Park Ohio Holdings Corp (PKOH) 2013 Q3 法說會逐字稿

Good morning and welcome to the Park-Ohio third-quarter 2013 results conference call. At this time, all participants are in a listen-only mode. After the presentation, the Company will conduct a question-and-answer session.

Today's conference is also being recorded. If you have any objections you may disconnect at this time.

I will now turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Good morning, ladies and gentlemen.

Welcome to Park-Ohio's third-quarter 2013 results. Joining me today is Scott Emerick, our CFO, and Bob Vilsack, our Corporate Secretary and General Counsel.

I'd like Scott, if you would, cover the Safe Harbor statement.

Thank you, Ed. Good morning, everyone, and thank you for joining us today.

If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at www.PKOH.com.

I want to remind everybody that certain statements we make on today's call, both during opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.

A list of the relevant risks and uncertainties may be found in the earnings press release, as well as in the Company's 2012 10-K filed with the SEC on March 15, 2013. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Additionally, the Company may discuss earnings as just adjusted and EBITDA. Earnings as adjusted and EBITDA are not measures of performance under generally accepted accounting principles. For a reconciliation of net income from continuing operations to earnings as adjusted, and for a reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA, please refer to the Company's recent earnings release.

Any references we make to earnings per share are on a fully diluted basis. Back to you, Ed.

Thank you very much, Scott.

Normally Matt Crawford, the President of the Company, would fill us in on the third quarter and year-to-date operating results, but he's on an assignment in India with some of our new global customers. So I've asked Scott Emerick, the CFO, to review the third quarter and year to date and cover guidance. And then I will reappear and take each of the units and point out some of the exciting things that are happening with the Company going forward and what we have achieved year to date.

So, Scott?

Thank you again, Ed.

Now let's discuss our results for the third quarter. As you can see by our reported results, we had a lot going on this quarter and just subsequent to quarter end. We sold our non-core business of our Supply Technologies segment and we sold a 25% equity interest in one of our forging businesses and the engineered product segment.

In addition, we were successful in completing one small bolt-on acquisition in our Engineered Products segment during the quarter. And we completed two other bolt-on acquisitions in our supplied technologies segment early in the fourth quarter. And finally, we received some disappointing news related to an unfavorable court judgment associated with our Engineered Products segment. Before I get into the highlights on the results of the quarter let me describe in more detail these unique transactions impacting the quarter. Ed will speak to our fourth-quarter acquisitions later in his comments.

During the quarter, we sold our non-core business of the supply technology segment for $8.5 million in cash, which resulted in a net gain after tax of approximately $4 million. The business is a provider of high-quality machine-to-machine information technology solutions, products, and services. The proceeds of this sale were used to reduce amounts outstanding on a revolving line of credit.

Beginning with our three- and nine-month periods ended September 30, 2013, the results of this business and the associated gain on sale were reported in our financial statements as discontinued operations, and prior periods have been adjusted accordingly to reflect this adjusted income statement classification.

Our earnings from discontinued operations were $3.7 million, or $0.30 per share, for the third quarter of 2013, and our loss from discontinued operations was $700,000, or $0.06 per share, for the third quarter of 2012. As a point of reference, this business generated net sales of $5.2 million through our date of ownership in 2013 and $5.8 million during the full year of 2012.

In August of 2013, we entered into an agreement to sell a 25% interest in one of our forging businesses in our Engineered Products segment through a strategic partner for $5 million in cash. This transaction facilitates the Company's capacity expansion in one of its growing product lines. The results of this forging business continued to be consolidated in our results, but the net income attributable to the noncontrolling interest, or 25% of this forging business's earnings, is deducted from our consolidated net income we derive: net income attributable to Park-Ohio common shareholders.

Also during the quarter we made an opportunistic acquisition of a small bolt-on pipe bending business with great synergies to our pipe threading equipment business and the engineered product segment. The small acquisition resulted in the recognition of a gain on acquisition of business of $600,000, or $0.03 per share.

As we previously disclosed in our 10-K and 10-Q filings, a subsidiary in our Engineered Products segment was a defendant in a lawsuit. Even though we believed we had a number of meritorious defenses and we vigorously defended the lawsuit, September 2013 the court awarded the customer damages of approximately $5.2 million. We have appealed the court's decision, but based on the court's judgment, we have expensed the $5.2 million, or $0.27 per share, in the third quarter.

