SPX Technologies, Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2014 SPX Corporation Earnings and 2015 Financial Targets Conference Call. My name is Steve, and I'll 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. Please proceed, sir.

[Ryan Taylor:]

Thank you, Steve, and 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 Q4 earnings press release was issued this morning and can be found on our website at spx.com. This call is also being webcast with a slide presentation located in the Investor Relations section of our website. I highly encourage you to follow along with the details on the slides during the webcast. A replay of this webcast will be available on our website until March 31. As a reminder, portions of the presentation and our comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings. The financial information presented today is on a continuing operations basis. And consistent with our 2014 guidance, we are presenting 2014 earnings per share and free cash flow on an adjusted basis to exclude certain items. In the appendix of today's presentation, we have provided reconciliations for all the non-GAAP and pro forma financial measures that we present this morning. Before I turn the call over to Chris, I just want to point out some notable items in our Q4 results that were not included in our Q4 guidance. Consistent with our year-end accounting policies, we recorded an $86 million charge to pension expense, primarily related to noncash mark-to-market pension adjustment. We also recorded $38 million of noncash charges generally related to our required annual impairment testing. During the quarter, we repatriated $92 million of cash from China and recorded the associated taxes. This was partially offset by unrelated, discrete tax benefits also recorded in the period. In our Thermal segment, we booked $25 million of additional costs and accruals related to the power projects in South Africa. The business environment surrounding these projects has continued to deteriorate in recent months. And in January, Eskom publicly announced additional schedule delays at both sites. We continue to manage through challenges with our subcontractors that have contributed to these additional costs, and we'll talk more about this in detail later on the call. Also, in the fourth quarter, we recorded $16 million of after-tax costs related to the planned spin of our Flow business. On a GAAP basis, including all these items, we reported a loss from continuing operations of $0.78 per share. Excluding these items, and consistent with our guidance range for the fourth quarter, adjusted Q4 EPS was $2.36 per share. For 2015, we have provided financial modeling targets for revenue, segment income, EBITDA and other reasonably predictable items for SPX as currently reported as well as for the 2 future independent companies. We do not believe it is useful to provide 2015 EPS guidance, given our plan to complete the spin of our Flow business in the third quarter this year, as well as the uncertain timing of the related financial impacts. However, we do plan to provide regular updates on the actions and the related costs associated with the spin-off of our Flow business. And with that, I'll turn the call over to Chris.

[Christopher J. Kearney:]

