director of Investor Relations. Thank you. Please go ahead.

[Ryan Taylor:]

Thanks Tracy. Good morning, everyone. Thank you for joining us. With me on the call this morning are Chris Kearney, our Chairman, President and CEO of SPX; and Jeremy Smeltser, our Chief Financial Officer. Our earnings press release was issued this morning and can be found on our website at spx.com. This morning's call is being webcast with a slide presentation that can be accessed in the Investor Relations section of our website. The webcast will be available until February 19. I encourage you to follow along with the webcast as we reference detailed information on the slides. Unless otherwise noted the financial information presented today is on a continuing operation basis. Our 2014 earnings per share guidance is on an adjusted basis to exclude the gain on sale of our EGS joint venture interest. Early extinguishment of debt charges and non-service cost pension items. Additionally our 2014 free cash flow guidance is also on an adjusted basis to exclude payments associated with the gain on the sale of EGS. In the appendix we have provided reconciliations for all non-GAAP financial measures included in today’s presentation. Portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. And please also note the risk factors in our most recent SEC filings. And with that, I'll turn the call over to Chris.

[Chris Kearney:]

Thanks Ryan. Good morning everyone. Thanks for joining us this morning. Over the past year we have executed several initiatives aimed at improving operational performance, returning capital to shareholders and focusing our strategy around our flow end markets. I’m very pleased with the steady progress on these goals and believe we’re on position to deliver revenue growth and continued margin improvement this year. We finished 2013 with a strong fourth quarter performance highlighted by solid cash conversion, margin improvement and order growth. In Q4 we reported a $1.85 of earnings per share. We generated $236 million of free cash flow and finish the year with $692 million of cash on hand exceeding our expectations. Segment income margins expanded 70 points driven by improved operational performance at both our Flow and Industrial segments. On the order front book to bill was one time, a good result in our highest revenue quarter of the year. Q4 orders increased over the prior year period in all three segments including a record level of orders in our flow segment a second consecutive quarter was strong bookings for Flow. Taking a closer look at the end market trends in our flow segment, orders in the quarter were up 12% you as we experienced growth across each end market. In Food and Beverage increased demand for both component and systems drove the highest bookings quarter in our history for this end market. This included a contract value in excess of $50 million to design and install our food processing technologies into a new diary plant in France. This facility is being built to meet the rising demand for high quality infant formula in China. It's scheduled to be completed in 2015. In Power and Energy, ClydeUnion had another good bookings quarter in both it's OE and aftermarket businesses and we continue to experience strong demand for pipeline valves in North America. In Flow and Industrial businesses, Q4 orders increased sequentially and year-over-year highlighted by a $10 million mixer order in India. During the quarter we saw increased demand in chemical processing markets driven by low shale gas prices. In contrast demand in mining and heat exchange markets remained soft. Looking at our power related markets; order trends in the U.S. power transformer market remained stable. We continue to see a high level of driven by replacement demand. Pricing in lead times were steady quarter-to-quarter given the stable end market conditions we remain focused on improving our overall productivity and throughput as we look to fill the remaining capacity at our power transformer plant in Wisconsin. In our power generation businesses we saw modestly improved quoting and booking activity during 2013. For our thermal segment year-over-year orders increased for the first time since the recession underscored by strong fourth quarter booking. We view this as an encouraging trend as we move into 2014. Outside of South Africa we’re forecasting revenue growth in our thermal segment this year. Looking at the backlog trends for each segment, flows year-end backlog increased 2% over the prior year driven primarily by growth in our Food and Beverage backlog. The quality of flows backlog improved during 2013 due in large parts of our disciplined approach to order acceptance. In addition to our higher quality of new orders entering backlog we also completed nearly all of the remaining $40 million of the distressed contracts that were acquired with ClydeUnion. And our thermal segment excluding South Africa the backlog increased 9% over the prior year and in South Africa the backlog is now down to a $149 million. At our Industrial segment year-end backlog declined modestly versus the prior year, this was primarily due to strong revenue conversion particularly at our transformer business as organic revenue for this segment increased 12% in 2013. Across each segment we’re very encouraged by the positive order trends we experienced in the second half of last year and we began 2014 with a solid backlog. On the strategic front in January we completed the sale of our EGS joint venture interest to Emerson Electric for $574 million and the sale processes for the discontinued industrial assets are progressing. As we continue to focus our business around our flow end markets we’re simultaneously reducing our overall cost structure. During Q4, we initiated actions that will significantly reduce our pension obligations going forward. In December we refinanced our senior credit facilities and extended the maturity date to 2018. And just yesterday we completed the early redemption of $500 million of bonds scheduled to mature later this year. As a result of these actions, we expect our annual pension and interest expense to decline significantly. Additional we have committed $500 million to share repurchases that we expect to complete by the end of this year. After all of these actions we still expect to be within our target leverage range of 1.5 to 2.5 times gross debt to EBITDA. Given that we have also implemented a dividend increase effective with our next quarterly dividend payment. Our annual dividend is now a $1.50 per share payable quarterly. Going forward we intend to review our dividend policy on an annual basis for potential increases when market conditions allow. Looking at our restructuring actions, in 2013 we recorded $32 million of restructuring expense including $7 million in Q4. The restructuring actions were primarily focused on integration efforts at ClydeUnion reducing our European cost structure and the transition to our new operational alignment. In total we reduced our global headcount by about 700 employees and closed one of ClydeUnion’s North America manufacturing facilities. For 2014 we have budgeted $25 million for additional restructuring actions which we expect to be concentrated in the first half of the year. In Q1 we’re currently executing a plan to further reduce ClydeUnion’s European cost structure. Additionally we’re evaluating opportunities to reduce our global corporate cost structure. We’re targeting a reduction on our global corporate overhead which would result in an annualized savings on 15% to 20%, a 10% savings in 2014 is already assumed in today’s guidance. These actions will begin this year and our design to better align our overhead cost with our new operational alignment and strategic focus on Flow. As we move into 2014 we remain cautious on the global economy but we’re encouraged by the positive order momentum we experience in the second half of 2013. In our financial guidance for this we’re targeting 2% to 6% revenue growth driven by our flow in industrial segments. And we’re targeting 90 points of segment margin expansion with margins expected to increase in all three segments. Our EPS guidance range is $5 to $5.50 per share and we’re targeting $225 million to $275 million of free cash flow. Jeremy will now take you through a detailed analysis of our fourth quarter results and 2014 targets. So at this time I will turn the call over to him.

