Aug 4, 2010
Executives
Ryan Taylor - Director of Investor Relations Chris Kearney - Chairman, President and CEO Patrick O'Leary - Chief Financial Officer
Analysts
Bob Cornell – Barclays Capital Nigel Coe - Deutsche Bank Securities John Inch - BofA Merrill Lynch Phil Gresh – JPMorgan Ajay Kejriwal - FBR Capital Markets & Co
Operator
Good day ladies and gentleman, and welcome to the second quarter 2010 SPX Earnings Conference Call. My name is Ann and I will be your coordinator for today's call.
As a reminder, this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode.
(Operator instructions). We will be facilitating a question and answer session following the presentation.
I would now like to turn the presentation over to Mr. Ryan Taylor, Director of Investor Relations.
Please proceed, sir.
Ryan Taylor
Thank you, Ann, and good morning every one. Thank you for joining us today.
With me on the call this morning are Chris Kearney, 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 invest relations section of our website spx.com.
This webcast will be available until August 18 and I encourage you to follow along with the webcast as we reference the detailed information on the slides. Please note that the slide presentation also includes supplemental schedules which provide reconciliations for all non-GAAP financial measures discussed today.
Our earnings press released was issued this morning and 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.
The updated 2010 EPS guidance we just discuss today is on an adjusted basis and from continuing operation. Please note the risk factors in our most recent SCC filings.
With that, I will turn the call over to Chris.
Chris Kearney
Thanks Ryan. Good morning everyone.
Thanks for joining us on the call. Market trends in first half of 2010 progressed much as we had anticipated.
We have seen improvement in many of our early cycle businesses while conditions in our mid to late cycle businesses have remained depressed. Our focus on globalization has been a significant contributor to our financial performance to the first half of this year.
Growth in emerging regions has helped to mitigate continue softness in certain developed markets. As expected weakness in the United States power transformer market weighed on our second quarter performance.
Despite this headwind, our second quarter earnings per share increased over last year and we have also exceeded our guidance. This is the first time in six quarters that our earnings have increased over the prior year period.
We’re pleased with the half earnings result in the quarter, which were particularly strong in our Thermal and Test & Measurement segments. We’re encouraged by the benefits we have realized from the restructuring action taken over the past two years.
These actions significantly reduced our cost base and we’re seeing the positive impact in our operating results. Looking our consolidated results for the second quarter, we reported revenue of $1.2 billion about the same as last year, as acquisition growth offset a 2% of organic decline and a 2% headwind from currency.
Entering the quarter we had anticipated a slight year-over-year benefit from currency. That did not materialize as revenue declined $18 million due to the weakening of the Euro and other currency rates during the quarter.
Sales into emerging markets accounted for 26% of our total revenue, largely driven by China, where revenue increased more that 50% year-over-year. Total sales into Asia Pacific were up 37%.
In the Americas revenue declined by 2%, and sales into EMEA were down 12% largely due to uncertain economic conditions in European markets. We reported a $136 million of segment income or 11.4% of revenue on par with last year's results.
This exceeded our targets primarily due to strong operating execution in our thermal and test & measurement segments. On an adjusted basis, excluding certain one time tax benefits, second quarter earnings per share increased 25% year-over-year to $1 per share.
We generated $36 million of free cash flow in Q2, 11% better that the prior year. During the quarter, we continued to see various stages of improved performance on our early cycle businesses.
Sales in the vehicle service industry increased sharply both on a sequential basis and as compared to last year. In our Flow segment, book and turn demand for components stayed steady from Q1 in the food and beverage, oil and gas and general industrial markets.
Demands in our key power energy markets remain soft, but we believe we’re seeing modest signs of stabilization in these markets. The timing and pace of recovery in our power market is still uncertain and we believe it will vary regionally.
We saw increase in large project activity quarter to quarter, primarily driven by demand in emerging regions. Our global capabilities and leading technologies give us a competitive advantage in providing customer solution in these markets.
Our dry cooling technology which minimizes water consumption and energy usage is the preferred cooling solution in arid regions of the world. Recently, we have been selected to supply three dry cooling systems on new power stations going into Peru, Saudi Arabia and China.
In China, we have also been chosen to supply crystal growers to a major solar manufacturer. In Norway we have been selected to design and manufacture a butter processing system for the region's largest diary producer.
We’re encouraged by the increased sequential order intake for large projects. However, in comparison to prior years, capital spending on large scale systems remains depressed.
Quoting of large projects has been active. However, we continue to see delays in order placement especially in the United States and in Western Europe.
At the end of Q2, our backlog was $2.7 billion, down 6% from the first quarter. The organic decline was 3%.
Changes to currency rates also reduced the backlog by 3%. The backlog for our flow segment increased 3% sequentially.
This is the second consecutive quarter in which it has increased. We also reported a 3% increase in our Industrial segment backlog with the aggregate growth in our other industrial businesses offsetting the decline in the transformer business.
