Enerpac Tool Group Corp (EPAC) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Actuant Corporation first-quarter fiscal 2013 earnings conference call. During the call, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded on Wednesday, December 19, 2012.

It is now my pleasure to turn the conference over to Ms. Karen Bauer, Actuant Director of Investor Relations and Communications. Please go ahead.

Good morning, everyone. Welcome to Actuant's first-quarter fiscal 2013 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; and Andy Lampereur, Chief Financial Officer. I would like to point out that our earnings release and the slide presentation supplementing today's call are unavailable in the Investors section of our website.

Before we start, let me offer the following cautionary note. During this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from the statements. These factors are outlined in our SEC filings.

Consistent with prior quarters, we will utilize the one-question, one-follow-up rule in order to keep today's call to an hour. Thank you in advance for following this practice.

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

Thank you, Karen. And thanks for joining us today on our first-quarter earnings call. The first quarter was more challenging than we expected going into the quarter, particularly from a core sales point of view. While Industrial and Energy continued to see positive growth, we saw significant declines in Engineered Solutions and on- and off-highway vehicles; as well as in Electrical, notably in the solar market.

As Andy will explain, an insurance recovery and favorable effective tax rates helped us mitigate most of the margin and EPS impact of the larger-than-expected sales decline. We responded to weaker conditions by controlling the things we can control, namely our cost structure.

We pulled the trigger on a number of contingency plans we had in place, which included both structural and temporary cost actions. I'll provide detail on this more, later in the call, along with guidance.

With that, I'll turn it over to Andy.

Thank you, Bob, and good morning, everyone. I'll provide some additional color on our financial results we reported today. Summarizing our results at a high level, we generated first-quarter sales of $377 million, down 4% from the prior year, due primarily to weakness in the Electrical and Engineered Solutions segments, as well as modest foreign-currency headwinds.

Our first-quarter operating profit margins declined 100 basis points year over year, and 70 basis points sequentially to 13.6%, due primarily to the lower manufacturing cost absorption, given the lower sales volume. Our EBITDA margin decline was slightly better at 60 basis points down, the difference due to currency activity in the prior year.

Diluted earnings per share was $0.49 in the first quarter, $0.01 below the prior year, which was the combination of lower sales and margins, partially offset by lower income taxes and financing costs. Our effective tax rate for the quarter was about 18.5%, which was lower than we had forecasted. This reflects some tax reduction actions we initiated during the quarter, and will help drive our full-year tax rate to around 21%.

Now I'll provide more color on our results, starting first with the sales line. Our first-quarter sales were down 4% on a year-over-year basis; reflecting a 7% core decline, a 1% currency headwind, and a 4% benefit from acquisitions -- being Jeyco, Turotest and CrossControls. The consolidated core sales reduction was driven by declines in the Electrical and Engineered Solutions segments, which were both down mid-teens on a core basis. In contrast, core sales were up in both Industrial and Energy segments.

We experienced weak demand early in the quarter in several businesses, but most pronounced in businesses that serve OEMs in the vehicle and off-highway equipment markets. These customers started notifying us in October that they were reducing their bill rates for the balance of the calendar year in order to reduce inventory. Recently, they've now extended their slowdown to well into the first quarter of calendar 2013. This obviously played havoc with our production supply chain and sales forecast, causing a sales miss, inventory build, and unabsorbed overhead in the quarter.

In addition to the inventory correction, solar sales were down 61%, a combination of a very high comparable last year, driven by feed-in tariff changes, and weak demand this year; the latter reflecting the spread of the recession from Southern Europe into Western Europe, government feed-in tariff and regulatory changes, and weak consumer and business confidence throughout Europe. Solar was the main driver to the sequential and year-over-year core sales decline in Electrical.

From a sales standpoint, it's important to put the first quarter in context. We started off with a weak September and then saw demand stabilize -- albeit at a lower level than what we would like -- most notably, again, in Electrical and in the Engineered Solutions segments. We're comfortable that the reduced first-quarter demand was not the result of market share losses. Despite Electrical and Engineered Solutions challenges, it's important to note that our first-quarter core sales did grow in our two most profitable segments, Industrial and Energy.

Due to the limited visibility of the production cuts by the OEMs, our ability to quickly rip out manufacturing costs and overhead was limited in the quarter. This hurt absorption in our facilities and adversely impacted our operating profit and EBITDA margins. It was most visible in the Engineered Solutions segments results, where margins took a large hit sequentially and year over year.

Overall, our consolidated operating profit margins declined to 13.6%, which unfortunately broke our string of 11 consecutive quarters of year-over-year operating profit and margin expansion.