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call today. Looking back on 2014, it was a milestone year for SPX. We successfully transitioned to our new operational alignment and executed a number of strategic actions, culminating with the announcement of our plan to spin the Flow business. We finished 2014 with solid operating performance in the fourth quarter, highlighted by strong free cash flow conversion across many of our businesses and impressive margin improvement in our Flow segment. As we begin 2015, reduced oil prices, strengthening of the dollar and the strengthening of the dollar clearly present headwinds growing -- to growing our top line. However, we still believe that we're well positioned with a diverse end market exposure to deliver organic revenue growth this year. And we expect the positive momentum in our operational initiatives to drive increased margins across all 3 segments in 2015. While we remain focused on continued operational improvement, we're also making good progress on our goal to separate SPX into 2 strong, independent companies. This is a unique opportunity to create shareholder value at both future companies, and we're committed to that goal. We're taking a proactive approach to restructuring and other actions that should strengthen our competitive position and improve our balance sheet so both future companies will be in the best possible position for financial success when we complete the spin. I'll begin this morning with a brief recap of our fourth quarter financial results and recent end market trends. Jeremy will take you through a detailed analysis of our Q4 results and 2015 targets, and I'll conclude with an update on the planned spin of Flow. As Ryan said, adjusted EPS was $2.36 per share in the quarter compared to our Q4 adjusted EPS guidance range of $2.05 to $2.30 per share. Adjusted free cash flow was $204 million, with each segment converting well over 100% of operating profit to cash. Looking at revenue. Excluding the South Africa projects, organic revenue growth was 2.6%, driven by strong core growth at our Thermal segment. Excluding the $25 million charge in South Africa, segment income was $177 million and segment margins improved 60 points over the prior year. Flow segment income margins expanded 190 points to 16.2%. That marks Flow's highest margin performance since Q4 2007, a significant accomplishment and validation of our long-term strategy. Our consolidated margin improvement reflects the dedication and commitment of our employees across the entire organization in supporting our continuous improvement efforts. Excluding the Q4 charge in South Africa, our segment margins have improved year-over-year in 7 consecutive quarters. The improved profitability reflects benefits driven by our new operational alignment, disciplined commercial initiatives and a lower structural cost base as a result of the restructuring actions executed over the past 2 years. Going forward, we believe there are additional opportunities across all of our businesses to grow revenue and increase margins. On the strategic front, we also made significant progress last year. We generated $683 million of gross divestiture proceeds as we further narrowed our business portfolio early in the year. We raised our annual dividend 50% to $1.50 per share, and we repurchased about $500 million of SPX common stock. In total, through dividends and share repurchases, we returned $550 million to shareholders last year. We completed our U.S. and U.K. pension actions and the early redemption of $500 million of bonds. As a result, we significantly reduced our interest expense and pension obligations. These actions, combined with our improved operational performance over the last 2 years, have put us in a very good financial position to execute the tax-free spin of our Flow business. Moving on to our revenue profile. From a geographic perspective, we have a nice balance, with just under half of our revenue from sales into North America concentrated in the U.S.; 24% of total sales are into Europe; with 19% in Asia Pacific. While we're encouraged by GDP growth projections for both the U.S. and Asia Pacific, Europe appears to be sluggish again this year. From an end market perspective, we see opportunities for growth in 2015 across most of the markets we serve, with the exception of oil and gas. Food & Beverage now represents our largest end market at 20% of total sales. The food and beverage market is less cyclical than many of our other markets we serve, and demand is driven largely by a growing population and rising middle class. This is particularly true for the dairy industry in Asia. In 2015, we expect our Food & Beverage business to deliver strong organic growth and margin improvement. Oil and gas sales accounted for 18% or $874 million of our total revenue in 2014. Breaking that $874 million down, aftermarkets, parts and services accounted for 36% while 64% related to original equipment. OE sales in the upstream were $220 million last year, accounting for 25% of our oil and gas exposure, but less than 5% of SPX's total revenue. In the midstream, we had about $210 million of revenue or 24% of our oil and gas exposure, mostly tied to North American pipeline activity. And sales into downstream and gas applications were each less than 10% of our oil and gas revenue. We view these sectors as areas of opportunity to increase our market presence. Based on recent oil prices and feedback from our customers, we expect new investments across all sectors of oil to be delayed to some extent, particularly in the upstream. As it relates to the upstream, our participation is primarily concentrated in production and transportation at existing wells. We don't sell any equipment that is used directly in the drilling process. In the mid and downstream, while new investments are likely to be delayed, we believe there is incentive for projects that are already approved and permitted to move forward. And in the aftermarket, we expect steady demand, given the need to maintain and service existing infrastructure. From a segment perspective, 85% of our oil exposure is in Flow. We also have modest oil exposure in our Thermal and Industrial segments. Looking at recent trends in Flow's Power & Energy business. We had strong oil and gas bookings in the fourth quarter, including the highest level of quarterly bookings in upstream and midstream for 2014. Notwithstanding our solid Q4 order intake, at the tail end of last year, we began to experience customers delaying investment, particularly on large OE projects. Orders in December and January were down sharply versus our average monthly order intake over the last 2 years. We believe this is due to oil producers reevaluating their capital spending priorities as they adjust to the lower oil prices. On an encouraging note, orders under $1 million have been fairly steady so far this year. And last week, we received a $15 million order to supply ClydeUnion pumps into a downstream LNG application. This order is a result of our commercial initiatives to expand our presence in downstream applications. In 2015, we expect Flow's Power & Energy revenue to decline 10% to 15%, due primarily to reduced OE activity in the upstream and, to a lesser extent, currency headwinds. Looking now at the trends across Flow's other end markets. We had strong Q4 bookings in Food & Beverage, with components in aftermarket orders up mid-single digits year-over-year. We also booked 2 large system projects during the quarter. We were awarded a $50 million order to design and install spray dryers at personal hygiene facilities in Belgium, and we also won an award for $25 million to design and install a dairy processing system in the U.K. In power generation, we continue to see nuclear opportunities developing and steady demand in conventional power. In Flow's industrial markets, our short-cycle run rates are steady, and we're seeing increasing demand in the Marine market for our plate heat exchangers. Larger CapEx projects have generally been delayed. We believe these delays are indirectly tied to the uncertainty in oil markets. Demand in the mining market continues to be weak, and we have seen slowing demand for our industrial components in Asia Pacific. Moving on to our Thermal segment. We had very strong order growth in our HVAC product lines in the quarter. In our comfort heating businesses, orders were up 15% over the prior year. This was partly due to yet another very cold winter. We're also increasing our market share as a result of the commercial initiatives implemented by John Swann and his teams at Weil-McLain & Marley Engineered Products. They introduced several new heating products this year and expanded their distribution network, with a particular emphasis on establishing new reps in the Northeast region. In our Cooling business, we're seeing sustained success from the commercial initiatives focused on adjacent market expansion, channel partner development and new product offerings. In -- orders in Q4 for packaged cooling towers were up double digits over the prior year. We were also awarded a few large power generation projects, including 2 orders valued at a combined $70 million to provide dry cooling towers for new coal plants in Algeria and a $25 million order to provide Balcke-Dürr condensers for a power plant in Germany. In total, Thermal's core backlog increased 17% year-over-year in 2014, a positive result that we expect to contribute organic revenue growth in 2015 and 2016. In addition to fostering these positive developments in the core backlog, Gene Lowe and the team at Thermal also remain focused on managing the challenges in Asia Pacific and South Africa. In China, the slowing economic growth is impacting demand for new power generation. Accordingly, our joint venture with Shanghai Electric has seen reduced demand and an increasingly competitive environment. For 2015, we expect our revenue and income related to the joint venture to be down double digits year-over-year. In South Africa, the business environment surrounding the Medupi and Kusile projects has become increasingly difficult with extended production schedules and ongoing challenges with our subcontractors. Eskom, the government-owned power producer in South Africa, has publicly stated that they are challenged with low reserve margins and have instituted rolling blackouts. In the midst of these challenges, Eskom announced in January it has delayed the startup of the first units at both the Medupi and Kusile sites. Startup of the first Medupi plant has been delayed 6 months and is now scheduled to come online in the middle of 2015. And the startup of the first Kusile plant has been delayed about 2 years and is now scheduled to come online in 2017. We expect this to extend our project timeline, and we're working with our customers to determine how these delays impact our scope and future revenue related to these projects. The $25 million charge we booked in Q4 is related to uncertainty and our ability to recover cost to which we are entitled from certain subcontractors who appear to be financially challenged as well as additional costs related to project delays. Based on our current assessment, we believe this charge puts our balance sheet in the most appropriate position. That said, there are significant potential challenges remaining due to the extended project schedules; the complex set of contractual relationships among the end customer, the prime contractors and the various subcontractors and suppliers; and the financial challenges facing some of those parties. Moving now to backlog. Our year-end backlog was down 5% or $100 million versus the prior year. The decline was due to currency, offset partially by a modest organic increase. Our Industrial and core Thermal backlogs increased by double digits year-over-year. In aggregate, those backlogs grew by $138 million. Flow's backlog declined $238 million, with 1/3 of the decline due to currency. Organically, the primary driver was a lower level of power and energy orders. Although our beginning backlog for 2015 is lower than the prior year, we believe the overall quality is healthier as a result of project selectivity. Nonetheless, the reduced level of backlog, combined with the strengthening of the U.S. dollar and the uncertain impact of reduced oil prices, present challenging headwinds to our top line this year. We've accounted for these headwinds in our 2015 targets, which are based on currency rates as of February 1. At these rates, we expect currency to be about a 5% headwind to revenue. That's approximately $230 million. We're targeting organic growth to be flat to up 4% and expect segment margins to expand 90 points. We expect the organic growth to be driven by Flow's Food & Beverage and industrial businesses as well as our Thermal and Industrial segments, where backlog increased last year. Given the uncertain environment in oil and gas, we expect Flow's Power & Energy organic revenue to decline. Jeremy will now take you through a detailed analysis of our fourth quarter results and 2015 targets. And at this time, I'll turn the call over to him.

