Hubbell Inc (HUBB) 2012 Q3 法說會逐字稿

Good day, everyone. Welcome to the Hubbell Incorporated third-quarter 2012 earnings conference call. As a reminder, today's call is being recorded. Now for opening introductions and remarks, I would like to turn the call over to Jim Farrell. Please go ahead, sir.

Good morning, everyone and thank you for joining us. I am joined today by Tim Powers, our Chairman and CEO; Dave Nord, our President and COO; and Bill Sperry, our CFO. Hubbell announced its third-quarter results for 2012 this morning. The press release and earnings slide materials have been posted to the Investors section of our website at www.hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our Company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note this discussion of forward-looking statements in our press release and considered incorporated by reference into this call.

In addition, comments made here also include some non-GAAP financial measures. Those measures have been reconciled to comparable GAAP measures and are included in the press release and the earnings slide materials. Now let me turn the call over to our Chairman and CEO, Tim Powers.

Welcome, everyone and good morning. I just have two overall comments before I let Dave do a review of the quarter and the current situation. First of all, the overall execution in the quarter by our factories and warehouses was just excellent. Customer service levels are reaching an all-time high and I have to compliment the effort of all of our employees to have such an excellent quarter from an operating point of view. And as you know, we had other positive elements as well in terms of cost price.

Some market comments. The markets slowed during the quarter. While the harsh and hazardous, residential, transmission, relight markets remained strong, other categories such as nonresidential, general industrial and international slowed during the quarter. Our markets slowed, but remained in a growth phase. Events in Europe and the US political situation, I believe, are having a negative effect on our customers' commitment to their future growth plans. With those comments, I will turn it over to Dave.

Thanks, Tim, good morning. I will echo Tim's comments on the quarter. We are pleased with the performance in the quarter. Obviously, not pleased with some of the market dynamics and some of the slowdown that we saw particularly in the early part of the quarter. But while not totally unexpected, we felt that the back half of the year was going to be a little bit slower than the start.

More importantly, despite that slowdown, we -- and a little bit lower top line -- reported results. Certainly some good performance on the margin side and Bill will take you through a lot of the details in a few minutes. But we are very focused and continue to be focused on margin, continue to be focused on execution, on maintaining price discipline and improving productivity. And I think that is all demonstrated in the results in the quarter.

We are focused on our service levels and we have continuing improving service levels. Our factory performance is really outstanding. I spent some time recently with our lead manufacturing executives. They are all very upbeat on the things that are happening. They are all very busy, they are all very positive on the actions that they are taking and the opportunities for more actions. So that is a good thing.

I have also spent a lot of time over the last several months out in the field spending a lot of time with our channel partners to get a feel for what they are seeing in the market, as well as a sense of their perspective on Hubbell. Not surprisingly, they are seeing in the market the same things that we are seeing, a slowdown, a little bit of unpredictability. But, at the end of the day, they also feel that there is continued growth potential and we will talk about that a little more later.

They are also very positive on Hubbell as an organization and the things that we are doing and you know that we have always said that what we really are focused on is the things that we can control in execution and investing for the future. We can't control the market; we just have to manage through whatever market.

And I think a couple of things that -- notable things in the quarter or around the quarter that talk to that. We have received a couple of points of recognition, one from an organization, IDEA, and that is the official technology service provider, an e-business standards body of the electrical industry. And we received the sixth annual award for outstanding performance in the area of e-business. We are commended for our e-business leadership and the incorporation of technology. And I think a lot of this goes back to the forward-thinking of Tim and guiding Hubbell to make data excellence a priority. That has been very important and it is important for our distributors because it helps in having good master data to operate in an e-commerce environment, as well as for our vendor-managed inventory. So I think that is a very good recognition.

Another one, and we obviously continue to focus on investing in new product development. In the lighting industry for the fifth year running, we have received more acceptances in the Illuminating Engineering Society's progress report. This committee of this group is the only group in the industry passed with monitoring significant advancements in the art and science of technology. And we have more significant advancements to the lighting fixtures than any other competitor again this year. So again, for the fifth year. So I think that is indicative of what we are investing in and that is what I hear from our channel partners around our investment, our technology, our new products. So all very positive things looking forward.