[Jeremy Smeltser:]

Thanks Chris. Good morning everyone. I will begin with earnings per share. For the fourth quarter we reported diluted earnings from continuing operations of $1.85 per share that’s near the high end of our guidance range. There were a handful of notable variances to our guidance model that are listed on this chart. We recorded $0.07 of pension income a $0.15 benefit as compared to our guidance model. This included $56 million of settlement fees on the liability transform to Mass Mutual which were more than offset by a mark to market gain recorded in the period. Discrete tax items were a $0.09 benefit versus our guidance. Offsetting the pension in tax benefits we recorded $0.11 on the other expense line that related to foreign currency losses and other miscellaneous expenses. The largest single item being the weakening of the South African Rand in the quarter. We also recorded a $0.07 charge associated with miscellaneous trademark impairments. As a remainder our EPS calculation is very sensitive due to our low share count approximately $600,000 of pretax income equals a penny per share. Moving on to the segment results for the quarter on a consolidated basis revenue in segment income were generally in-line with our expectations. Revenue declined 3% from the prior to $1.3 billion primarily due to lower sales at our thermal segment. Segment income increased 3% to $171 million and margins improved 70 points to 12.9%. Our Flow segment reported $720 million of revenue for the quarter down $8 million or $1 on an organic basis versus the prior year. The organic decline was due to a lower level of OE pump revenue resulting from our increased discipline and order acceptance as well as fewer nuclear project opportunities. Revenue associated with distressed contracts and ClydeUnion acquired backlog declined $22 million year-over-year. Excluding this decline revenue increased 2% over the prior year. The primary growth drivers for ClydeUnion’s aftermarket revenue and sales of pipeline valves which both increased by double digits. We also experienced growth in Food and Beverage were sales of both systems and components increased year-over-year. Flow segment income increased 14% over the prior year period to $103 million and operating margins were up 180 points to 14.3% within our long term target range. And margin improvement was driven by leverage on the increased aftermarket and component sales as well as cost reductions from the restructuring actions completed earlier in the year. We were especially pleased with the operating performance of ClydeUnion. Moving on to a good third quarter ClydeUnion’s operating margin grew comfortably into the double digits in Q4. For the second half of 2013 ClydeUnion reported $273 million of revenue with double digit operating margins. As Chris mentioned we have additional restructuring actions currently underway at one of ClydeUnion’s Europe facilities that will further reduce our cost structure. On a sequential basis Flow’s revenue increased 10% in Q4 driven by a seasonal uptick in aftermarket sales particularly in oil and gas. Quite the sequential increase in revenue the backlog remained steady from Q3 to Q4 at just under $1.4 billion. Both fourth quarter orders were up 12% year-over-year backlog was flat quarter-to-quarter and up 2% over the prior year. For the full year we reported $2.6 billion of revenue, a 1.5% organic decline from the prior year. Consistent with Q4 this was due primarily to a lower level of OE pump revenue resulting from our increased discipline on order acceptance. Year-over-year there was a $65 million in revenue associated with the distressed OE contracts at ClydeUnion. Operating income increased $23 million or 8% to $308 million and Flow’s operating margins increased 110 points to 11.7%. For 2014 we are targeting Flow’s revenue to increase 3% to 6% and this includes the 1% benefit from currency. Organically we expect Flow’s revenue to increase 2% to 5% with growth across all three end markets. We’re targeting Flow’s margins to improve about 100 points again in 2014 driven by leverage on the organic growth improved project execution and a lower cost structure as a result of the restructuring actions. Moving on to the thermal segment, thermal’s Q4 results were in-line with our expectations with revenue down 18% year-over-year to $365 million. Currency was a 2% headwind and organic revenue declined 17% reflecting the ramp down on the South African projects and lower sales of power generation equipment. Also as expected sales of residential boilers were down from the elevated volumes in Q4, 2012 related to Hurricane Sandy release efforts. Segment income was $32 million and margins were 8.9%. Reduced profitability was due to the organic revenue declines partially offset by improved execution and cost reductions from our restructuring actions. From a sequential perspective thermal’s fourth quarter was seasonally strong driven by winter demand for our short cycle residential heating products. We continued to execute well on the South