Enerpac Tool Group Corp (EPAC) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation third-quarter earnings conference call. If you'd like to view the presentation online, please refer to meeting invitations for details. Afterwards we will conduct a question-and-answer session. (Operator Instructions.) As a reminder, this conference is being recorded, Wednesday, June 19, 2013.

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

Great. Good morning, and welcome to Actuant's third-quarter fiscal 2013 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; Mark Goldstein, Chief Operating Officer; and Andy Lampereur, Chief Financial Officer.

Our earnings release and the slide presentation supplementing today's call are available in the Investors section of Actuant's 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 these 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. Thanks in advance for following this practice.

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

Thank you, Karen, and good morning. We were pleased with our consolidated results for the third quarter. The inflection that we discussed on our last earnings call did, in fact, take place. EPS came in at the high end of the expectations on a comparable basis, aided in part by a lower-than-forecasted tax rate. Free cash flow was also strong for the quarter, as we expected.

Obviously, we had a big change in our reporting, with the Electrical segment now in discontinued operations. We announced the decision to begin a sales process two weeks ago, allowing us to refocus on the three remaining segments. Andy will touch on some of the discontinued operation details shortly.

From continuing operations standpoint, our core grow growth rate, while still negative, sequentially improved. Both Energy and Industrial had positive growth, and we believe the destocking is now largely behind us in Engineered Solutions. Despite the 2% core sales decline, our EBITDA margins remain flat at 19.6%, a good performance, especially considering some of the restructuring costs that we took during the quarter.

We initiated our first look at 2014 guidance in this morning's press release. It does not reflect any capital deployment in M&A or stock buybacks, which would be additive when completed.

I'll review guidance in more detail later on the call, but first I'll turn it over to Andy to cover the financial results. And then Mark and I will come back and cover a few additional topics.

Andy?

Thank you, Bob, and good morning, everyone. There's two items that I want to cover before providing our normal color on quarterly results. The first is the overall accounting for the Electrical segment divestiture; and the second are some comments on income taxes.

Our third-quarter results included a $150 million non-cash net write-down, or $2 a share, of the carrying value of the Electrical segment; as well as $11 million of net income attributable to the segment's results in the third quarter. This net $139 million loss is reported in discontinued operations in this quarter's P&L.

The results of the Electrical segment for prior periods have also been reclassified to discontinued operations, net of applicable income taxes.

Our results for the third quarter of 2013, including the Electrical segment but excluding the non-cash write-down, totaled $419 million in sales and $0.76 a share of EPS. The sales were at the top end of our original $410 million to $420 million third-quarter guidance range. And EPS was well ahead of the $0.63 to $0.68 EPS guidance.

These adjusted results include about $0.05 benefit from lower-than-guidance effective tax rates, as well as $0.02 benefit from an Electrical segment fire insurance settlement in excess of what we had assumed in the guidance. Excluding these items, our EPS was about $0.01 above the top end of our guidance range. So in terms of performance versus guidance or expectations, before factoring out the Electrical segment, the quarter came pretty much together as on forecast.

Core sales growth improved sequentially, and EPS was up year-over-year. Now, part of this improvement in EPS for both continuing and discontinued operations was a lower tax rate in 2013. We had anticipated an unusually low third-quarter tax rate when we provided guidance on our last earnings call, but we ended up with an even lower effective tax rate.

Third-quarter taxes benefited from reversing a tax reserve due to the foreign tax statutes lapsing. Additionally, we had a $0.02 true-up benefit to 2012 taxes when we filed our federal tax return for that year last month.

A few more comments on income taxes. Our go-forward tax rate for continuing operations should be in the 19% to 20% range, other than the current fourth quarter, which will be closer to 25%.

The lower continuing rate results from the removal of Electrical segment profits and income taxes, with the majority of Electrical segment profits generated in the US, which has the highest tax rate of any country that we operate in. So, that's it for taxes and discontinued operations.

Let's review results from continuing operations now in more detail. I'll start first with slide 6, which tracks quarterly year-over-year core sales growth. This trend graph, which we have used each quarter for the last several years, has been adjusted to include just core sales from continuing operations, with the Electrical segment removed for all periods.

