Donaldson Company, Inc. (DCI) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Donaldson First Quarter FY '13 Conference Call. [Operator Instructions] Today's conference is being recorded, November 21, 2012. I would now like to turn the conference over to Rich Sheffer. Please go ahead.

Thank you, Alicia, and welcome to Donaldson's Fiscal 2013 First Quarter Earnings Conference Call and Webcast. Following this brief introduction, Bill Cook, our Chairman, President and CEO; and Jim Shaw, our Vice President and CFO, will review our first quarter earnings and our updated outlook for fiscal '13. Next, I need to review our Safe Harbor statement with you. Statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from these forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. Now I'd like to turn the call over to Bill Cook. Bill?

Thanks, Rich, and good morning, everyone. As you saw in our press release we issued earlier this morning, our first quarter sales and EPS were very consistent with the updated outlook we announced in October. As we discussed last month and summarized again in our release today, we had started our new fiscal year in August with excellent operating momentum and a good open order backlog. However, we then began to see conditions at many of our customers start to quickly decelerate in September and into October. Our sense is that what has caused this slowdown is the significant decline in business confidence due to the ongoing high levels of global uncertainty. The Wall Street Journal earlier this week summarized the probable causal factors of this uncertainty issue, including the U.S. elections, the government transition in China and the impending fiscal cliff issue in the U.S. The list goes on, but I think we all get the point. There is a high level of uncertainty now negatively impacting business confidence and investment decisions generally. Consequently, we see many of our Engine OEM on-road and off-road equipment customers reduce their production schedules to both deal with their declining end market demand and their own now higher-than-desired inventory levels. For example, according to ACT Research, North American Class 8 year-over-year truck build rates decreased 9% in August, 18% in September and were down 19% in October; and our OEM on-road sales declined 16% in local currency during our first quarter. Based on ACT's latest forecast, North American heavy truck build rates are now expected to be down 15% year-over-year in total in our fiscal '13. Our OEM off-road sales were a better story, down less than 1% in local currency. As a reminder, our off-road sales include construction, ag and mining equipment. According to Caterpillar's earning call last month, they are cutting production of both construction and mining equipment to -- production levels to below their end market demand to achieve their inventory reduction targets in their fourth quarter, which ends in December. In ag equipment, which we currently see as the best of our OEM end markets, North American ag equipment sales continue to be strong, as just evidenced by John Deere's announcement this morning that they had a 16% increase in ag equipment sales in their recent quarter. So net-net, in total, our OEM off-road sales decreased less than 1% in local currency during the quarter. The utilization rates of the existing fleets of on-road and off-road equipment in the field have also softened during the last 2 months, resulting in lower order rates for our replacement filters from our OE distributors, independent dealers and distributors. We do also believe that some of our larger aftermarket customers have been destocking their replacement filter inventory levels to adjust to their newly revised expected market demand, so there is a short-term compounding impact of the current lower end-user demand. In total, our engine aftermarket sales decreased less than 1% in local currency during the quarter. Moving to our Industrial Products reporting segment. Our Industrial Filtration Solutions sales were even with last year with continued growth in the Americas, offsetting weaker conditions in Europe and Asia. In our Special Applications Products, we have seen hard disk drive -- our hard disk drive filter customers reduce their production schedules to adjust for reduced corporate IT spending and also to adjust their own inventory levels. According to both Western Digital and Seagate's recent earning announcements, industry drive volumes were down 11% in the quarter ending September, but started to improve in October. Helping to offset this for us and also within Special Applications, our newer venting products had a good quarter as we continue to expand the products that our filters are being incorporated into, including hearing aids, ostomy bags and automotive sensors. In total, our Special Applications sales declined 6% in local currency during the quarter. And finally, our Gas Turbine Products business continued its recent strong performance as local currency sales increased 36% in the quarter, driven by a rebound in the number of large gas turbine projects in -- particularly in the Middle East and Asia. So to summarize what we said in our press release, we see many of our end market environments experiencing what we expect will be a short-term downturn. We do expect our company to return to year-over-year growth in our second quarter, although the conditions will vary by different end markets. To be clear, one of the key benefits of our diversified portfolio of filtration businesses is that it will still provide stability or balance as we forecast at some regions, including Latin America, South Africa and Australia; and some business units like Gas Turbine and Integrated Venting Solutions. We'll continue to have good growth this year and which will help to offset some of our slower regions and business units. Bottom line and including all the positive and negatives I briefly summarized, we still expect to deliver both top line and EPS growth for the full year. I'll now turn the call over to Jim for his comments on our operations before we discuss our outlook for fiscal '13. Jim?