With the benefit of understanding these specific transactions and how they impacted our results, let's summarize our US GAAP earnings and earnings as adjusted for the quarter. We reported net income attributable to Park-Ohio common shareholders of $12.2 million, or $0.99 per share, for the third quarter of 2013, compared to $10.7 million, or $0.88 per share, for the third quarter of 2012. This represented earnings-per-share improvement of 12.5%.

Now let's focus on earnings as adjusted, which was $0.93 per share for the third quarter of 2013 and $0.94 per share for the third quarter of 2012. Earnings as adjusted for 2013 of $0.93 per share is calculated by taking net income from our continuing operations of $0.71 per share, which excludes the net income related to the sale and operating performance of the non-core business, classified as discontinued operations, and then deducting the net income attributable to noncontrolling interest of $0.02 per share and a gain on acquisition of business of $0.03 per share, and then adding back the litigation judgment cost of $0.27 per share.

As you can see, after excluding the impacts of the sale of a business, along with the nearly offsetting litigation judgment costs and the two smaller items, our earnings as adjusted in the third quarter of 2013 are very comparable to the 2012 earnings as adjusted of $0.94 per share. Even though a couple of our business units were facing significant headwinds during the quarter. Furthermore, our EBITDA as defined increased 6% to $29.5 million in the third quarter of 2013, compared to $27.8 million in the third quarter of 2012.

We will now cover a more detailed review of underlying performance and our consolidated results and core business segments. Net sales increased 6% in the third quarter to $304 million, compared to $285 million in the prior year. The revenue increase is attributable to volume increases in the Assembly Components segment. On a sequential basis, revenues decreased 1% compared to the second quarter as economic sluggishness continued into the third quarter in some of our end markets.

The gross profit margin percentage was 18.0% in the third quarter which is 100 basis point reduction, compared to the 19.0% gross profit margin in the third quarter of last year. This decline in gross margin percentage is largely due to a change in the sales mix between the comparable periods, as the lower margin Assembly Components revenues were a higher percentage of consolidated revenues than in the prior year.

Consolidated SG&A expenses increased slightly to $31 million in 2013; however, SG&A expenses as a percentage of net sales declined 50 basis points to 10.2%, 2013. This compared to 10.7%, 2012.

Since our interest expense of $6.6 million was comparable between the two periods, let's turn to taxes. Our effective tax rate for the third quarter of 2013 was 29.8%. This compared to the prior-year effective tax rate of 34.1%. We now estimate our full-year effective tax rate to be 33.7%.

Now, I'll cover segment results. First, let's review the supplied technology segment performance. Supplied technology segment revenues represented 38% of consolidated revenues during the third quarter of 2013. Revenues were flat year over year at approximately $116 million. While we did see revenue growth in the automotive, semiconductor, consumer electronics, lawn and garden, and agricultural and construction markets, these gains were offset by the softness we continue to see in heavy-duty truck, which decreased 11%, and defense, which decreased 29%.

We would like to highlight the strong diversification of our end markets that allow for nearly a flat quarter year over year, even when our largest market in the segment, heavy-duty truck, decreased 11% year over year in the third quarter and 20% on a sequential basis with the second quarter. Despite flat revenues quarter over quarter, we increased segment operating income dollars 7% to $9.3 million, and increased segment operating income margin 50 basis points to 8.0% in 2013. We realized good product and customer mix and we remain committed to strong expense management.

Next, I will discuss the Assembly Components segment. Assembly components revenues represented 35% of consolidated revenues. Net sales increased 26% to $106 million in the third quarter of 2013, compared to the third quarter of 2012. Approximately half of the revenue increase is attributable to the Bates acquisition that was completed in the second quarter of 2013.

The other half of the revenue increase is primarily attributable to the organic growth in the aluminum business. On the strength of the new program launches secured in the aluminum business, aluminum revenues increased 34% compared to the prior year.

Segment operating income grew $1.5 million to $7.6 million, which was a 25% improvement over the prior year. Segment operating income margin was 7.2%, consistent with the prior year. We expect margins to improve in this segment as the new programs for the 2014 vehicles moved past their initial launch phases.