[Jeremy W. Smeltser:]

Thanks, Chris. Good morning, everyone. I'll begin with earnings per share. For the fourth quarter, we reported a diluted loss per share from continuing operations of $0.78. As Ryan mentioned, this included some notable items not in our Q4 guidance, which I'll discuss in more detail. We recorded a charge to pension expense of $1.45, the largest component being the annual noncash mark-to-market adjustment. The mark-to-market charge was largely due to a reduction in discount rates and changes to our mortality rate assumptions, partially offset by better-than-expected returns on our plan's assets. We also recorded noncash impairment charges totaling $0.74 per share related to certain businesses within our Flow and Thermal segments. The 2 most notable write-downs were for our joint venture with Shanghai Electric and our ClydeUnion tradename, both driven by the recent macro developments affecting those businesses. During the quarter, we repatriated $92 million of cash from China and paid $19 million of U.S. and foreign withholding taxes, a fairly attractive rate. This resulted in $0.46 of income tax provision, which was partially offset by $0.36 of unrelated discrete tax benefits also recorded in the period. The charge related to the South Africa projects was a $0.46 impact to EPS. And we recorded $0.39 of cost associated with the spin-off of our Flow business. Excluding all these items, adjusted EPS for Q4 2014 was $2.36 per share. Revenue in the quarter was $1.28 billion, down 4% year-over-year due to currency and the South Africa projects. Currency was a 3% or $45 million headwind to revenue. Lower revenue related to the South Africa projects was also a 3% headwind. A portion of this decline was anticipated in our targets due to the natural ramp-down of the projects. We recognize revenue in these projects based on percentage of completion accounting. As such, the $25 million charge recorded in the quarter also reduced revenue. Excluding the South Africa projects, organic revenue grew 2.6%, driven by strong core growth of the other businesses in our Thermal segment, and segment income increased 3% to $177 million, with margins improving 60 points to 13.6%. Looking at Flow's Q4 results. Revenue declined 6% to $680 million. Currency was a 4% or $32 million year-over-year headwind. Organic revenue was down 1% due primarily to lower sales of Food & Beverage and Industrial components in Asia-Pacific. Throughout the rest of the world, Food & Beverage and Industrial sales increased by mid-single digits. In Power & Energy, organic revenue was essentially flat, as increased sales of OE pumps and nuclear valves were offset by declines in aftermarket sales and oil-related capital projects in Europe. Segment income increased $7 million or 7% to $110 million and margins expanded 190 points to 16.2%. This income and margin improvement was driven by improved operational performance across all 3 end market platforms. For the year, Flow's margins improved 220 points to 13.9%, firmly within our long-term target margin range of 13% to 15%. We are very pleased with the improved performance across all 3 end markets. Tony Renzi, Marc Michael and David Wilson have all had a positive impact on their businesses since we moved to the new alignment a year ago. And we are particularly pleased with the significant turnaround at ClydeUnion, where the full year operating margin improved to 15%, up from 5% in 2013. Flow's backlog declined 4% sequentially due to currency. Book-to-bill for the segment was just over 1 in the fourth quarter, driven by strong orders in our Food & Beverage and Power & Energy businesses, as Chris mentioned earlier. On a year-over-year basis, Flow's backlog declined $238 million. About 1/3 of the decline was due to currency. From an organic perspective, the backlog for Power & Energy and Industrial declined versus the prior year, partially offset by double-digit growth in our Food & Beverage backlog. As a reminder, we took a more selective approach on large orders last year in both Power & Energy and Food & Beverage. While this contributed to the overall backlog decline, we believe it also improved the quality of the backlog. Improved project selectivity and project management have improved our on-time delivery and ability to meet customer commitments. These factors have also contributed to Flow's margin improvement over the past 2 years. Given the uncertainty in oil markets and the strengthening of the dollar, we expect 2015 to be a challenging year for Flow's top line. In total, we expect Flow's revenue to decline between 3% and 8%, including a 6% headwind from currency. Organic revenues are expected to be down 2% to up 3%. We're targeting mid-single-digit organic growth in Food & Beverage and Industrial. And due to the impact of oil prices, we expect Flow's Power & Energy revenue to decline between 5% and 10% organically. We are targeting 40 points of margin expansion at Flow, driven primarily by the healthier backlogs and improved execution in our Food & Beverage business. Over the next 2 to 3 years, we believe there are additional opportunities to expand Flow's margins, as we execute our global footprint initiatives and drive continuous improvement efforts through Lean and supply chain management. We also have restructuring actions planned for the first half of this year. Given these initiatives and the strong 2014 margin performance, we are increasing our 2- to 3-year margin target for Flow by 100 points to 14% to 16%. Moving on to Thermal's Q4 results, beginning with the reported results on the left side of this slide. Revenue increased 5% to $384 million. Currency was a 3% headwind. Revenue recognized on the South Africa projects declined $44 million, and this includes the $25 million charge. Segment income was $11 million or 2.7% of revenues. This includes a total loss of $28 million on the South Africa projects. These projects are challenging, and Gene and the team in South Africa are doing the right things to manage through a difficult business environment. That said, the financial impact from these projects is overshadowing the underlying improvement in Thermal's core business. To provide transparency into the core business, we have presented Thermal's results excluding the impact of the South Africa projects on the right side of the slide. In Thermal's core business, organic revenue increased 22% and margins expanded 30 points year-over-year to 9.9%. Organic revenue increased across each product line, led by our cooling tower business, which reported over 30% organic growth. Our heat exchanger businesses also reported double-digit growth, and sales of personal comfort heating products were up high single digits over the prior year. For the full year, we've provided the same analysis. Reported revenue declined 1% to $1.3 billion. Currency was a 2% headwind, and the South Africa project revenue declined $119 million. Segment income was $52 million or 3.9% of revenues. This includes a total loss of $34 million on the South Africa projects. Excluding the results of the South Africa projects, Thermal's core business experienced 9% organic revenue growth. Global sales of cooling towers were up 13%, partially driven by commercial initiatives and new product offerings in the packaged cooling product line, which primarily serves the HVAC market. Sales of Weil-McLain boilers and Marley Engineered heating products increased 9% over the prior year. The cold winter season was a benefit, however, these businesses clearly outgrew the market in 2014. Segment income in the core business increased $24 million or 39% to $86 million and margins expanded 150 points year-over-year to 6.9%. The improved profitability was driven in part by cost savings from restructuring actions at our Balcke-Dürr business, which improved sharply from a challenging year in 2013. Thermal's profit also improved due to leverage on the organic growth in the HVAC businesses. We continue to see steady, positive development in Thermal's backlog. Thermal's core backlog increased to $615 million, up 17% or $88 million over the prior year. It is important to point out that the large orders we won late last year are 18- to 24-month projects. So in terms of aging of the backlog, we expect about 2/3 to be recognized as revenue this year, with about 1/3 or $200 million expected as revenue in 2016. The core backlog development underscores the success of our commercial initiatives across the segment. In South Africa, the ending 2014 backlog was $100 million, and