African backlog which is now down to $149 million. Excluding South Africa thermal’s backlog has increased quarter-to-quarter and is now up 9% from the end of 2012. For the full year thermal’s revenue declined 10% to 1.3 billion with operating margins of 6.1%. We’re encouraged with the organizational progress made last year. Gene Lowe and his team have continued to reduce the cost structure in thermal power generation businesses to reflect the current market environment. We’re also encouraged with the improved order trends in the back half of 2013 and believe we will see a more stable financial performance this year. For 2014 we expect about a $50 million revenue headwind in South Africa as we continue to wind down our work on the large power projects. We expect revenue in other regions of the world to grow between 2% and 6%. We’re targeting thermal segment margins to improve approximately 40 points year-over-year. And now I will move on to Industrial, revenue increased $43 million in the quarter or 23% to $234 million, organic growth was 22%. Each business in the segment grew organically led by sales of power transformers which increased by more than 20% over the prior year period. Segment income was $35 million up 42% over the prior year and margins improved 200 points to 15%. The margin expansion was driven by the leverage on the organic growth as well as improved execution of power transformer business. We’re pleased with the year-over-year growth in margin expansion in industrial even though we anticipate it at a stronger margin performance. This has not developed as expected due to timing delays with certain projects in our higher margin businesses. Those orders are now expected in 2014. Sequentially revenue increased sharply in Q4 up $64 million or 38% from Q3. This was due to improved productivity of both medium and large transformers at our plant Wisconsin where the number of units shipped in the quarter exceeded levels reached during the peak in 2008. A strong revenue conversion resulted in a sequential backlog decline. Orders however were steady quarter-to-quarter and up versus the prior year. So for the full year our industrial segment reported $735 million up 12% from 2012. Each business in the segment experienced organic growth led by a double digit growth in our power transformer and fare collection businesses. Segment income increased $24 million or 29% to $104 million and operating margins improved 190 points to 14.2%. The 2014 we’re targeting 6% to 10% revenue growth with about 80 points of margin expansion. We expect the growth to be driven primarily by our power transformer business as we continue to grow into the expanded large power capacity. Now I will cover our consolidated financial targets for 2014 beginning with our midpoint earnings model. We’re expecting revenue to grow between 2% and 6% to approximately $4.9 billion and segment income margins to improve about 90 points to 11.4%. Corporate expense is targeted at just over $100 million or 10% lower than last year. This includes a partial benefit from the cost reductions related to the restructuring actions Chris mentioned. In addition to reducing corporate overhead cost we have also significantly reduced our pension and interest expense. Pension expense is expected to decline to $9 million this represents the annual service cost on our remaining pension obligations. Net interest expense is expected to be about $68 million; this reflects a 35% year-over-year decline primarily driven by the bond redemption we completed yesterday. Stock compensation expense is $35 million and consistent with prior years we expect about 60% of stock compensation expense to be recorded in Q1. We’re targeting approximately $25 million of restructuring expense with a majority expected to be recorded in the first half of the year. Our model assumes that 26% tax rate and 43.6 million diluted shares outstanding. This reflects completing our $500 million share repurchase plan rapidly throughout 2014. Based on these assumptions our full year EPS guidance range is $5 to $5.50 per share. From a quarterly perspective we’re targeting segment income to be very consistent with our historical seasonality. We expect to generate approximately 17% of full year segment income in the first quarter. Looking now at our first quarter targets revenue is expected to be approximately $1.1 billion. We’re targeting low single digit growth partially offset by lower revenue from the power projects in South Africa that will continue to ramp down this year. We’re projecting $90 to $95 of segment income with margins improving at least 100 basis points to between 8.3% and 8.7%. As I mentioned about 60% of our full year stock compensation expense is expected to be recorded in the first quarter. We expect to record approximately $10 million of restructuring expense in Q1, this is primarily related to European cost reductions at ClydeUnion. This level of restructuring expense in Q1 is a $0.15 headwind to the year-over-year comparison. And we’re modeling 45 million shares