I think we also have -- I also spend time out in a lot of our factories and are continuing to do that. One of the things, particularly in the lighting factory, it is abundantly clear that everywhere you turn, it is about LED and the opportunities in LED. So we are very much engaged in embracing that. And so that is another point that is bright for the future.

And lastly, we continue to invest in new businesses. We closed on an acquisition in our power business just after quarter-end, first week of this month, a company called Trinetics, about a $27 million transaction that makes high-voltage capacitor switches. A nice bolt-on to our power business and actually the first acquisition done in that business in about four years.

So I think that is a good indicator and I think there is a lot more in the pipeline. We have a number of transactions that collectively are in the works that I'd like to close before the end of the year, but could roll into next year as we work through integration plans. But altogether, that would be another $75 million to $100 million investment in those transactions. So all good things that we are working on, as well as trying to navigate a very challenging market. So with that, let me turn it over to Bill to take you through some of the details in the quarter.

Thanks very much, Dave, and good morning and welcome, everybody. I am going to be using the slides to guide our comments here this morning that hopefully you found on the website. I am starting on page 3. Our sales increased about 3%, as Dave mentioned, a moderating level in the third quarter here with acquisitions providing about a positive 2 points being offset by negative 2 points from foreign exchange.

Operating profit margin of 17.1%, a very attractive level for Hubbell, 70 basis points of improvement and being aided by some favorable price commodity cost dynamics. Reported fully diluted EPS of $1.45, a higher tax rate in the third quarter of '12 gave us a $0.06 headwind compared to last year. We will talk about that as we get to that page more specifically.

Page 4, we talk a little bit about some of the markets, maybe diving into what Tim and Dave were alluding to. On the nonresidential side, we certainly see the new construction still being slightly negative, which is really being driven by the public spending shrinking as a percentage of the total, but I think we are embracing that because I think we are getting to a much more sustainable balance between the public and the private. And as we have commented on several of the more recent quarters, the renovation and relight market providing a very attractive offset to that and again, continuing to provide double-digit growth for us in the quarter.

The industrial markets were more mixed. Energy, where we are selling harsh and hazardous products into the oil and gas and mining markets, continued to be very strong. Some of the industrial production areas a little more flat and the high-voltage test equipment, which we have been talking to you about, continues its trend of having a down year.

Utility markets, transmission continuing strong and distribution pretty flat and residential showing that there may be finally here some decent legs here to the recovery. I think we list resi fourth here because it is the smallest of our four markets, but as a leading indicator, it might actually prove to be very important. Our history suggests for us that the resi recovery should precede non-res in the 12 to 18 month kind of range. And so if resi is starting to pick up as well as it looks, that bodes well I think for non-res starting to get there too.

So that reviews our markets. Digging now into the gross margin, we generated 34% gross margin, a 100 basis point improvement. This is where you see the price/cost kicking in at the gross line. At the S&A level, we had 5% growth really being pushed upward by higher pension and benefit costs.

At the OP line, we generated $135 million of operating profit. Again, from our perspective, an attractive 17.1% level and again, our drivers here were price/cost pushing the gross margin up and some headwind from pension and benefits.

At the other expense line, we had some FX transaction gains in the third quarter of '12, which drove that number down a little bit and on the tax side, we had a little bit of headwind here with a tax rate of 32.1%. We had R&D tax credit embedded in that third quarter '11, not in '12 and higher levels of domestic income helping to push up that tax rate.

At the net income line, you have got 6% growth to $87 million. We have mentioned all the drivers and the earnings per diluted share also up 6%. Our share count being pretty consistent between the two periods, 59.7 million shares in third quarter of '12.

So I think let's break down the quarter and distinguish between our two segments and we will start with Electrical on page 9. We have reviewed the markets. Where that comes out in some business units is our harsh and hazardous business was up double digits serving some of those energy markets, which is the real bright part of the industrial versus the high-voltage showing declines, which is creating that mixed level.

For resi for us, we had high single digit growth in our lighting business there and that new construction slowdown in non-res is being offset and balanced by some of the relight and reno business. So 5% growth for Electrical, a 90 basis point pickup in operating profit to 16.4% and a lot of that improvement in margin again being driven by the price/cost dynamic that is proving to be favorable, offset a little bit by some of the higher S&A costs we mentioned.