our contracts include provisions for price adjustments. Additionally, given the extended project timeline, we are working with our customers to negotiate the amount of future revenue associated with contract extensions not currently reflected in backlog. At this time, we expect, at least, an additional $100 million of contract adjustments, which would put the future total revenue estimate at over $200 million. So looking at our 2015 expectations for Thermal including the South Africa projects, we are targeting revenue to be flat to down 3%. Currency is expected to be about a 4% headwind, and we are targeting 1% to 4% organic revenue growth, driven by Thermal's core businesses. As reported, margins are expected to improve about 270 points. Excluding the South Africa projects, core margins are expected to expand about 50 points to 7.4%. Gene and his team have done a really nice job improving the core business over the past 2 years in a challenging end market environment. And they are committed to continued improvement going forward. Over the next 2 to 3 years, we believe Thermal can grow organic revenue 3% to 5% annually, with a margin target of 8% to 10%. Moving on to Industrial. Revenue in the period was $214 million, down 12% over the prior year. Currency was a modest headwind. The organic revenue decline was due to lower shipments of fare collection systems and power transformers. The decline in fare collection sales in Q4 related to order delays, as our customers continue to evaluate the availability and processing of government funding. At our transformer business, the revenue decline was due to timing, as we had a very high level of shipments in Q4 2013. Despite the revenue decline, the profit in our transformer business increased modestly. For the segment, income was down $5 million over the prior year to $32 million and margins were 14.9%. The decline in fare collection sales was the main driver of the reduced profitability. The ending backlog for Industrial was up 17% or $50 million over the prior year, driven by strong order volume for power transformers and, to a lesser extent, communication technologies. Our transformer business continues to see a high level of replacement demand as utilities continue to increase their focus on addressing the aged installed base. Pricing remains challenging but stable, and average lead times in the industry continue to expand slowly, an encouraging trend. Looking specifically at our transformer business. Revenue grew 7% in 2014, and backlog was up 22% over the prior year. We have now seen 3 consecutive years of strong organic growth, and given the backlog development last year, we expect growth in 2015, driven by increased volume and production. However, given the lack of price improvement, profitability is expected to be stable. Overall, we are booked through the third quarter this year. We are now quoting 8- to 10-month lead times for medium power units as we selectively fill out our remaining production slots for the fourth quarter. Internally, our focus is on reducing design cost and improving operating performance. Looking at our 2015 expectations for Industrial. We're targeting revenue growth between 2% and 5%. Currency is expected to be about a 2% headwind. We're targeting 4% to 7% organic revenue growth and 40 points of margin expansion. The organic revenue growth is expected to be driven primarily by recovery in fare collection system sales and, to a lesser extent, growth in the transformer business. We also expect sales in our radio detection and hydraulic businesses to grow in the low single digits. We've updated our 2- to 3-year targets for Industrial. In our revised targets, we are assuming a more moderate pricing environment in the U.S. power transformer market. In that environment, we believe Industrial can grow organic revenue 3% to 5% annually and expand margins to between 15% and 17%. Moving on to our 2015 targets for SPX as currently reported. We are modeling revenue to decline 1% to 5%, and this includes a 5% headwind from currency translation. Our modeling targets are based on currency rates as of February 1. Using these rates, currency translation is expected to be a $230 million headwind to revenue and a $23 million headwind to segment income. This results in an EPS headwind of approximately $0.42 per share due to currency translation. On an organic basis, we are targeting revenue to be flat to up 4%. We expect segment margins to improve across all 3 segments, with consolidated margins increasing 90 points in total to approximately 12%. Excluding the year-over-year benefit from South Africa, consolidated margins are expected to increase 30 to 40 points. For free cash flow, we are targeting 100% conversion of operating income, excluding costs related to the spin of Flow. As Ryan mentioned, we don't believe it's useful to provide earnings per share guidance for 2015 given the uncertain timing of the financial impacts related to the spin. We only expect to report Q1 and Q2 results as a combined entity. With the spin expected to be completed in Q3, we expect to report third quarter results as separate companies. Also, during the first half of the year, we expect volatility to continue in corporate expense, interest expense and the tax provision, as we work through the process of organizing 2 separate corporate structures. We have provided targets for certain items that we can reasonably estimate. We are targeting $20 million of restructuring expense in 2015 expected to be concentrated in the first half of the year. Stock compensation expense is expected to be approximately $42 million with about 60% recorded in the first quarter. And pension service costs are expected to decline to just $5 million for the year. We estimate the full year effective tax rate to be in the high 20s and diluted shares outstanding to be approximately 41 million shares. We are also providing 2015 EBITDA targets for SPX as currently constructed and for both future companies. We are calculating EBITDA consistent with the definition in our credit facilities. As currently reported, we are targeting 2015 EBITDA in the range of $550 million to $600 million. As for the future companies, for SPX Flow, we are targeting 2015 EBITDA to be between $375 million and $405 million. And for the SPX infrastructure company, we are targeting $175 million to $195 million of EBITDA this year. Looking at our first quarter modeling targets. We expect revenue to be down 8% to 10% versus the prior year due primarily to the currency and oil-related headwinds. Currency is expected to be a 6% or $65 million headwind to revenue and about a $5 million headwind to segment income. This results in about a $0.09 headwind to EPS due to currency. Organic revenue is expected to decline 2% to 4% due primarily to low -- lower Power & Energy sales in our Flow segment. We are targeting organic revenue to be flat year-over-year in our Thermal and Industrial segments. Segment income is expected to be between $73 million and $83 million with margins at about 8%. We expect lower profitability versus the prior year as a result of the organic revenue decline in Flow's Power & Energy business as well as an unfavorable revenue mix at both Thermal and Industrial. We have planned about $10 million of restructuring actions in the quarter concentrated in our Flow segment as we continue to focus on our global cost structure. Looking briefly at cash flow and our financial position. In the fourth quarter, we paid the remaining $58 million of taxes related to gains on asset sales. As I mentioned earlier, we also repatriated $92 million of cash from China and paid $19 million in associated taxes. We repurchased $75 million of SPX common stock in Q4, completing the $500 million share repurchase plan that began trading in December 2013. In total, under that plan, we repurchased 5 million shares or approximately 12% of the outstanding share base. For the full year, we generated $281 million of adjusted free cash flow, including $204 million in the fourth quarter, consistent with our historical seasonality. We ended the year with $428 million of cash on hand. Total debt was $1.37 billion, down 18% from the prior year. Our gross leverage ratio declined to 2.4x, and our net leverage was 1.7x. In summary, the work we've done over the past 2 years to reduce our debt and pension obligations has put us in a very good financial position to execute the spin transaction. On that note, I'll turn the call back over to Chris to provide an update on the spin.