Now I'll provide some color on our results by segment, starting first with Industrial. The Industrial segment generated 2% year-over-year core sales growth in the quarter, a continuation of the trend of moderation we had been seeing. During the quarter, as expected, the growth experienced in the integrated solutions product line more than offset the slowing economy's impact on the base industrial tool product line. Despite the recession in Europe, the Industrial segment generated modest year-over-year growth there on account of robust integrated solutions project business. This same mix, however, hurt margins, as the IS projects don't generate as high a margins as the standard industrial tools.

Within the Industrial segment, end markets with better than average demand in the quarter included bolting, energy and mining, where we continued to capitalize on our vertical market strategy and took market share.

Shifting now to the Energy segment, market conditions there remained steady. Although at first glance, the 4% core sales growth was a noticeable decline from the 14% core growth we reported last quarter, Hydratight core sales growth were again in a healthy double-digit range. Cortland, however, had a lumpy first quarter, with a year-over-year sales core decline, despite very strong bookings and quote activity. We remain confident about the outlook for Cortland and expect solid growth for the full year. In fact, we've recently won at Cortland a $5 million umbilical order from a new customer that will ship later this fiscal year.

On the margin front, the report is good within Energy segment, where we had a 60 basis point year-over-year operating profit margin expansion. This was due in part to favorable segment sales mix as well as the additional volume.

Turning now to the Electrical segment, year-over-year sales declined 16% on account of the drop in the European solar demand that I discussed earlier. Within North America, we saw positive core sales growth in the retail, business-to-business, and utility channels. However, OEM volumes were below last year, especially in transformers, and resulted in an overall mid-single-digit decline in North America for the Electrical segment.

Electrical segment operating profit was up sharply over last year's first quarter low-water mark, attributed that to the savings from the transformer plant consolidation project that was wrapped up last quarter, as well as the insurance recovery from a fire at Mastervolt's Dutch facility.

Now on to the final segment, Engineered Solutions. This segment clearly felt the biggest impact from the inventory corrections, which impacted nearly all of its end markets. Coupled with the fact that the Engineered Solutions has the heaviest proportion of its sales from Europe of any of our segments, this resulted in a tough quarter and a 17% core sales decline.

Bob will elaborate on the contingency actions we took in the segment during the quarter in order to reduce costs. But it wasn't enough to make up for the reduced sales volume in the quarter, resulting in a sizable decline in Engineered Solutions' first-quarter operating profit margins.

Before turning the line back over to Bob, I'll quickly conclude with a snapshot of our cash flow, liquidity and capitalization. Now, as is typical in the first quarter, our free cash flow lagged earnings on account of the payment of annual expenses that we accrue throughout the year, including prior-year 401(k) contributions and bonuses, as well as annual insurance premiums.

Although not impacting first-quarter free cash flow, we also paid our annual dividend in the quarter. And we repurchased an additional 260,000 shares of stock under our buyback authorization. We're still comfortable with our existing $200 million free cash flow forecast for the year.

Our net debt to EBITDA leverage is at 1.2 times, still below our long-term targeted range of 1.5 to 2.5 times. Liquidity and availability both remain in great shape, with our full $600 million revolver available and ready to fund growth investments.

With that, I'll turn the call over to Bob.

Thank you, Andy. As part of the 2013 annual planning processes, our businesses put together contingency plans, and we began acting on a number of those as the quarter unfolded. In general, they can be classified in three broad areas -- temporary cost reductions, structural cost reductions, and accelerated acquisition integration activities.

The actions varied by business, with the most extreme actions taken in segments that are seeing the biggest topline weakness -- Electrical, and Engineered Solutions. In total, we reduced headcount by about 100 people, or 2% in the quarter, with about another 100 headcount reductions planned for the balance of the year.

Depending on the business, we have delayed or reduced annual raises; we've reduced workweeks; had furloughs; cut back on travel and other discretionary spending. Plans are in place at a number of the low-cost country expansions in order to structurally shift capacity from higher-cost areas. For example, we moved a number of Maxima's product lines from a US facility to a Mexican facility.

In addition, we've taken actions at recent acquisitions to better leverage functions between sites, which is leading to some consolidation. For example, we consolidated our Power-Packer truck facility in Brazil into Turotest's nearby plant. The cost of these downsizing actions are incorporated into our outlook in fiscal 2013, and represent a net hit to EPS next year, but will benefit earnings in subsequent periods.

Two additional things to keep in mind on the cost front -- first, our teams do an excellent job of executing these types of actions, and we proved that in the last recession. Second, in the great recession we took out about $40 million of structural cost, reducing or headcount from 8000 to 6000 employees, and closing about a dozen facilities. Very few of these positions have been added back.