Our Thermal segment backlog, which accounts for nearly 60% of our total, declined to 11% sequentially to about $1.6 billion. Currency rate changes reduced the value of our thermal backlog by 4%; organically it decreased 7%.
Nearly half of the thermal backlog is related to two large scale power projects in South Africa scheduled to be completed in 2013. We are currently executing as planned on those projects.
Looking at our visibility for the remainder of the year, we now have 74% of our 2010 estimated revenue already recorded or included in our backlog. This is comparable to where we were last year at this time, and gives us confidence on our revenue outlook for the remainder of 2010.
Reported revenue remains sensitive to trends in short cycle markets particularly in our Flow and Test & Measurement segments. Based primarily on our improved Q2 earnings results we have raised our full year EPS guidance range to $3.30 to $3.50 per share as adjusted.
This represents an 8% increase in the midpoint of our EPS guidance to $3.40 per share and assumes exchange rates from late July. Our pre cash flow guidance remains at a $180 million to $220 million which is approximately 115% conversion of net income.
Patrick will provide more details on our updated guidance later in the call. Looking now at our financial position, at the end of Q2 we had just over $400 million of cash on hand and $1.3 billion of debt.
Our leverage ratios remained stable with debt to capital at 41% and gross debt to EBITDA at 2.2 times. Our solid financial position has provided us the flexibility to execute strategic acquisitions over the past three quarters including two small acquisitions in Q2.
So far in Q3, we have invested approximately $65 million of cash on hand to fund the acquisition of Anhydro. We continue to monitor potential acquisitions.
So, at this time, I will turn the call over to Patrick to provide more detail on the Q2 results.
Patrick O'Leary
Thanks Chris. Good morning everyone.
I will begin this morning with the review of the Q2 earnings per share. We reported Q2 earnings from continuing operations of a $1.40 per share.
This included $0.40 of tax benefits related to audits of our 2006 and 2007 US income tax returns. Excluding these benefits our EPS was $1.00 per share versus our guidance range of $0.65 to $0.75 per share.
We exceeded our guidance primarily due to better than expected operating performance in our Thermal and Test & Measurement segments. Additionally, the timing of certain restructuring actions that we had anticipated incurring the second quarter shifted to the second half of this year.
Looking at the year-over-year comparison, on an adjusted basis Q2 EPS increased 25%. Consolidated segment income was flat year-over-year as operating improvement in many of our businesses offset $0.46 earnings per share decline from the power transformer business.
The most notable improvement within our thermal segment, where increased operating income contributed $0.28 per share to year-over year-earnings. Our test and measurements income increased $0.14 per share.
We benefited from reduced restructuring expense which increased EPS $0.25 compared to last year. Reported revenue for the quarter was $1.2 billion flat to the prior year, growth from acquisitions of 3% was offset by 2% organic decline and about 2% currency impact.
Segment income was about $136 million, 11.4% revenue both flat with the prior year. Looking at the results by segment beginning with Flow Technology, Flow reported revenue of $383 million in Q2 down 3% from last year.
The Gerstenberg acquisition increased revenue 4% and this was offset by 6% organic decline. Currency changes decreased revenue by 1%.
The year-over-year organic decline was primarily due to reduced sales in the oil and gas sector. Additionally, revenues from large scale food and beverage systems were down versus last year.
Segment income was $45 million, down 7% and margins declined 40 points to 11.8%. The Gerstenberg acquisition diluted margins by about 60 points in the period and the lower sales volume particularly in the oil and gas sector was the primary cause of the decline in segment income.
This decline was partially offset by restructuring savings and benefits from lean and supply chain initiatives. Sequentially our revenue increased 8% and margins increased 10 points.
Flows ending Q2 backlog with $636 million, that's up 3% from Q1. Orders increased sequentially primarily driven by food and beverage system orders.
In addition to the large order in Europe which Chris mentioned, we also continue to see strong orders for smaller food and beverage systems in Asia Pacific. Book and turn orders across our oil and gas, food and beverage and industrial markets with stable quarters to quarter.
Moving on to the Thermal segment, our reported revenue to Q2 with $393 million, up 7% from last year. The SPX Heat Transfer acquisition contributed 6% year-over-year growth, organically revenue increased 3%.
This was primarily driven by an increase of dry cooling and heat exchanger projects. Thermal had strong growth in emerging markets as sales into China and Africa more than doubled as compared to last year; currently changes reduced revenue by 3%.
Segment income includes 78% to $49 million and margins increased 490 points to 12.4%. The profitability improvement was due to improved project execution and an increase in higher margins dry cooling revenues.
Margins also benefited from the early completion of certain retrofit projects in the United States. Looking at the sequential performance of thermal, revenue increased 11% from Q1 driven primarily by the timing of dry cooling projects and an increase in retrofit projects.
