EnerSys (ENS) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the EnerSys third quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time.(Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Mr. David Shaffer, President and CEO. Sir, you may begin.

Thanks, Bridget. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted on our website slides we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to go to the webcast tab in the Investor section of our website at www.enersys.com. I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subjectto uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons.

Forward looking statements are based on management's current views regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of factors that could affect our future results, including earnings estimates, see forward-looking statements in item two, management'sdiscussion and analysis of financial conditional results of operations set forth in our quarterly report on form 10-Q for the fiscal quarter ended January 1st, 2017, whichwas filed with the U.S. Securities and Exchange Commission.

In addition we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see ourcompany's Form 8-K which includes our press release dated February 8th, 2017 which is located on our website at www. EnerSys.com. Now let me turn it back to you, Dave.

Thanks, Mike. On Wednesday, we announced our third quarter results of $1.18 per share, which was above our guidance range of $1.12 to $1.16. And a quarterly dividend of $0.17.5 per share, payable on March 31st. You notice on slide three, we had another good quarter and achieved third quarter records for as adjusted gross profit percentage of 27.6% as well as earnings per share of $1.18.

The increased year-over-year profitability was due primarily to lower manufacturing costs, improved pricing and mix and for earnings per share from lower tax rate and shares outstanding. These as adjusted results do not include the third quarter charge of $17 million for the German competition matter. We believe it was appropriate to take a charge at this time, and in our recent 10-Q we presented a financial range of possible outcomes. Unfortunately we are unable to discuss this issue any further as this matter is still ongoing. I would refer you to our fiscal year 2016 10-K and subsequent 10-Qs for additional commentary on this issue.

Please turn to slide four. I now want to focus on our current business activities and fourth quarter guidance. During the quarter I was pleased to see our Europe, Middle East and Africa and Asia regions improve their year-over-year sequential operating earnings percentages. The EMEA region was once again able to exceed our 10% minimum operating earnings percentage target at 11%. This was primarily the result of increasing year-over-year mode of power premium product mix and the benefits generated from our cost reduction programs without which the EMEA region would not have exceeded 10% operating earnings.

In Asia, we experienced improved results in India, an increase in ICS profitability in Australia, and China's organic volume was higher. On a year to date basis our Asia region, operating earnings percentages approximately 6%, which is about 500 basis points higher than last year's comparable year to date percentage of 1%. In addition, Asia is a net intercompany importer and therefore assists the other regions especially EMEA, in increasing their local profitability.

Please turn to slide five. During the fourth quarter, our global lead costs will continue to rise sequentially and year-over-year by over 10%. In addition, other raw material costs such as steel, plastic and copper are also rising. To combat this increase to our cost of goods sold, we have initiated price increases effective in January through April, and will automatically realize lead pass through increases on approximately 30% of our business. Additional price increases are likely given that LME lead prices have exceeded $1.05 per pound. The Americas regions will not realize any material price increases until the first quarter fiscal year 2018, while EMEA and the Asia regions will realize a majority of their price increases in our Q4 fiscal year of 2017.

Please turn to slide six. I want to briefly cover the remainder of our global businesses. In mobile power we continued to experience slow growth in the Americas and Europe, but still at historically record levels with good, premium products mix. In reserve power, we continue with trends of; one, strong uninterrupted power system sales and orders in the U.S. and Europe; two, lower telecommunication sales and orders in emerging markets which slows especially our EMEA region; three, higher Americas enclosure business; four, increased sales in the U.S. of odyssey TPPL batteries to the trucking industry; and finally five, our aerospace and defense business in the U.S. is seeing good demand across all product sectors while Europe's A&D business is off due to some pushouts in business.

Based on the above trends and information, our earnings per share guidance for our fourth quarter is between $1.19 and $1.23. We anticipate a sequential increase in sales volume and pricing and reduction in operating expenses, all to be offset by increasing lead costs.