outstanding in the quarter. Our GAAP earnings per share will include a gain on the EGS transaction of at least $6.50 per share and a charge of approximately $0.45 related to the early redemption of our bonds. We plan to exclude these items in our adjusted earnings calculation based on these assumptions our Q1 adjusted EPS guidance range is $0.15 to $0.22 per share. Before I turn the call back over to Chris I will review the significant capital allocation actions we have announced. Starting with pension, in Q4 we agreed to transfer our monthly pension payment obligations under our U.S. pension plans at Mass Mutual. We’re also currently in the process of offering a voluntary lump sum payment option to former employees who are entitled to a future pension benefit from the plan. When completed these two actions are expected to reduce our U.S. qualified pension obligation by approximately $800 million or 75%. We appreciate the contributions of our retirees and former employees they have made to the company and we believe these actions will provide a continued security and increased flexibility in managing those benefits. The $250 million voluntary contribution we made early last year put us in position to take these actions which didn’t require any additional funding. These actions are both consistent with our strategy to reduce volatility and pension cost and funding requirements. Going forward we do not expect any significant future contribution to this plan. In conjunction with these actions we also changed to mark to market accounting for pension and post retiree medical plans. As required under this approach we will revise prior period financial results to reflect this historical impact of mark to market accounting. Going forward we plan to exclude the mark to market adjustment and non-service cost pension items from our adjusted earnings per share calculation. Our new debt structure reflects the bond redemption completed yesterday and the refinancing of our senior credit facility is completed in December. We extended the maturity of the facility to the end of 2018. Among other changes we increased the borrowing capacity under our term loan from $475 million to $575 million. We expect to borrow the additional $100 million during the first half of this year. The current interest rate of the term loan is about 2%. We now don’t have any significant required debt repayments until 2017. As a result of these changes we have reduced our annual interest expense by about $36 million or $0.52 per share. And with the bond redemption completed our leverage has now declined into our target range of 1.5 to 2.5 times gross debt to EBITDA. Looking at share repurchases since 2005 we repurchased 44 million shares at an average purchase price of $56 per share. In December we entered into a 10D51 [ph] share repurchase plan to facilitate an additional $500 million of share repurchases. We expect this plan to be completed near the end of 2014. So far we have repurchased a little over 800,000 shares under the plan. Including this year’s plan our total share repurchase investment over the 10 year period increases to $3 billion and over this time period we will have reduced our diluted share count by approximately 45%. In addition to the share repurchases as we announced this morning we’re also increasing our annual dividend by 50% from $1 per share to $1.50 per share. This increases the current yield to approximately 1.6% slightly higher than our peer group average. From a cash perspective our annual commitment for the dividend is around $65 million or 25% of our annual free cash flow. We began paying $1 per share dividend in 2004 and maintain at that level over the past 10 years. As we simplifying our portfolio and matured as a Company we believe it is the appropriate time to increase the dividend this year. Going forward we intend to reveal dividend policy with the Board on an annual basis to evaluate potential increases when market conditions allow. Moving onto our projected liquidity we began the year with $692 million of cash on hand and subsequently received $574 million from the EGS transaction. Taxes on the gain from the sale of our EGS interest are estimated at $236 million in total and are expected to be paid quarterly. Excluding the tax payments we’re targeting about $250 million of adjusted free cash flow in 2014 at the midpoint. The bond redemption resulted in a cash outflow of about $530 million and we plan to offset a portion of this outflow with additional term loan and revolver borrowings as needed. The net debt reduction is expected to be about $300 million. And we have approximately $550 million remaining on our share repurchase and dividend commitments this year. Based on these projections even with the significant capital already committed this year we expect to maintain sufficient financial flexibility and we expect additional liquidity in 2014 from the anticipated sales of the discontinued operations. That concludes my prepared remarks and at this time I will turn the call back over to Chris.

