Enovis Corporation (ENOV) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Colfax Corporation Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Brannan. Sir, you may begin.

Thanks, Shannon, and good morning, everybody, and thanks for joining us. My name is Scott Brannan, and I'm Colfax's Chief Financial Officer. With me on the call today is Steve Simms, our President and CEO. Our earnings release is available in the Investors section of our website, colfaxcorp.com. We'll also be using a slide presentation to supplement the call, which can also be found on the Investors section of the Colfax website. Both the audio of this call and the slide presentation will be archived on the website later today, and will be available until the next quarterly call. During this call, we will make forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainty, including those set forth in our SEC filings. Actual results may differ materially from any forward-looking statements we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them, except as required by law. With respect to non-GAAP financial measures, the accompanying information required by SEC Reg G relating to these measures can be found in our press release and in the supplemental slide presentation, again, in the Investors section of the Colfax website. And as a final reminder, it is important to note that we are able to report pro forma sales, including Howden and ESAB for 2011. But as in prior quarters, we do not have pro forma adjusted operating income, adjusted net income or adjusted net earnings per share for 2011 on a pro forma basis. As such, we are unable to make comparisons of results other than sales on a pro forma basis. And with that, I'll turn it over to Steve.

Thanks, Scott. Good morning, everyone. Today, I'll provide a review of our third quarter results, followed by a brief operational update, and then Scott will provide more detail on the financials and our updated guidance for the year. After which, we'll open it up for questions. And we're pleased with our third quarter results, especially given the economic environment. The benefits of our global footprint and balanced portfolio were particularly evident with strength in various regions and product lines, offsetting weaknesses elsewhere. For example, while fluid-handling continues to experience the softness in oil and gas demand that we highlighted in the last quarter, this was more than offset by solid performance at Howden, which realized organic increases in both sales and orders, while profit margins were in line with expectations. In addition, the quarter underscores our team's commitment to delivering the margins we believe are appropriate and possible for this business. For example, while fabrication technology sales volume fell below forecast, profit margins actually exceeded expectations, driven by aggressive SG&A restructuring, global sourcing, plant consolidations and improved pricing. In terms of the macro environment, the slowing we saw in the quarter was fairly broad-based across all geographies, with no single region standing out. Order rates continue to decline in our Fluid-Handling business in line with the trend we've experienced all year. However, the gas handling order rate remained strong and, in fact, would have been similar to quarter 2, but for a few large orders which were expected in September but booked in early October. In addition, areas of strength discussed on previous calls such as SCR remediation projects in China and maintenance programs in South Africa continue to deliver, and demand across both business segments in Russia continue to contribute significantly to our revenues. Now for a look at specific results, adjusted EPS for the 2012 third quarter was $0.33 per share, which includes $0.03 per share related to a noncash adjustment to deferred tax balances. This compares to $0.30 per share reported for the 2011 third quarter. Other than adjusted EPS, there's very little comparable between 2012 and 2011 due to the signs of the acquired ESAB and Howden businesses. The stronger U.S. dollar in the third quarter of 2012 resulted in a 7.4% year-on-year reduction in revenues. On an organic basis, that is excluding FX and acquisitions, net sales for the 2012 third quarter were $954 million, an increase of 5.1% compared to $972 million of pro forma sales for the 2011 third quarter. Turning now to our business segments, for Gas and Fluid Handling, net sales during the third quarter were $465 million which represents an increase of 15% organically compared to $423 million of pro forma revenues in last year's third quarter. With respect to our end markets, please refer to the slides for specific growth rates. As you review that data, you'll note that currency had a 6% drag on sales and 7% on orders for the period compared to the 2011 third quarter. In reviewing end markets for the Gas and Fluid Handling segment, I'll begin by focusing on our largest sector, Power Generation. For the 2012 third quarter, sales increased by 23% organically. As in the first 2 quarters, sales were particularly strong in China and South Africa. Growth in China continues to benefit from compliance with aggressive