Thanks, Bill, and good morning, everyone. Our gross margin was 33.7% in the quarter compared to 35.3% in last year's first quarter. As we noted in our press release, the biggest drivers of the decrease were lower fixed cost absorption due to the decrease in production volumes and the unfavorable mix generated by the larger number of gas turbine project shipments during the quarter. These combined to lower our gross margin by 250 basis points. Partially offsetting this was the impact of our Continuous Improvement initiatives, which increased gross margin by 100 basis points. Our operating expenses were flat in dollars year-over-year, but increased as a percentage of sales to 21.2% versus 20.5% in last year's first quarter. The drop in sales caused negative leverage, which hurt our operating expenses by 50 basis points in the quarter. Our discretionary cost containment actions that we implemented during the quarter helped to offset the 60 basis points of increase resulting from higher pension expense and incremental expenses related to our strategic business systems projects. There's still a lot of uncertainty regarding how long the European economy will remain in the recession, the pace of general industrial recovery in China and the potential for a fiscal cliff in the U.S. So we'll continue to manage our operating expense levels cautiously in the near term. However, we do plan to continue making strategic operating investments critical to helping us achieve our $3 billion and $5 billion sales goals. Our operating margin came in at 12.5% this quarter. Looking at our operating margin forecasts, we believe the many cost containment actions we have initiated and are continuing to work on will help us better align our manufacturing and operating expenses with our forecasted customer demand, so that absorption of our fixed costs should have a smaller impact on operating margin going forward. Please note that our second quarter operating margin is normally our lowest of the year due to seasonal holidays causing the fewest shipping days of any quarter for us. As a result, our current expectation is that our second quarter operating margin will be comparable to our first quarter. We expect our operating margin to increase in the second half of our fiscal year due to the combination of the better sales outlook in our second half and the benefit from cost containment actions that we have initiated. For the full year, we expect our operating margin to be between 14.2% and 15% or comparable to last year's record of 14.6%. Our effective tax rate was 29.4% in the quarter versus 25.5% last year. Last year's first quarter had $4.3 million of tax benefits, primarily due to favorable settlements of tax audits. Based on our projected global mix of earnings in fiscal '13, we forecast our full year operating -- full year tax rate to be between 28% and 31%, the midpoint of the range being about 1% higher than fiscal '12's rate. Absent the retroactive extension of the research and development credit in the United States, our second quarter effective tax rate could be a little bit higher than our first quarter and full year rate due to the timing of discrete items. As I mentioned in the August earnings call, we've seen profitability of our U.S. operations improve considerably. While this is obviously very good news, it unfortunately has a negative impact on our overall base tax rate. In addition, we've been fortunate to have realized the benefit from favorable tax settlements the last couple of years, which have lowered our effective tax rate. These discrete events -- these are discrete events. And consequently, we do not see these benefits repeating in the next 1 to 2 years. As you probably noted in the press release, our outlook is based on a $1.27 exchange rate between the U.S. dollar and the euro. While this is favorable compared to the $1.24 rate we used in our initial guidance in August, it's slightly unfavorable to the $1.29 we used when we updated our outlook in October. In fiscal '12, the dollar to euro averaged $1.32 in both our second and third quarters and $1.25 in our fourth quarter. With this in mind, we are forecasting foreign currency headwinds of approximately 2% in the next 2 quarters of fiscal '13. Our first quarter CapEx came in at $21 million. With the slowdown in many of our end markets that we experienced in the first quarter, we have slowed down or delayed a number of projects that we originally expected to complete during fiscal '13. We now expect to spend approximately $100 million on CapEx in fiscal '13. About $40 million of this is carryover from fiscal '12 projects that were authorized but not spent prior to last year end, and the balance will be selectively spent from fiscal '13's capital budget of $100 million. The breakdown of this year's CapEx is projected to be approximately 20% related to capacity expansion; 30% for our technology initiatives, which include our strategic business system projects; another 25% is for tooling for new products; and 25% will be related to cost reduction activities through our Continuous Improvement initiatives. We expect depreciation and amortization will be between $62 million and $66 million in fiscal '13. Free cash flow is $43 million this quarter. As mentioned, CapEx was $21 million compared to $18 million in the last year's first quarter. Working capital was a source of cash this quarter, as a decrease in accounts receivable from our fourth quarter added $29 million of cash from operations. For fiscal '13, we expect the full year cash flow from operating activities to be between $235 million and $265 million. As part of our longstanding share repurchase policy, we repurchased 1.5 million shares or 1% of our diluted outstanding shares in the first quarter for $51 million. Our debt-to-cap and debt-to-EBITDA ratios are now at 22.2% and 0.6%, respectively, well within the financial covenants of our various credit and note agreements. We are in the process of renewing our $250 million revolving credit facility and expect to have the new agreement in place in December. We expect interest expense in fiscal '13 to be between $11 million and $13 million, and our balance sheet remains strong with $289 million of cash and short-term investments. So with that, I'll pass it back to Bill, who will provide additional details on our updated outlook for fiscal '13. Bill?