Now, let's move into a discussion of the Engineered Products segment. Engineered Products revenues represented 27% of consolidated revenues. Net sales decreased 4% to $81.5 million in the third quarter of 2013 compared to 2012.

Our forging business demand continued to be very strong in the quarter, as revenues increased 11% over the prior year led by our rail business. However, the industrial equipment business demand for original equipment continued to reflect weakness discussed in previous calls, especially in the international markets. Based on our third-quarter booking levels, we continue to expect a stronger fourth quarter in the capital equipment business as compared to the second and third quarters. Very importantly, we continue to realize steady aftermarket performance in the industrial equipment business.

Segment operating income decreased 11% to $12.7 million, while segment operating income margin was still relatively strong at 15.6%. Unfavorable customer and project mix, coupled with the impact of fixed costs spread over a lower base of volume in the industrial equipment business, contributed to the reduction in segment operating income margin compared to 16.8% in the third quarter of 2012.

Next, I would like to take a moment to highlight cash flows. Year-to-date operating cash flows are $37 million and compared to $43 million for the first nine months of 2012. While our receivables did increase at quarter end for strong third-quarter end sales, the quality of our receivables remains very good and we continue to be very diligent in our inventory management, as well.

In fact, for the nine months ended September 30, year over year we have reduced our days of inventory on hand by five days. In addition, we generated $14 million of cash from investing activities as we sold the non-core business and an interest in our small forging business.

Net capital expenditures were $17.3 million for the first nine months of 2013, the majority of our capital expenditures are earmarked for growth. We are still forecasting net capital spending for the year to total approximately $25 million, with $14 million of this amount representing growth capital for aluminum equipment for the new program launches in the aluminum business of the assembly components segment. We expect depreciation and amortization to approximate $20 million.

Overall, we are pleased with our third-quarter performance, given some of the headwinds in our business. At this time, we would like to give you an update on our guidance for 2013. We are now forecasting full-year consolidated revenues to increase approximately 8%. After considering our updated mix of business based on these expected revenue levels, we have narrowed the range of our earnings forecast. We are forecasting our earnings as adjusted to be in the range of $3.77 to $3.97 per share.

Earnings as adjusted is comprised of our US GAAP earnings, described as earnings from continuing operations attributable to Park-Ohio common shareholders, which is forecasted to be in the range of $3.53 to $3.73 per share. Then the $0.03 per share gain on the acquisition of a business is deducted from, and the $0.27 per share litigation judgment cost is added back to our US GAAP earnings range to derive the earnings as adjusted. As a reminder, the impact of the after-tax gain on sale from the discontinued operation, net of this sold business's year-to-date operating performance, are not included in earnings from continuing operations or earnings as adjusted.

In addition, we are forecasting EBITDA as defined to be in the range of $121 million to $124.5 million for 2013. Before I turn it back over to Ed, I want to update and highlight the transformational change that Matt mentioned on the previous call given our recent acquisitions. As a result of our excellent growth in the last couple of years, we are forecasting a reduction in our leverage position, which will serve as a springboard as we continue our growth trajectory. As you may recall, between 2008 and 2010 our gross debt leverage hovered in the high 4%s to the high 5%s.

As we have grown the business and its earnings power, both organically and through strategic acquisitions, we simultaneously have significantly reduced our leverage position. At the end of 2012, our gross and net debt leverage had fallen to 3.8% and 3.35%, respectively, and we are forecasting leverage at the end of 2013 to be 3.2% and 2.8%, respectively. We're very proud of this achievement especially after completing several high-quality bolt-on acquisitions this year and incurring above average growth CapEx.

Thank you. I'll turn the call back over to Ed.

Thanks, Scott. Very thorough. Appreciate it.

I want to address again the overall operations year to date, particularly in the Company. Considering sometimes the wind not being right at our back I think we've navigated the year very well. And I think the results of the Company are a real picture of the balanced portfolio of operating companies we have worldwide.

We've talked about our customers. We talked about our touch points. And even with two of our largest divisions or silos, supply technology fighting a dramatic reduction in the trucking business and defense. Along with other what we know historically in the capital equipment business, it's always about order, order, orders and big rush to get it out fourth quarter. Historically, this Company's operated that way; we're pretty much online. But again, I think where we are today and where we're going to end up the year is, again, representative of diversification and the ability of the Company has enough opportunities and enough customers worldwide to continue making progress, even when some of our strongest divisions are not performing as expected.