[Chris Kearney:]

Thanks Jeremy. To summarize our capital allocation actions, in 2013 we made a voluntary pension contribution which fully funded our U.S. plan and put us in a position to execute the transfer of Mass Mutual in the Voluntary Lump Sum Program. We also purchased 3.5 million shares for $260 million. This year our capital allocation commitments include a net debt reduction of $300 million or 18%, an additional $500 million in share repurchases and a 50% increase in our annual dividend. Over the last 10 years we have now deployed or committed approximately $7 billion of capital more than half is being returned to shareholders through share repurchases and dividends. We invested close to $2 billion on acquisitions primarily concentrated on building our flow end market platforms and we reduced our total debt obligation by about $1.8 billion. These actions were largely funded by divesture proceeds which have totaled nearly $5 billion and unlocked significant value for our shareholders. As you can see we have a strong capital allocation track record focused on increasing shareholder value. I want to briefly remind you of our capital allocation methodology. We utilize our strategic planning process to forecast EBITDA and cash flows based on these projections we formulate our internal valuation of the Company. Our top priorities are to maintain our target capital structure and fund our dividend. After satisfying these priorities our goal is to invest capital in the highest risk adjusted return opportunities that are available to us. As you saw on our presentation today our near term objectives remain focused on increasing operating margins and returning capital to shareholders. Although we view acquisitions as a key part of our strategy to further expand our flow business we do not plan on allocating capital acquisitions in the near term. In 2004 we have simplified our portfolio and significantly transformed the company. Over the past decade we have consistently executed a strategy to narrow the focus of the Company and to better position our business in higher growth, higher return markets. Divestures have played a key role in this process. Since the end of 2004 we have divested 20 businesses for gross proceeds of approximately $5 billion and an average EBITDA multiple of 12.5 times. This has unlocked significant value for our shareholders. Our strategic growth has been focused on expanding the breadth of our flow related product offerings, to concentrate on serving market sectors that require highly engineered system solutions and components. This differentiates SPX and keeps us at the forefront of innovation in our markets. As a result of our transformation Flow now represents close to 2/3rds of our revenue base and our product offerings are concentrated on serving customers in power and energy, food and beverage and industrial flow markets. We believe future investments in these three end markets will be driven by population growth, the expanding middle class, environmental and sustainability efforts. Looking at the development of our segment income and earnings since 2008 the growth of our flow segment and our strategic capital allocations have largely offset cyclically depressed earnings in our power generation and power T&D businesses. In 2014 our flow segment is expected to account for 63% of our total segment income. Looking at our end market and geographic revenue breakdown last year about 44% of our total revenue was generated from sales into power and energy markets including 17% exposure to oil and gas and our exposure to food and beverage increased to 20% of total revenue. From a geographic perspective North America remains our region of highest concentration with 45% of our total revenue and 23% of last year sales were into Europe with 80% into Asia-Pacific. So in summary we remain cautious on the global economy but are encouraged by the positive order momentum we experienced in the second half of 2013 particularly in our Flow segment. For 2014 we’re targeting 2% to 6% revenue growth, continued margin expansion and strong cash generation. As part of our ongoing efforts to drive lean initiatives throughout our organization, we intend to execute plans designed to better align our global overhead structure with our operations. We’re committed to improving operational performance, returning capital to shareholders and executing our strategic initiatives. Our growth initiatives continue to be focused on increasing our ability to provide highly engineered products and solutions to customers in our key end markets. We think the earnings potential of our Company is as strong as ever and we’re excited about the growth opportunities in front of us. So that concludes our prepared remarks and at this time we will be happy to take your questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Michael Halloran. Please go ahead.

[Michael Halloran:]

So just want to talk a little bit about what’s the composition of the backlog now looks like throughout the Flow segment? Obviously made comments about some of the distressed backlog, it's no longer in there. Maybe you can just talk about what the buckets look like from a food and beverage, from a ClydeUnion and some of the end markets within it. And then also what the pricing feels like in the backlog today versus maybe a year or two ago and not just relative to what your portfolio used to be but also maybe relative to market and then also how lead times are progressing.

[Chris Kearney:]

If you look at the total composition of the flow backlog Mike it's driven obviously largely by food and beverage and that tends to be a longer cycle business when you take into account the systems part of that obviously and larger project business. Power and energy and particularly oil and gas within that since the ClydeUnion acquisition now makes up a significantly larger part of that. Industrial flow tends to be more shorter cycle than the other two flow end markets. With respect to the quality we have talked a lot as you know about improving the order selection process at ClydeUnion and I think we’ve been successful on that front in addition to all the efforts focused on improving the operational performance of that business. So we certainly feel better about the quality of backlogs that we have and as you also know Mike we’re very focused on maintaining the appropriate balance between OE and aftermarket business in ClydeUnion, in all of our power and energy business within flow. The same is also true for improving the quality of the order entry process in our food and beverage backlog and we feel like we’ve been under Michael’s leadership much more disciplined about that and feel better about the project selection process and about the quality of projects that we do have in the backlog and it becomes more focused on concentrating on our sweet spot in that business and that has developed into clearly the dairy products area.

[Jeremy Smeltser:]

Yeah I think Chris hit right on the head Mike, I think industrial typically represents within flow about 10% of the total backlog and the rest is kind of split between food and beverage and power and energy. I would say year-over-year the backlog increase has primarily been driven in food and beverage in total though the mix in the power and energy backlog is better than it was a year ago because of the decline in the challenged projects at ClydeUnion. So that’s kind of how we start the year here.