We generated third-quarter sales from continuing operations of $344 million, essentially even with the comparable number from last year. That equates to a year-over-year core sales decline to 2%, but an improvement from 5% core sales decline last quarter. Energy and Industrial core sales were up 2% and 5% from a year ago, respectively; while Engineered Solutions' 10% core decline was a sequential improvement from last quarter, and reflects less destocking impact. I will provide more color by segment in a few minutes.

Moving on to the next slide, which is slide 7, our third-quarter operating profit margin from continuing operations was 16.6%, up nicely from our seasonally weak second quarter. On a year-over-year basis, operating margins declined 50 basis points. An increase in restructuring expense in Engineered Solutions this quarter, as well as a shift in sales toward lower-margin product lines within each of our three segments, weighed on the margins.

However, third-quarter margins were the highest we've seen in the past year, and we expect fourth-quarter margins to increase both sequentially and on a year-over-year basis.

Now I'll step down one layer of detail, and provide some color on our results by segment, starting first on slide 8 with the Industrial segment. Industrial generated 2% year-over-year core sales growth in the third quarter, which is a touch better than the 1% from last quarter. As has been the case all year, the integrated solutions product line within Enerpac outperformed the standard industrial tool product line, with both solid quoting activity as well as revenues.

Other sales details in the quarter in the segment include low-single-digit core growth in the Americas and continued softness in Europe; which didn't get worse but, frankly, didn't get any better. Bolting product line sales were very robust globally, as Enerpac continues to have success with this growth and innovation initiative. Also encouraging were margins, which despite unfavorable product line mix, were up 120 basis points year-over-year in the quarter, and at their highest level in the last five years.

Moving on to slide 9 in the Energy segment — core sales from the third quarter improved 5% year-over-year with gains in both Cortland and Hydratight. On a regional basis, Asia was strong; Europe and the Middle East healthy; and the Americas flattish, on tough comps from a year ago. Operating profit margins improved sequentially from the seasonally weak second quarter, and were up 70 basis points year-over-year, due to first-half cost reduction actions and the incremental flow-through on the sales growth this quarter. At nearly 20%, they were the best we have seen in the last 12 months.

Now on to our third and final segment, Engineered Solutions, on slide 10. We were encouraged by number of things in this segment in the quarter. First, year-over-year core sales improved sequentially, compared to the 17% decline in quarter one; 12% in quarter two; and now, 10% in quarter three. Second, we saw European heavy-duty truck sales increase over last year for the first time in a number of quarters. Third, we picked up several nice wins in ag in North America and vehicle airflow in China. And, finally, our operating profit margins, while still lower than we would like, we are at their highest level in the past year.

A few more comments now on sales in Engineered Solutions. Despite difficult comps in a number of end markets, sales did show sequential improvement. We have seen a definite change in OEM destocking activity in several end markets, and believe the worst is behind us. Sales comps in the fourth quarter and into 2014 get easier, and we're expecting continued improvement in the next several quarters.

Now, before wrapping up my prepared comments, I'll quickly cover cash flow, liquidity, and financial position. To summarize, our balance sheet and liquidity position have never been better. We had a good cash flow quarter, with $77 million of free cash flow, part of which was generated from reducing working capital that was built in the first half of the year. We did spend about $5 million of cash in the quarter on the repurchase of 162,000 shares of our stock.

We have our entire $600 million revolver available today, and $161 million of cash on the balance sheet to fund growth going forward. We plan to reinvest these funds in acquisitions, or return it to shareholders in the form of stock buybacks.

That's it for me. I will turn the call over to Mark.

Thanks, Andy. Turning to slide 12, I wanted to take a minute to talk about our strategic focus on several secular growth trends, and to provide more clarity around how our three remaining segments are capitalizing on these long-term macros.

The first secular growth trend is increased global energy demand. I think the connection with Actuant is pretty straightforward, especially as it relates to Cortland and Hydratight, and their focus on the oil, gas, and power gen markets. Within Enerpac, the business is having success with bolting tools and energy markets, as Andy mentioned earlier.