While we focus on cost reductions, we aren't losing sight of growth and innovation investments at Actuant to support our long-term sustainable growth. We have demonstrated success with growth and innovation, and you can see some recent examples on this slide. In a low-growth environment, it's more important than ever for Actuant to gain share and expand our global reach. We have and will continue to balance the short-term cost reductions with investments in the long-term.

Rather than go through these wins from the slide -- which are measured in millions -- let me make the following comments. Our Growth and Innovation efforts have led to product innovations in all four segments. Similar to our OpEx continuous improvement efforts, we've created standard processes that now focus across all Actuant ATU business units regarding Growth and Innovation.

And finally, a big part of Growth and Innovation is emerging market opportunities. We made a major step forward this quarter, opening an Actuant office in Bangalore, India. Similar to our successful China facility, this facility will support Actuant business units worldwide. This includes sales to third parties and sourcing engineering and IT services internally for Actuant.

So, in summary, we're getting traction through our Growth and Innovation initiatives, and we're committed to this effort even in the current challenging economic environment.

The other growth focus is acquisitions. We have a high level of activity in the funnel, heavily weighted towards the Energy space. There are a number of tuck-in and midsize Weasler-like deals at various stages in the process, and we feel good that some will cross the finish line. You may recall we talked about a bigger deal in the pipeline. We took a pass on that deal recently, due to integration complexity.

As we've communicated many times, we believe that the integration phase -- the I in our AIM process -- is so critical to an acquisition's success, that without it, it didn't make sense to go forward with this deal at this time.

Now let's turn to guidance. As we discussed in the release, the current macro environment is definitely more challenging than it was on our last earnings call. There is increased global uncertainty, which results in customers essentially delaying decision-making on purchases, investments and new projects.

We see this in most of our businesses. Many customers are highly focused on reducing inventories at the dealer or retail level, down through the entire supply chain. You've all heard a number of well-known OEMs publicly acknowledging this in recent earnings calls and investor conferences.

We believe the bulk of the inventory corrections will be completed in early calendar 2013. We see good momentum continuing in Energy, and have a solid backlog in Enerpac IS. So at this point, we're leaving our full-year guidance and free cash flow unchanged. But recognize that it will be more back-end-loaded, and likely to be at the lower end of the guidance range versus the upper end.

As I explained earlier, we are triggering contingency plans in the first quarter in order to protect earnings. We are, however, reducing our 2013 full-year sales guidance to $1.6 billion to $1.625 billion. We now expect full-year core sales to be down 1% to 3%, compared to the earlier guidance of 3% to 5% positive; with the back half up, and the first half down.

The change is largely driven by the lower solar sales in Electrical, and inventory corrections by the Engineered Solutions OEM customers. Core sales outlooks for Energy and Industrial are generally in line with our earlier guidance, although at the lower end of these ranges versus at the top.

For the second quarter, we're expecting sales of $360 million to $370 million, and EPS of $0.34 to $0.38 a share. In the second quarter is usually our seasonably weakest, and it will be magnified this year by the customer inventory de-stocking efforts, as well as some of our downsizing costs.

Obviously, you can do the math. To achieve the midpoint of our full-year EPS guidance, we need about 20% year-over-year improvement in the second-half earnings. So why do we believe this is possible? There are a number of factors to consider, as you will see here.

A better balance of OEM production schedules and end-market demand is probably the largest piece. Easier second-half comps; cost reductions savings, from the cost reductions we've done; coupled with the prior year, we had restructuring costs that are not repeated; and lowering finance costs, the result of the refinancing and debt conversion in the third quarter of fiscal last year.

So, despite the growth-challenged first half, we are optimistic about the year-over-year second-half earnings growth. And we are ready to reduce costs further if the economy worsens. As Andy stated earlier, we believe our free cash flow will be around $200 million for the year.

Finally, as always, future acquisitions and stock repurchase activity are not included in the guidance. But as we've already discussed, we have a pretty robust pipeline, and we would expect to deploy capital on both as we move forward.

That's it for my prepared remarks. Operator, please open the lines up for question-and-answer.

(Operator Instructions). Ann Duignan, JPMorgan.

Hi, guys. It's Ann Duignan. Could you give us a little bit more color on the customer inventory corrections? We're all well aware, I think, of the Caterpillar's announcement that they have quite a lot of inventory to cut. But does it go beyond that, across more industries or more regions or more customers? Any color would be greatly appreciated.

Let me tackle that, Andy, and if I miss any comments, please help me out. Basically, when we looked at the guidance that we gave at the beginning of the year, I think we had already -- and we were already in a decline in the European OEMs, so the truck and auto. And what we saw this quarter was really some of the North American market starting to do the same thing. And that was in agriculture, off-highway equipment, construction equipment. So it was something that I think was kind of compartmentalized to Europe and China last quarter, and moved to more of a global inventory correction in this quarter.