Please turn to slide seven. I want to shift the discussion to our M&A strategy. We continue to be very active on the M&A front, even though under my tenure we have not executed a large acquisition to date, there is a lot of activity going on behind the scenes. We are looking at a broad range of companies and different battery technologies and chemistries, globally, bolt-on and complementary businesses. In order to assist in managing these opportunities, we have recently added a Vice President, Business Development. We are doing a lot of work to find and execute the right deals for EnerSys' shareholders.

Please turn to slide eight. I wanted to provide an update on our lean initiatives program. We have begun our lean deep dive at four of our facilities that impact $900 million in annual sales. This is the beginning of the global harmonization process that will lead to eliminating waste, increasing productivity and cycle time compression, which will ultimately lead to organic growth and cost-savings. In fiscal year 2017, most of our efforts have been made in the cost reduction part of our business. We estimate that approximately $25 million to $30 million of savings will be achieved this year. A portion of these savings will be offset by annual cost increases, such as wages. We estimate that the net savings to EnerSys this year from our first year of lean initiatives will increase our operating earnings percentage by approximately 50 basis points.

Please turn to slide nine. A final reminder that our next Investor Day will beheld on Tuesday, February 28th at the New York Stock Exchange. We look forward to seeing you there as we highlight the company's accomplishments, strategies and goals.

In closing, I am very pleased with our third quarter performance. We are experiencing profitability improvements in Asia and EMEA and continue to drive our mix of premium products. Our lean initiatives have started in earnest and the initial savings are already impactful. I remain excited about EnerSys' future and the short-term and long-term market opportunities we are pursuing. Now I will ask Mike Schmidtlein to provide further information on our results and guidance.

Thanks, Dave. For those following along on our webcast, I am starting with slide ten. Our third quarter net sales decreased 2% over the prior year to $564 million, due to a 1% decrease in volume and a 3% decrease from currency translation offset by 1% increase in price and 1% from acquisitions. On a regional basis, our third quarter net sales in the Americas were up 3% to $314 million, while Europe's went down 6% to $186 million, and Asia decreased 10% in the third quarter to $64 million. In the Americas, a 2% increase in acquisitions and 1% from volume offset a 1% currency decline. Europe at a 1% decrease in volume and 5% of negative currency. In Asia, the volume decreased 9% and currency declined by 2% while pricing increased 1%.

On a product line basis, net sales from motive power were down 3% at$293 million, while reserve power was flat at $271 million. Motive power had a 1% increase in pricing overcome by 2% decline in volume and foreign currency. Reserve power had a 3% currency head wind offset by 2% in acquisitions and a collective 1% in price and volumes.

Please now refer to slide 11. On a sequential quarterly basis, third quarter net sales were down 2% to the second quarter from 2% negative currency. The Americas region was down 3%, while Europe was 3% higher and Asia was down 10%. On a product line basis, motive power and reserve power were both down 2%.

Now a few comments about our adjusted consolidated earnings performance. As you know we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our company's Form 8-K that includes a press release dated February 8th, 2017 for details concerning these highlighted items.

Please turn to slide 12. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $10 million to $69.3 million, with the operating margins up 190 basis points. The increase in operating earnings from the prior year reflects higher pricing and lower manufacturing costs. On a sequential basis, our third quarter operating earnings were down $2 million on lower revenue and higher lead and manufacturing costs, with the operating margins flat at 12.3%.

Operating expenses, when excluding highlighted charges, were at 15.3% for the third quarter compared to 15.0% in the prior year. The full year's operating expenses for fiscal 2017 should be comparable to fiscal 2016 of approximately 15%. Excluded from operating expenses recorded on a GAAP basis are net charges of $14.8 million, primarily related to the $17 million chargefor the German competition matter and EMEA restructuring or exit charges and credits.

Excluding those charges, our Americas business segment achieving operating earnings percentage of 14.3% versus 13.6% in third quarterlast year, primarily from the impact of higher volume and lower manufacturing costs. On a sequential basis, America's third quarter decreased 120 basis points from the 15.5% margin posted in the second quarter due to higher commodity and manufacturing costs.