environmental regulations and a series of maintenance projects has provided growth in South Africa. As expected, orders for the platform surged by 11% organically, with contributions from new build activity in Taiwan and other parts of Southeast Asia and growth of our higher-margin aftermarket business. We expect double-digit growth in revenue and orders to continue in the fourth quarter as we've already booked significant orders in the U.S. during the month of October. Next, Oil, Gas and Petrochemicals, which is the second-largest market for Gas and Fluid-Handling. Sales for the 2012 third quarter increased 15% organically, while orders decreased 10% organically. Our revenue growth was driven by Howden where we benefited from industries' investment and downstream upgrades. However, these gains were partially offset by continued declines in Fluid Handling, whose primary focus is on upstream applications. In line with these recent trends, we project our total volume growth in this segment to slow in the fourth quarter driven by fluid-handling, which now expects a more significant decrease in this end market versus previous assumptions. While Gas Handling continues to enjoy strong bookings in certain geographies such as Russia, this is not sufficient to offset the overall market trends, and total orders have continued to decline from 2011 levels, driven largely by reduced oil consumption, excess refining capacity in the developed world. We expect orders to continue declining for the next several quarters, though this should reverse in the medium term as refining capacity is added in Brazil and Russia and new pipelines in North and South America begin construction. Turning now to Marine, this end market includes both commercial marine and defense customers and is served primarily by fluid-handling. Marine is very large -- I'm sorry, which is a very long cycle market, has been a challenging sector for the past several years due to sharp decline in new vessel deliveries. Sales for the 2012 third quarter were down 11% organically versus pro forma 2011 third quarter. This is consistent with our expectations and performance in the first half, as our backlog in Marine projects was depleted in 2012. However, we are pleased with the order rates, and the segment are up for the second quarter -- sorry, however, we are pleased that order rates in the segment are up the second consecutive quarter, driven in part by strength in vessels serving oil and gas industries. We expect these trends of declining revenue and modestly higher order rates to continue in the fourth quarter. Despite the challenging near-term dynamics, this is a sector we like over the long-term, given the overall increase in global trade and the impact our products have on customer economics. Next, let's turn to the mining end sector. Sales for the 2012 third quarter increased 46% organically while orders increased 24% organically. Strong revenue growth was anticipated based on the strong orders received in 2012 and should continue into the fourth quarter. Overall, order activity remains somewhat subdued in South America and certain other regions, although a very large order booked in North America contributed to the robust growth in total orders this quarter. While many raw material prices have declined in recent months, we remain cautiously optimistic about the prospects for bookings over the next several quarters, given project activity and certain strategies Howden is implementing. Finally, I'd like to touch upon the general industrial end market, which encompasses a wide variety of products and applications for both gas and fluid-handling. For the third quarter of 2012, sales increased 9% organically and orders increased by 6% organically. While the performance in this market was better than expected overall, overall results contain submarkets, which are in the state of growth or decline modes. For both sales and orders, growth was strong in Gas Handling, particularly fans from the steel industry. In Fluid Handling, both sales and orders declined in the mid-single digit range. This is a slightly higher rate of decline than prior quarters, with European distributors and municipal markets particularly slow. We currently expect a similar decline in fluid-handling revenues in the fourth quarter. While we expect continued growth in both sales and orders from gas handling, the rates are expected to slow modestly. From a profitability standpoint, adjusted operating margins for the Gas and Fluid-Handling segment decreased 1.5 points from the second quarter to the third primarily due to lower volumes. However, this sequential trend is in line with seasonal patterns for this segment and is in line with our expectations. We continue to actually apply the CBS system across our entire organization, resulting in benefits from our customers and shareholders. Our CBS materials process emphasizing demand pull and process flow is an example of the successful standardized approach we are deploying across all of our global businesses. The power of CBS, specifically the CBS materials process, can be seen through the deployment at 2 very different sites within Colfax. As we discussed in last