Yes. What I would add to that, Ann, is in Europe, we had seen it in the back half of last year, certainly in truck and auto. We saw it in the newer acquisition, CrossControl. They serve mining and forestry as well. It happened there. This is globally we're seeing this; it's not just Americas, but the big shift was in the Americas.

Fourth quarter of last year, fiscal year, to first quarter of this year -- most of our OEM accounts -- off-highway, construction equipment, mining, 20% to 25% lower production rates than the fourth quarter.

So, Ann, I know you cover a lot of these companies. What we are seeing is basically what they are saying publicly. That they are trimming -- it's the back half of this year -- that they're going to trim, depending on the market, they are going to trim into the first quarter. But they are all also saying 2013 calendar year is going to be somewhat flattish, not necessarily down -- and certainly not down what we're seeing at the production level.

So, we're pretty optimistic that we've seen a big chunk of this. There will be some more carryover into the second quarter, and then things will moderate. And we'll be back to production equals sales. And that's what we didn't see this quarter.

Okay, that's very good color. I do appreciate it. That helps. And then a more philosophical question, you've noted on the larger opportunity for an acquisition, you took a pass because integration, by your measure, was going to be too complex. Does that imply that this was a spinoff of a larger corporation; and, therefore, those always get messy and that's what caused you to change your mind? A little bit more color on what you define as, the integration was too complex.

Yes, you are somewhat precisely right. It was a spinoff of a bigger company. And a lot of the shared services had been centralized at the bigger company level. So first, you're going to have to de-integrate from the parent and then re-integrate into our business. And that seemed to us to be kind of a double integration with a lot of complexity.

Okay. It's good to know that I'm almost precise. I'll get back in line and take my questions back into the queue. Thanks.

Allison Poliniak, Wells Fargo.

Hi. Good morning, guys. Going back to your acquisition comments; and you seemed a little bit more optimistic about the pipeline in terms of Energy. If I remember correctly, some of the issues recently have been multiples. Has that changed somewhat, that you're a little bit more optimistic here?

No, I wouldn't say there's been a big change. In fact, during the quarter, a couple of Energy assets went away from us because the multiples were too big. So, I wouldn't say the things that I'm optimistic are getting close to the finish line, have any change in what -- our normal 6 to 8 times EBITDA.

Okay. And then, absent the acquisition, could you touch on -- I guess maybe, Andy, this is for you -- your capital deployment ideas for 2013 in the absence -- say, the acquisition market still remains out of touch here.

Yes, I think we definitely expect to deploy capital in acquisitions, as you said. Beyond that, we put cash on the balance sheet and wait for an acquisition. If we like the situation with the stock prices, if there is a dislocation from a buying starting standpoint out there, we'd act on it. So, those would be the priorities out there. We certainly wouldn't be prepaying any debt.

Great. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

Hi. Good morning, guys. Can you quantify the restructuring costs in the quarter, what you think they are for the year, and how do you think about the savings? And then also quantify the insurance recovery.

Sure. In the quarter it was roughly $1 million. For the full year, it will be --

That's the restructuring, right?

That's the restructuring, right. Yes, thanks for the clarification. Full year, looking at restructuring of roughly $6 million of hits on that. Looking at roughly a 1-year payback, but a lot of the payback will be next year, just given the timing and whatnot. Roughly, of that $6 million, probably looking at $3 million coming at us in quarter two; and the balance in the back of the year.

With regard to the fire again, it was a couple million bucks. That was the gross amount. We also had costs, obviously, that went the other way on it earlier in the quarter, but those are pretty difficult to [quan]. But discretely, it was a couple million bucks.

Okay, and then you mentioned -- you're not changing your topline assumptions for Industrial and Energy, but you mentioned maybe towards the lower end. Where are you seeing variations in those businesses, or resiliency versus what you're seeing elsewhere?

Yes, I think when you look at Industrial -- I think Andy's comments were somewhat clear -- the moderation is in the standard distribution Industrial tool business. The IS is offsetting that; and, also, specialty distribution tends to offset that. So, things like mining distributors or people like that tend to be a little more robust than a general -- a full line distributor.

Over on the Energy side, Cortland was the place that we were weaker. Hydratight, right where we expected it to be; didn't really see any weakness across anything. But Cortland -- it is a lumpier business; we sell large things that, as Andy talked about, you can have a $5 million umbilical. Things were moving around between the first quarter and the second quarter. We're really not that concerned, even though it was negative for the quarter. We're really pretty confident it's coming throughout the rest of the year. It's one of the reasons we get a little more comfortable with the back half.

Great. Thanks a lot.

Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys. On the Enerpac business, the base business, how much was that down?

A couple points, right?

1 to 2?

1 to 2, maybe? 1 to 2 points.