Let me go a little further into Supply Technologies. I mentioned the trucking. When the trucking is down, and it's our largest segment there, when the trucking is down 20% and has been steadily there for the year, although all reports indicate that upturn in 2014 on the trucking side, defense is still an open issue. But let's please understand this, these two acquisitions in what I call the Eurozone, one in Ireland and one in England, we now have a platform of six locations. And one of the criticisms of our North American companies that want to do business with us in Europe, is we did not have a platform. Maybe we had one warehouse but that wasn't enough for them to release all the production fasteners to us. So it's six platforms, well entrenched sales force.

We really expect a lot of new sales, organic growth, by introducing our proven system of supply chain management in Europe. So we needed this. We've been looking at it for a long time. We're able to find two strategic ones. To management, these are profitable companies and the growth potential there for our new, to them, our new way of running the factories, the supply chain management is enormous. I'm very, very happy with the prospects of supply tech rebounding domestically with the trucking business coming back.

But more important, we have really picked up an excellent opportunity to put ourselves again in the Eurozone in a big way. In a way that's acceptable, and the response by our large North American customers has been really very positive.

Moving on, it might not seem like much when we do a transaction and invite someone into take 25% or sell them 25% of our business in Arkansas, which incidentally is that specialty forging business for the railroad industry. But our suppliers feel Sumitomo is the one that acquired that 25%, and we negotiated this transaction for five years. And we finally got it and this is going to be about the future, it's going to be about growth, it's going to be about their interest in expanding and more steel out of their facility in Arkansas. That's a very, very positive. It's small, doesn't show up a lot, but again this is where we have lots of pockets where we can do very well, make an awful lot of money, be strategic, and in most cases, be single-sourced.

I want to talk a little bit about the $5.2 million hit to earnings at ATM. And last year, we had to engage, there's been three lawsuits in that business over the last 10 years that I've been around. The first one ended in a draw with no money exchanged. We lost to, as you know, $12 million, $13 million to a South African company in a lawsuit which we settled, which turns out to be a very good move. But at the same time, right after that popped up, this lawsuit, and this was in Arkansas with another steel-related company, and we always felt that the South African problem was the fact that they bought the equipment just before the steel industry really took a deep, deep dive.

But this was one we shouldn't have lost. We vigorously filed appeal virtually the next day. There were like 15 charges against the Company and the judge ruled on 1. And so we feel very good about our ability to do that, but we've taken the hit.

But I want to point out, this is not a continuation of write downs in this capital equipment business. And it's important to think of it this way. This particular unit, Engineered Products segment, this is one that's averaged over $30 million EBIT a year for 10 years. And this is an incredible Company.

And but it's not, there's going to be a series of these things. It just seems to come together. It's a lot of money when you talk about $13 million. I think will get the $5 million back. But I wanted to point out this is a very well run Company. We make a lot of capital equipment.

And there's not a history for this. But two years in a row, at least it got my attention. So I wanted to explain that to everyone, so it's not we're going to call every year were going to be write off in that particular business. Hopefully not.

A little about the Assembly Components part of the business, we made an acquisition. As you remember in FRS, the Bates Rubber Company in Tennessee. That's exceeded what our expectations were, they're doing a fantastic job there. That part of the Assembly Components business, as we've talked about, is poised and ready to go with a GM contract in China in 2016.

And I believe that will follow with others. So both sides of that business is really responding. I think it's clear to say that the Aluminum business finally has really launched in size. I think you'll see very, very strong results going forward relative to sales and growth. There is no letup in the need and the switch in the auto and truck industries with the F-150 and the minivan all going to safety critical steering knuckles, and we're right in the sweet spot.

And we just received an order that starts in 2016 for a new 10-speed transmission. And transmissions, they don't change transmissions. They are in their cars for 10 years. So that seems to be going very well.

So generally speaking, we've all talked about this N5 target. We have a meeting here last year in August and we talked about the ability to grow the Company to $2 billion by 2017. That required the Company to grow on a run rate this year by $141 million. Next year is $165 million. We have and will achieve by year end the run rate of an increase of that 12%. So we are going to make the first bogey. Considering we did not launch N5 until March.