Europe's operating earnings performance of 11% was up from last year's 8.4% and from last quarter's 9.4% on better price, mix and cost reductions. The operating earnings percentage in our Asia business improved in the third quarter this year to a 6.3% operating profit from a 2.4% income in the third quarter of last year, and from last quarter's 5.1%. Asia's improvement reflects better mix and manufacturing costs.

Please move to slide 13. As previously reflected on slide 12, our third quarter adjusted consolidated earnings of $69.3 million was an increase of 16% in comparison with the prior year, with the operating margin increasing 190 basis points to 12.3%. Excluded from our adjusted net earnings from the third quarter is approximately $16 million in after tax highlighted charges, the largest being the $17 million charge for the competition matter in Germany. See our press release issued yesterday for the details of those items.

Our adjusted consolidated net earnings of $52.0 million increased 25% from the prior year, or $11 million, and improved 200 basis points to 9.2% of sales. The $11 million increase reflects the $10 million higher operating earnings and the lower tax rate. Our adjusted effective income tax rate of 20% for the third quarter was lower than the prior quarter of 24% and the prioryear's third quarter rate of 23%, due primarily to better performance and lower tax jurisdictions. We believe our tax rate for the fourth quarter of fiscal 2017 will be approximately 23% and the full year we expect the rate to be approximately 24% on our as adjusted earnings. However, this assumption anticipates no significant changes in our tax rates or legislation in the countries whoa operate in.

EPS increased 28% to $1.18 on higher net earnings with 0.80 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buy backs last fiscal year. We expect our final fiscal quarter 2017 to have approximately 44.2 million of weighted shares outstanding.

Please now turn to slides 14 and 15. As usual, we have provided information on a year to date basis similar to that of our third quarter on the prior pages. These two pages are for your reference and I don't intend to cover the year to date results.

Please now turn to slide 16. We have added this slide to provide investors with additional insights into our business and how potential U.S. tax law changes might impact us. In light of our modest net importer position, we would expect an additional U.S. tax impact that we believe we could mitigate relatively quickly. If overseas profits are taxed, it would have a larger negative one-time consequence,but would free up nearly $400 million in cash from general corporate purposes and potentially lower interest expense. In general we believe our global footprint and strong capital position allow us the flexibility to adapt to many future tax changes.

Please now turn to slide 17. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong and we now have $467 million of cash on hand and short-term investments, as of January 1st 2017, with over $451 million undrawn from our credit lines around the world. We generated $167 million in cash from operations in our year to date and fiscal 2017.

Our credit agreement leverage ratio is at 1.5 times and will likely drop further by year-end, barring any significant acquisitions. Capital expenditures were $36 million in the first nine months of fiscal 2017 compared to $46 million in fiscal 2016. We expect to generate adjusted diluted net earnings per share of between $1.19 and $1.23 in fourth quarter fiscal 2017, which excludes an expected net charge of $0.04 per share from our continuing exit in South Africa and other restructuring programs and acquisition activities.

We anticipate our gross profit rate in the fourth fiscal quarter will decline approximately 100 basis points from higher lead costs, and our interest expense to be approximately $5.9 million. In conclusion we remain excited about our future opportunities. Now let me turn the call back to Dave.

Thanks, Mike. Bridget, we can now open the line for questions.

Thank you. (Operator Instructions) Our first question is from the line of Ben Hearnsberger from Stephens Incorporated. Your line is open.

Good morning. Thank you for taking my question. This is actually [Hugh] on for Ben. In regards to the geographical performance you all have seen some nice growth tail winds from the Asia region before this quarter and we saw this close to a 10% decline in this quarter. Can you talk about anything noticeable that lead to this decline and the near term and long-term opportunities in this region going forward?

Hugh, this is Dave, nice to meet you and thank you for joining us. A lot of the growth you noted in the Asia region was business at a very large telecommunications provider in China, and as you probably know, China -- excuse me, telecom tends to be a very lumpy business. And so it was just a slow down from this customer in terms of the number of sites and the amount of capital they wanted to deploy this quarter. In the long run we know this customer has a lot of work to do, and we anticipate this business will cycle back up at some point.