Thanks, Jim. Fortunately, our outlook hasn't materially changed from what we provided in October. As Jim mentioned, we had a slight change to the top line due to a tweak in the foreign currency rates we use when updating our forecast, as the U.S. dollar has strengthened again recently. However, in local currency or constant exchange rates, our full year sales forecast has remained the same. As we look to each region of the world, we -- first, we expect most of Europe to remain in the recession for the balance of our fiscal year. Moving to Asia, it's recently been reported that the Chinese economy bottomed out in the July-August period, and we believe that conditions there could begin to slowly improve during the second half of our fiscal year. We see the current U.S. conditions as a short-term correction or pause. Now obviously, should conditions in any of these regions show signs of being worse than we forecasted, we will, of course, quickly respond and expand our cost-saving actions to address our cost structure to actual business levels. However, our current forecast is that we are expecting our total company sales to grow approximately 4% over the next 9 months for the balance of our fiscal '13, with some businesses, such as Gas Turbine, going much faster and obviously helping our overall results. In total, we expect our full year fiscal '13 sales to be between $2.5 billion and $2.6 billion or up between 0% and 4% compared to the record sales we delivered last year. Within our Industrial Products reporting segment, we're forecasting sales to increase 4% to 10%. This will be led by our Gas Turbine Systems business, where sales are expected to be up 21% to 27% for the full year, including strong large project shipments in the next 2 quarters. We are forecasting our Industrial Filtration Solutions sales to increase between 0% and 5% for the full year with continued growth in the Americas, slowly improving conditions in Asia and particularly China, both offsetting the recessionary conditions in Europe. And finally, we're forecasting sales of our Special Applications Products to increase between 1% and 7% for the full year, as we're anticipating improved demand for our membrane products, better disk drive filter sales and growing demand for our new venting products. In our Engine Products reporting segment, we're expecting sales to be even with last year. Our on-road global OEM customers are planning to build fewer trucks during fiscal '13. As I mentioned earlier, ACT Research forecast Class 8 build rates to be down 15% in our fiscal '13. However, medium duty build rates are expected to be up 4%. Within our Off-Road Products sales, we expect ag equipment demand to remain strong in the Americas. We expect demand for equipment use in residential construction to continue improving in North America, while demand for larger equipment used in non-residential construction is expected to be weaker. In Europe, demand for construction equipment, generally, is also expected to be weak. In Asia, we anticipate demand for construction equipment to begin improving in the second half of our fiscal year. However, we still expect production rates to remain below end market demand for the next few quarters, as our OEM equipment customers continue to work off their current excess inventory levels. We foresee current softer demand for mining-related equipment continuing and the excess inventory of some categories of mining equipment to keep production of new mining equipment below last year's levels. Finally, we do expect low-single digit growth for our aftermarket or replacement filter sales business. While utilization rates of on-road trucks and off-road equipment in North America are lower, they still remain positive and are expected to continue to be positive. We expect utilization rates of equipment in Asia to begin improving over the balance of our fiscal year, while we expect our aftermarket dealers in Europe to remain cautious given the recessionary conditions. So overall, looking forward into a pretty hazy future, we are now facing a mixed bag of economic conditions. We do have some strong end markets, such as GTS. We have some good regional stories, including Latin America. However, we're also seeing weaker conditions in many of our engine OEM equipment end markets, especially on-road heavy truck and several of the off-road equipment segments. So while we can't control the economic environment we live in, we are focused on those things we can control. By doing this, we can offset much of the general economic weakness in the environment, and in effect, to help create our own recovery. We are doing this in many ways. As we've discussed in previous calls, we have many significant market share growth opportunities in many of the faster growing emerging economies, where we remain underrepresented. We are continuing to add resources, distribution and OEM customers in these currently underserved regions. For example, in the engine aftermarket in our last quarter, we added roughly 100 new distributors around the world. We're also continuing to add new part numbers to our product offering, nearly 600 for our aftermarket business in the last quarter. Another key item benefit benefiting us is the ever-increasing number of systems in the field, which are installed with our proprietary filters. Using proprietary technology for first-fit applications will help us and our OEM customers retain a much higher percentage of the replacement filter sales for many years into the future. The essence of our growth model is continually developing innovative new filtration technologies for OEM customers and using the combination of our proprietary technologies and application engineering capabilities to design first-fit systems that provide better value for our customers and help retain their replacement filter business for the future. In other words, using the old razor and blade analogy, designing the best-performing razors over and over again and using our unique designs to retain the blade business for our customers and ourselves. We have a number of different unique designs and proprietary technologies in our arsenal that we're using across our company to accomplish these dual objectives. One that we've specifically highlighted over the last few years is our PowerCore technology. This is a great example of how we invest centrally in technology and then leverage a new technology into as many applications and businesses as possible to realize fast sales growth and the best ROI, which allows us then to reinvest in development of the next generations of new technologies. Our goal is to repeat the cycle over and over again. We are now very successfully using PowerCore in both our Engine and Industrial segments. Our engine PowerCore sales in our first quarter were $29 million, up 22% over last year. And within that, sales of the replacement filters are up 32%. On the industrial side of our business, we sold another 300 Torit PowerCore dust collection systems and doubled our Torit PowerCore replacement filter sales. So in total, Torit PowerCore sales were up 43% from last year's first quarter. Putting the 2 pieces together, our total company PowerCore sales totaled $34 million in the quarter, up 25% over last year. This is just one good example of how we're using our unique technologies to develop products to help us to grow faster than the underlying market growth rates. Now to quickly summarize, we're certainly facing a more challenging global economic environment than we anticipated 3 or 6 months ago. But this isn't the first time we've had to deal with this type of challenge, nor will it be the last. We have a detailed game plan as to how to manage our business both to successfully navigate through the short-term challenges in some of our markets and regions while also taking advantage of the growth opportunities we still see. We will also continue to selectively invest in our company for the future. As we have over the past 25 years, we will continue to utilize, grow and expand our diversified portfolio of filtration businesses, as this has been proven repeatedly over time to be the right business model for our company and our shareholders. We do expect this diversified portfolio of filtration businesses to deliver full year sales growth over last year's record of $2.49 billion and EPS this year of between $1.68 and $1.88 with the midpoint of this range being a new EPS record. This concludes our prepared remarks. Alicia, now we'd like to turn -- open up the call to questions.