[Michael Halloran:]

And then just on the ClydeUnion margins side. Maybe just an update specifically about how things are going on the restructuring side, what the next steps there are and then good to see the double digit second half of the year margin progressing there. When you think about that in a full year basis what would the run-rate look like exiting ’13?

[Jeremy Smeltser:]

Sure on the restructuring front you know as we mentioned in the prepared remarks we currently have a significant action underway in Europe which is the primary action planned for this year for that business. Clearly the mix as you know Mike gets better for us in the second half of the year and that helps. The margins look better in the second half and they do in the first half. So I wouldn’t expect our exit rate to continue into the first half of 2014. Now that said with restructuring savings, with the mix in the backlog looking better and continued discipline of pricing as well as just the overall process improvements that Tony and his team are making. I expect we’re going to be approaching the double digit level on an annual basis here in 2014 and we feel better than we have ever about where we’re at the business.

[Michael Halloran:]

What was the margin in ’13?

[Jeremy Smeltser:]

For the full year it was mid-single digits.

[Operator:]

Your next question comes from the line of Shannon O'Callaghan. Please go ahead.

[Shannon O'Callaghan:]

The margin story clearly really good one but it also looks like the underlying flow margins ex-ClydeUnion you must have been pretty good in the quarter as well. Can you talk about what was driving the expansion there? Was there anything notably favorable or is this just normal good leverage given you’ve taken?

[Chris Kearney:]

I think more on the latter Shannon you know sequentially revenues were up pretty significantly from Q3 to Q4 and as we often have experienced in our flow business overtime when that happens in Q4 margins climb pretty rapidly. So it's pretty consistently underlying our legacy flow businesses with what we have experienced in past years.

[Shannon O'Callaghan:]

So good seasonality but no unusuals.

[Chris Kearney:]

Yeah aftermarket climbs you know in a big chunk of the business as you would expect as people are spending the last of their budgets in our various end markets but nothing specific or significant or that I would call abnormal in the margins in Q4.

[Shannon O'Callaghan:]

Okay and then on transformers can you talk a little more about filling out the capacity at Waukesha and what are you assuming for medium versus large in 2014 and maybe how you might flex that if you get better medium demand.

[Chris Kearney:]

Well first of all Shannon we’re quite pleased with the trajectory that we’re on in terms of the new large power facility where we have more than doubled revenues year-over-year from 2012 to 2013 and what I’m most pleased about is the significantly improved efficiency not only in that part of the factory but across Waukesha generally. Recall that when we built that new capacity which was targeted for a large power production, we’re very clear that it's flexible capacity and we can flex and fill the factory and level load it with the best combination of product to maximize profitability in the business and that’s really what our focus is on. So as we enter into 2014 we’re encouraged by a number of things, really great performance in Q4 in terms of the revenue growth and revenue growth throughout 2013 but the steadiness in terms of the order process and the opportunities that are out there. So as we feel 2014 we’re feeling good about opportunities, the market in terms of volume, pricing clearly has remained stable but very encouraged by the good job that our folks at Waukesha have done in terms of engineering improvements and productivity improvements that are resulting and our ability to continue to improve margins even in a steady pricing environment.

[Shannon O'Callaghan:]

And in terms of the stuff that was pushed from 4Q, have you guys assumed that in showing up in ’14 in industrial?

[Jeremy Smeltser:]

It will be in 2014 not all in Q1 unfortunately.

[Operator:]

Your next question comes from the line of Nigel Coe. Please go ahead.

[Nigel Coe:]

Lot going on here but dividends bump sort of grabbed my attention. I’m just wondering Chris you know when the Board was debating dividends happen next year what kind of motivated the increase to dividend is it signal it out we have finally hit the impact on earnings and therefore comps you know the other segment [ph] not for this year but beyond, is it the message that you want to hardwire bigger payout ratio going forward more capital return to shareholder. What were the issues that you debated at that level?

[Chris Kearney:]

I think Jeremy hit on it in his prepared remarks Nigel, I think it reflects largely the majority of the Company and where we’re in terms of achieving a level of stability and critical mass around our flow business and obviously comfort around the solid cash flow performance that we’re seeing in a company and that we foresee in 2014. So when we review where we’re in dividend clearly we look at where we’re relative to our peer group and I think with this 50% increase this puts us I think in a nice position relative to that group and above that average.

[Nigel Coe:]

And then just looking at the forecast for 2014 and just the industrial top line growth of 6% to 10%. Officially you would say the backlog the flat backlog trends wouldn’t suggest that kind of increase going forward. So what gives you confidence that industrial can increase at that level and maybe just sort of how transformers looks within that picture.