Segment income was up 55% from Q1 and margins increased sharply to 12.4%. The profit improvement was driven by early completion of the retrofit project and also an increase in the higher margin dry cooling revenue.
Thermal ended the quarter with the backlog of $1.6 billion, that's down a 11% from Q1, changes in currency rates reduced the value of the backlog by 4% and the organic decline by 7%. As a reminder, quarterly changes in our thermal backlog are highly influenced by the timing of large orders.
The decline in our thermal backlog is largely due to continued spending restraint by US and European utilities, as well as our execution on the South African project. Fundamentally, we believe the need for power infrastructure remains strong and we expect them on to increase over time as economic recovery continuous.
In terms of management, we continue to see signs of significant recovery, revenue increase 16% to $240 million in Q2, organic revenue growth was 18% offset partially by 2% decline due to currency. Organic growth was driven by increased global sales of diagnostic and service tools to OEMs and their dealership networks.
Better than fare collection systems also increased sharply year-over-year , partly due to stimulus funding. Regionally, our revenue grew 27% in Asia Pacific and 21% in the Americas, revenue in Europe was flat versus last year.
Segment income increased 78% to $24 million and margins improved 350 points to 9.9%. This improvement was driven largely from leverage on the organic revenue growth.
We also benefited from cost savings associated with the restructuring actions taken last year. Sequentially revenue increased 17%, OEM sales increased as we recorded revenue related to new vehicle programs for Ford, Saab, Volvo and Mitsubishi.
Aftermarket sales also up due to seasonal demand for air-conditioning test units. We also have launched program in Philadelphia to upgrade the fare collection systems on the city streets and buses.
Segment income margins improved 330 points in Q1 driven primarily by leverage on the revenue growth and a favorably sales mix. As we look to the future we are encouraged by the anticipated increase in new platform launches, which are a key driver for revenue for this segment.
Many of the launches are expected to be hybrid or electric vehicles. Last year we began a program to support the development and roll out of OEM electric vehicles.
As part of this program, we have developed an SPX home charging station. We are supporting GM's prelaunch program for the Chevy Volt with installations of home charging stations to key stakeholders.
Our fourth segment, Industrial Products reported revenue of $173 million in Q2, that's down 22% organically from the prior year. This decline was driven by reduced volume and lower pricing of medium transformers into the US transmission and distribution markets.
Q2 revenue in our transformer business was down nearly 50% versus the same period last year. This was offset partially by double digit organic growth in sales of hydraulic tools, crystal growers and telecommunications technology.
Segment income was $18 million, 10.2% of revenue. Decline in segment income and margins was due to the organic revenue decline in the transformer business which offset improvements in the other businesses.
Looking at the sequential trends, second quarter revenue was flat to Q1 and margins declined 140 points. Our industrial segment backlog increased 3% sequentially $369 million.
The increase was primarily driven by the $18 million ordered we received for crystal growers. The backlog for power transformers declined 6%.
Pricing on new transformer orders remained competitive in Q2. However, we did see a slight pick up sequentially in order volume.
We expect order volume to increase modestly in the second half of this year as utilities exhaust their 2010 capital budget. Load on the grid has increased somewhat this summer due to the hot weather and increased economy activity.
This is putting stress on aged transformers. Our revenue target for this business remains at $250 million in 2010.
Based on second quarter pricing for new orders, we expect operating margins on transformer shipments in the second half of the year to be in the mid to low single digits. Although we believe we are nearing the bottom of the cycle for transformers, it is difficult to predict timing or pace of recovery.
At this point, we have only about four months' visibility. Our joint venture with Emerson Electric, EGS is the primary driver of our equity earnings.
In the second quarter, we reported equity earnings of $7 million, that's up 31% from last year. The joint venture completed an acquisition of a small company during the quarter focused on expansion in South America.
Our portion of the investment was $16 million. End market demand for EGS' hazardous electrical equipment improved during Q2.
Based on the acquisition and increased demand we have raised our full year target for equity earnings to $32 million, about 12% of our 2010 estimated pre-tax income. Moving on to free cash flow, we generated $36 million during the second quarter, up 11% from last year.
This reflects $12 million of CapEx and $7 million of restructuring spend. Through the first six months we reported a net cash use of $1 million.
Our first half of (inaudible) performance is in line with our experience in prior years. The majority of our annual cash flow is typically generated during the second half.
We expect 2010 to follow this historical trend and expect to meet our full year free cash flow target of $180 million and $220 million. At the midpoint this represents a 115% conversion of net income.
Before I turn the call back over to Chris, let me briefly review the revised assumptions for our third quarter and full year EPS guidance. In Q3, we are targeting year-over-year revenue growth between 8% and 13%.
We expect revenue from acquisitions to contribute approximately 5% growth and we're targeting organic growth in the single digit. Segment income is targeted between $143 million and $153 million, down about 5% from Q3 2009 but up about 9% sequentially from Q2.