[Christopher J. Kearney:]

Thanks, Jeremy. I will conclude with an update on the spin transaction. As illustrated on this slide, SPX has undergone a significant transformation over the last 15 years. Since the end of 2004, we divested over 20 businesses for gross proceeds of approximately $5 billion at an average EBITDA multiple of over 12x. This unlocked significant value for our shareholders. It also narrowed the focus of our company as we diversified away from our legacy automotive roots and expanded globally into diversified infrastructure markets. As a result, we repositioned our business in more attractive, long-term growth markets. In recent years, we concentrated on expanding our Flow business in attractive end markets and realigned our resources to better serve our global customer base. As a result of our transformation, Flow represents about 60% of our revenue and is concentrated in Power & Energy, Food & Beverage and Industrial Flow markets. And our infrastructure business represents about 40% of our revenue and is concentrated in power, HVAC and specialty infrastructure markets. We believe increased investment in all these secular end markets will be driven by population growth, the expanding middle class, and environmental and sustainability efforts benefiting both future companies. The next logical step in our transformation is the spin-off of our Flow business. The Future Flow Company will be named SPX, Flow Inc. and will be listed on the New York Stock Exchange under the ticker symbol F-L-O-W. Upon completion of the spin, I will serve as Chairman, President and CEO of SPX Flow; and Jeremy will serve as CFO. SPX Flow will be a pure-play flow company, well positioned in attractive secular growth markets, with a diverse global customer base. It will have a very broad offering of highly engineered components and integrated solutions with well-recognized brands. Its large installed base provides a significant opportunity to grow aftermarket sales, a key growth initiative for Flow. Consistent with the 2015 modeling targets we published today, we estimate 2015 revenue for SPX Flow will be around $2.6 billion. Assuming stand-alone costs, we estimate the pro forma EBITDA will be between $375 million and $405 million. The Future Infrastructure Company will retain the name SPX Corporation and will also be listed on the New York Stock Exchange under the new ticker symbol SPXC. Upon completion of the spin, Mike Mancuso will serve as the Chairman of the Board; Gene Lowe will serve as President and CEO of SPX; and we have named Scott Sproule as the CFO. Scott has been a key leader at SPX for 10 years. Previously, he has served as VP of Corporate Finance, CFO of our Test and Measurement and Flow segments and most recently, as CFO of our Flow's Power & Energy business. The future SPX will be well positioned as a leading provider of highly engineered products and solutions in the power and infrastructure markets. Many of the businesses are technology leaders in their respective markets, and they continue to innovate to maintain that edge. Over the past year, several of these businesses have demonstrated the ability to outgrow market demand and gain share. Future revenue potential for this company will be highly correlated to global power generation investment, U.S. electricity demand and infrastructure spending. Consistent with the 2015 modeling targets we published today, we estimate the 2015 revenue for the future SPX to be about $2 billion. Assuming stand-alone costs, we estimate the pro forma EBITDA will be between $175 million and $195 million. We're making good progress so far on the actions necessary to complete the spin transaction. In addition to determining the company names and key senior executives, we've also identified additional Board of Director candidates. We're working through the process of establishing separate corporate structures, and we expect to make substantial progress on this goal by the end of the second quarter. We obtained consents from bondholders for SPX Flow to assume the $600 million bonds, and we're on pace to submit the initial Form-10 filing with the SEC in April. In total, we expect onetime after-tax separation costs to be in the range of $60 million to $80 million. To this point, we've recorded $17 million of after-tax costs. We're targeting completion of the separation in Q3 2015, and we are on track to meet that goal. So in summary, significant progress has been made over the last several years to simplify and strengthen SPX. We finished 2014 with a solid fourth quarter operating performance, highlighted by strong free cash flow conversion and impressive margin improvement in our Flow segment. As we begin 2015, we remain focused on continued operational improvement and separating SPX into strong, independent companies. We're making good progress towards the separation and expect to complete the spin of our Flow business in the third quarter. We believe the spin will provide both companies greater flexibly to focus on and pursue their respective growth strategies, enabling them to create significant value for shareholders, customers and employees. We also believe the execution of this plan will allow investors to distinctly value the unique attributes of each company. So that concludes our prepared remarks. And at this time, we're happy to take your questions.