quarter's earnings call, our Howden Mexico facility was introduced to CBS in April. Since then, follow-up Kaizen activities driven by local leadership have dramatically improved results. Since the introduction of CBS, the team has reduced inventory by $700,000, decreased total operating cost by $1.5 million per year and opened up 9,000 square feet of additional manufacturing floor space for business expansion. We're also able to drive continuous improvement in our more mature high-performing operations such as our fluid-handling Monroe, North Carolina facility. This plant has been one of our top-performing sites for years in lead time, inventory and customer delivery. Since April, using the same CBS tools at Howden Mexico, they compressed lead time by 33%, reduced inventory by 23%, and increased on-time delivery to our customer by 3 full percentage points over the period. With that I'd like to turn our attention at this point to ESAB's results and the status of our profit improvement initiatives. Third quarter sales for ESAB were $490 million, down 2% organically versus last year. Despite the lower-than-expected sales, adjusted operating margins improved by 70 basis points during the third quarter in comparison to the second. Despite the softness in top line sales, this margin rate was higher than expected as costs were tightly controlled and price increases largely held. As I mentioned in my introductory comments, the revenue shortfall was broad-based and generally in line with the overall slowing of the worldwide economy. The welding market is largely a short cycle one and sales are tightly correlated to underlying economic conditions. This is evident in the sequential and third quarter patterns we see in our daily consumables revenues, which are largely in line with regional economic activity with the exception of North America. In the U.S., which accounts for less than 20% of ESAB's revenues, we encountered some start-up issues in our newly commissioned solid water plant, which contributed to flat North American revenues for the quarter. We're currently implementing countermeasures but expect that this will adversely affect North American revenues in the fourth quarter as well. From the segment as a whole, we expect revenue trends for the fourth quarter to be similar to the third as several customers have indicated they expect extended shutdowns in December. Adjusted operating income for the quarter was $43.9 million or 9%. As Scott mentioned earlier, this margin percentage is not comparable to last year, with notable differences being the inclusion of research and development, pension and amortization expenses, as well as joint venture earnings. As noted above, despite the softness in top line demand, ESAB profitability improved versus the second quarter and was ahead of our internal expectations. While we expected flat margins with the second quarter, we were actually able to achieve a 70 basis-point improvement. SG&A expense associated with central operations was down significantly as cost savings actions taken earlier in the year were fully realized in the third quarter. Another significant contributor to the improved margins was our Indian operation, which increased margin significantly despite a challenging economic environment. To ensure that we continue to realize these kinds of improvements on a sustainable basis, the ESAB team is aggressively driving the implementation of the Colfax Business System. As an example, by implementing the demand pull process, which we first piloted at Fluid Handling, the ESAB team has experienced similar results. Several weeks ago, Clay Kiefaber, the leader of our fabrication technology platform, together with a team of associates at our solid water manufacturing site in the Czech Republic, launched demand pull in the Magwater Cell. The objective of the Kaizen event was to reduce the reliance on multi-week forecast, cut levels of raw materials in work-in-process inventories and produce to actual customer demand. While much is less to do with that site, the customer delivery from this cell is now at 99%. Inventories have been cut by 57%, and we now build actual customer demand as opposed to a multi-week forecast. While cost takeout was not the objective of this event, we also garnered a $120,000 annual cost reduction through the elimination of outside rental warehouse space. As communicated in our July release, and as noted in these results, the ESAB cost and restructuring program remains on track, and we are -- we continue to be confident with our plan to deliver margins in the low teens within 3 years of acquisition. While we will not offset the full impact of reduced fourth quarter volumes on our manufacturing facilities, we do expect margins near those of the third quarter through the period. And in light of the reduced volumes, our team is aggressively reevaluating our manufacturing footprint, examining additional cost reduction opportunities aimed at ensuring that we deliver 2013 levels of profitability. And now I'll turn it over to Scott to provide more details on the financials. After Scott's discussion, I'll provide a bit more color on merger and acquisition activities. Scott?

