Q4 2010 Earnings Call

February 17, 2011 8:30 am ET


Christopher Kearney - Chairman, Chief Executive Officer and President

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

Ryan Taylor - Director of Investor Relations


John Inch - BofA Merrill Lynch

Shannon O'Callaghan - Lehman Brothers

Scott Gaffner - Barclays Capital

C. Stephen Tusa - JP Morgan Chase & Co

Robert Cornell - Barclays Capital

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

Jeffrey Sprague - Citigroup

Deane Dray - Citigroup Inc

Nigel Coe - Deutsche Bank AG



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Good day, ladies and gentlemen, and welcome to the Fourth Quarter SPX Earnings Conference Call. My name is Stephanie, and I will be your operator for today. [Operator Instructions] I would now like turn the conference over to your host for today, Mr. Ryan Taylor, Director of Investor Relations. Please proceed.

Ryan Taylor

Thanks, Stephanie, and good morning, everyone. Thanks for joining us. With me on this morning's call are Chris Kearney, our Chairman, President and CEO of SPX; and Patrick O'Leary, our Chief Financial Officer.

This morning's call is being webcast with a slide presentation, which can be accessed in the Investor Relations section of our website at spx.com. This webcast will be available until March 3, and I encourage you to follow along with the webcast as we reference the detailed information on the slides.

The 2010 EPS and free cash flow results that we discuss in this presentation are on an adjusted basis from continuing operations. We have included supplemental schedules in the appendix of today's presentation, which provide reconciliations for all non-GAAP financial measures discussed today. Our earnings press release was issued this morning and can also be found on our website.

Before we continue, I would like to point out that portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings.

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

Christopher Kearney

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call this morning. We reported our fourth quarter and full year 2010 results this morning, and we're pleased with the results. We met or exceeded all of our Q4 and full-year financial expectations.

During the year, we also made progress towards our long-term strategy and improved our financial position. Demand in most of our key markets improved, and we're encouraged by positive trends in many of these markets as we move into 2011.

I'll begin this morning with a few highlight from 2010. Last year, growth from emerging markets, early-cycle businesses and acquisitions offset headwinds in our late-cycle Power and Energy businesses. $1.2 billion or more than 25% of our revenue was generated from sales into emerging markets. Revenue into China grew 39% versus the prior year, and revenue into Africa was up 36%.

Our Test and Measurement segment reported 15% organic growth and 200 points of margin improvement, reflecting broad recovery in the global vehicle service industry. In our Flow Technology segment, we completed two strategic acquisitions that have expanded our presence in the food and beverage process equipment market. Our total sales into this market grew 10% year-over-year.

Despite headwinds in mature power generation markets, our Thermal segment reported flat revenue with 130 points of margin expansion to 12.1%, matching its record margin performance. This reflects very solid execution and high-quality projects.

We began 2010 with a solid balance sheet and ended the year in even better financial position, with increased flexibility and liquidity. Adjusted free cash flow for the year was over $200 million, representing 113% conversion of net income. We're pleased with our performance in 2010, and we're optimistic about our growth potential over the next few years.

Looking at the key financial results for the fourth quarter, revenue was $1.3 billion, flat to last year. Double-digit growth in Test and Measurement and Flow Technology was offset by revenue declines in our late-cycle power-related businesses in the Thermal and Industrial segments.

Segment income and margins were slightly better than we had targeted at $160 million and 12.1%, respectively. On an adjusted basis, EPS exceeded the top end of our guidance range at $1.13 per share. This excludes a $0.17 tax benefit.

As we indicated in the January guidance meeting, our Q4 free cash flow was very strong and as a result, we elected to make a voluntary pension contribution of $100 million. After this pension contribution, free cash flow was $174 million in the quarter.

From a geographic perspective, fourth quarter sales into the Americas grew 5% year-over-year and sales in the Asia-Pacific increased 2%. This offset a 13% decline of sales into the EMEA region, primarily reflecting weakness in Europe.

Sales into emerging markets accounted for 25% of the total revenue in the quarter. We expect emerging markets to continue to be an important factor for our business. Additionally, we expect economic growth in the U.S. and in Europe to benefit many of our businesses over the next few years.

Now looking at the full year, revenue increased 1% to $4.9 billion. As expected, the impact of lower volume and pricing on Power Transformer shipments caused a decline in profitability in 2010. Segment margins declined 60 points to 11.5%, and adjusted earnings were $3.62 per share, down 8% from 2009. Adjusted free cash flow for the year was $206 million.

We reported our 2010 year-end backlog in January. I'll briefly review the key points with you this morning. The year-end backlog was $2.9 billion, down 1% from Q3. This was due to a modest decline in the Thermal backlog, reflecting the late-cycle nature of the power-related businesses in that segment. Thermal's book-to-bill ratio increased to 0.9% in the second half of 2010, and order activity has been better at the outset of the 2011 than it was a year ago.

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