But many integrated solutions projects have been in the Energy space as well — for example, skidding systems for launching oil rigs and strand jacks for heavy lifting applications in power gen. In addition, Power-Packer provides stabilizer legs for trailers used at fracking sites.

The second macro focus is global infrastructure. This not only includes Enerpac with its construction-related projects; but Power-Packer, which provides cab tilt and latching systems for the heavy-duty truck market that facilitates the efficient transportation of goods, both to and from emerging markets.

It also includes maximatecc, which serves construction, material handling, and cargo equipment OEMs with displays for their capital equipment. Farm and food productivity is the most recent secular trend that we have focused on. Actuant's approach to capitalize on this trend involves Weasler's drive on products, as well as maximatecc's products for smart farm digital display technologies, and Elliott's newly launched efficient ag seeder systems.

The final targeted trend is natural resources and sustainability. Mining is a big piece of this. And what we are doing is facilitating quicker and safer maintenance to critical equipment in these harsh environments. Time is money in these applications, and preventing or minimizing downtime is critical.

From our specialty designed bulldozer lift system, to rail alignment tools for underground mining, Enerpac has launched a number of new products, creating increased market share in this maintenance area.

Cortland also gets into the action here, with the [box] drops it offers for mining equipment recovery. We also target this macro trend with our Gits business, which provides emission control airflow valves for various on- and off-highway applications.

Today we generate well over 50% of our revenues in these secular growth areas. These examples illustrate how our segments are focused, and fit the secular growth trends that we believe will provide above-average core growth over the long-term.

In addition to the four secular growth areas that we are pursuing, we are also trying to increase our presence and sales in high-growth geographic markets, shown here on slide 13.

Each of our three continuing segments has opportunities to capitalize on the long-term growth in these critical areas, which include regions such as the Middle East, Southeast Asia, Africa, India, China, and Brazil. Examples include the dozer lift systems that I just mentioned, which are drawing interest from customers in China. Similarly, Enerpac's rail alignment tools have gained traction in mining on a global scale.

Engineered Solutions' examples include emission control and air flow valves for China, heavy-duty truck cab tilt systems in India, and ag equipment solutions in Brazil. Energy is also capitalizing on significant oil and gas projects in Asia, Brazil, and the Middle East.

Admittedly, we are starting from a relatively small base. We have 20% exposure to the broadly defined rest of the world. So, while sales today in these high-growth regions are small, we are clearly gaining traction with recent successes, and have a lot of upside potential.

I'll now turn the call over to Bob to walk through our guidance.

Thanks, Mark. Let's start with the guidance for the remainder of fiscal 2013, which is summarized on slide 14. We are zeroing in on fourth-quarter sales of $320 million to $330 million, which assumes year-over-year core sales in the range of minus 1% to plus 1%.

EPS from continuing operations is expected to be in the range of $0.48 to $0.53 a share; that's versus $0.48 last year. This will result in full-year fiscal 2013 EPS from continuing operations of $1.85 to $1.90, an improvement over last year's $1.83 per share.

We are still shooting for free cash flow of $200 million, meaning we'll need to be at the high end of our fourth-quarter fiscal 2013 guidance range of $75 million to $85 million.

In terms of foreign currency assumptions, our fourth-quarter guidance is based on a euro of 1.3 and a British pound of 1.55. As Andy mentioned earlier, we are expecting a fourth-quarter tax rate of around 25%. And, finally, our guidance does not include any fourth-quarter stock buyback or acquisitions.

Now, turning to slide 15, which is our first look at 2014 — we are initiating sales guidance from continuing operations of $1.315 billion to $1.340 billion; and EPS of $1.95 to $2.05 per share. I'll cover a number of important assumptions with these estimates. But as has been our practice in the past, we won't be providing segment-level detail until our year-end earnings call.

We are assuming a continuation of the low-growth environment that we see globally. We expect basically a flattish European GDP; some modest improvement in China and other high-growth markets over the year; and the US to continue in the 2% to 2.5% GDP growth trajectory.