So Power segment, we will switch to page 10, it may be worth pausing for a minute here and going through a discussion of the components here. As you recall, Power has been growing pretty handsomely throughout the year and we are showing a flat quarter and it is probably worth disaggregating that a little bit. I think we spent quite a bit of time the last two quarters -- and Dave mentioned it in his comments -- highlighting that we thought that the second-half compares for Power would be more difficult even though the spending levels could be high. And let's dig into that a little bit.

So for us, we had FX unfavorable for a couple points headwind and if you remember, I think most of you had joined us in February, earlier this year, for our Investor Day and when Bill Tolley was describing in more detail our Power segment, he highlighted the component of those sales that go internationally, as well as that go to what we would call here the construction market. So other utilities other than electrical like water utilities, telcom utilities, cable utilities. The international component was down and those construction markets were down for Power this quarter.

So when you get to the North American electrical utility piece, there was some decent increases there with transmission providing most of the growth. Distribution being reasonably flat and the evidence to us appears that a lot of the distribution spending from the industry was pulled a little bit front-end-loaded into the first couple quarters of the year. So just wanted to give you a little bit of that extra color on some of the Power sales dynamics. At the OP line, you see 30 basis points of margin expansion to a healthy level of 18.7%.

Switching now to cash flow, you will see, when you compare the third quarter of last year to third quarter of '12, the two larger changes are in the working capital line, as well as in the other line. Within working capital, we have a negative $14 million compare coming from a tax payable from prior year where, because of Hurricane Irene, we actually made our tax payment the first week of October. And that creates a negative compare on how that working capital looks.

And then at the other line, we have made $15 million in pension payments in the third quarter this year that we did not make last year. So that is creating a negative compare there. So I think from a working capital perspective, we are hoping to deliver on our full-year number of getting to net income.

Okay, so that wraps up the quarter and let's switch to the year-to-date perspective now. We are showing sales growth to $2.3 billion, 8% growth, operating profit of $361 million, 15.8% margin and growth of 110 basis points. Again, very attractive increase and we are able to lever that 8% sales growth to 15% net income growth. So very attractive, as Tim and Dave both alluded to, year-to-date financial performance.

Now let's break that down between the two segments. Year-to-date, Electrical, just under $1.6 billion of sales, 7% growth. Again, some of the business unit drivers there being harsh and hazardous. The Burndy business has been a big growth contributor there and the residential has been double-digit growth. So some good contributors to that 7% growth number. At the operating profit line, 80 basis point improvement to 14.8% helped again by a price/cost tailwind.

Year-to-date Power results, up 9%. Again, for the year, you have got increases in distribution, very active transmission projects and with that 9% growth really helping drive 150 basis point margin improvement to 18%. Helped again by some favorable price/cost dynamics.

Year-to-date cash flow has a very similar story to the quarter. The two lines to focus your attention to are the working capital line and again, we mentioned that tax-paying difference in the other line has that pension difference. So I think if you do the math, you will see that we still -- we think there is room for us to improve on our working capital management and we are focused on that and focused on getting you our goal of getting to 1 times net income for the year.

Trade working capital, to focus on that line item a little bit, you will see in the third quarter of '12, we were just about 19% of sales. The third quarter for us is seasonally our highest and it looks a little bit larger than last year. And so I think, again, we have got a little bit of improvement and work to do there but, we are focused on it and I think we will have that in line by the end of the year.

Our capital structure on page 17 continues to be very solid. We have got cash balances and a debt-to-cap ratio of 27% and we are actually remaining in a net cash position relative to debt. So a very liquid and strong balance sheet to support a number of the initiatives that Dave was describing both from an acquisition and investment perspective.

So our outlook for '12 is for sales to increase 6% compared to last year. As you will recall, we had last quarter anticipated a 6% to 8% range. So this is reflective of some of the slowdown that Dave described to us observing in the earlier part of the third quarter. And as you kind of reverse out the math, you will see that it implies a relatively low growth rate for the fourth quarter in the low single digits. And I think our experience has been that the fourth quarter can be hard to predict at times.