And we feel very good about next year and maintaining the growth in, of course with the growth we expect to increase the earnings. So we again feel, year to date, with a very unusual economy with things not being perfect across the board in the Company, we continued to make the numbers. We continue to grow the Company. We see no change in that in 2014.

We'll be talking about that in the appropriate time, but we're on track. The Company is doing what is necessary to, in fact, ensure the future. I want to point out that yesterday in our 10-Q, the Company posted an issue with the SEC. And I've asked Bob Vilsack, the Chief Legal Officer, to explain that as much as he can because this is an ongoing discussion with the SEC.

So, Bob, do you want to cover that?

Thanks, Ed.

I would only like to comment that the SEC and DOJ's investigation is a nonpublic investigation focused on a third party. As such, we can't speculate on the breadth or nature of the SEC and DOJ investigation, nor can we speculate on the effect this matter may have or not have on the Company's financials.

The Company intends to cooperate fully with the SEC and the DOJ in connection with their investigations of this third party. And at this time, we cannot entertain any questions and must simply direct you to our disclosures in our Form 10-Q for the third quarter.

Thanks, Bob.

And if anybody does not have access to the 10-Q, you can ring us up or contact us here and we'll be glad to send it over to you so you can have it, so you can really read it. It's not in the release, it's in the 10-Q which is appropriately placed there.

Okay. Based on I think we've covered everything. And I'm looking forward to answering any of your questions. So I'm going to open up the lines and thank you for joining us.

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session.

(Operator Instructions)

Ajay Kejriwal, FBR.

Thank you. Good morning, gentlemen.

It's good to see you make those acquisitions in Europe in supply tech that obviously was an area that was a gap. And now you have very nice location. So maybe talk a little bit about what that brings? Does it get you new customers, new supply relationships?

And then I know you touched on the opportunity to leverage this organically, but maybe elaborate that a little bit if you can? Whether new relationships could be expanded upon in terms of obviously you have a very strong position here in the US, but you used that to get new customers in Europe?

Well thank you. Let me describe it this way. When you have very, very large customers, people like Volvo and Eaton and all these companies that you have relationships with. They are interested in taking the way and the efficiencies and the real reduction in cost to their facilities in the Eurozone.

We quoted on business last year. And we lost a block, a substantial block, I think it was $21 million a year, to one of our best customers in the basis that we did not have the facilities and the background and the organization over there to supply them. And they're not going to turn over the production lines to us on the basis that we're going to build a plant. Okay, or build a warehouse.

So we've been looking. And I mean we have been looking under every rock in Europe to get what we thought were established organizations, one's been in business 100 years the other one was in 21 years, with new customers.

I don't think there was one customer in either of these locations that we have been doing business before. But they are especially bus manufacturers, there are a lot of customers that we should have and we start, these are winners from the first day. You know, Ajay, I look at this thing, a bolt-on acquisition or investing in the new operating capital is a total cost to start.

We are in these two companies for the sales ratio at lower than what we would have just built on new account. Okay? This is a terrific, but we've got the identity now and we need it for India. We need it for Germany. We need it in a lot of locations, so we're all over Asia as you know, North America, and we're going to do very well.

But we're starting -- and the one thing we realize, and I think we all should realize, that Europeans particularly want to do business with the Europeans. And it's not that they don't like the Americans, but it's a lot easier for the English and the Irish people roaming around Europe selling product a new idea, with all do respect. So I hope that answered the question, but it's positive.

That's very helpful and that comment certainly resonates well on doing business locally. Maybe talk a little bit about the margins.

Are margins in that piece close to businesses similar to segment margins? Higher, lower? And then any color you can provide on valuation?

Scott?

Yes, I think, Ajay, what you can say is that we should have comparable margins from these acquisitions with supply technologies when you blend the two businesses together.

Good. And the valuation?

The purchase price, we did disclose in the Q a little over $20 million in acquisition price. So that was funded with cash and some borrowings on the line of credit.

Good. That's helpful. And then the other interesting deal I thought was the forging piece that you sold 25% interest in. Sounds like strategic, a strong strategic relationship.

Maybe talk a little bit about what to expect? Does the help on the cost side? Do you expect it to benefit topline at some point? Just a little bit more color on what that brings?

I'll talk about that. I want to go back to Eurozone or our effort over there.