That's helpful, thank you. And then can you just put some more color on the growth opportunities from some of your newer products like OptiGrid?

Yes, Hugh, we remain very bullish long-term on the OptiGrid and energy storage systems in general. I hope you can join us later this month at the New York Stock Exchange because you would have a chance to meet our new Chief Technical Officer and he will roll out our new product road map. And you would see in there different components of where we think the market is going to be. It is never fast enough, and I've said on many calls in the past, the energy storage markets have evolved very slowly. In general, we are very optimistic and very excited about it. It should be an important part of the product portfolio coming over the next five years or so. And then in terms of other growth opportunities, we have talked a lot about getting deeper into the heavy truck market. We have seen great growth in that arena with some of our premium products. We have new mode of power products we will be talking about later this month. In general, energy storage continues to be an exciting opportunity and we look forward to it.

Great. It is great to meet you guys and best of luck.

Thanks.

And our next question is from Noah Kay from Oppenheimer. Your line is open.

Good morning, gentlemen. Thanks for having me on, and great to be with you for the first time. Looking forward to seeing you at the exchange for the Investor Day. So just to talk about the quarter first; obviously you had improved profitability across all of the segments and it looks like a lot of that was coming from the cost reduction and frankly the contrasting discipline across the lines of the business. But going forward you mentioned some of the puts and takes in Asia. How much pressure are you seeing right now in some of the key end markets whether it is materials handling or telecom? And do you think that maybe there is an opportunity for a bit more up lift to pricing as we go into future quarters?

Noah, welcome to the team. We look forward to working with you in the future. I'll just take the different pieces. On the motive power, we -- again we have no indication from any of the industrial truck association data, current order rates, the conversion rates of gas to electric in China -- everything seems and continues to be healthy in that regard. We've talked a lot about on prior calls about the complexity of today's material handling and about the velocity of goods and transactions and inventory turns. And all of this continues to be in our favor and a lot of focus for our guys. Because these aren't extraordinary growth rates. It has been a steady and solid business for us and a lot of the focus for us is improving the price mix with premium products and that will continue to be the opportunity.

On the reserve power side, we talk a lot about tell telecommunication with the cycles. That's been the disappointment for us for several quarters. We had great opportunities in Asia, in China specifically. That slowed down this particular quarter. But again, I think one of the other important things to mention in that regard is that it does feel like we found bottom in the EMEA region when it comes to telecom. We've now, on a sales per day basis, have been in a fairly flat part of the curve for probably three quarters in a row now. So we feel like that hopefully is going to start to tick up as people start to invest further into 4G and 5G, as maybe some of these developing markets shore up a bit. So that's always a frustrating piece of our business to forecast, but long-term we still feel like we have the right product solutions to help the customers.

And in the other parts of our market growth wise, our customers still continue, especially in the heavy truck markets, to realize and recognize the superior performance of our products. And as we talked about in the past that's a billion dollar addressable market of which we have a very, very small share and a lot of upside growth potential. Did that get it?

Yes, and just to follow-up on the last point, can you update us on your expectations for how you are thinking about adoption of these premium products in the heavy truck market, maybe over the next year or so? You talked about that in the past, kind of what you thought the cadence would look like. Is that pretty much the same track?

I would say we have done a great job. I just looked at this number. We historically have said -- and if you looked at some of our old decks that our premium products were about 25%. That was sort of the normal run rate. The -- we just ran the numbers yesterday to double check and it is actually trending close to 35% today. So that, again, has been a real focus for us. It has been critical, especially in EMEA, to help protect against the normal everyday pressures of a competitive business.

And that clearly shows in the margins as well. And maybe just a last question -- and more on the cost side. You have seen and you talked about lead prices creeping up for the quarter, maybe seeing some stabilization at this point, but we seem to be coming off of a cyclical bottom over the past year or so and returning to more normalized prices. We actually heard a pretty material announcement from a very large lead acid battery manufacturer this morning on the new innovative lead to cycling process. I was just wondering how you are thinking about managing your lead exposure from here? And whether or not you see any potential changes or disruptive technologies out there that would kind of help you get a little buffer against the volatility of commodities beyond the hedging strategy you have in place?