Our growth in innovation program will provide incremental sales above these GDP forecasts, with the carryover benefit of new products and initiatives already launched, and the impact of some new projects.

Finally, we also see some favorable sales comparisons, given the destocking impact in the current year not repeating in 2014, most notably in Engineered Solutions.

If you take all this into account, we're expecting core sales growth in the 3% to 5% range for fiscal 2014, with all three segments in positive territory. Average incremental profit margins on the sales growth will be about 20% to 25% range, more modest than normal as a result of some incentive compensation expense built for 2014, compared to very little in fiscal 2013.

In total, we're expecting 50 to 75 basis points of improvement in our EBITDA margins next year. Andy covered the tax outlook earlier in the call. We're projecting 19% to 20% effective tax rate, which is up 200 to 300 basis points from fiscal 2013.

We have not included the expected benefits of future acquisitions, stock buybacks, or the Electrical segment proceeds in our guidance. Slide 17 here tries to give you some perspective about the acquisition horsepower and the stock buyback potential on various assumptions.

We will factor them and when they happen. As a result, we are assuming about 76 million to 77 million shares outstanding for the EPS calculation. We have not baked in any potential interest income or savings from the Electrical divestiture in our financing costs, and are currently projecting about $25 million of interest expense for 2014.

Our free cash flow target is $175 million, roughly 110% of net income. This excludes any free cash flow that the Electrical segment will generate prior to the sale.

Our priorities for deploying capital in Actuant remain the same — number one, to fund internal growth initiatives; two, to fund acquisitions; and three, to fund stock buybacks.

With $160 million of cash on hand, free cash flow over the next year, and proceeds from the Electrical divestiture, plus revolver availability, we have over $1 billion of capital we could use — put to use. It is not a question of if we will deploy capital, but how and when.

In summary, growth is clearly our priority, as evident by our business model, which you can see on slide 17. We continue to execute the same business model we have followed for more than a decade. Our capital allocation priority for growth remains unchanged. Our pipeline of acquisition ideals remains decent, with deals in a variety of sizes and in timing.

It continues to be skewed towards the Energy segment. We have a number of interesting ideas in the other segments as well; and also in high-growth markets. Some deals have moved out of the funnel, and others have moved in. A number have of ideas have been active in the funnel for nearly a year. There will be deals, but the timing and magnitude of them is dependent on many factors outside of our control. We're going to continue to be disciplined in acquisitions.

That's it for our prepared remarks. Operator, I'll open up the phone lines for the Q&A section of the call.

(Operator instructions). Allison Poliniak, Wells Fargo.

Hi, guys. Good morning. On the Industrial segment, obviously margins impressive as always. When I look at 2014, I know one of the things you said that was causing it to be a little bit higher was lower incentive compensation. Should I assume that comes back a bit more in 2014?

Yes, definitely, Allison. I think we've got just a couple of million dollars built in there for 2013. And a normal year, if we hit our targets and whatnot, would be closer to $20 million. (Multiple speakers) This is for all of Actuant, yes, not just Industrial.

Not just Industrial. Okay.

Yes, that's clearly impacting each of the four segments.

Okay, perfect. And then if I think about restructuring (multiple speakers). Sorry. The quiet restructuring you talked about, is that mainly Engineered Solutions that the margins might not materialize as significantly as we would expect with that quiet restructuring?

Yes, in the quarter in particular, we probably had 150 to 200 basis points impact from restructuring in ES in the quarter. Some of that will continue on into next year, as well's, math. That's where the majority of this is, as we move some manufacturing out of high-cost areas into low-cost areas. So, that's what's going on.

I think if you peel that out, we're encouraged by the trend we're starting to see in Engineered Solutions.

Great. Thanks, guys.

Matt McConnell, Citi Research.

Thank you. Good morning. Just a little more insight into that 3% to 5% organic revenue growth target. Is there a measurable contribution from the growth and innovation initiatives? And maybe how much of that is coming from market growth versus your outperformance?