[Operator Instructions] And our first question comes from the line of Hamzah Mazari with Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: Bill, the first question is just around your priorities for growth initiatives and capital projects. You talked about delaying some projects. Could you give us a sense of what you're delaying, what you want to keep? Just give us a sense of where the priorities are right now.

Hamzah, as Jim mentioned, we are considering deferring or delaying some projects that were mostly related to capacity expansion. So for example, we announced last March a new campus in China. That's still the right thing to do. But just given the slowdown in China -- or the ongoing slowdown, we don't need that capacity as quickly as we had thought, say, a year ago. So we're not canceling the project. We're just deferring parts of it because we don't need the capacity. We don't think we'll need the capacity as quickly as we once thought. We're still continuing other projects that are -- that we've prioritized and said these are critical to our strategic growth objectives. Jim mentioned about our global ERP project, and we're continuing with that because we think that's, sort of, foundational to our $3 billion and $5 billion growth objectives. So it's selective. Hamzah Mazari - Crédit Suisse AG, Research Division: Okay. That makes sense. And then, just on capital allocation, you guys haven't done an acquisition in a long time. You do have acquisitions sort of contributing to your long-term revenue growth rate. What do you -- what's your updated view on valuations in the marketplace? Guys like Eaton, Parker Hannifin are buying stuff in filtration. Maybe just update us on why are you guys not being aggressive?