I think this year's fourth quarter is going to be characterized with some degree of market uncertainty relative to volume. And I think for us, customer behavior, as they get into managing their inventories and allocating their purchasing habits as the year-end comes closer, can create a degree of unpredictability for us. But at the margin line, you will see that we are expecting a 70 basis point improvement. Again, to recall, when we were with you last quarter, we were thinking that was 50 basis points plus and so that is an improvement to where we were. Again, if you try to solve for what that implies for our fourth quarter, it is a fairly modest improvement in the fourth quarter, margin expansion for the fourth quarter.

And it may be worth highlighting a couple of points to recognize that we won't be expanding margins as much as the first three quarters. The first item is we had a gain on sale of some land surrounding our headquarters in the fourth quarter last year. That gain on sale isn't repeating and the acquisition that Dave mentioned of Trinetics, while it will be next year a very attractive margin contributor to Hubbell, for its first quarter of our ownership, some of the acquisition accounting causes us to -- we recognize the sales without any real OP contribution. So those two factors create some dampening on what otherwise underlying operatingwise is a little bit better margin expansion.

So when we net those two out, our earnings outlook is reasonably consistent with where we were at the halfway mark. Again, I mentioned a few times we are still focused on getting you free cash flow equal to net income. And I think our tax rate -- I mentioned some of the unpredictability on the sales side in the fourth quarter. For us, taxes tend to have some volatility in the fourth as well as you get a number of factors coming together.

It is worth noting out that our expectation of 32% does not have an R&D tax credit embedded in that. Many of you may have more insight or be predicting something there. To give you order of magnitude, if that were to get past, that would be in the sort of $0.05, nickel range for us in terms of helping EPS.

So we add all that up and I think I echo what you heard very clearly from both Tim and Dave is a record EPS year, something certainly from our perspective Hubbell is very proud of that performance. So that kind of wraps the numbers up and I was going to hand it back to Dave to give you more of a market and longer-term outlook.

Okay, thanks, Bill. Certainly a lot of moving parts. I think Bill gave you a lot of color and we will take questions in a minute. But I think let me put it in perspective. First, you've got to go back to look at the third quarter. The third quarter was, from a volume standpoint, weaker than we thought, but a lot of that was attributable to, when we look back July and August. July and August was particularly weak, but we saw that start to recover a bit in September. So a better finish to the quarter, a better rate to exit. And what we are seeing so far halfway through the month of October, the volume is up year-over-year. So that is a positive.

The challenge is that, and there is no -- I don't think anybody is surprised. There is a lot of uncertainty in the market right now. There is a lot of apprehension certainly in the space that we operate in. That is what we hear from our customers and I think it certainly affects most significantly those things that are CapEx-related on the industrial side. Industrial production is still up, so the MRO piece of the business is still performing well and there is a lot of activity.

But there is pockets of uncertainty that I think are certainly waiting to see the outcome of our political environment and the election in three weeks to figure out what the direction is going to be, as well as what the outcome and the resolution of some of the fiscal cliff elements are. So all those from a business perspective are certainly putting a lot of clouds out there that we just have to wait to part. But in the meantime, we are executing well and we are performing well.

Looking beyond that, and that is what I am focused on and where we are investing, is really looking out to the medium and long term. And when we look at our markets, I could go market-by-market, but on the utility side, the transmission project activity -- it will continue to be -- we are bullish on. It is driven by the aging grid and the focus on reliability and connecting to these new lines of renewable power.

The distribution business has to continue to grow. The grid needs to be upgraded, but it will probably be more at a modest level, probably around GDP, and international growth will continue. As Bill mentioned, on the residential side, recovery is clearly underway. You saw it yesterday. It came out in housing starts up another 15%, but they are still well below the normal range of 1.2 million to 1.5 million starts, so still room to grow there. So we are very optimistic and more importantly, that becomes a leading indicator for the nonresidential market.

In that market, new construction remains and it is bouncing along near bottom. The recovery keeps slipping to the right and I think that is a function of the residential having been slower than anticipated. But certainly the renovation and relight part of that business has good growth prospects and that is in the early stages.

And lastly, on the industrial side, the extractive industries remain positive, but they are slower than they were because they had great growth, but they are still positive. The core industrial cycle is still growing and then the high-voltage part of that business for us on industrial continues to be volatile.

So overall, we strongly believe that we have got growth prospects medium to long term and the question is what is the magnitude of those. And that is what is still uncertain and I think waiting. Some of that will hopefully have more clarity as we exit the year and see where our political environment and our fiscal policy ends up. But all in all, we are planning for ongoing growth going forward. So with that, let me turn it back to Jim and we can open it up to questions.