[Operator:]

[Operator Instructions] Please stand by for your first question which comes from the line of Shannon O'Callaghan.

[Shannon O'Callaghan:]

Maybe a question on Food & Beverage first. I mean, you mentioned the dairy strength, particularly in Asia. Could you go through maybe a little bit more detail there, maybe at some of your other food and beverage markets? And also what's going on with margins in Food & Beverage? Is there an opportunity to improve those?

[Christopher J. Kearney:]

Yes. What I would tell you, Shannon, is that the plan under Marc's leadership has come together pretty nicely. The fundamental drivers in that business, which made it attractive to us in the first place, still exist. And that's particularly growth -- and growth in dairy products in the emerging markets and especially Asia Pacific, and particularly in China. So that's still driving a lot of growth and a lot of opportunity for us. Related to that, there are opportunities in Europe as well that we've talked about over the last year or so in terms of increasing production capacity, new production capacity, as the opportunity for those producers in Europe to export into that same growth market have been enabled. And so that's driving growth for it as well. But credit to Marc and his team, what they've done, in addition to being disciplined and selective about those system opportunities, is that they're really focused on component, aftermarket and service. And so what we expect to see over time, and what we expect to support margin growth and revenue growth in that business to come from is greater penetration in those areas and growth in those important aspects of the Food & Beverage segment. But we feel good about the order development in that business going into 2015 and feel good also about the outlook for that business for the full year.

[Jeremy W. Smeltser:]

I would say, Shannon, if you look at our 2015 margin expansion target for Flow, that's really primarily driven by Food & Beverage. We do expect margins to improve nicely there, offsetting a decline in Power & Energy, which you'd expect with 5% to 10% organic decline expectations on the top line.

[Shannon O'Callaghan:]

Okay, that's helpful. And then maybe just on South Africa. I mean, another pretty sizable charge this quarter. Can you just explain a little bit this issue with being able to recoup some of those costs? And what are the chances you actually get that back and any of this reverses or vice versa that we have additional charges?

[Christopher J. Kearney:]

Sure. Happy to do that, Shannon. So the charge that we've taken in the quarter, I think, appropriately recognizes the risk and the challenges as we see them today. And that charge reflects the -- both the additional costs of us having to step up and step in to the shoes of some of our providers in order to get this project over the finish line, but I think also reasonably reflects what we view as risk of recovery from some of those distressed parties. That said, we're -- we feel good about our right to pursue recovery in those, but I think taking this charge is the appropriate thing to do, just being realistic about the risk and actually the cost of getting there. So I think the good news in South Africa is that as we have stepped up our effort to compensate for some of the struggling subcontractors, we have seen marked improvement and feel good about that. That said, the challenges inherent in this very complex project as we hopefully get closer to the finish line are still there, and those challenges are inherent and reflected in the charge that we announced today. So I think there's some important milestone events coming up. I think commissioning of the first unit in Medupi, which is now scheduled for the middle of this year, is a very important milestone. And I think when that happens, that can serve as a catalyst to accelerate completion of these projects. Understand the background against which we're doing this, and that is a very severe power shortage in South Africa and a very strong imperative to get these things done. So I think that is an important milestone in Medupi. I think if you look at the Kusile project, the increased progress, particularly on the air-cooled condensers, as we've had to step in and step up our effort to replace contractors who are struggling is likewise notable and I think, has been well received by the customers. So I think the actions that we've taken at this point in time are appropriate and put us in a better position going forward, not only in terms of the balance sheet, but in terms of our ability to get this thing done. I think the better news is that even though the completion dates continue to extend, we are, hopefully, closer to the end than the beginning of this with about $200 million in revenue accounting for potential adjustments going forward outlooked and about $70 million to $80 million of revenue outlooked in 2015. We'll begin to ramp down manufacturing in the first half of this year, focused now obviously on construction and commissioning. So it's been a difficult challenge, but I think Gene and his team have done a very nice job on their front. And I think we've done what's appropriate on ours.

[Jeremy W. Smeltser:]

I think a couple additional facts that are helpful for everybody is over the life of the projects, in total, we still remain modestly profitable after this charge. And another probably important fact is, from a cash perspective, about half -- roughly half of the charge that we took, essentially, has already been spent with the rest cost in the future.

[Operator:]

And your next question is from the line of Nigel Coe.

[Nigel Coe:]

Just wanted to -- just a quick follow-up on Shannon's question on the charge in South Africa. So as you ramp down the manufacturing and move into the construction phases of that project, does the risk of further charges dissipate accordingly?

[Christopher J. Kearney:]

Well, I think the charge that we've taken today is correct given what we know today and the challenges and the risk that we see. That said, Nigel, there's not been a lot of straightaway in this project, and there still are complexities getting things done in the construction and the commissioning phase. But again, to reiterate what I said in response to Shannon's question, while it's been painful and this charge is significant, we feel better about the control that we have over what we're doing and our ability to help steer this thing to completion. That said, this is -- these are very, very large, complex projects with a lot of other parties involved and a lot of things, frankly, that are not within direct control. But we're focused on the things, obviously, that we control and what we can do to best execute them and how to account for it appropriately.

[Jeremy W. Smeltser:]

I do want to clarify as well, Nigel, it's not that we're moving from manufacturing to construction now. They've been overlapping for an extended period of time. In fact, remember, we talked about in the Q3 call that Medupi 6 was actually oil-fired. It was supposed be fired up completely in December, but it was oil-fired, just not coal-fired. So that unit is actually complete, though being tweaked. But if you look at the ACC side, as Chris mentioned on Kusile, the first 3 units are essentially up in the air. So the construction has been going on for quite some time. So it's not kind of a point-in-time switch, I guess, is my point.

[Nigel Coe:]

Okay, that's helpful. Let's move onto guidance. I think the broad framework for '15 is probably consistent with what people were thinking, but probably 1Q margins are coming in quite a bit weaker than people expected. So certainly, what we expected. And you mentioned the mix within both Thermal and Industrial. And I'm seeing [ph] the industrial mix to transformers. But can you maybe just put a finer point on the mix impact you've seen in 1Q?