Well, I'll start with that we're mostly have been and will remain an organic growth story. And I think our preference, given our model, is to invest for organic growth opportunities wherever we see it. And the 9% to 10% growth objective that we have in our strategic plan, we're going to -- we want to get it, about 75% of that organically. So acquisitions, we're really looking at adding maybe about 2% to our sales per year. So it's a smaller part of our growth initiative. But we have a -- it's not that, that's not important, it's just not the major component. We do have a team, a very focused team looking at acquisitions, and we're always looking. But we also have our own financial metrics that an acquisition has to hit in terms of both earnings and ROI. And quite honestly, I'd say, over the last 2 years, as we've come out of the recession, that the multiples that we've seen have sort of pushed up some of the acquisitions out of reach. So we're patient. We continue to see lots of great organic opportunities to invest in, and we continue to look for acquisitions that we can do that'll meet our financial objectives. Hamzah Mazari - Crédit Suisse AG, Research Division: Great. And just a last follow-up question, I'll turn it over. Just a clarification, are you guys -- in your commentary, is it fair to say you guys believe that this inventory adjustment at your engine OEM customers is largely behind us? Or is this going to be -- we need another quarter of inventory adjustments to go through?

Hamzah, Bill again. I think a lot of it is behind us. But I think the -- there's -- a lot of this is around companies or customers that have calendar year ends. And so I would say, over the next month, it'll be behind us. And in some cases, we're seeing where they're already ordering a lot in January to offset what they're pulling down before their calendar year end, and we're actually trying to work with some of the customers to smooth that. But I think most of it is behind us, but it'll probably go through December.

Our next question comes from the line of Charley Brady with BMO Capital Markets.

Back quickly on the CapEx question. You mentioned in your prepared remarks 20% of the CapEx going towards capacity expansion. Given kind of the outlook for a lot of your end markets here, where are you adding capacity, which type of products?

Yes. This is Jim. A lot of it is some of our proprietary products we're continuing to expand. It's not so much brick and mortar as it is additional lines within our existing facilities, whether that be geographically expanding our reach of certain products that are -- that historically have maybe been made in the U.S. We're moving those to some of our operations outside the U.S. So what -- as Bill mentioned, we've sort of scaled back some of the bricks-and-mortar type expansion, but we're still expanding the breadth of some of our product lines.

That's helpful. And as you look to the engine aftermarket piece and you look into your distributor channel, I guess, given the short lead time of that type of business, I mean, what level of confidence do you have as you look out, I guess, relating to the back half of fiscal '13 given where inventory levels are to distributors that, that business doesn't actually wind up maybe being a minus?

Charley, Bill here. To some extent, we think that part of what we're seeing, have been seeing a -- probably similar to Hamzah's last question is that we've seen people working down inventory. So it's sort of a double whammy in the short term, where there -- the utilization rates are lower than they were a year ago, but also people in the channel are reducing their inventory. So as I mentioned a few minutes ago, we think that, that will -- the inventory or that destocking will probably largely be behind us or essentially be behind us by the end of the calendar year. A lot of companies are in calendar years, and they're trying to work their inventory levels down for that. So that's sort of holding things back a little bit right now, but we're also forecasting that as some of this uncertainty gets behind us and also sort of the seasonal impact that some of our business has had as we get into the second half of our fiscal year, the combination of those things and the absence of any more destocking, that's one of our assumptions, will mean that, that will -- the sales rate will pick up in the aftermarket.

Okay. And just can you remind us how much of off-road is agriculture?

Charley, this is Rich. It's between 25% and 30% of our off-road market.

Our next question comes from the line of Laurence Alexander with Jefferies. Lucy Watson - Jefferies & Company, Inc., Research Division: This is Lucy Watson on for Laurence today. Just to touch on your comments on expected market share gains, what are your expectations for 2013 in particular?