Yes, it is measurable. You always, when you're doing growth and innovation, it's difficult — how much you want to attribute that you might have gotten before we started that initiative a couple of years ago. We're guessing we're about 100 basis points of growth from G&I initiatives in that 2014 guidance.

It's probably a little more skewed towards Industrial and Engineered Solutions. But, really, all three of the segments are participating. If you recollect, we were saying 200 to 300 basis points in total. So we'd say we're seeing about half of the benefit that we targeted there. And I think that's probably on schedule; maybe a little ahead of schedule of where we thought it would be.

Okay, great. That's helpful, thank you. Just following up on that idea, you mentioned that all the segments would be positive. Would any be above that 5% organic range? I know we'll have more insight next quarter, probably, and at the analyst meeting, but would any be above that 5% range for next year?

(Technical difficulty) stay away from the segment pieces, but I think the one (technical difficulty) look at, if you were going to do it, would be Engineered Solutions, where you're coming off — just getting back to 2012 would get you above 5%. Fiscal 2012 would get you back to 5%.

The destocking —

Yes, and destocking. I'm sorry, go ahead.

Yes, destocking.

Okay, great. That's what I was (multiple speakers). All right, great. Thanks very much.

Ann Duignan, JPMorgan.

Hi, good morning, guys. Could you just give us a little bit more color on what you are seeing out there that gives you confidence in the end of destocking? I think by what you said just said right now, it's not that you're anticipating any significant restocking. I think you're saying that we're just (technical difficulty) customer?

Yes, why don't I start, Andy, and you can chip in behind me. I think that what we have always said, our canary in the coal mine is European truck. It seems to be, for us, the one first one that goes down, and the first one to come back out. And we indeed saw that this quarter. It was up in single-digit range. Volvo in particular had a nice quarter. We handle Volvo really across the world, across their platforms, and so it's a good proxy for us of the totality of a market.

We saw some recovery in other truck accounts, as well. Still a little negative in our OEMs here in North America, particularly the off-highway guys more than the truck guys. So that's been weak. And then auto has been — has also been weak. And I think we've talked to you guys at length about what's happening in auto is, at least in the convertible top part of the business, is it's elongating.

You're staying with older models longer, so you don't get the new model push that results and some extra inventory in the system that gets put in. And we are expecting 2014 to be somewhat of a light year, also, in auto for new product launches, things like that.

From a chronology standpoint, I guess my two cents is, I think November-December were the worst, or the bottom of the barrel; so right at the back end of the first quarter, beginning of second quarter, orders just totally canceled. Nothing — or production. Nothing was going on. And tail end of January, February, we started seeing production start again, actually making some product; certainly not where we were at in the first quarter.

And that has continued to inch up a little bit over the following months here. Bob was right — we're feeling it right now still lingering, as North American construction equipment, but a lot of — it's much better than where it was.

Yes, it's running its course. We can see the end of the tunnel.

So the canary is coming back out of the mine?

Correct.

— as opposed to not. Yes, okay. Just to follow up on your comments on Volvo and European truck, are you concerned at all that this is pre-building for pre-buy, or inventory buildup prior to the emission standard changes in 2014? Or do you think it's really — was so bad that it's just recovering from significant weakness?

Where our cab system, tilt system, goes into the truck is very late in the cycle. So they don't keep a lot of inventory. So it would really be too early to be attributing it to the December emissions change.

Okay. And just a real quick follow up — are you seeing any weakness in Europe, particularly in Germany right now, on the back of the floods? We just got an email suggesting that the PMI out of Europe could be very weak tomorrow, as a lot of that production and manufacturing activity may have slowed in Germany on the back of the floods. Have you seen any of that, or you think it's too localized?

Nothing specific on the flood, I would say. Germany has been a little bit softer than some of the other countries in Europe in the last quarter.

But our guidance for 2014 is a roll-up of the businesses. We've spent some time with the businesses within the last month. We didn't hear a lot of effect of the flood.

Okay, thank you for the color. I'll get back in line. Appreciate it.

Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys, and Karen. Bob, just on the Enerpac business, can you segregate out the growth you saw in the legacy Enerpac business and the IS business?