The cash we talked about came out of Europe. It wasn't money out of the American lines. Okay? You get that, Ajay?

Yes. Of course. That's clear.

It wasn't our line of credit. We used capital that was over there.

As far as this relationship with Sumitomo, it's 12 years, 13 years. We started the forging plant right next door to them. And we dominate the track plates as we've talked about in certain parts of the railroad industry.

They are interested in -- it's taken a long time for them to get comfortable with us. And they are interested in expanding that business. We are collectively working in identifying new customers which we require additional capital investment in equipment.

But on the other hand, we have a built-in lower cost, substantially lower cost than anybody else trying to do the same. So if we launch ourselves into a particular business, they are very interested in dominating the business. So we have targeted one area that would make a lot of sense, and as you remember we do have a company, we make our own forging presses.

And not only do we make forging presses, to do the type of forgings were talking about you need induction heating equipment which is Ajax Magnethermic. So literally we can build a whole new forging line at a very reasonable cost, expand where we are. And as long as we're getting that discount on the steel -- substantial discount on the steel because they buy scrap and they turn it into low content iron steel, so I'm looking for a lot here.

It was a long time to get the relationship. We necessarily do not get excited about selling a piece of a company that is making money profitably, but they paid a fair price.

And more important, they're going to be a side-by-side partner in expansion because we have the technology, the access to the capital equipment at a discount, and they have the steel. And where we go, they're going to be, we're going to be very difficult to stop. So you'll be hearing a lot more about little Arkansas steel in the future.

Excellent. And one more from me before I pass it on.

Ed, you mentioned the trucking market. Obviously has been weak this year. Maybe just some sense on what your expectation, what you see from customers in terms of their rebound?

Is it sometime early next year? Or is it even beyond that? What's your thought?

Well, I gauge this thing, it seems like the aftermarket is slowing down. There is an aftermarket content to our business and I understand that a little bit. It's clearly, I would say we're going to get at least a 10% increase.

I don't want to measure it in units. I want to measure it in the fact that I believe our revenues are going to -- it's not going to go back to where it was at the peak. In the trucking business, at one time, this is a $50 million type area, when it goes downs substantially, it hurts.

But if we get half that back, if it goes back to flat, if it goes back up, if it just increases 20%, I'd be thrilled. Okay?

And the impact on -- keep in mind we have to maintain all the supplies, all the people, and everything else because when they rebound, it runs for five years, flat out. And so we can't close things so we're carrying a burden -- we're carrying a substantial burden because we've lost that revenue. And the defense is down.

But even losing that revenue and so forth, we've done very well in supply technology, run a better Company. But this revenue we're adding from the other side in the Eurozone and the trucking business comes back, we're expecting this Company to still perform.

If we can get through this year as we've expected, and I think we've raised our guidance in an old-fashioned way, we're doing better than we even thought But we really believe that we've got all the pieces and it's lined correctly and we're going to have we're going to make our N5 goal next year and even if we have to drag along the trucking business.

Good. That's very helpful. Thanks much.

Okay, thank you.

Jay Harris, Axiom Capital.

I'd first like to say that I thought this call was if not the clearest and best call you've done, as good as any other call. Either that or I've gotten all the wax out of my ears. But anyway, --

We're trying. We're trying, Jay. We set our skinners here based on you and your questions and the wax in your ears.

(laughter) All right. Fair enough, fair enough. Have you guys been able to characterize why we have so much weakness in the truck vertical market? And, well, first, that one.

In simple terms, we do a lot in the trucking business but our the gold standard in the trucking business and for our Company is Volvo. And it's simple as they are just not selling new trucks. And --

Yes, but I'm asking have you been able to characterize why the demand for new trucks sloughed off? Is it an intermodal competition with railroads? Or just that we went through an excessive building cycle and there were excess truck capacity that had to be absorbed?

Or was it a matter of truck driver availability? Have you been able to characterize any of that?

Well, I have a friend that's in the trucking business, number one. You point out something which is subtle but very important. The average age of the truck drivers, the people out there actually driving the rigs, is moved up north of 50-years old. Not that that's old, but the question is there's not a lot of come young people coming in.

And more important, there isn't just enough freight. Again everyone is saying, what's happening? But I think it's a driver combination. I think the trucks are lasting longer. But it's like anything else, they last longer but they still get old, they're getting older by the minute.