It is a great question. We are excited about the Aqua Metals technology. We are certainly rooting for them to be successful. Clearly, sources, especially domestically, of high-quality environmentally-friendly recycled lead is a net positive for the industry. We look forward to that.

The smelters are a tricky business. Sometimes you love them and sometimes you hate them. It depends on which part of the curve you are on. For us right now we will come back to the strategic question and talk more about the price management side. This industry has matured since maybe a decade ago in terms of the discipline of price recovery. It is good to see, but it is always hard to catch up. I would say that as you noted, commodity pressures are still -- they hit us fairly hard in Q3 and will hit us really hard in Q4 and there is a tremendous pressure on how our sales team is right now to continue to push these things -- push these prices through. Then there is continued pressure on our Chief Operating Officer to continue to drive cost and waste out of the business so we can stay ahead of this.

I would say one thing I would note and one of the reasons I think Europe had a pretty decent quarter is they tend to be heavy on allot of the price pass throughs. They are automatic in nature. It is a higher percentage of their sales are using that. I think they got out a little sooner than maybe our U.S. business did, in terms of price recovery. We never catch it on the way up. We never catch it fast enough, but we'll catch it. We will eventually get that recovery where we need it to be. Europe got out ahead.

In terms of our smelter as part of our acquisition strategy, is Aqua Metal something we would consider investing in? Absolutely. Nothing is off the table in that regard. We have to make sure these are good investments and that market has changed dramatically over time as the price of -- in the old days scrap batteries used to be free. So smelters, there was a very good business proposition to be made there. But today scrap isn't free. Users have realized the value of those and so the economics are not quite the same anymore, but it is definitely not off the table. Is that enough detail on that?

That's extremely helpful. Thanks for the color, and see new a few weeks.

Thank you. Look forward to it.

Our next question is from the line of Michael Gallo with CLK. Your line is open.

Hi, good morning. My question is on the margins. Obviously as you look forward, you have the -- up to 8% price increases going in. I was wondering, one, if you see any signs of any freeloading (inaudible)? Two, whether you have any concerns that these price increases may be offset by some declines in volume? And then a follow-up question if you have the latest ITA data that would be helpful. Thanks.

Okay, Mike. It is Mike Schmidtlein and I will try to take those. Our margins -- in my script I mentioned our fourth quarter gross profit we would expect to decline about 100 basis points. We will be seeing sequentially call it $15 million or so in additional lead cost pressure. The price increases that we discussed will offset two-thirds of the number. That's the net 100 basis points reduction is kinda taken with the pricing. When costs are going up, the prices always lag behind by a quarter or two. It does put pressure on us, from a margin standpoint.

Our fourth quarter is always our strongest quarter. Some of that has to do with our customers mostly being on a calendar year basis, and their capital budgets get refreshed. It generally has the most days, working days, and has the fewest holidays. You get the benefit of those items which then allows the volume that we anticipate to be in our fourth quarter to overcome the net price cost differential. We'll see an expansion in gross profit dollars in our fourth quarter despite a decline in the margin as a percentage of sales.

In terms of data and I think -- if we are referring to the WITS data which is the industrial truck market, it remains a very robust market. We typically look on the trailing three months in comparison with the prior year. And when you do that on a global basis, the new truck orders are up 11%. And that is not outside of the quarter intake increases year-over-year that we are currently seeing. Now to your point about whether -- are customers getting ahead of upcoming price increases? That could be the case. But we've seen relatively strong growth -- double-digit growth this our orders in the last 16-week period. We measure four weeks, eight weeks, 12 weeks, 16 weeks; in all of those we have seen good, solid growth which I think the ITA data supports.