Lucy, this is Bill Cook. I'll take that one. As we've -- typically, we've averaged between 2% and 4% of our sales growth over time from market share gains, and we've analyzed this for the last 2 decades. So we can take a look at what GDP is growing, what the filtration market is growing and what our share gains have. We don't comment specifically every year, but that's been a function -- we've achieved that through a function of some of the things that I touched on in my comments, expanding distribution, where we're underrepresented and we still have lots of opportunities to do that; expanding our product line or offering more products through those distribution channels; and then retaining more of the aftermarket with proprietary products like PowerCore. So it's a combination of those things. That's what we've averaged, and that's sort of the over -- strategic planning period. That's what we're assuming we're going to get going forward. It's between 2% and 4% per year. But we don't comment specifically on any 1 year what we're going to do. Lucy Watson - Jefferies & Company, Inc., Research Division: Okay. And then, to revisit your comments on cost savings initiatives, if we get to a situation where you do need to reevaluate and try and cut more cost, how much do you think you could take out of the business in total?

Well, Lucy, Bill again. We don't think this is a repeat of where we were 4 years ago. I mean, 4 years ago at this time, we were heading into a global recession. And I would say if that happens, I'm not suggesting that it will, but if something like that happened, we would execute the game plan that we executed the last time, and we reacted very quickly. We had our third best profit year in our history that year, including the restructuring. And we've got it -- we've tried to stay ahead of it. So we adjusted our production capacity very quickly in our plants and distribution centers. We had to do some painful things in terms of restructuring our workforce and all of our discretionary expenses. But if it came to that, I think that would -- I would just point back to what we did 4 years ago as an example of what we would do. But again, we're not -- that's not our guidance as that we don't think that's going to happen, but that is one of the plans we have on the shelf in sort of a worst case scenario.

Our next question comes from the line of Brian Drab with William Blair. Brian Drab - William Blair & Company L.L.C., Research Division: I just wanted to focus for a second on the geographic markets that you said you're seeing strength in Latin America, South Africa, Australia. And talk a little bit about which businesses, is it Engine or Industrial, where are you seeing the strength in terms of product lines in those regions?

Brian, Bill here. I think -- just talking about Latin North America, I think we're sort of seeing it across really everything we're doing down there. A lot of that's around just sort of the expansion where we've been underrepresented, especially in South America, leveraging the plant that we put into Brazil a couple years ago, the distribution center we put in Chile last year. So it's back to the -- maybe the -- one of the earlier questions in terms of how we grow through market share gains. It's leveraging the investments we made in Mexico, serving that region, Brazil and Chile, and it's across really all the markets that we serve. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And that's Latin America and...

Right. Brian Drab - William Blair & Company L.L.C., Research Division: And now, South Africa and Australia, is that similar story then or that it's broad-based?

Yes. Brian, this is Rich. If we look at our South Africa operations, in local currency terms, we were up 15% over last year growth in both the engine side and the industrial side. We made nice gains on both sides. Similar story in Australia as well. We were up a few percent in local currency terms there as well. And as you know, we do have a bit of leverage in Australia to the mining market, but that -- what we've seen there is the utilization at the mines hasn't fallen off that much yet, so they're still holding in pretty well. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And the language that you used around cost containment was -- you used the word containment as opposed to cost cutting. Is it fair to say that, at this point, what you're doing in terms of costs is containing them and haven't really started any sort of significant cost-cutting program?

Brian, this is Jim. I think when we say containment, we were built up to a pretty high level of sales in our fourth quarter of last year, and our plans actually anticipated that the expense base growing to support an even higher level in the coming year. So what we've done in terms of containment is we have put in selective hiring freezes. We're down about 600 employees, mostly through just attrition. We've put controls in place in terms of discretionary spending. But then, on top of that, we have delayed some of the planned expenses. So it's mostly scaling back from our plan, but we also have put in place some discretionary cost controls to line up and get us back on track with where the current demand is.