So it's pent-up demand and my friend in the trucking business that turned his fleet over every five years and now turning it over seven years. But the seven years catches up and then they get to turn it over again, so I don't think it's one thing as just a general economy, the trucks are made better.

But it is as been a cycle business for many, many years. And it will continue to be one and it's one of the down cycles, when they come back it's not the engine, it's not the EPA, it's not the gas mileage, it's just bad time for them. Sometimes you can sell air-conditioners and sometimes you can't. That's what it is.

I don't think it's one. It's a blanket of things and I'm not smart enough to figure out. Alls I know is we're down and the number one company in the country that does this is down, and I'm sure they're working very hard to get up.

That would suggest that over a period of time, we ought to go back to where the former peak of activity was?

I think back there and past, looking -- the numbers to me look like $10 million or $15 million in this business is nothing. On the upside, so we'll even do better.

I mean, again we've got all the fixed costs. It's just, it will get it. And it will come. And when it arrives, it would even push us even further.

But let's even think in terms of it staying at the level it is through 2015, 2014, that the extreme thought but that's not the case. But if it starts up and let's say in the fourth quarter, of some are saying in the fourth quarter of 2014, we still have enough momentum in the other companies to wait for that, and maybe some will slowdown in some other parts of the division. That's the diversity of the Company. This is what's good about where we are.

Turning to defense --

It's a start.

Is the decline -- are we going to go through another year of decline in 2014?

We don't know. The defense really from our viewpoint is not a big item. It's not anywhere, it's a small little item on versus the trucking business. I only mentioned it because it's symptomatic of what's happening in a lot of areas, but the defense business if it stayed at the level it is, we'd still be happy.

We were talking about peak years, but it's not going to affect the performance of the Company long term, any slowdown in the defense industry.

The last question has to do with tax rates. Should we expect because the US economy is growing better than other industrial economies that your tax rate will rise somewhat next year?

You mean our current government is going to increase taxes on the manufacturers?

No. Just the tax rates are a reflection of the geographic distribution of where your earnings occur? And -- I'm sorry, what did you say, Scott?

Jay, what I would say is one, we just targeted some international acquisitions that have territories in the UK and Ireland that have lower tax jurisdictions. So as we grow internationally, there is going to be the potential to lower our overall effective tax rate.

I can't give you any specific guidance today --

I understand.

-- on what our 2014 effective rate will be. I hope to be able to give that to you in March. But I think if of you just assume a consistent to maybe slightly down rate might be a good way of thinking about it right now.

All right. Excellent. Thank you, guys.

Thank you very much, Jay.

Steve Barter, KeyBanc Capital Markets.

This is actually Paiges filling in for Steve. Just a couple of quick ones. You guys did a very good job in the prepared remarks and a lot of the questions already being answered. But on the aluminum side, do you anticipate continued increase in the revenue increases there into 4Q and into next year?

I expect to do more sales in 2014 than we did in 2013.

Got it. And then just I guess a follow-up, I know --

In fact, I would say it's reaching because it's a long way. but everything stays the way it is as you know, the contracts that we are ramping up just are coming on board. So 2014, it's spoken for. So we have a very good idea where 2014 is going, and quite frankly based on the new developments the new things, 2016 and beyond isn't going to get perkier.

We have a natural limit in the sales we can do in our six facilities. But there are wonderful, wonderful ideas coming from international companies and others. We've been selected as someone that they clearly -- our customers like us and there are European companies that would like to be in America in different technology than we're in.

For example, all the frames on the cars are currently iron. We've been talking about knuckles and calipers and transmission parts, but the frame you can imagine how much steel is in the frames.

In Europe, particularly in Italy, they have already moved to aluminum frames. It requires diecasting 35,000-ton machines that are bigger than his whole building. And a lot of expertise and there are a number of people that would like to be in that business and being in America, but they don't want to go greenfield so they've got to find partners that have customers.

And anybody that can show up with new technology in a business within the business that we do not have. And there's tremendous demand, there is a tremendous shortfall for large diecasting capacity in America. And so we are listening and we think if the Company is going to, the aluminum company is going to get bigger, it won't be in the current products we're in. Because we're going to go through that capacity.