Yes. I'm going to let Andy take a crack at that first, and then let me come back and give some color.

Yes, the IS portion of this is up 7%; 7%, 8%-ish during the quarter. IT probably eked out 1% or so on itself. Certainly North America was up through the quarter. Asia, doing okay in some areas; a little bit softer in Australia. With mining, Europe continues to be down year-over-year, but certainly not getting worse than what we had seen in the last quarter or two.

What has been great about the integrated solutions, the IS business — in this quarter, we really saw this in spades — is what we've started to see is business that is customized for an application, but really from a manufacturing point of view is a standard product.

So this would be like a gantry crane or a strand lift. And these products are starting to — what's happening is, somebody sees it in operation and says, hey, that will work for my application. So, success brings more success in this area. And all of a sudden, we've seen gantry cranes being sold globally; where, in the past, it was pretty much a European market.

That's one of the reasons that the margins have been doing better in that IS product line from when we started a couple of years ago, is we've had a concerted effort to really try to standardize some of the components. Still customized for the application, but standardized componentry allows us to really get some efficiencies in the manufacturing.

Had a great bauma show; it's a big European show dealing with a lot of the heavy lifting. And we just created a lot of excitement. I think that's going to feed into next year. So, that IS business strategy has really worked well over the three years we've put it together.

Thanks. Just a quick follow-up — on the share count outlook for fiscal 2014, it's up on 2013. Is that just incentive-related comp being factored in there?

That's correct.

Thanks.

Brett Linzey, KeyBanc Capital Markets.

Hi. Good morning, everyone. Could you just talk about the sequential trends you saw within the Energy business across Cortland, as well as Hydratight? And then just as it relates to the tough compare in North American nuclear, when do we lapse that?

I'd say the comparable is just a — it's a sequential improvement. Cortland, I think we were talking last quarter how some of the bigger programs were getting pushed later in the year. We saw some of those start to ship. And it gives us confidence, again, in the future going forward.

The nuclear piece relates to Hydratight, and we will anniversary that probably within the next quarter to quarters two quarters, in that ZIP Code. Now, when we say anniversary, this was a maintenance turnaround. This was not tied to new nukes or anything like that.

It was tied to some things that were going on in power generation down in the South and North America. We are seeing a little more nuclear maintenance activity going on outside of North America, gives us a little bit of confidence.

Anything to add, Andy?

No.

Okay. And then on Engineered Solutions, the decrementals, I think, were relative to our model; maybe a little bit worse. It sounds like you guys had some one-time reorganization of sales, et cetera. Would you be able to quantify that? And then I guess as we think directionally into fiscal 2014, how should we think about incrementals as that business starts to comp positive?

Yes, about a couple of million dollars in Q3, relative. Last year it was almost nothing; so roughly a $2 million increase year-over-year. Next year, there will continue to be some restructuring activity going on in the first half that's going to be largely front-end loaded on this.

However, the incremental volume that we're expecting to see year-over-year also will kick in in the first half, so that will offset some of it. So we are expecting margins to improve next year, both first half and second half, in Engineered Solutions.

Okay. And just given some of the acquisitions you guys have done in that segment, should we think about historic incrementals (multiple speakers)?

You're on question three, Brett. You're pushing it to question three.

Go ahead and finish your question.

Karen is trying to be the enforcer today.

She's just warning the next caller, but go ahead.

Well, it was still on Engineered Solutions. Just about the incrementals — given the acquisitions, how should we — should we think about historical incrementals in that business similar going forward?

You should think about historical incrementals. When we talked about more modest recovery in total for 2014, I think Engineered Solutions will do better than that. It had a fairly steep drop of over — in double-digit sales decline. It's got some element of fixed cost structure. Our assembly light business model, that's what it has. And we will be leveraging that going into next year.

So, I think if you look back at how we recovered from the 2008, 2009, recession and we had good margin expansion, I would expect to see similar type incrementals.

Okay, great. Thanks for the time, guys.

Scott Graham, Jefferies.

Hey, good morning. I'll keep it to two, and not get yelled at.