I would say certainly some of that, it is hard to separate how much as a result -- but just going back the 12-week data probably doesn't have a lot of the impact of the price increases, and it was over 10% globally in terms of order rate growth. The orders continue to be in decent shape, and so volume should be all right in the quarter. It is really a question about, and I hope all my guys are listening; it is all about price recovery, price recovery, price recovery.

Just a follow-up to that, Mike, I think I was asking more -- and maybe I didn't clarify -- on the margins as you get into the first half of the next fiscal, as you start to put this $1.05, $1.06, $1.07 lead through. Should we still assume two-thirds is a good prophesy -- which I think has been historically on price per capture? Or does that get to be a level that has increased so much in a short period of time, that we might see less price realization than that?

We will continue to see continued pressure from lead costs based on current stock prices. That's certainly going to continue on to our first fiscal quarter. That's when we'll start seeing the price increases that we announced in the Americas. That's when those will start to have a benefit. Europe will be one quarter further along in that process with their pass throughs. I would hope that -- while I don't know we would get a 100% recovery on lead cost increases year-over-year, I think we would be narrowing the gap between what our pricing is lagging. Having said that the margins we get in the fourth quarter probably I wouldn't anticipate exceeding that in the first quarter. But as you know, one of the reasons we only give guidance one quarter out is we simply don't have enough visibility with our order book and our lead costs to really have a lot of confidence in those numbers at this point in time.

Thank you.

(Operator Instructions). Our next question comes from the line of Brian Drab with William Blair. Your line is open.

Good morning. Thanks for taking my questions and I apologize if I ask something that's already been asked. I've got overlapping conference calls this morning so tell me to go read the transcript if necessary. Mike, I was wondering if you could fill in a couple of holes on the WITS data. Would you mind giving us the North America, Europe, Asia? And also is this the three-month period ending in January or in December?

This would be the December information. The January numbers typically don't come out for another week or two. So they are not as fresh as perhaps we would hoped. But to your question, Brian, the total Americas were up 3%. Total EMEA was up 13%, with Western Europe at 12%. And Asia was up 15%; for that total worldwide 11%.

What was the Europe number again one more time?

So EMEA was 13%.

Thank you. And then as we look back at the motive segment, I think this is the first quarter in a few years where you -- sorry, you had a decline in volume year-over-year. And I'm wondering, is this temporary? How do we reconcile that with still continuing good truck order data?

Brian, if you look at the year to date numbers, motive for us is a fairly steady business. This quarter we stepped off a little bit. I dug into that. It was a couple particular brands that were off, and now we look at the order rates for those brands, and they have come back strong. I don't see any underlying issues based on the WITS data Mike just quoted, based on the current order book. I think we just had some timing of some big orders and maybe some comp issues. But in general, everything looks solid on the motive power front.

Thanks. And then I don't know if you touched on this, but any color on the anti-competitive situation in Europe that you could offer?

So you missed it earlier, but as I said in the prepared remarks, we just really can't comment on it because it is an open issue, and I just refer you back to the Qs and the K about all of the detail we can provide at this time.

Understood. Thank you very much.

Thank you.

We do have another question from Howard Rosencrans with VA. Your line is open.

Yes, hi, guys. Congratulations on another very good quarter. I'm curious regarding the use of the -- you gave some color sort of on the scale of the capital that you have overseas, and I believe you said $400 million, if I am not mistaken, that you would hope to bring back but it is mitigated by the international tax situation. Can you give us some color on the plans for what you might do with that capital? And just broadly what are you seeing on the acquisition front? Are there more substantive acquisitions for calendar 2017 might bring than in the past? Thank you.

Yes, as I said for a couple quarters now that our focus is to be on maybe some larger deals and get the average deal size up. We are bullish on the opportunities we have in the pipeline today. That is clearly our number one choice for use of cash.

In terms of the repatriation, I don't know what strings would be attached yet. We have to wait and see what the tax rules come out as. As you know we have some debt and some interest expense, that it might make sense to pay that down and get that interest rate down. We just have to see what rules apply. But the number one choice is the M&A pipeline and we are optimistic.