Okay, Jennifer, we are ready to take the audience questions.

(Operator Instructions). Christopher Glynn, Oppenheimer.

Thanks, good morning. I was interested in, Dave, your comments about the cadence for July and August were kind of slow. I think we were pretty well through July on your last call when you expressed a bias to the high end of the range. So I take it August was where the real surprise to you was. Any way you can parse what was destocking versus end demand, really just the channel adjustment maybe?

Okay, a couple of parts to that. I think there was weakness at the beginning of July, but I think as I have often said, you can't draw conclusions in this business by a week or two, sometimes not even by a month because there is -- and more recently there has been more volatility. What we were surprised by is that weakness actually accelerated as we exited July into August. So it was really the back half, really a summer slowdown.

And I think a lot of people were certainly frustrated and maybe even surprised. I think depending on the market when we talked to the distributors about the utility side, I think everybody had the view that we kind of thought might play into it and that was the early activity because of the warmer weather that might impact the summer activity. And I think that is probably what has played into it.

We had some -- there was some storm activity early in the quarter, but nowhere near the level of activity that we had last year. So we had some negative implications. It was a slower storm season interestingly than we had last year, at least for the business that we serve. So I think that is largely what contributed.

Then you come back after Labor Day, everybody comes back after summer and there starts to be an uptick, although still with caution. I am not sure that we saw, at least through the third quarter, any destocking going on. Although that is certainly something that we are looking out for and I would expect that we will probably see some in the fourth quarter as distributors are looking out with a more conservative view and so that is another thing that is more likely impacting our fourth quarter. Does that help?

Yes, that's great. Thanks for all that color. And then just lastly with a little bit of change in the pace of business activity out there, is that changing the pricing dynamic or the stability of your pricing?

Well, I would say that one of the pleasant surprises in the quarter is that we were able to hold price longer than you might expect in a slowing market. I am not sure that we expect that to continue, so I think that is what helped us. But, again, we have been, and our operating folks have been keenly focused on price discipline and trying to maintain price leadership. And so we expect that to continue, but obviously we have got to balance that with market conditions.

Thanks.

Rich Kwas, Wells Fargo Securities.

Hi, good morning, everyone. Dave, on high voltage, the test business, I know that has been volatile. I think Tim mentioned last quarter there were some signs of stability. What are you seeing there now?

Rich, it is a very long leadtime order business and so we tend to not try to find economic indicators, but rather kind of give you how our book looks. And I think, as Tim and Dave were giving color in terms of more of the capital side of our customer base is where we're seeing more of the softness and our high volt is kind of a good example of something where our customer is going to be a transformer manufacturer. And we are actually seeing orders that are getting sort of delayed and pushed. So I think the softness that we are seeing on the industrial side is probably across Hubbell's portfolio maybe being most acutely felt by high voltage for us.

Okay. That is helpful, Bill. And then on the residential side, could you just clarify for us if you have gotten any benefit on the start side from the utility infrastructure? I think if I recall, the first half of the year, you hadn't gotten any benefit and I assume in the third quarter it probably wasn't much. But how are you thinking about the leverage from higher housing starts and how that could affect power positively as you look out over the next 6 to 12 months?

Rich, we haven't seen any of that yet, but we certainly view that as additional opportunity. It will come. There will be -- as you start to work through some of the pre-developed property, start to put in some new developments and I think, at this level of activity that we are starting to get to, it becomes much more new development, new grading, new infrastructure. And that is where we will start to see it. But we don't expect that until sometime next year, maybe early next year, but we are planning for middle of next year to start to see some benefit.

Okay, great. And then this is the last question on price/cost. Within the margin outlook for the fourth quarter, are you assuming that it gets back to neutral because you are facing tougher comps?

It doesn't go all the way back to neutral the way we are thinking of it, but it is let's call it narrowing expectations.

Okay, great. Thanks, I will pass it on.

Steve Tusa, JPMorgan.

Hey, good morning. On the balance sheet, one of our companies recently paid out a pretty significant one-time dividend in front of concerns around the tax rate situation. Are you guys considering that? Do you guys consider tax policy in your kind of balance sheet planning and would that at all impact timing on decisions on what you may do with your cash?