[Jeremy W. Smeltser:]

Sure. I mean, in Industrial, actually, the bigger issue year-over-year, driving something different than probably what you'd expect is the fare collection sales being down year-over-year. So we do expect the recovery for the year, but it's more in second quarter and on than it is the first quarter based on the timing that we see from our customers today. And at Thermal, slightly unfavorable mix of project backlog, specifically for Q1 versus last year. And really, for Thermal, remember, we're only doing about 10% of their full year's revenue in the first quarter, so it just moves the needle very quickly at that low level of revenue.

[Nigel Coe:]

Okay. And then just, finally, within the oil and gas, you talked about it down 5% to 10% for the full year. Can you just remind us where your Power & Energy margins are in relation to the 14% average for the segment? And what kind of [indiscernible] margins are you seeing on that Power & Energy decline?

[Jeremy W. Smeltser:]

Sure. Yes, they are -- the Power & Energy margins, as we've talked about, are higher than the segment average. They're the highest in total. So it is hurting us fairly dramatically on the top line. And the same thing as it relates to currency as well for the power and energy business because they're at a higher margin.

[Operator:]

Your next question comes from the line of Jeff Sprague.

[Jeffrey T. Sprague:]

Just a couple quick things. Just looking at some of the guide components. Jeremy, on interest expense, specifically, in your appendix, you're guiding $69 million. It looks like the underlying interest expense x the bond charge was 12.5 or so. So your kind of run rate, $50 million. I know there's some refinancing and things that are going to go on. But can you just kind of bridge us from what looks like a $50 million kind of run rate at year-end to kind of the $69 million guide that you're using?

[Jeremy W. Smeltser:]

Yes. I think what you're seeing in the back -- in the appendix actually excludes interest income for our credit agreement calculations. So it's kind of -- it's not the GAAP income statement numbers. So that's probably the big disconnect there. As it relates to the income statement, what I would expect is -- with no financing transactions, which isn't what's going to happen. But if there were no financing transactions, I'd expect interest expense to be relatively flat from a GAAP perspective, excluding the onetime events like bond consent and the early extinguishment of debt charges in '14, so in the low 60s range all-in. But the reality is probably in late Q2, we will execute new credit facilities for both companies, and so there'll be right-offs of previously deferred financing costs, et cetera, et cetera, which are just difficult to predict in total.

[Jeffrey T. Sprague:]

Okay, that's helpful. And I was just wondering, just on the guide, in aggregate, just want to make sure I have it clear about Thermal in the base. Is the deltas for 2015 off the 2014 base? Does that 2014 base include or exclude the charges from Thermal in Q4?

[Jeremy W. Smeltser:]

Yes. So when you look at Chart 16, which gives the targets by segment, that is increases that include the charges in 2014. So that's GAAP. And then in my comments, what we said is Thermal core is more like 50 points of margin improvement, 40 to 50 points of margin improvement, excluding the impact of those charges in 2014, as compared to the 270 points of margin improvement on the GAAP front for Thermal.

[Jeffrey T. Sprague:]

And then just one last one on transformers, and I'll move on. So it sounded like margins did improve in the quarter. Was it -- I think, it's down revenues or certainly down units and up margins. But you characterized pricing as stable. So is there some inherent underlying margin improvement on restructuring or mix or other factors going on in that business?

[Jeremy W. Smeltser:]

Year-over-year in Q4, perhaps, a bit in mix. I mentioned the high Q4 revenue in 2013, and a lot of that revenue was large power shipments that were essentially built by the end of Q3 and just recognized revenue in Q4 without a lot of profit. In general, in the business, as I said, profitability relatively stable, given pricing relatively stable, but modest improvements expected in 2015. Continuing to work on our design cost and trying to get our cost down for like units and certainly also focused on the supply chain. But as we mentioned in our long-term target update, starting to reflect a more moderate longer-term environment there.

[Operator:]

Your next question comes from the line of Mike Halloran.

[Michael Halloran:]

So just following up on that. Lead times for that division currently are at, what, 8- to 10-month lead times? Maybe you could just help me out with what a typical lead time would look like for when you'd start seeing pricing come through at least a little bit more than where you guys are now. Or maybe a better way to put it, utilization levels from an industry perspective, where are those lead times from an interim perspective, where are those? And how do those compare?

[Jeremy W. Smeltser:]

Yes. I mean, on medium power, Mike, I would say that when the whole industry is in the 8- to 10-month range in the past, we've started to see price move more quickly. Industry utilization, very difficult data to get. We do more closely just monitor competitor lead times in the open-market bids that we do. But I would tell you, there's a couple of other folks that we're consistently seeing with similar lead times to us, but there's still a number of players we're seeing more down in the, I'd say, on average, 6-month range, maybe even 5 to 6 months. So seeing some movement but not probably enough movement to be moving pricing yet.

[Michael Halloran:]

And then on the oil and gas guidance or the power and energy guidance, could you just help me with the components of that guidance just to make sure I understand how are you thinking about the aftermarket versus downstream, upstream, midstream pieces? And where are those kind of slide on the spectrum from a contraction perspective?

[Jeremy W. Smeltser:]

I'm not sure I followed, Mike. I'm sorry. Could you repeat the question?

[Michael Halloran:]

Yes, just could you go through the pieces of your -- what was it, down 5% to 10% Power & Energy? Where does the upstream side for you fall from a contraction perspective? How you're thinking about aftermarket and the power pieces, the regular power pieces as well?

[Jeremy W. Smeltser:]

Yes. I mean, what we would expect in the upstream, despite that we don't have really direct drilling equipment, we still expect the upstream to be down more than the 5% to 10% organically. In the midstream, we're seeing some customer delays, but the backlog is also strong, so probably right in that range. And then as Chris mentioned in his comments, on the downstream side and the gas side, we actually, in the first quarter, are getting some decent orders. So we're optimistic that, that might be more low to mid-single-digit decline. We're certainly not expecting, in our full year figures, any increase in the price of oil. I just don't think that would be a prudent thing to do right now.