And as soon as we're through that capacity, which is very soon, if we want to grow we can advance ourselves by taking more of the current market. But that's subject to change when the auto industry slows down. But the growth is in more aluminum in the car in areas that we are not in, which is about technology and we're not going to go there without a technology partner.

And what I'm trying to -- this strategic arrangement with our friends at Sumitomo, I like the arrangement of having a side-by-side investor and a real investor in one quantity or another on board. So I'm going to follow that. That's I'm going to be a copycat on the basis that it seems to me that we have some strategic value to a lot of people, particularly in the aluminum.

And there is parts of the aluminum business I'd like to be in. What our Company would like to be in. But I don't want to go develop the process. I don't want to go develop the systems. I need a partner and they need us.

So there's going to be hopefully in the future you get the right partner, they bring something to the table other than money, and you can do very well. So that's where we're going.

Yes. That's great color. Thank you for that.

And just moving on to supply tech, seems like a healthy increase year over year in margins. How much of that was one-time or is that just a permanent shift? And we should think of that as the new level going forward?

Well, the only thing I can say about our friends downstairs that run that's division, and you know how decentralized we are, I'm very proud of them. I hope a couple of them are listening because they just ran a business that was a little under the weather from the standpoint of a couple big sectors being out, they just ran a better company. Okay? It's that simple.

But the answer is there not also investing in -- we didn't get the organic growth we were looking at. If we have the organic growth, we would have had to come up with more money.

So what you're not seeing is the fact that if we'd had written another $50 million in sales, which I hope we would have, we'd had to have to put that in the working capital. And as you know, it's four months to get out of from the working capital into the return.

So there's as part of that, you follow what I'm saying here? There's a rollout of this business that is very expensive, new business. Now, when you acquire companies in England and Ireland, you're in business the next day at a profit that's obviously accretive else we wouldn't do it.

Got it. And then I guess a follow-up for supply tech, what's the new business pipeline looking like or just the quoting activity? And then if you could talk about international versus domestic?

In the pipeline business?

No. On the supply tech side. So you might have customers coming to you and your potentially quoting them on new business?

Well, supply technologies, let's start with something very interesting. This isn't my first comment on this. As you heard me over the years talk about the efficiency and I've always thought that supply technologies with our systems on a scale of 1 to 10 in the management of the business were 10s or 12s. And I've been a little frustrated with the overall marketing efforts on a global international and domestic basis.

But there has been a dramatic shift in the Company in the last 90 days. Of the top three people as you would be responsible for marketing and sales, of the top three, two have been replaced. And the top person has been replaced. And the top person was just replaced by someone that's been in the industry with our competition for some 17 years.

Because of where we are, we're getting a real look at some of the top people in that business. There are a couple customers that are starting -- they're large companies and they don't feel there's been an investment, they don't feel they're a growth company. So we're muscling up on the sales side of the business.

And with all this comes lots of quoting, so again I'm very excited about it. So I think we're going to see for the first time, this thing move to a marketing and sales orientation that it's never had before.

And they're going to drive, for example, in Europe, in the Eurozone, a whole new ballgame over there. So I'm excited about the fact that we have a system, we have a way. It's very important to manufacturing and we're going to get out there and sell a little bit more.

And I'm spending a little bit more time, as you know, in the field talking about that. And that's some of the exciting things for 2014, 2015, and 2016.

Yes. That's great color and I know we're over time, so I'll follow-up with the others I had. Great quarter. And looking forward to your next quarter.

Okay. Great. Thank you very much.

Look, we're going to have to wrap this up today. Again, we are moving ahead.

We have a distraction. And we have distractions and positive things, but the net result is the Company is moving forward year-over-year. We're very pleased with our N5 prospects. We talked about making a serious and investment in this.

And actually for the first time, if anybody really knows me, I did a video of my son Matthew on our N5 and distributed it to the 160 people that were at the sales conference in August. Okay? And, excuse me, in March. And so we're going to get a little more invested in the marketing and telling the story about the Company.

We think we have the pieces for the future. We can do a lot of bolt-ons. So we're in a good position. It's a lot of hard work but the prospects are great.

So I want to thank you. All of the investors and interested parties and all the stakeholders in the Company. And like I look forward to seeing you in the spring with more positive thoughts on where we're going and where we'll be at that time. Again, thank you very much and have a nice day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.