(Laughter) Good job, Scott. Good job.

I won't get yelled at from you, Karen. The acquisition pipeline — you guys indicated some went in; some went out. If we go back to the analyst meeting, one of the things I think you guys said — particularly, I think, you, Bob — was that there was a larger deal in the pipeline at that time. I was just wondering if that was one of the ones that went out of the funnel, and if something similar in size has come back in?

No. One of the deals that is a little larger in size, that I'm guessing I was referring to, is one of those deals that we've said has been in the funnel for over a year. So that would not probably be one that exited the funnel.

So, just to try to summarize, when we say large, we're in the Weasler and a little bit above Weasler size — $150 million, $200 million, $250 million, ZIP Code. That would be a large deal for us. Obviously, we have looked at bigger things than that. We told you about one last year that we did stop looking at. But that would be in that range.

In addition to that, we have our more middle, down the fairway, $25 million to $75 million deals. We've got some things in emerging markets that look a little more exciting, so we're trying to spend a little more time there. It's not a very developed M&A market, so it's difficult. But we've been spending more time and effort in those kind of areas. That would give you the color I hope you're looking for, out of the funnel.

Yes, very much so. The other question I had was on the mix comment that you made earlier about — within segment mix. Were you talking about the ISI type mix, product line versus product line? Or were you talking about — within the product lines, the mix went negative?

Largely between businesses within the segment, or within major product lines; so, in Industrial, as an example, IS grew faster than industrial tools. IS margins are lower within Energy. Cortland grew faster than Hydratight. Cortland has — Hydratight has higher margins. And the same thing within Engineered Solutions, as well. Some of our higher-margin business is there. We're more challenged, from a topline standpoint, this quarter.

That's great. Thanks.

Bob Franklin, Prudential Financial.

Hi. On — let me see — I guess slide 9, the deep water umbilical, ropes and cables — is that all market strength and catch-up? Or are you picking up market share from anybody?

I think that's largely —

Market share and catch-up.

Just market catch-up, where we had some stuff that was pushed from left to right. That part of the market, actually, has been quite strong for the last 12 to 18 months. But there was some stuff pushed, first half into second half.

Okay. And, I'm sorry, what's the end use for that?

That is largely — those are work over umbilicals for maintenance in subsea applications. It might be connected to an ROV. It could be just a diver down there, that sort of stuff; doing maintenance, subsea.

Okay, great. Thank you.

Mig Dobre, Robert W. Baird.

Hi, good morning. This is Brian Brophy in for Mig. Last quarter, you mentioned that the slope of the recovery was modestly lower than your prior view. Can you give us an update, or any color on your view, regard the pace of the recovery versus three months ago?

I would say it's the same. I guess if you really wanted to point a really tight lens on it, you might have a little slower moderation in Engineered Solutions, but I would put it almost the same.

Got you. And then, in the press release, you called out some difficult comparisons in ag, which impacted Engineered Solutions. But we've seen some pretty strong ag sales over the past couple of months, in spite of these tougher comparisons. Can you reconcile the difference we're seeing here?

Typically, what we're selling on the ag front is the farm implement, as opposed to the tractor or the combine. We're seeing two different challenges right now; first, from a spring planting standpoint, planting was late this year. Therefore, replacement cycle was slower to materialize when it came through.

The second piece actually relates to the drought last fall. The harvest was lower in some areas on the grains, if you will, which is an important part of ag for us; less handling of grains; less, therefore, replacement parts as well. So we're definitely seeing replacement part down and a little bit off volume down in grain handling type of applications right now.

So a lot of Weasler — something like 40% of Weasler — is really based on usage, hours used in the field. As these drive lines get utilized, they get banged up, and they need to be replaced. That should bode very well long-term. A, it's a recurring revenue; it's not tied to new pieces. The vehicle doesn't perform — the vehicle or the implement doesn't perform its work without this shaft. You can't shortcut it at all. So that's going to bode well.

When you step back and look more at that macro growth driver that Mark talked about, and you think about 6 billion people on the planet going to 8 billion, and the productivity required to get that out of farm, we feel great about it.