This is Bill. Just to add onto that, we -- Jim mentioned we're down about 600 people from the beginning of our fiscal year. And we use a combination of temporary and contract employees as part of our employment base to help us manage through, sort of, fluctuations in any 1 plant or region. And that's what we've -- that's sort of our first line of defense when we have a slowdown like this, so we can move on that pretty quickly just to try and balance our production capacity with the current demand levels, and we'll continue to do that. We have more flexibility there as well by plant, by region as well. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. That's helpful. And, Rich, I'll come back to you later today with a lot of numbers questions and try and fill in these tables. But if I could just ask one question. This has been a topic people have really been focused on. Can you give us any numbers around your growth in the U.S. aftermarket independent channel?

Yes, I can. Brian Drab - William Blair & Company L.L.C., Research Division: I know you can.

Yes. In the quarter, the U.S. independent aftermarket was down about 3%. We did see a little bit of pickup in the quarter in the OE replacement aftermarket. That was up maybe 1%. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. So that's the...

So in total U.S. aftermarket was down about 1%. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And the independent down about 3%?

Yes.

Our next question comes from the line of Brian Sponheimer with Gabelli & Company. Brian Sponheimer - Gabelli & Company, Inc.: So you're guiding to about $140 million of free cash for a dividend of, say, $50, $52 million in the year. That leaves you roughly $90 million, and you've repurchased $50 million worth of stock in the first quarter. I know you stick to a fairly tight guideline as far as your repurchase. But given an absence of acquisitions, do you think we could see you get more aggressive with the -- regarding how you view your own shares over the course of the next 9 months?

Yes. This is Jim. I think we kind of have a long-standing policy of trying to get at least 2% of our shares to get to a net 1% reduction. We really don't comment specifically on what we're going to do in each particular year. Some years might be a little more, some years might be a little less. But generally, that's kind of where we look to get to on average. If we would do that, that would be -- get us to about $100 million if prices remain about the same. So I'm not sure we would comment specifically on any given year. But given past practice, we'd ideally, on average, like to get to the 2%. Brian Sponheimer - Gabelli & Company, Inc.: Okay. And just within the ag market, with Deere out today talking about 4% growth for their ag business in 2013 but, undoubtedly, a lot of young equipment out in the field, would you benefit if there was a shift to a greater aftermarket mix for the ag space? Or is it really going to be OE that continues to help drive your growth there?

Brian, Bill here. I think it's really both. I mean, we want to -- we want the production just to remain strong as it has been, and 4% over a very strong year is pretty good news because that's putting more of those proprietary systems out in the field. So longer term, as we get more and more, say, PowerCore-type installations out there, that's going to benefit the aftermarket. And then, the second part would be is if we have -- we look forward to good utilization of that equipment in the field as we get into the next planting season. So we're really -- we're looking at sort of both, remaining strong first-fit and then a good utilization of the existing equipment in the field.

Our next question comes from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Bill, could you just kind of speak to maybe the IFS orders in the quarter? I'm curious, that being maybe a bit more of a cyclical piece of your business on the industrial side, how did the orders look in the quarter? And how do you feel about that business timing when it could kind of hit bottom?

Well, as we mentioned in our guidance, Rick, this is Bill. We're assuming that manufacturing activity in the Americas remains good and that we're going to see some improvement in Asia and not much of really any change or weakened Europe. That is a mid-cycle business for us. And so -- and it's held up. So I – we don't comment specifically on the orders publicly. But I was with the guy who runs that business for us globally yesterday afternoon and I mean, I think we're cautious about what might be over the next hill, but the businesses remain good. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. And then, just as I was trying to get at kind of short-term tone -- and again, a business that you can sometimes see a budget flush occur. But I'm just curious, short term, if the orders kind of reflect any of that or if we're really looking at, again, similar to the -- your other commentary that really was second half better than the first half. Is that where your comfort level still lies?

Yes. Well, I think it's not one of our leading indicator businesses. And so we learned that in the last -- we went through the recession, okay? Because a lot of the projects are in -- have been in the pipeline for quite a while. So it's not as long as Gas Turbine, but it is longer just because of the nature of the projects. And if this confidence -- business confidence failure or there's some certainly last [ph] it could have had a more negative impact on that business, of course, because I think the pipeline of new projects might dry up. But so far, it's held in there in the Americas and we're probably more concerned about what's happening in Europe because that's where we've seen it weaken so -- but we haven't seen that happened in the U.S. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. And then just as we kind of stay recalibrated here on this fiscal year and think about the progression into the second quarter from the first, we'll see typically, the second quarter sales decline a bit from the first quarter. Now we have Gas Turbine up. We have engine aftermarket, which recover off that -- your first quarter level. But some of these other businesses, Industrial, Special Apps, OEM, Engine, all could have a weaker second quarter yet. But I -- how do you feel about the progression of sales for the second quarter off the first? It feels like it should be up a little bit. But historically, it's down. I'm just trying to stay recalibrated on this year since it's a bit unusual.