Rich, we would not consider a one-time dividend in the face of a change in tax policy. We have a longer view of the value of the cash on our balance sheet. We have a near-term opportunity for acquisitions and just a balanced view of return of money to shareholders over time either by dividends or by share buybacks, along with our investments in the expansion of our portfolio and capital. So this isn't something that we would take a short-term action as you are suggesting here in the face of perhaps a tax change, perhaps not.

Okay. You talked about the uncertainty in some of the retrofit projects in non-res or perhaps some of those are being pushed around. Can you give us any anecdotes around the magnitude of that? Can we think about maybe -- you said six to eight at the high end before. Now that is six. Can we take some of that difference and think about that as what you had in your funnel before and kind of what is in the funnel now? Is there any -- a lot of companies are talking about these delays and we are trying to get our hands around the magnitude of this and what could -- it is important as to what could come back onto the Board when things get a little bit better, if they ever get better. Can you maybe give us a little bit of anecdotal evidence around that?

Yes, Steve, just to clarify, if I misspoke on retrofit, reno, relight, those kind of projects, we are actually not seeing any impact or any slowdown. Those are double digits. We are seeing the paybacks very strong. We are seeing the people who are making those decisions to do the retrofit are some of the best real estate owners in the country in terms of owner/operators and are trying to run their properties more cost effectively, more efficiently and have that fundamentally improve their cost of goods sold.

So that is big-box retailers, that is large express companies, that is large makers of industrial equipment. All those kind of categories of customers of ours are continuing to make that reno, retrofit, relight decision. So we are actually -- that is actually kind of defying some of this, but so where you see (multiple speakers).

I guess where you are seeing the delays, can you maybe describe some of those and whether it is in industrial or --?

Yeah, I mean for us then it comes across in large capital projects where we might be selling wiring devices into. We referred to the high-voltage test equipment, so someone might have been planning something on the transformer side and they are making a more cautious decision, perhaps waiting for some of the clarity that Dave is kind of describing as hopefully being on the horizon. And some of those new construction projects, buildings, maybe you are slowing that down a little bit, a hotel, something that you were going to do.

So we just see some caution in our customer base that, as Dave said, inflected for us sort of in that July and through August. So for us, it is a little bit difficult to extrapolate that six-week order pattern and tell you that we have perfect insight into how everyone is going to react to the election and everything else. But in general, we have taken a more cautious tone for this year as we wait for some more clarity to come out of it.

Okay, that's helpful. Thanks.

Nicole DeBlase, Morgan Stanley.

Yes, thanks, good morning, guys. So maybe just a question on 4Q. So you guys have guided for low single digit organic growth. Can you parse it out a little bit between Power and Electrical? Do you expect kind of similar trends to what we saw during the third quarter?

Nicole, we haven't -- we like to avoid the practice of giving real quarterly guidance. I think for the -- as you think about how they roll forward, I don't think we are anticipating a lot of dramatic change for you in either the Power or Electrical segment really from Q3.

Okay, got it. That is helpful.

I don't think you should think of any -- yes.

Okay, and then you mentioned pension. How much of a drag was that on your margin and then what is the outlook for pension expense based on where we are today on a year-on-year basis into 2013?

Nicole, the pension impact on the SG&A line, inclusive of the benefits, was the whole difference, the 30 bps that you are looking. The pension is call it a $12 million headwind or so.

And outlook into 2013, and initially, I know it is a little bit earlier, we don't have the discount rate information yet?

Yes, I mean it certainly at this point doesn't appear to us that that is going to be anywhere near that kind of headwind. A lot of factors, as you know, with rates and expected returns, but it should not be anywhere near that magnitude next year.

Okay, thanks. And if I could just sneak one more in, is it possible to quantify the price/cost benefit that you saw within margins during the quarter?

Yes, it was a little -- it was around a point, Nicole, of tailwind.

Okay, great. Thanks.

Jeff Sprague, Vertical Research Partners.

Thank you, good morning, everyone. Could we just dig a little bit further into kind of what the deal pipeline looks like? You kind of foreshadowed maybe there is $75 million or $100 million that may happen in Q4 or in the very near term. Is the pipeline fairly active looking beyond that? Certainly your comments about the dividend and those things suggest that they are, but maybe just a little bit more color on how acquisitions versus share repurchase gets balanced into 2013.