A little more in Europe and a little less in the US, but in that zip code.

Okay. And on the (multiple speakers).

US was actually up. US was up by --

So, Andy is saying the US was up and Europe was down -- in the base.

Okay, that's helpful. On the Energy business, on the Cortland business, what was the magnitude of how much it was down? And then what's been the order intake that you think is going to give it some growth going forward?

Yes, it was down roughly 10% in the quarter. We had a very high order month coming in, particularly in the umbilical space, ropes. And the non- -- I mean, there's portions of Cortland in the Energy segment that really are non-energy; some defense in there, as an example. Our backlog at the end of the quarter was up 10% from the beginning of the quarter. So that gives us pretty good comfort level, where we're at.

And also, importantly, I think the backlog, and things are in the higher value-added umbilical side of the business. As you know, we have a rope business there. We have some industrial umbilicals. A lot of this was the oil and gas umbilicals, which are predominantly UK-based, but they carry a better margin profile.

Thanks.

Ajay Kejriwal, FBR capital markets.

Thank you. Good morning. Maybe a clarification on your guides. So, you're taking your rev core sales guide down by maybe $90 million, $95 million. But you're maintaining your EPS guide, of course, low end of the range. And then there are a couple tailwinds to [accelerate] lower, and it'll be doing a lot of this cost savings work. Maybe help us directionally, are there any businesses that you think will be better? That's a lot of operating income dollars that you've got to make up for, using a 30%, 35% detrimental on that $90 million, $95 million of revs. What are the other positives? If you can help there, that would be helpful.

Well, a couple comments in this area, and then Andy can give some color behind me. The first is, this is pretty typical with what we've done on the upside. When we beat the analysts' expectations in a quarter, it doesn't mean we necessarily change this year. Well, we're in a bit in the reverse this quarter. Just because the first quarter was weak, we don't feel inclined that this is the time to change it. I think we've been self-admitting and very transparent, that the lower end is better than the upper end, given what we see.

So, what are the things that give us comfort in the incrementals, if you will, that you're saying? Well, the largest piece is really those OEM customers, and the fact that we have a high degree of confidence that the inventory correction is going to be over in the second half, and you're going to have reasonable production levels. That business is, in Actuant, is a difficult business to cut costs -- the incremental margins are good in that business. They're bad when it goes down, and they're good when it goes up.

And you guys saw this in Engineered Solutions over the recovery in the last recession. I think the other things I already talked about. We have lower interest expense; the lower tax rate is structural. As we said, we're bringing down our full-year guidance from 22%, 23% down to 21%, 22%. So it's not just a one-quarter thing; it's structural. The cost reductions we talked about, Andy is saying $6 million for the year; about a one-year payback on a lot of that. We'll see some of that in the third and fourth quarter; full-year effect going into 2014.

And then the last thing, and an important one, I think we commented on, is the mix. The two most profitable businesses are still growing. That's Industrial and Energy. We expect that to continue for the rest of the year. So, that mix makes a pretty big difference in that first-half to second-half view.

Good, that's helpful. And then on share buybacks -- so you're not assuming additional buybacks in your guide, are you?

Correct.

That's correct.

Okay. And then restructuring -- that $6 million is included in the guide; it is not excluded.

That is correct, yes.

Okay. That's helpful. Thank you.

Incrementally -- just as a reference point -- incrementally, that's about $3.5 million, $4 million incremental to what we assumed on our last guidance.

Yes. Which is one of the reasons your second -- and the second quarter is the worst. So it's one of the reasons the guidance in the second quarter might look low to you guys.

Matt McConnell, Citi Research.

Good morning. Thank you. Could you maybe differentiate this period versus 2008, when demand really fell off? And I know a lot of your markets are still below prior peak, so there might be less room to drop. But anything else that gives you confidence? Because this is probably expected to be the low-water mark for each of the segments, I would assume, based on the guidance. Any confidence in that reacceleration would be helpful.

Yes. It's an excellent question. And I'll tell you, there were times in this quarter, probably late September -- when, as we said, September seemed like the world stopped -- that I felt like we were going back to 2008, 2009. I don't feel that today. I think the inventory correction, like I said, I think we are seeing where that's going to hit the end of the tunnel, if you will, in the first quarter.

It has not been as global as the last one. Like I say, we've seen pretty good declines in Europe, but there is places that I think are improving. We are not back to -- we haven't even recovered the housing market from the 2008, 2009. I don't see a major market like housing that is going to lead everything down like it did the last time. So, I just don't see how much lower Electrical can go in that regard.

We certainly saw the bottom of the solar market in the quarter, as we discussed. So, that's the topline things. What's structurally different? We went into the last recession, close to 3 times leverage. It was right after the Cortland acquisition. We're going in at just the opposite this time. We're going in at 1.5 -- or, 1.1, 1.2 times leverage; $200 million of free cash flow we're generating this year.