[Chris Kearney:]

I think back to my response to a previous question I think notwithstanding the flat or slight decline of backlog in industrial going into the year. When we look at the order flow that supports our 2014 outlook and the continuing opportunity out there in the market, we clearly feel good about that and when we look at the rest of the businesses in the industrial segment some of those are shorter cycle businesses but when we look at their performance in 2013 which was quite good when we consider the delay of some of the projects that didn’t occur in 2013 we will carry into 2014 and additional prospects beyond that, all of that taken together supports our growth outlook for industrial in 2014.

[Nigel Coe:]

And just a quick one to Jeremy you called small market charge on the Rand depreciation [ph] in Q4. We have seen (indiscernible) in Q1, does 1Q guidance include any further market charges?

[Jeremy Smeltser:]

There is a little bit from January which continued to be volatile as you commented but I think at this point we’ve stability and locked that closure. So there is a little bit in there for Q1.

[Operator:]

Your next question comes from the line of John Baliotti. Please go ahead.

[John Baliotti:]

I guess in aggregate the global economy not a whole lot better or a lot more visibility then I would say last year but your guidance if you look at where the guidance has been over the years going into the next year. It seems that your implying you feel better about the portfolio, obviously slide 36 is showing the dramatic portfolio reshaping is got to help. I was just wondering how would you compare the portfolio today relative to your end markets you know if you went back a couple of years ago or certainly if you went back to what it would look like in that slide.

[Chris Kearney:]

Yeah sure. We clearly you know as you know you’ve been following the company a long time John. The transformation has been pretty dramatic and with that I think has come clearly more stability and with flow now accounting for 63% of the Company’s earnings and more than half of the Company’s total revenue. Recall that you know our game plan, our strategic game plan around flow and why these businesses are attracted to us and why we have built critical mass around these now significant three end markets is that we’re focused on growing the company around these higher growth and higher quality businesses than have better end market profiles and we have in fact done that. And so when we look notwithstanding the caution that we mentioned about global economy which I think everyone feels and it's probably consistent with everything you’re hearing. When we look at the trend that we saw in the second half of the year in orders and the record order periods that we had particularly in food and beverage it's pretty significant and gives us some comfort in terms of how we enter 2014 mitigated obviously by larger macro concerns. So it's a balancing John between both of those I think the world is understandably and reasonably cautious overall but when we see that translating into the year we’re feeling reasonably good about our businesses.

[John Baliotti:]

So does that mean that you feel better like you’ve more within your control as opposed you know some of those businesses that you’ve exited you’re rising and falling with the tide but despite your best efforts but compared to that looking at a learner more focused portfolio, do you feel that even with the global economy not giving a lot of visibility or a lot of health is more within your control?

[Chris Kearney:]

We feel internally we have got more stability and certainly greater critical mass around these businesses. Food and beverage is clearly a steadier and less cyclical and that’s helping to mitigate some of the cyclicality we have historically seen and some of the old businesses particularly the power related businesses. So I think that historic cyclicality has been mitigated largely by a steadier group of businesses and I would underscore food and beverage.

[Operator:]

Your next question comes from the line of Jeff Sprague. Please go ahead.

[Jeff Sprague:]

Just a couple of things first on thermal can you elaborate a little bit on kind of what’s driving the non-South African demand growth, is it power related or is it more in the commercial businesses? And secondly on thermal the stage of the projects that you’re at now does it give you any better clarity of visibility on kind of the contingency exposure at the end of the projects?

[Chris Kearney:]

Well first of all in terms of what’s driving growth, we’re seeing more growth across thermal outside of power. There is an interesting evolution in terms of how the backlog is developing in that business with a lesser emphasis Jeff on one time mega or big projects into a steadier flow of smaller projects and some of that coming outside of the power business. We have done a really good job on the innovation front particularly in our package cooling business and so we’re getting traction on some of that new technology. We’re also getting traction on products that are in development for a while in hybrid cooling and we’re seeing the benefits of all the heavy lifting that Gene and his team has done in 2013 with respect to restructuring and with respect to consolidating his business into a one cooling approach. What was the second part of your question?

[Jeff Sprague:]

Just thermal but unrelated, just thinking about the trail in South Africa.

[Chris Kearney:]

So with respect to South Africa and your question was I think specifically around the trailing contingent liabilities associated with that. You know as we have always said but the closer you get to the end of that project and completion of those projects the less concern there is in terms of those trailing liabilities starting to trail off. That’s always way, there is still a lot of erection and construction work to be done on those projects and much of what we do is obviously driven by construction schedules of our customers and so but every year we get closer to the end of that project and now we’re, as we mentioned this morning a $149 million left in the backlog.

[Jeff Sprague:]

And then secondly for Jeremy just on the pension to understand a little more clearly what you did. So there is no additional cash required to kind of offload the monthly payment obligation that comes out of the funding you did earlier? And when I think about your reporting going forward you said you’re just going to report service cost only in the P&L and exclude mark to market and other. But is there much other beyond mark to market as you’ve moved all this stuff off and then how significant it's kind of the exclusion as it relates to pension in your P&L?