We expect Q3 margins to be down compared to last year primarily due to lower pricing on transformer shipments. We are targeting segment income margins to be flat sequentially at about 11.5%.
Our EPS guidance for the third quarter is $1.00 to $1.10 per share. Changes in short cycle order trends, timing of restructuring actions and volatility in foreign exchange rates could impact actual results.
Looking at the full year target by segments, these targets now reflect the Q2 results and our updated expectations for the remainder of the year. For flow, we are targeting revenue growth between 1% and 3% with segment margins between 12.6% and 13%.
Our targets for flow now include the Anhydro acquisition. We're expecting about $50 million of the revenue contribution from Anhydro in the second half of the year.
Looking at thermal, we've narrowed our revenue range and are now expecting revenue to be flat to up 2%. Based on the margin performance in Q2 we have increased the margin target for thermal to 10.7% to 11.1%.
For test and measurement, we narrowed the target ranges and now expect revenue growth between 6% and 8% with margins around 8%. For the industrial segment, we are expecting revenue to decline 10% to 12% and we've reduced the full year margin target modestly to about 10.5% at the midpoint.
On a consolidated basis, we are targeting approximately $4.9 billion of revenue in 2010. This represents a total revenue change from 2009 between 1% decline and 2% growth.
We are expecting organic revenue to decrease between 1% and 3%. Acquisitions are expected to increase annual sales by about 4%.
Our guidance model assumes exchange rate from late July. Based on these rates currency fluctuations are now projected to have about 2% negative impact on the full year revenue.
Segment income margins are expected to be between 10.8% and 11.2%. In the revised model our adjusted full year tax rate is 34%.
Our earnings per share guidance range is $3.30 to $3.50 per share. We have included a full earnings model to the midpoint of $3.40 in the appendix of this presentation.
Cash flow guidance of $180 million to $220 million includes approximately $40 million to $50 million of cash restructuring, $35 million for pension funding and $90 million to $100 million of capital investments. I'd like to remind you that we have about 50 million shares outstanding.
This makes our EPS model highly sensitive to changes. $750,000 of operating profit is equal to approximately $0.01 of earnings per share.
Also certain events noted on this chart could occur over the balance of this year and in fact our actual EPS and free cash flow results. With that, I will turn the call back to Chris.
Chris Kearney
Thank you, Patrick. We remain confident in our long-term strategy and we continue to invest in future growth opportunities both organically and through acquisitions.
Since our last earnings call, we have executed several strategic actions that we believe improve our competitive position across our three key end markets. In Q2, we now plan to expand our transformer manufacturing facility in Waukesha, Wisconsin.
The plant expansion will add 140,000 square feet of manufacturing space, an increase of about 50%. Once completed we expect that Waukesha Electric will be able to offer the broadest array of power transformers of any domestic transformer producer.
Our net investment is expected to be approximately $45 million with a very attractive return on capital estimated at greater than 20%. The feedback we've got from our customers had been positive and several of them have made inquiries and requested quotes.
We are currently participating in bids on large power transformers that we intend to manufacture in the expanded facility. We expect to complete the land purchase and permitting in the coming months and we are on track to start construction by the end of this year.
The construction is expected to be completed by the end of next year and we expect to ship our first unit in 2012. Just a few weeks ago we completed the acquisition of Anhydro, a leading global supplier of custom engineered food and beverage processing systems.
Last year 72% of its revenue was generated from sales into the food and beverage market. It also serves chemical and pharmaceutical markets.
Annual revenue was approximately $100 million and we expect the acquisition to be accretive to earnings within the first 12 months. Anhydro was based in Denmark where they have a state-of-the-art facility dedicated to application development and customer trials.
Its core competency is in evaporation and drying technology which enables us to broaden our system capabilities and on liquid applications in the powers. Prior to the acquisition, Anhydro outsourced all of its component manufacturing.
Going forward, we intend to supply many of the components required for Anhyrdo's systems internally. We believe Anhydro is an excellent strategic fit.
Its system technologies complement our APV and Gerstenberg Schröder designs. Our customers have provided very positive feedback on the acquisition and are expanding systems capabilities.
Lastly, we announced that we have acquired a minority position and entered into a strategic alliance with Launch Tech. Based in China, Launch is a global player in the automotive aftermarket.
Last year it reported $68 million of revenue with 50% generated from sales into China. It also has a strong presence in Europe and in the United States and a leading presence in other emerging markets like Russia and South America.
Its total sales have grown 15% on average over the past three years. Under our framework agreement, we expect to work with Launch to co-market each other's products and leverage our global distribution networks.
This alliance is a natural strategic fit. It's designed to drive mutual growth by enabling both of us to serve our customers on a global scale more efficiently.
So, in closing, through the first half of this year, we've seen recovery in many of our early cycle businesses. As we anticipated market conditions in our mid to late cycle businesses remained depressed.
Our Q2 earnings increased over last year and exceeded our expectations. We're pleased with our financial results for the quarter and we've raised our full year EPS guidance by about 8%.