Yes, sure, Jeff. Certainly the pipeline -- the near-term pipeline is very active; we have got some things. But looking out, we see a lot of opportunities. There are a lot of businesses that we would love to have in our portfolio. One of the things that I have found interesting from my travels with channel partners is they are all full of ideas of different businesses that would be nice to add to our portfolio. So as active as we have been in identifying, I am getting an additional list that is good to know. So I think there is tremendous opportunities.

As you know, shaking them loose, finding them, getting them to be sellers are all part of the activity, but I think -- and we are clearly focused on larger -- I say larger than what we have been doing, the $25 million to $50 millions, looking more in the multi-hundred million dollar type of transactions. It takes time; it takes a lot of effort. We've continued to add to our resources. We've continued to add to the focus of our whole management team. And so I think I am seeing a lot more energy and activity and emphasis that I think will -- I am certainly pushing and I expect that we would have a lot more activity into next year.

And just the answer to this question obviously isn't totally answerable until you actually know what you bought and what you paid and all that sort of thing. I think Bill pointed out the purchase accounting pension that you had possibly in Q4 with deals, but the type of stuff that you are looking at that I guess you'd still say larger for you, but not especially large, do those have an opportunity to be year one accretive even if there's pressure in the quarter of acquisition or a quarter or two initially?

Absolutely, absolutely. I mean our objective is to not be dilutive and most of the ones that we look at, the way we look at, have the possibility absent some unusual transitional and transaction-associated cost to be accretive in the first year.

Great. And just switching gears to a couple items, can you tell us what percent of your lighting business is now LED?

We are up to 16% now, Jeff.

Okay. And just thinking about T&D and I guess maybe T specifically, Tim or Dave mentioned interconnect to renewables. Do you see any particular challenge in your '13 on wind, if kind of wind installations cliff here on us on the production tax credit dynamics?

I think that there are so many opportunities to improve the grid that while some of the bigger lines so far -- the bigger jobs have been connecting renewables that there are substantial opportunities to connect different parts geographically and we are seeing a number of those jobs come forward. Now whether we are going to see a huge amount of growth over this high level of transmission spending remains to be seen, but it is going to remain at this level with some slight growth and I think that the wind or the renewables is only one part of that story.

I think there are so many other needs to improve the grid and to streamline it and to update it for -- for instance high-voltage DC replacing AC lines, coming down in voltage classes from the highest to 345 KV and so on that the part of the utilities who recognize how important this can be in reducing line losses and increasing reliability will continue to invest. And I am expecting this high level of investment to continue for quite a few more years.

Do you see any activity around coal plant closures, the prospective disruption to the grid as it stands as coal plants go down and any positive feedback in the T or D from that?

They are enough isolated so as not to cause any overall big pattern. I think you have a number of things going on, which is fuel switching. So you have some oil-fired coal plants converting to natural gas. The legislation and regulation around greenhouse gases are forcing some of the older plants to be taken off-line. But if you listen to the manufacturers who are selling gas turbines such as General Electric, the demand is up and they are going to be substituting those kinds of combined cycle plants. But I would say this is more in the range of a smooth transition than anything that represents a significant move.

I think probably the best opportunity for reshaping the grid beside the transmission side is certainly the expansion of new housing. As Dave indicated, the national homebuilders really haven't reached the stage where -- they are procuring land now, they are getting it permitted and as soon as they begin to consume land, that is when the shape of the distribution grid begins to change. And following on that comes the commercial construction that goes with the expansion of houses and then schools and so on. And really that is what changes geographically where the demand is and so that is really coming, as Dave indicated, in '13 and then on into '14. So it is just a ways away, but we can see it now. We can see it coming.

Great, thanks a lot.

Mike Wood, Macquarie Capital.

Hi, good morning. Our utilities team at Macquarie here is thinking that we may have a peak CapEx year driven by California renewables trying to -- spending a lot this year to meet a 2015 mandate. Can you just talk about your exposure to that specifically to the California renewables utility spending?

I would say that we refer to a broader category called NERC work and this is federal requirements for reliability and safety of the grid. And across the country, there is a diversion of some spending toward improving the reliability standards of the grid.