[Michael Halloran:]

And from an aftermarket perspective, any sense that customers are pulling back there or even adding to that piece as they maybe defer and have to do a little bit more on the maintenance side?

[Jeremy W. Smeltser:]

Yes. I think Q4 was lighter than we expected and particularly, November and December. But the team feels that, that's more kind of an industry freeze given the very rapid changes and kind of no certainty of where the bottom was. Realistically, our team feels like aftermarket should be steady to potentially improving for us from a market share perspective given all the investments that we're making in service centers and the like.

[Operator:]

And your next question comes from the line of Julian Mitchell.

[Julian Mitchell:]

Just a question on the organic growth guidance because for Q1, I guess, you're guiding for organic sales to be down about 3%; and for the year, you're saying, at the mid-point, they're up maybe 2%. Q1 has the easiest comp, and you also highlighted the reason for the big drop in Q1 is Power & Energy, which probably doesn't get better after Q1. So I just wanted to sort of understand maybe it's something in the backlog timing, but why would organic growth accelerate off a tougher comp for the rest of the year?

[Jeremy W. Smeltser:]

Yes. I mean, in general, across all 3 segments, it's really about the longer-cycle projects in the backlogs, which just have very light revenue in Q1 as compared to the rest of the year. It's really, Julian, not a view on our part to an improving macro environment after Q1. It's project timing pretty much across the board. And as I mentioned, the shorter cycle P&E orders were pretty light in November and December, which is impacting pretty dramatically, the first part of Q1 for that part of Flow.

[Julian Mitchell:]

And how much of the year is kind of sales guidance is in your backlog today?

[Jeremy W. Smeltser:]

Yes. It's in the high 50s, relatively consistent with our history.

[Julian Mitchell:]

And then lastly on transformers. You talked a little bit about a change in assumptions for medium-term kind of pricing in the industry and the effect that, that had on the segment medium- or long-term margin guide. Has that change in price assumption led to any change in your strategy around the use of the new capacity that you brought on a couple of years ago?

[Jeremy W. Smeltser:]

I would say it's impacting it somewhat, and Chris has some thoughts to share on it as well. What I would say here on the short term, something we've been talking about for quite a while is that we can use the expanded facility or expanded portion of the facility for a higher mix of medium power units if we choose to, and that impact is what we're choosing to do for our mix in 2015.

[Christopher J. Kearney:]

Yes. And Jeremy is right, Julian. I have consistently challenged our team to take advantage of the flexibility that we've created there, right, and that is to balance the load of medium to large power with whatever are the most attractive opportunities. And I think they're doing that, and I think they're frankly doing that better now. And so the nice thing about the production capacity, particularly, at Waukesha, is that we do, in fact, have that flexibility. So as we sit here today with essentially 3 quarters of the year booked, and as they plan to fill out the year by filling the factories in Q4, they're approaching it with that in mind; and looking across both markets, large and medium, to find the most attractive opportunities. And so they're in a position where they can be more selective, as we said in our comments today.

[Operator:]

And your next question comes from the line of Robert Barry.

[Robert Barry:]

Just actually wanted to follow up on the earlier question about deriving the outlook for Power & Energy. I mean, to what extent would you say the assumptions there are still somewhat of a moving target? And to the extent they are, how did you think about forecasting that down 5% to 10%?

[Jeremy W. Smeltser:]

Well, certainly a difficult time for us and all of our peer companies to be forecasting revenues for oil and gas related end markets right now. I mean, our approach is we take just like we do at currency, here's the current rates, here's the current pricing in oil. We canvass the customer base. We're very close with our customers on the upstream and the midstream, in particular. And we try to forecast based on current short-cycle rates and what we're hearing from our customers and what's in the backlog, and we'll update every 90 days as best we can.

[Robert Barry:]

And how have the trends been? I mean, are the delays still kind of mounting? Or has there been pockets of stability? How would you characterize it?

[Christopher J. Kearney:]

Yes. I wouldn't characterize them, Robert, as mounting. My take on this is that we saw enormous volatility in the fourth quarter and coming into this year. And what we've seen with the price of oil over the last several weeks, at least, is that we're straddling $50, and it seems to have become a little more stabilized. And the way I see that playing out is, to the extent it does stabilize with less volatility in whatever range it may stabilize in, I think there are parts of our end markets that recover more quickly, and I think Jeremy alluded to this in an answer to a previous question. I think that first happens in the aftermarket, right, and some of the downstream opportunities. And so I think there was a broad shock to the system with the precipitous drop in prices. What I would tell you is I think the market and particularly, our customers are digesting that. I think, again, to the extent we have stability within a tighter range, then I think you start to see from the aftermarket, things starting to stabilize. That's the way I would see it playing out.

[Robert Barry:]

Okay, great. That's a very helpful color. Maybe just lastly for me, a question about Asia. You mentioned slowing in Flow Industrial and also in power gen. To what extent would you attribute that to slowing in the end markets versus just the SPX-specific factors?

[Jeremy W. Smeltser:]

Yes. I don't -- I wouldn't point specifically to SPX-specific factors. I think from a power perspective, you're seeing a general slowing, which reflects likely an economy that's slowing more quickly than what you're seeing in headline data. That's my take on what we're seeing and hearing in the power industry. We have a pretty good look into the power industry with our relationship with Shanghai Electric, and they seem to be tightening their belts as well. So that's probably the bigger focus. I mean, we certainly are going through change, in Asia Pacific and in China, specifically, as we take our end market approach to running the business into Asia Pacific this year. So we have, I would say, a highlighted focus on our commercial success in Asia this year that we hope we'll get some market share as we go through the middle of the year, but our expectations are not for an accelerating Chinese economy this year.

[Ryan Taylor:]

Thanks, Robert. This is Ryan Taylor. We appreciate the thoughtful questions. But at this time, we're going to conclude the call here. We still have a number of analysts in the queue. And for the usual, I'll be around all day to help you guys with the model and answer any questions that you might have. So we thank you for joining us, and that concludes our call today.