Our globalization strategy has driven significant year-on-year sales increases in emerging markets. We've benefited from the restructuring actions taken over the last two years and we see continuous improvement through the focus on our operating initiatives.
Our financial flexibility has allowed us to execute on strategic actions in each of our key end markets and we believe we are well positioned for growth as our markets recover. We are confident in our long-term strategy and we plan to continue to prudently execute this strategy to create value for our shareholders.
So, thanks again for joining us on the call and at this time will be happy to take your questions.
Operator
(Operator instructions). Our first question comes from the line of Bob Cornell with Barclays Capital.
Please proceed.
Bob Cornell – Barclays Capital
Since I am first up I will ask the obvious question. I mean, transformers had a tough quarter, you're talking about expanding order volume but a weak second half, maybe just give us a better view of that picture from your mind?
Chris Kearney
Yeah, sure, Bob, we would be happy to. Again to reiterate our prepared comments, we remain bullish on the long-term attractiveness of this market, medium and long-term and that hasn't changed nor really has our view on 2010 changed.
Our financial targets for the transformer business for this year haven't changed. We are still targeting about $250 million of revenue from our transformer business this year and that's down a little more than 30% from last year.
That decline as we mentioned before Bob is about half price and half volume. So our guidance assumes that pricing remains challenged in that business throughout the balance of the year.
So, there haven't been any meaningful changes to conditions in that medium power transformer market in the US since our Q1 call. We did, as Patrick mentioned, in his remarks we did see some modest increase sequentially in order volume most likely reflecting those customers using their capital budgets for the remainder of the year.
Historically in that business what we've seen is volume increases preceding price movement. So it is also important to remember that at this point in the cycle our visibility on transformer shipments is really only about four months and with that level of visibility it is really difficult for us to predict when we will see a recovery in that market.
So, its premature I think for anybody to say that we have seen a bottom in this market. We have seen rolled on electricity grid increased due to the summer heat and partly due to some increased economic activity, but again at this point it is really unclear as to what levels of impact that increased demand is having exactly on our business.
So again to reiterate, we think increased electricity demand will be a key driver for recovery. In the medium and long term we have confidence in the dynamics of this market.
We still think it's an attractive place to be and we have validated obviously that confidence by the investment we have chosen to make in Waukesha both to expand our capacity and to expand our technical reach in that business. So medium to long term we like the dynamics of our business.
Bob Cornell – Barclays Capital
Do you have a comment on the price embedded in the backlog relative to the price embedded in the Q2 shipments?
Patrick O'Leary
Obviously, at the time we have been shipping orders that were taken at higher prices. We went into the year with a lot of pre-recession orders and so, throughout the last over year we have had this dynamic of shipping orders that were taken significantly before.
That will mitigate as we come through the tail end of this year. Basically, if you look at the pricing over time, it has come down and at this level it's a $250 million business with single digit margins.
Bob Cornell – Barclays Capital
Okay, follow up from me, I mean thermal had a great quarter, I mean maybe a little more color on what's rolled out and what the outlook is
Patrick O'Leary
Yeah, what we saw about was, a couple of things one a better mix of business with more of a dry cooling mix in the quarter. In addition to that we had some recon business which tends to bring with it better margins.
In terms of project execution, what we have seen consistently over the last couple of years with Drew and his team is much better performance in terms of execution on these projects; we have talked in the past about better contract instruction. So as a whole that business continue to improve in the way they run it and manage to continues to improve.
Then on some of those recon projects we are incentivised to move efficiently and to complete the jobs early and there are incentive payments that come with the early completion of those projects and some of that was in the mix as well.
Chris Kearney
Obviously that segment has been and will continue to be lumpy based on the timing of these large orders. So, you are going to continue to see fluctuations quarterly both in terms of the top line and in terms of the margin delivery.
Operator
Our next question comes from the line of Nigel Coe of Deutsche Bank. Please proceed.
Nigel Coe - Deutsche Bank Securities
Just wanted to dig into the second outlook a little bit more. A couple of things jump out of me.
The first is the big pick up from 2Q to 3Q on the revenue line, just wonder if you could maybe provide a little more color on the moving parts between 2Q and 3Q?
Patrick O'Leary
Yeah, it's really relating to some timing issues and what we are seeing is that the timing of restructuring action impact, the move from Q2 to Q3. As we mentioned on the call some of the restructuring actions that we expected in Q2 have shifted into Q3 that accounts for about $0.09.
Nigel Coe - Deutsche Bank Securities
Right, but more on the top line, Chris.
Chris Kearney
Sure. If you look at the thermal segment as I discussed I'm saying it's obviously project driven and lumpy.
If you look at flow, it has been sequentially improving. We have the dip in margins in Q2 that's largely driven by dilution from the Gerstenberg acquisition and obviously the absolute OP dollars there were brought down by the organic strength.