In California, it is hard to say at this point if we have reached a peak this year or it is next year. I mean there is more to be done and in our case where we participate in the grid, you can really have that spending still come into place right up to the last minute because what we have is easily installed. So we are not talking about the apparatus like power plants and large substations. We are the piece parts along the line, so the spending can remain high for that for a number of years.

Great. And the international piece of the utility business, can you characterize what you are seeing there? Is that deferrals or driven by something else?

It is deferrals driven by slower economic growth in Asia, slower economic growth in Brazil and it isn't that they are putting the plans on hold or terminating the plans, it is that the demand for power is -- increased amounts of power is being slowed by their slowing economies, so they are just shifting the projects to the right. So if you can imagine what the difference in China is between 7.5% and 10% growth, it is a number of different high-voltage lines, it is a number of different power plants. The same would be true in Brazil and other developing parts of the world. So it just means the same plants are in place, but they are sliding to the right until such time as those economies begin to rebound.

Thank you.

(Operator Instructions) Noelle Dilts, Stifel Nicolaus.

Hi, good morning. Thanks. I have a couple of questions that actually just kind of expand on some of the questions that have been asked earlier. On the LED side, you talked about that being about 16% of your lighting business. Can you discuss the trends you are seeing there in terms of margin? We are hearing that margins are getting better on those products and also going into the next couple of quarters, you might actually have a tailwind from some lower input costs, particularly the bulb. So can you comment on what you are seeing there in terms of profitability?

Sure. For us, we have had -- and we have been pretty consistent in describing the margins for the LED products as being very comparable to the legacy technology that they replaced. I think some of our friends in the market were saying they were getting [inferior] margins and those have been improving. But for us, they have been pretty comparable on an SKU-by-SKU basis. The units cost more, so you make more dollars, but the margins are comparable.

And I think going forward, you are right to say that a lot of the inputs are expected to come down and the way we view that is the product itself becomes cheaper and it affects things like the payback and those kinds of decisions. And we are sort of planning to be able to make comparable margins on those products as opposed to and instead those cost input declines really help increase the adoption rate for us essentially.

Okay. Great. And then back on your acquisition and this pipeline you are looking at of potential acquisitions, Trinetics, it sounds like it is the first acquisition in a while that is kind of focused more on the Power side. As you look forward, are you favoring the Power space and the utility side more or will it be kind of balanced in terms of your current business?

I would say that our approach is actually quite balanced. I don't think the Power guys had been on a four-year drought because of lack of looking and it certainly wasn't because of lack of our view of positive outlook for Power. It is just the nature, as Dave was describing, of the pipeline. It sometimes hard to predict and -- but going forward, we certainly would love to do more Power deals. We think it is a very attractive space.

As Tim was just talking, Power, for us, because of its more global standard, lends itself in ways to a more international kind of level of expansion. The harsh and hazardous business similarly can lend itself to a more international expansion. But I think Dave described it right to say that our balance sheet is very well-positioned and we would love to enhance all the parts of our portfolio.

So it is much more when the opportunities with a compelling fit and the right value present themselves that we can do them as opposed to us pushing in one direction or the other. We would love to add to all of it.

Okay. And final question, our work suggests that we are seeing transmission project awards accelerate in the back half of the year, at least relative to the first half. I know you said you expect trends to be relatively consistent in the fourth quarter in terms of Power. But are you seeing any type of pickup in orders or inquiries that you think may be related to this kind of late surge in activity?

Your analysis is correct. I think there have been more awards as the year has gone along. What is different about the nature of business as it becomes sales for our Company is last year there were a number of immediate large releases coinciding with the awards. This year, the cadence is more of a traditional nature. Meaning that you get an award, which is very large and spread over let's say 18 months, to coincide with the construction of the line. And unlike last year, we are getting more of the incremental releases at the beginning, which would be more traditional than last year when we got large releases earlier. But our market position in our space obviously puts us in the number one market position and we are doing very well in the market on transmission system jobs.

Perfect. Thanks so much.

Okay, Jennifer. I think that takes us up to the hour.

That does. And there are no further questions.

Okay, everyone -- yes, thank you very much for joining us today. Again, if there are any follow-up questions you may have, feel free to contact me after the call. Thanks again for joining us.

That does conclude today's presentation. Thank you for your participation.