[Jeremy Smeltser:]

Sure it's on the first part, you’re exactly right. The funding that we did I think in April of last year, the $250 million that really was sufficient so no additional cash from the Company was transferred to Mass Mutual or will be paid out in lump sum, that will out come out of the plan. So a really good result there we’re very pleased with that and then on your second question related to the P&L, not really I mean the service cost is really what’s left. Obviously the other components the return on assets where discount rates are I mean that’s essentially the point of the mark to market adjustment and the volatility and I think you can see it in the restatement where last year we recorded as we rerecorded pension mark to market we recorded huge debit in Q4 and this year a huge credit that volatility has nothing to do with the cash going out the door from the company and so we will just exclude that and it's very difficult to predict whether that entry will be a debit or a credit each other in the size but I think the important thing is the service cost represents really any true increase in our obligations overtime and managing the assets appropriately I would expect that the plan frankly would be able to pay for that service cost as well overtime. So we’re in a great position and I’m really happy with where we’re at. I think it was a really good year for our retirees and for our shareholders with the actions we were able to take.

[Operator:]

Your next question comes from the line of Nathan Jones. Please go ahead.

[Nathan Jones:]

So if we could just look at the annual guidance here for a second, 2% to 6% is a pretty wide range there. Could you may be start at the 2% and talk about what you would need to see in order to get to the 6%?

[Jeremy Smeltser:]

Well I mean certainly a part of the how wide that range is does come from some of our larger project awards, you know that comes in thermal, that comes in the food and beverage business and flow and those can be lumpy and the timing can move out on those. So that is the reason we have to be probably appoint wider in our spread than you might see elsewhere and then you combine that with over 50% of the business is short cycle. I think it's a reasonable range to put out there. I think as you think through your own models I would also dive deeper and go segment by segment and think about exactly where you would like to peg that. But I think we’re pretty comfortable with the range as it is out there. I think it's more about winning projects in the marketplace and when customers finally decide to place final orders on the larger projects that we will move us within that range.

[Nathan Jones:]

So would it be more dependent on the short cycle businesses in the near term? I would assume he larger projects are probably more impacting 2015 revenue than 2014 revenue?

[Jeremy Smeltser:]

This early in the year there is a lot of room for revenue particularly if you think about those projects being recognized on a percentage of completion basis. There is a lot of room for those projects that come in the first half to have some revenue this year. So I think it's a mix of the two Nathan is how I would describe it.

[Nathan Jones:]

Okay and on the order discipline, primarily around ClydeUnion, I know I've had extensive discussions with you guys about this. One of the things you said, Chris, was that you were no longer targeting those extremely complex projects that would increase the execution risk. After two years of owning ClydeUnion, is there any thought or has there been any move, to moving back up that complexity scale in terms of what Clyde will bid on?

[Chris Kearney:]

Yeah I think it would be clear Nathan, what I said is that those highly complex opportunities have to represent a more manageable portion or percentage of your total backlog and so I think when you look to fill a factory and to get the benefit of a lean manufacturing approach to the extent you can have a larger percentage of that backlog be in order to configure I suppose to highly engineered custom orders which is a large part of what we inherited. You’re going to put a lot more predictability and frankly profitability into your factory because you’re going to have more repeatable business. That’s not to say that those products aren’t also complex and highly engineered but to the extent you can engineer a solution and replicate that again and again clearly you’re going to get greater efficiency through the factory. There is clearly the opportunity to do that and as we look at how Tony and his team have thoughtfully approached the business and built the backlog going into 2014, it is with that in mind. There will be a portion of the business that approaches those high end, more complex, more custom engineered solutions but in my mind you can’t be successful over a sustainable period of time as that continues to be an extraordinary large percentage of your backlog.

[Nathan Jones:]

Make sense. I'm just going to slide one more in. You quoted strength in pipeline valves in North America. How is the market looking outside of North America for those?

[Chris Kearney:]

Developing I would say but our business historically has primarily been focused in North America and Europe and Asia-Pacific represent a smaller portion for pipeline valves specifically. Currently our pump offerings are more global but overtime with the whole strategy around power and energy with our existing products and what ClydeUnion brought to the table you know the plan is to globalize our products everywhere in power and energy.

[Ryan Taylor:]

At this time we’re out of time for the call so we’re going to conclude. We have got a number of analyst still remaining in the queue and I apologize that we didn’t have a chance to get to everybody. But as per the usual I will be around all day to answer any follow-up questions you might have. Feel free to give me a call. Thank you for your time and we will talk to you next time.

[Operator:]

Thank you for your participation in today’s call. This concludes the presentation. You may now disconnect. Have a good day.