So, in terms of first half to second half, we are showing little over $2 in the second half versus about $1.37 in the first. The big changes are in between the first half and the second half are in thermal and flow.
Nigel Coe - Deutsche Bank Securities
So this sounds like that the Q2 to Q3 revenue pick up driven more by thermal than anything else.
Chris Kearney
Project I mean.
Nigel Coe - Deutsche Bank Securities
Right, okay and then just to look at the flow margins, it looks like you got into low 13% to 14% margins in second half. We have seen sub 12% margins year to date, margins that bump around 12% in 2009.
What gives you the confidence that you are going to get that raise in the second half of the year, particularly given Anhydro is going to come in 3Q and seems that's going to be dilutive?
Patrick O'Leary
Yeah, it is. I mean, at the start we'll be going through the post accounting effect with the Anhydro.
If you look at business volumes we do have one large project that's scheduled in the second half. You can tell from the comments that we had two quarters now where the backlog has improved and so the early short cycle trends are actually pretty decent and fairly stabile there.
So, it is fair to say that we're expecting sequentially ramped up performance. Then you look at the margins compare to history they are actually very doable.
Nigel Coe - Deutsche Bank Securities
Okay. And then finally from me, you gave some color on Waukesha margins in the second half of the year, I don't think you've ever given that kind of color before.
Can you maybe put that in context where they are running year-to-date turns and may be 2009?
Patrick O'Leary
I am not going to go into the financial statement to the transformer business, but you know relative to history, at the bottom of the cycle we tend to come down to low single digit margins. So, just really what we're trying to do that with give an indication about kind of where the business is operating.
You can tell in terms of the way the backlog is developing that the rest of the businesses which are mostly shorter early cycle businesses are kind of holding there own against the transformer business in terms of development at the backlog. Just I want people to understand a lot of the pain that we dealt within this business was from the middle of last year to the middle of this year.
So we got this continuing impact that we just discussed about the rolling effect of declining pricing in the back log and how that actually gets delivered out in revenue. As we said we expect the business to just stay at this kind of level as we develop up the year.
Nigel Coe - Deutsche Bank Securities
One more crack. Just to understand the first half and the second half swing in the industrial segment, can you just provide any color whatsoever on Waukesha margins being, I thought, in mid to upper single digit, is that through similar range?
Chris Kearney
Yes.
Patrick O'Leary
Yeah, in the first half of the year they were in, and then as we moved to the second half and we're working off a lower price backlog you move to double digit this thing.
Operator
Our next question comes from line of John Inch with Merrill Lynch. Please proceed.
John Inch - BofA Merrill Lynch
Firstly Chris or Patrick, what is your expectation of deal related cost, I guess, for the quarter and then for 2010 as part of your guidance given the acquisitions you have this far?
Chris Kearney
Well, with respect to the restructuring it includes about $5 million to $10 million of costs related to acquisition integration. With respect to, what I would call direct deal cost, they are in the range of $3 million to $5 million for the full year.
Those are some external costs, lawyers, etc and some sort of T&E type costs. So those are really the two buckets, John.
John Inch - BofA Merrill Lynch
As we roll into 2011, Patrick, if you were to kind of with the three primary deals what would be a rough estimate of the magnitude of accretion from these transaction? So, I guess you have the cost of voidance and accretion prospects?
Patrick O'Leary
No, it's really premature to give that. You could look at the revenues.
There is another factor that takes place and that is in the first period for a full inventory turn there's no there's no manufacturing profit allowed to come to the income statement. So, you've got a period of time on these acquisitions where you've got a quarter or so where there isn’t any contribution.
Most of these acquisitions that we've done in the last 18 months they've got a profile that looks like they would ultimately come up to the average margins for the segment and you could take those revenues and give the teams some integration time 12 to 18 months and then stop modeling the revenues at those at those levels.
Chris Kearney
The other thing, John, that's challenging in terms of integrating particularly the board acquisitions that we do it it's some times difficult to accurately predict the pace of restructuring because of the issues that you have to deal with in terms of the changes that go along with that working with accounts and things like that. So, with any of these obviously we try to effect the integration plan as quickly as possible, but sometimes to those restructuring costs do get pushed depending on how quickly we're able effect the changes we need and go through the appropriate works account.
John Inch - BofA Merrill Lynch
Yeah, now I understand. I think you said, Chris, Anhydro is expected or maybe Patrick said, expected to be accretive.
If you start at $0.10 to $0.15 cents dilution at 2010, it sounds like it could be sort of comparable amount of accretions of maybe towards the back half of the ’11 although sequel. It’s that’s sort of fair?
Patrick O'Leary
We'll give a more definitive indication (inaudible) when we do guidance for 2011 but the actual amount and timing restructuring is, as Chris mentioned, quiet volatile. The level of restructuring under the new accounting going forward relating to acquisition will obviously be variable and we’ll do our best to give an indication of that, but with $35 million of restructuring embedded in this year's guidance obviously the level of overall restructuring both operational and acquisition related in 2011 will have a fairly significant impact on the earnings.