I think it's a very different dynamic on that side. We spent a fair amount of time in 2008, 2009, chasing around with banks and amendments; ended up doing the equity offering at 12. None of that is in the cards, with where our balance sheet is now.

And the final thing I would tell you is Growth and Innovation. It was a big initiative; it started after the last recession. We reinvested into that part of the business. As you heard from my prepared remarks, I'm quite excited about the progress we're making there. I think that is going to be something that's going to be able to mitigate -- I think it's already mitigating -- but I think it will mitigate more, if you have more downturn.

Matt, the things that I would -- the way I would answer the question is, it really feels a lot different than back then. When I think about November, December, January of fiscal 2009, in our case; we went from flat, to minus 10, to minus 20. It just -- every week, businesses were coming in my office, taking their numbers down further. There was no bottom. It was like trying to catch a falling knife.

And what happened here, after we saw September results in the middle of October, they re-forecast the numbers. They hit their numbers. They hit them for October; they hit them for November. So the ability to forecast -- they're hitting their numbers. It's not like catching a falling knife. It's a very different feel right now.

Okay, great. That's really helpful. And going back to the leverage difference versus last cycle, is it tough to complete deals if -- is there any lack of visibility when you are forecasting out what your target companies are going to do? Is that an impediment to getting deals done here? Or did that have anything to do with the large deal going through or was it strictly the integration?

Yes. It had very little to do with the large deal, because of the stuff we're looking at are primarily in the same markets that we're in now; meaning they are not a fairway over. They are the kind of businesses we do now. We really have the ability to calibrate our business against whatever that acquisition is.

And because we can do that, I think we have more confidence in our ability to know what the business is going to do. Where you do see a disconnect is in -- you still have sellers' expectations, trying to price off 2012 or earlier trailing EBITDA. And we are going in saying, gee, guys, that's not the outlook that's going to be out there; and I'm not sure we believe your forecast, up 20% in 2013.

So, that in lies the issue, is the sellers' expectations have to become reality. And, as I said, a couple of deals happened this quarter where either other buyers bought it or the seller simply pulled the process, because he had valuation expectations higher than people were willing to go to.

Okay, great. Thanks very much.

Mig Dobre, Robert W. Baird.

Thank you. Good morning. My first question is on the cost reductions, trying to separate it into buckets. As I understand it, the $6 million that you talked about primarily relates to structural cost reductions. Am I right?

Correct, the majority of it does.

Okay. Can you provide any sort of color on the temporary cost reductions and how those might impact the second half of the year? Because the $6 million, as I understand it, will primarily impact the fiscal 2014.

Just to clarify, the $6 million is the cost of -- that would include, to the extent that we had reductions in force, where we are releasing employees and paying separation pay, that would be in there as well. It is not purely a plant shutdown. It is a combination of the two. If you look at the temporary items -- that would include reduced work weeks, furloughs, four-day work weeks -- it's going to be cutting back on travel expenses, other discretionary type stuff. That's pretty quick. You've already seen a dose of that come through in terms of savings in November. And when you look at our P&L, that's a big reason why our SAE expenses, our SG&A expenses, were down.

Especially at corporate, we are down year over year, even though we've done some acquisitions in the past year. That's why they're down. So, you are already seeing those.

Yes, variable comp is a pretty good issue in itself. Last year, I think we paid out $17 million, $18 million worth of variable compensation. This year might be half of that -- $10 million, $12 million; I don't know, somewhere in there. It's going to be a function of what earnings we deliver, but a lot of those are self-policing. They are part of the structure. The Board agrees them at the beginning of the year.

Our variable comp tends to be tied to our guidance. And so if we're at the low end of guidance, you should think we're probably going to be lower end of the bonus. And these things are self-policing. So that's a sizable chunk. If you look back half of last year, how much you were accruing for bonuses and what you will likely accrue this year. Those things come into play, too.

We didn't include those as reductions, right? Because they're just part of the cost structure that's variable.

Right. And that's where I was trying to get -- trying to understand that dynamic. Then my next question is -- going back to the Energy segment -- I'm trying to understand what your updated expectations for the full-year organic growth would be? Previously you said 8% to 11%. And I know you talked about solid order intake at Cortland. Are you expecting to be maybe towards the lower end of that range? Or is that range not applicable any longer, after the quarter?

No, you're correct. The expectation going in was 8% to 11%. We are holding on to that expectation. But it will probably be at the lower end of that range, as opposed to the higher end, based on the first-quarter miss here in Cortland.

And the same is true in Industrial.

Okay, thank you.

James Kawai, SunTrust.