Yes. Rick, this is Jim. I think you're right. What's maybe the anomaly this year compared to other years is the impact of Gas Turbine. We do expect a fairly strong second quarter, which will essentially make that historical pattern you mentioned not as relevant. So I think it's -- and as we model out the quarter, we try not to give guidance by quarter, but we are anticipating some growth quarter-over-quarter from first to second. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes. Overall driven by GT.

Yes. There's some puts and takes in there, but Gas Turbine will really help carry that.

[Operator Instructions] Our next question comes from the line of Eli Lustgarten with Longbow.

I apologize if [indiscernible] since I was the last question on this here conference call. You might have said something that I might have missed. Just one clarification, in the Industrial Products outlook, basically, the overall and the individual pieces were tweaked downward slightly. You went from a 5% to 11%, up to 4% to 10%. Gas Turbines instead of being up 23% to 29%, it's up 21% to 27%. Are those all just natural tweaking and some currency? Or is there any change or stretching out [ph] going on there?

Eli, this is Jim. It's really just, as we re-forecast the business, some were slightly better, some were slightly worse. But the biggest driver there is currency. We had a little bit of a downward impact from currency, but no fundamental changes.

You said there's going to be a tweak. I mean, I just want to make sure there wasn't any change, because Gas Turbine was actually the most noticeable one that changed.

Yes.

And you touched on Special Applications. Now when you talk about the outlook for the OEM stuff, you mentioned mining. Are we looking at a double-digit decline in the mining-related businesses that you hear? I mean, that's what we're hearing across the marketplace. Is that consistent with what you're seeing at this point?

Eli, this is Rich. We're thinking more a 5% to 10% rate based on what we've heard from our customers.

Okay. In your guidance you look out -- we noticed a lot of inventory liquidation taking place in the December calendar quarter, but you're -- we're hearing potentially that some of it will spill over into the first part of next year but that's not part of your assumption at this point. The one I'm thinking about is Caterpillar actually, I think indicated they're going to take $1 billion out in the first quarter. So we're just trying to get some idea that your guidance basically assumes that most of it occurs, if not all of it occurs, in the December quarter?

Yes, Eli, this is Bill. We were asked the question earlier about this. We think that most of it is going to occur by the end of December. There are a lot of the companies who are trying to work their inventory levels down, both a reflection of the lower end market demand but also with their upcoming fiscal year. So and we've actually seen, in some cases, customers placing orders for -- in January to sort of rebuild their inventory. The one exception to that would probably be in China, okay, where -- and I -- we said in our prepared remarks that we think that for a while -- for the next couple of quarters, probably, the -- they're going to -- the rates of construction equipment builds will be less than the end market demand because there's a lot of construction equipment and inventory in China. So that would be probably the main outlier that we would see is that in China construction equipment, there's an excess supply that has to be worked off.

Okay. And is there anything going on in pricing across the board of anything material in light [indiscernible] pricing...

Nothing -- Eli, Bill again. Nothing material in pricing. No.

And showing no further questions in the queue at this time, I'd like to turn the conference back to Mr. Cook for any final remarks.

Thanks, Alicia. Now to conclude our call, I'd like to thank everyone for your time and continued interest in our company. As I mentioned at the end of our last call with you, you know that the global economy moves in cycles. We hope that many of the major uncertainties we mentioned today will be resolved over the coming months. In the longer term, we know our customers and their end market conditions will recover. We also know that when the global economy returns to a growth mode, it will require many more of our products to improve people's lives, enhance our customers' equipment performance and protect the environment. Our strategic growth goals of achieving $3 billion in sales in fiscal '16 and $5 billion in fiscal '21 remain intact. I want to thank you all and wish you all a great Thanksgiving holiday. Goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.