So, while it's got — it will have these periods where, if you get a late spring or a drought, you'll get some aberration in this aftermarket product, we couldn't be any more pleased than we could be right now with the position we have with Weasler.

Got it, thanks. That's all I had.

Jamie Sullivan, RBC Capital Markets.

Hi, good morning, thanks. Question on Energy — is there a more catch-up, or how long will the deferred projects continue on? And maybe you can just talk about how the bookings were in the quarter.

We did have some catch-up, I would say, on some projects that were moved out from the first half into the second half. We definitely had one particular umbilical I'm thinking of, a pretty decent sized one, that shifted from Q3 into Q4, largely for the same reason, again.

So, it's natural that there is pushing and pulling around within here. Orders were pretty good in the quarter. I would say, particularly, in Hydratight; good quarter there. Umbilicals is still going very strong for it. Some of the non-defense type revenues that sound strange to be in Energy, but there is a small part of Cortland that is on non-energy and defense, whatnot. That certainly is much weaker than it was a year ago. But all in all, I'd say the orders were pretty decent.

When we do give segment-by-segment guidance in the fourth quarter, one of the things I'm certain we'll be talking to you is, we're up a very tough comparable on Gorgon. This is that project in Australia that we've been talking about. It's a multi-year program. But we are at a point now where it's flattening to be down, maybe, even a little next year, versus what it has done this year.

So, there are a couple of those bigger ones. I wouldn't guide you that — when I look at it going forward, I'm going to say there's a pent-up demand. I think it's normal Energy. Some of these things that got delayed will be offset by some of this large, programmatic activity moderating a bit.

That's very helpful, thanks. And then, second question, more long-term on Energy, and how you are thinking about M&A - just where you see Actuant participating. You talked about the secular trend. There's obviously a lot that — in the energy landscape in terms of upstream, downstream, et cetera; services, products. How do you see, or where do you see, the barriers for Actuant? What are the limits? Where would you like to focus that business, long-term?

Well, I could spend the next hour on that question alone, Jamie. It is obviously our largest acquisition activity. I'd put it in three broad areas today. I'd put — number one, is to do more around the joint integrity product line. There is a lot more we can do around that product line in terms of leak detection; maybe sealing material; doing work on the inside of the pipe; moving upstream more towards asset integrity, not just joint integrity.

So, that's the Hydratight platform. It has resulted in us buying five or six acquisitions put together all in the Hydratight brand name. And I could easily see how that could double again and still be joint integrity, right where we're at. Probably some geographic growth there. So, that's probably our largest opportunity.

Number two, I would say, would be the umbilicals and doing more subsea environment. I was just amazed at the OTC show this year — and if anyone was down there — how much is going on in processing on the bottom of the ocean floor. That's the big trend right now is, how can we do more on the bottom of the floor? And that is, straight away, you have to have the power to get to the bottom of the floor. It's got to get there somehow. And that is right down our umbilical, power cable product line.

It plays right into what Jeyco does in mooring and holding vessels in place, as you are doing more in subsea environments. So I would say subsea would be the second one. And as a derivative of that, outside of the umbilicals, we do see more going on with this rope business that we have. It's a smaller part of Cortland, but we see a continued shift from wire cable to more rope cable. That was one of the things that really impressed us about Jeyco.

We have our Puget Sound Rope business, which is a subsidiary of Cortland, out in Washington. And we have Selantic, which does some heavy lifting. All of that focused on rope and the conversion from wire to rope. And the weight and properties make a big difference there. So, three broad strategies that I would put my energy acquisition focus on.

That's great. Thanks a lot.

And we have no further questions at this time. I will now turn the call back to you.

Okay, great. Well, thanks, everyone, for joining the call today. We'll be around all day to answer any follow-up questions you have.

Just from a calendar standpoint, we will release our Q4 earnings on Tuesday, October 1; so a tad later than usual, but mark your calendars for that. And then our annual Investor Day will be held on Monday, October 7, in New York. The invitation will go out for that shortly. But again, mark your calendars in advance. So, thanks a lot.

And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.