John Inch - BofA Merrill Lynch
Yeah, I know that’s fair. Chris, I think was that a conference you were asked about your thoughts on South Africa, and obviously there is still that sort of funding question looking ahead.
I think, the fact that your project are continuing is a pretty good sign and some people make conjecture that South Africa will find the money. All that said, what potentially is the variable kind of revenue deferral, if you want to call it that, that could impact 2011?
Again I know it's premature, but if you had just sort of sized the risk, I don’t think its high but it's probably a deferral, how would you frame it at this point based on everything you understand to be in place?
Chris Kearney
I can't really comment on 2011. What I can tell you, John, is that you know as this year has progressed.
We've clearly become more confident with respect to our views regarding the risk of cancellation. We've taken about $180 million of progress payment so far, we’re producing as required and as scheduled.
So, those projects are moving along just fine and that the real risk of delay that we see in South Africa is really no different than we see in any of these other large projects that are more construction related than anything. Having said that, the pace of our project thus far in South Africa has moved along as anticipated.
With respect to Ascom and their funding challenge, they still do have a funding gap going forward. We don’t see that impacting also other suppliers in the short-term.
That’s something that they’ve made progress thus far in resolving both through additional loans and through significant rate increases over the last two years. As we look at 2010, what we said so far about that with respect to South Africa is that we’re looking at about another $250 million of revenue coming out of those projects, which is how we pace it for you when we talked about before.
Patrick O'Leary
Which is not just significantly about the 2010, John
John Inch - BofA Merrill Lynch
Yeah, I understand. Actually it almost sounds like you’re a little bit more confident about next year anyway.
Do you guys have any kind of an update on India? I mean, the power market there when you read the various headlines suggested that markets really beginning to pickup here on several different fronts, I guess from a generation standpoint.
What’s going on your Thermax business? Are you thinking about perhaps expanding your footprint in any kind of a more tangible way to kind of capture opportunity in the Indian market?
Chris Kearney
Yeah, we continue to see in the John has a very attractive market for us. I think with great opportunity not only in our power-related businesses, but across really all of our major end markets and so, it’s a focus of significant development opportunity for us.
In fact, we just hired a new Country Manager for India who will start shortly for us. With respect to our Thermax joint venture, I had occasion to meet our joint venture partners a few weeks ago.
As we said before Thermax is a very impressive company and a great partner. We continue to see opportunity to leverage that relationship to help us even beyond the scope of the intended joint venture.
So, the joint venture and our relationship with Thermax is progressing as we hoped and as we planned, but there are, we think, just enormous opportunities for SPX in India. We are going to continue to work with Thermax and we are going to continue to work now under the leadership of our new Country Manager who is going to bring our businesses together in a more coordinated way to try and get those opportunities.
It will be important.
John Inch - BofA Merrill Lynch
Do you have any financial targets in mind, Chris, over time may be not necessarily near term?
Chris Kearney
No, in the near term we will talk about that, when we talk about when we talk about guidance on 2011 in January.
John Inch - BofA Merrill Lynch
Over time how big could SPX be in India do you think?
Chris Kearney
Well, I think, it's hard to predict that. If you want to use China as a proxy, I mean you look at the rate of growth for us in China over last eight years, it has been pretty dramatic.
As you know, John, I mean it's gone from basically no presence to now a significant presence and significant revenue. We think that India affords the same kind of opportunity.
It has been a little more challenging to get at it as other Western companies that have experience. We think particularly in basic infrastructure and basic process equipment needs and also with respect to automotive diagnostics.
We have got great customer contacts there, and there is good opportunity. So, it's going to be the focus of development for us for sure.
Operator
Our next question comes from the line of Phil Gresh with JPMorgan. Please proceed
Phil Gresh – JPMorgan
Just on the transformer businesses trying to get a sense you obviously sound incrementally more positive here. Do you feel like Q2 here, I mean is the inflection point and even if the recovery is gradual or is it?
I am trying to get sense of that versus budget plus comment.
Chris Kearney
It's really too early to say that. The comments coming out of our customers which you can see a lot of those publicly are I would describe as cautious.
Really how they set the 2011 capital spending budgets I think would be more of a factor. We do see some order taking for 2011 and we have a number of reasons for that one might be that our customers see pricing right now as attractive and maybe kind of as good as they get but you really can’t say.
We really haven’t seen a significant change in that market. It is fair to say there was a slight improvement in demand.
I think there are a number of factors for that. Typically, our customers will move to use all of their 2010 capital budget.
The load is a little different obviously regionally based on the way the weather has been. So, I would say that we haven’t changed our view for this year and that we are still in a very cautious mode with respect for that business.
Our medium to long term view obviously supported by the significant investment we are making in large power is still that the drivers of recovery are all basically there. We just honestly cannot tell you.