Yes, good morning. I guess my question is on the Electrical segment. If you strip out Mastervolt, which seemed to add 300 basis points, you get to somewhere in the high- or mid-8s, in terms of operating margins. I was wondering if you can give some color as to the margin goals for that business for the year. I know you did a bunch of restructuring last year.

And then also if you could help us understand, sequentially, how that solar business may play out. I know we had a very tough comp. Maybe when comps ease up in that business.

Yes. The margins -- if we look at Electrical margins in total, and we back out the fire again, margins were still up year over year. If we look at Electrical margins in North America, they were of a couple hundred basis points. EBITDA margins were up a couple hundred basis points year over year. That's reflecting the now-completed consolidation of the Lumberton transformer plant -- shifting it down to a lower-cost country; so we saw improvement coming through in that business.

I believe that answered the question on those two. As to solar, maybe if you can restate that question -- I'm not sure I totally understood.

Well, it seems like a lot of the organic growth decline was attributable to solar. I'm just curious when the comps ease up through the year.

Probably third and fourth quarter. And we had a pretty robust solar year all the way through, last year. The big UK order was first and second quarter (multiple speakers).

Right. I know there was some lumpiness from last year.

Right. I can dig that up. I can come back to it if it's any different than what Bob said here. But I think he's right. This clearly was the biggest bump in the year was -- single bump -- was this UK order. Just in the first quarter alone, as a reference point, our sales in the UK in solar were down $8 million year over year. It's because -- probably the year before, they were probably up $6 million. So it had to do a lot with a single order there.

That's helpful. And then a larger picture, relative to the de-stocking that's going on. I think most people accept that it's pretty broad. Is your sense that the OEMs had too much inventory going into this soft patch? And they are reducing to normal levels? Or is your sense that they are getting ready for, just in case contingencies and taking inventories down below what would promote smooth operations? If you have any color there, that would be helpful.

I don't think we have much color other than to say that what we read on all these customers, and you guys cover a lot of them. It seems to be consistent with what we are seeing as a supplier to these customers. So, most of them are telling you that it is trimming fourth quarter in expectation of a somewhat flat year in 2013, with a truck pre-build that comes late in calendar 2013 in Europe.

That is a pretty consistent message. And I would say, we don't see a lot of difference between what they're saying publicly and what we are seeing as a supplier.

Got it, that's helpful. Thank you.

And, Mig, just to provide you a little color on the solar last year. Directionally -- James, I'm sorry -- $15 million, quarter one of a year ago -- down to $8 million, and then 10 and 10. So you get an idea how big the first quarter was a year ago. And then at the back half it was pretty consistent.

Jamie Sullivan, RBC Capital Markets.

Hi. Good morning. Question on Industrial, in terms of the mix and the margins; how we should think about that dynamic throughout the year, based on what we observed in the first quarter here.

Yes, I'm glad we have question on something that's doing pretty well, which is Enerpac here. What played out in the first quarter was, almost to a t, what we expected from a margin standpoint. We got a little bit of grief when we laid out the guidance. People said, hey, your margins aren't going up. It's because of this mix. We knew that solar was going to -- excuse me -- we knew that IS, integrated solutions, was poised to have a very good growth year, based on the backlog that we had out there, and that's playing out.

The margins in that product line certainly are up from where they were at a couple of years ago when we bought the business. But they are well off or well below the close to 30% EBITDA margins in the base, or north of 30% in the base business. So, you're getting that dynamic going on.

I would expect that to continue on. There is really no difference in view, as far as the way the year is rolling out here. I think our IS will lead from a gross standpoint, and that segment will lead industrial tools, for the balance of the year.

That's helpful. And then a question on the portfolio. Bob, you talked about where you are focused on acquisitions. Are you thinking at all about any divestitures, or where you might trim some of the portfolio?

Yes, we're always looking at that. We're always debating that with our Board of Directors. There is not really much to update you on. There's nothing imminent that I want to update you on. These are topics that, they happen when they happen. They don't get that pre-advertised. So I don't really have much to tell you there.

Okay, thank you.

Charley Brady, BMO Capital Markets.

I just want to go back on the corporate expense line. Some of the commentary -- you've taken some costs out. But the corporate expense line this quarter was a good bit lower sequentially and year on year. What should we be thinking of for a normalized run rate for the remainder of 2013?

Yes, the corporate, Charley, was the impact, when you look at it sequentially from Q4. It was clearly -- the incentive comp was down. That was the biggest factor on that. As far as what we think for the balance of the year, probably $7 million to $8 million or so, quarterly. So probably $1 million or so higher than where we are at right now.

Okay, thank you.

Scott Graham, Jefferies & Company.