I'll ask one question follow on in that regard then. Dave, what would you and your board or management team feel comfortable with, in terms of a leverage ratio? I've considered the leverage ratio very, very modest considering how exceptionally well -- and I mean that in all sincerity -- you guys have run the business over the years. Where might you go to if the right acquisitions were to turn up, in terms of leverage ratio? Thank you.

So, Howard, this is Mike. I will try to answer your question. This is some insights that we plan to give in our Investor Presentation Day at the New York Stock Exchange at the end of the month. In terms of size, we believe that we could make an acquisition as large as $2 billion. The leverage ratio that would come up from that would be somewhere slightly over three times. You have to keep in mind that typically when you make big acquisitions, you are acquiring very established companies that have a very well-defined and demonstrated cash generation of their own. So you are fairly quickly paying down that leverage ratio. And I think -- assuming that everyone is comfortable with the quality of the targets that we might be looking at, I think that is not outside of the realm of comfortable operating ranges, with the expectation that within two or more years you would probably be back down somewhere comfortably in the two's.

Okay, and then I will ask one more if I might. Let's say that on the -- that in 2017 you weren't successful in identifying some meaningful acquisitions. Would you consider a meaningful return of capital, either in the form of maybe a one-time dividend or a meaningfully higher ongoing dividend? And in the same context, would you update me where we stand on the buy backs? You guys have always been price sensitive, and in that regard you have done a spectacular job in supporting the stock, but I am just wondering, with the stock at these levels what your posture might be. Thank you.

It is going to come down to what the stock price is at the time. We will always make that assessment. It will depend on what the likelihood if it is not 2017 what the likelihood of a deal is in 2018. So it is very difficult to give you a flavor for that as we sit here today, but we'll assess it. We are open minded. One-time dividends, changing our dividend rate going forward, it is all on the table. Nothing's off the table. We will just see what the situation is, but obviously the job -- our job is to emphasize M&A. That's what we are trying to do.

And Howard if I could add just a little color to that, sometimes if we were looking at a large transaction that would be material non-public information which would preclude us from being out in the market buying our shares. So sometimes even if the share price looked like it was below the intrinsic value of our stock we may not be able to participate. As we know, there is a better part of the year where our window is closed for normal operating results and the timing of the window and when those are made public.

But to Dave's point, M&A would be first. There is so much uncertainty right now on what the tax situation might be, not only in the U.S., but throughout Europe with the [beps] initiatives. We have no idea what type of reactions other countries might have if the U.S. makes changes in their trade policies. So I think it would cause us to really want to assess the situation carefully before jumping out in a big way.

I know I could compute this easily, but I don't have it in front of me. You guys are one and a half times net levered including the cash overseas or is closer to one time? If you could just ballpark that for me.

That's the credit facility in which we don't get full credit for those overseas funds. The logic there was if you brought down the debt you'd have to pay that US tax rate it has largely gone untaxed at. If overseas profits were taxed under any of the plans that are being discussed on the U.S. basis, then you have suddenly taken that off the table. And that's where you would say, okay, in that case you may -- and if interest expense, I think whether that gets grand fathered as not -- if it ever becomes non deductible, it would make interest expense a much higher priority if you had an expense that was not tax deductible. You could have debt repayment and you could be looking at dividend changes, M&A, as we discussed, and of course share buy backs are still an option.

During the quarter did you purchase any stock? I'm sorry. I didn't catch that.

We did not acquire any shares in this quarter. We have an authorization that is available and it is approximately $20 million. So relatively modest. It is the annual acquisition that we typically will try to make to offset the dilution that comes from our stock compensation programs. But other than that we have nothing further and have not made anything in this fiscal year to date.

Okay, great color. Thank you so much.

Thank you.

And I am not showing any further questions, so I will now turn the call back over to Mr. Shaffer for closing remarks

Thanks, Bridget. I just want to thank everyone for attending the call today. We look forward to seeing you at the New York Stock Exchange on the 28th and have a great day, everyone. Take care.

Ladies and gentlemen, this does conclude the program and you may now disconnect.