If you look at the top of the cycle we consider it a long cycle business, but at this point in the cycle we consider it a short cycle business and visibility is limited with us basically participating more in the open market than with direct customer negotiations. So, I think its going to be a while before we know where the exact inflection point has been.
The business is operating right now at kind of a operating level it came to at the last point of the cycle, but obviously we have a little more volatility when you get down to low single digit margins.
Phil Gresh – JPMorgan
The second question and is just on the guidance the math around it. I mean I think in the past couple of years you said the average Q4 earnings are about 36% of the total year and this year if you kind of back into it it's more like high 20s.
Is there something specific going on in the Q4 that lead you to say that or is it kind of conservative at this point in the cycle?
Chris Kearney
Yeah, it is a little bit unusual given our historic trends in the business, but as we have mentioned before Phil its really a mixture of things its in project timing in our thermal segment where we see more projects weighted in the middle of the year and then seeing them drop off in Q4. We have got the sequential decline in the pricing of transformers in Q4 and which is going to be the least profitable for our industrial segment.
It's just also important to remember that two thirds of our business is short cycle and so we don’t have great visibility to book and turn orders towards the end of the year. So, I think given the economic conditions that we are all working our way through I think we have been appropriate and appropriately cautious in terms of how we looked at the second half of the year and particularly Q4.
The other thing I would mention is it's important to remember that restructuring is expected to be significantly higher in the second half 24 million versus a 11 in the first half of the year.
Operator
Our final question today comes from the line of Ajay Kejriwal with FBR Capital Markets & Co. Please proceed.
Ajay Kejriwal - FBR Capital Markets & Co
Nice margin performance in thermal and you touched on mix and execution. Maybe talk about the currency dynamics a little bit.
If I recall correctly you do a lot of designing engineering work in Europe and your costs are in Euro, but you are selling in South Africa and emerging markets. So, as the Euro has depreciated versus the dollar how has that helped you?
I know, you talked about the top line.
Chris Kearney
Yeah. Honestly, Ajay, its not that significant because the funding in South Africa is actually coming from a quasi-governmental entity, there is a substantial local requirement.
In fact there is black empowerment legislation and so, we are helping our immediate customers meet those local requirements through local manufacturing. So, while it is true that small portion of the contract is actually being engineered outside of South Africa, in Belgium, in Germany, the reality is that most of the cost is taking place locally.
So, with respect to volatility from the actual movement between the currencies we do have some banker evidence in place to eliminate that volatility. So, with respect to currency at this point for the South African activity I don’t honestly expect it to be significant on the full recovery horizon.
Ajay Kejriwal - FBR Capital Markets & Co
It was not a meaningful for number helping increment margin in the quarter?
Chris Kearney
No.
Ajay Kejriwal - FBR Capital Markets & Co
On test and measurement, nice improvement in segment performance. So, how should we think in about revenues in this business and I don’t care much backlog in the business but to the extent you have visibility on new platform launches and pending expectation with auto dealers?
Patrick O'Leary
It's really our shorter cycle business and there is some seasonal elements for this year that’s a little different. I mentioned the concentration of air conditioning sales in the second quarter, some projects (inaudible).
So, I think over time for the segment we would expect to see the segment normalize and looking forward certainly we look for the breaking through the double digit marginal performance. It's got a significantly lower US cost price from the restructuring that we have done.
Try to get some regional color on the call today. Obliviously, from those remarks you heard the Europe is flat and so, the overall environment for spending is somewhat uncertain but Asia much smaller, moving forward, a lot of activity.
So, I think the real move in that business relates to 2011 and 2012 changes in the overall market. It's obviously too soon to give numbers for them but certainly expect the test and measurement segment to recover.
Chris Kearney
Yeah, what we have said all year, Ajay, is that we expect to receive the recovery this year. As Patrick just outlined, and we are seeing but really beyond this year when more and more of those new platforms roll out that’s what really drives growth in that business.
I think from a cost position and from a technology position globally that business is better positioned today that it’s ever been. So, that's what give us confidence in that segment going forward.
Ajay Kejriwal - FBR Capital Markets & Co
I have not heard you call out fare collection systems in a while, but sounds like that was positive you have got some order in the quarter. So, maybe some color on what you’re seeing the business and expectations?
Patrick O'Leary
Yeah, what we’re seeing in that business just we’ve seen some short-term benefit from a lot of the stimulus dollar spending in the United States and that is a US business almost entirely. So, they have seen the benefit from some of the local cities getting funding to upgrade the systems on their busses.
Chris Kearney
Frankly, longer-term we see the market there quite positive. We expect the better government to continue funding transportation quite heavily over the next couple of years.
Ryan Taylor
Thanks Ajay. That concludes our call for today.
I’ll in the office most of the day if you have follow up questions. We thank you for joining us on the call today.
Operator Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may disconnect.
Have a good day.