Good morning. I just wanted to ask a little bit more about Enerpac. And I know that your distribution does not carry much inventory. But, obviously, in the last downturn, we saw something happen there with inventory. I just wanted to make sure that you guys are still feeling the same way as you did a quarter ago, that the inventory in that channel is nominal; there is nothing excessive out there that has you -- has a cause of concern for the next couple quarters.

Yes. There is nothing out there that gives us any cause of concern. It's one of the fundamental differences, as we talked earlier, from the 2008, 2009 slowdown. And this one, it just -- we did see something in the last one. Our distributors are focused. And we have no indication that they're doing anything other than stocking the top movers, and placing orders for things that aren't top movers, and normal levels of inventory.

Understood. I wanted to also ask you about the passing on the large acquisition. Was any of that having to do with not wanting to take on additional debt into what's a little bit of a murkier environment look in the first half of next year?

Well, we've certainly gotten beat up for Cortland; timing it at the wrong time, right going into a slowdown. I don't think that caused it. The thoughts were going through our mind, Scott. They couldn't not go through our minds that, gee, are we buying at the wrong time in a cycle? As I said earlier, I think we've got that -- that should be reflected in your forecast -- that the business has given you, and what you think you can do in the early years.

But it was a big deal. And it was happening at a time that -- it was north of $500 million -- it was happening at a time where we were concerned about the economy.

Okay, good.

The reason we went away was integration, though.

Understood. Last question -- Growth and Innovation -- is the increase in restructuring not just a factor coming from a weaker environment, but also your desire to keep Growth and Innovation spending at that $20 million level? Or has the number come down as well?

Well, I don't think that number has come down. But what's happened is, it's being annualized. So it's not an increase in our cost structure year over year, because we were running a great deal of that last year.

But that number has not come down, though?

No. Our pace in the last year [has been] $25 million. And, if anything, it's up a little bit from that, as far as what the forecast is.

On a full-year rate.

It's for the year. If you look at our headcount, what's interesting is a year ago -- from the end of November of last year to this year, ignoring the acquisitions -- our headcount is down 100 people. But we're up 100 in the SAE area, which is where the marketing, engineers, and the sales folks are.

Yes.

And that's G&I, so that's really what you're saying.

That's exactly what I said in my prepared comments. It was -- the $40 million of cost take-out is real. We've added back some costs for Growth and Innovation. I like the fact that we're spending the costs on the front end of the business.

Yes. I apologize. I jumped onto the call a little bit late. So I was just making sure. All right, thank you.

Mig Dobre, Robert W. Baird.

Thanks for taking my follow-up. Just a couple of quick ones. Sticking with Growth and Innovation, has the mix and the way you're allocating the spend changed amongst the segments? Just given what you're seeing out there as near-term opportunities.

No, I wouldn't say the mix has changed. We evaluate ideas that come in across all four of the segments. Clearly, I think there was more runway in Energy and Industrial. They have bigger, more global opportunities. And so the projects are bigger and articulated well. And so, they get it; just like they have the lion's share of the profit in the business, they have the lion's share of the opportunity in the business. It tends to follow that split.

Okay. And last question is for Andy, more of a modeling thing. On a tax rate, in the past you've spoken about 23% as a good, longer-term tax rate. Now we're talking 21%. Is this sustainable, and we should be thinking about that looking at 2014? Or are we drifting back towards a more normal tax rate?

Good question.

I'm waiting for this answer. It's going to be good, because I'm going to hold him to it.

Yes, this is really a good question, because I'm trying to figure out what they're doing in Washington right now. So I'm really going to punt on that one. What we are expecting this year -- our rates will be lower as throughout the year. This isn't a one-time blip, and the other quarters are going to be higher than last year. I need a little bit more time.

We're getting -- from a mix standpoint, we're getting more pressure on our rate because more of our profits are in the US right now than in Europe. And, clearly, the US rates are at 35% versus the European rates are down 22% to 25%. So that's weighing against it, on it.

But, on the other side, we have an emerging market strategy that -- China's rates are quite a bit lower. You've got Energy growing, and that's a place where we are deploying capital. And that's a very global business. It's not a US-centric business at all. If it's anything, it's more global. Those things work in our favor. Just the fact that you have more income, obviously, works against the fact that you're under the statutory rate in the US.

My advice to you, at this point, is stick with the 21%-ish this year. But don't bank on that next year yet. It's still early.

Okay. Thank you very much, very helpful.

Ms. Bauer, there are no further questions at this time.

Great. Well, thanks for joining our call today, everyone. We'll be around all day to answer any follow-ups you have. Just a note that our second-quarter call will be held on March 20, so you can plan on that. And, finally, we hope you have all had a very safe and happy holiday. Have a great day.

Ladies and gentlemen, that does conclude the conference call for today. Have a great day, everyone.