Thank Steve. For the third quarter, sales were $954.4 million, up 5.1% organically compared to pro forma of 2011 third quarter sales. Operating income -- adjusted operating income was $85.3 million, representing an adjusted operating margin of 8.9%. Fabrication technologies adjusted operating margins were 9%. Gas and Fluid Handling adjusted operating margins were 11.1%. Fluid Handling margins were similar to the 2011 third quarter, primarily as a result of restructuring savings and lower amortization expense, which offset the loss margin on lower sales. ESAB continues to make solid progress in its adjusted margins as Steve discussed, and margins increased 70 basis points from the second quarter. This performance is significantly better than the third quarter of 2011. Corporate and Other costs reduced margins by 1%. Excluded from the adjusted operating income are restructuring cost of $15.9 million incurred in connection with the cost reduction projects Steve discussed a few minutes ago, $14.5 million of significant year one fair value adjustments related to acquisition-related inventory step up and contract backlog and $3.3 million of costs associated with our asbestos insurance coverage litigation. Interest expense for the quarter was $23.6 million, which includes approximately $4 million of noncash amortization of discounts and deferred issuance costs, as well as facilities, fees and cost of the bank guarantees and letters of credit. We made $2.25 million of debt principal repayments this quarter. Our effective tax rate for adjusted income for the quarter was 25.3%. This was reduced by 4.7 percentage points by the impact of a 2 percentage point reduction in the corporate tax rate in the United Kingdom, which was enacted into the law in July. As Steve mentioned earlier, this is a noncash benefit as it is simply a lower rate being applied to our net deferred tax liabilities in the United Kingdom. There's no impact on taxes expected to be paid, and for the fourth quarter, we expect the effective tax rate to be approximately 30% on adjusted earnings. Operating cash flow for the third quarter was $33 million. Inventory balances decreased $11 million in the quarter and networking capital decreased $9 million from the second quarter end. As you may recall, last quarter, we began reducing working capital and made a top priority for the balance of the year, with an overall goal of having no growth in working capital for the full year. Working capital improvement was limited this quarter as top line softness left us with more inventory on hand than anticipated. We expect to make a much more substantial reduction in working capital in the fourth quarter. Finally, our backlog in the Gas and Fluid Handling segment was $1.4 billion again this quarter. Our book-to-bill ratio for the third quarter was 0.95:1, reflecting strong bookings in our Gas Handling business, offset by weakness in Fluid Handling. Turning now to our guidance for the balance of the year. As Steve discussed, we are experiencing reduced demand in our Fluid Handling and our Fabrication Technology businesses relative to our previous expectations. While Fluid Handling typically experiences a seasonally higher sales level in the fourth quarter, we no longer expect that for the 2012 fourth quarter. Demand does, however, remain as expected in the Gas Handling unit. This top line softness will reduce our 2012 expected revenues to a range of $3.9 billion to $3.95 billion. The reduced revenue limits any material improvement to our expected margins in the Fabrication Technology segment. We are therefore, expecting margins for this segment in the fourth quarter at or slightly below the 9% margins earned in the third quarter. This lost margin on the lower sales level and certain unabsorbed fixed cost, we will not be able to eliminate within the fourth quarter for lower expected adjusted operating profit from our previous guidance amounts. Further reducing adjusted operating profit will be the newly acquired entities Steve will discuss shortly. Due to investment banking fees and significant noncash charges from inventory step up and onetime amortization, the net effect of these acquisitions is to reduce adjusted operating profit by $0.01 in the fourth quarter. The cost associated with bolt-on acquisitions like these two are included within our adjusted earnings. And the costs themselves have a negative $0.03 impact on our fourth quarter adjusted earnings per share guidance. Both of these entities are expected to be accretive for all quarters in 2013. The end result of a lost profit associated with lower volume and the charges related to the recent acquisitions is a revised adjusted earnings per share guidance of $0.37 to $0.41 per share for the fourth quarter and $1.29 to $1.33 per share for the full year 2012. Other nonoperational metrics are included in the Appendix to the slide deck. Any metrics not addressed in the slide deck are materially in line with our earlier guidance. And with that, I'll turn it back to Steve for the closing remarks.

Thanks, Scott. As Scott noted, like many companies in our industrial universe, we've experienced a weakening in our top line during the third quarter of 2012 and have assumed this will continue into the fourth quarter as well. Having said that, we remain confident and committed to delivering the results which we've previously discussed. This means operating margins for ESAB, Howden and Fluid Handling in the low, mid- and high teens, respectively, within 3 years. It also means driving increasing levels of working capital productivity well beyond the figures we shared here today, and eventually reaching a position where free cash flow exceeds net earnings on a sustained basis. Finally, an update on acquisition activities, we recently received antitrust clearance for the previously announced acquisition of Soldex and expect to close this transaction next week. To refresh your memory, Soldex is a leading provider of welding products along South America's fast-growing Pacific Coast. The acquisition makes ESAB the clear leader in South America with a strong presence across the entire continent. We look forward to working with Soldex's talented management team to continue growing their business and leveraging their strength throughout ESAB. This quarter we also closed a smaller acquisition Covent Fans Based in Montreal, Covent is one of the leading industrial fan manufacturers in North America and is expected to contribute between $18 million to $20 million an annual sales. We expected -- we're excited about the potential to leverage Covent's well-regarded products through Howden's global channels. The purchase price of this transaction was $32 million. Overall, our acquisition pipeline remains robust across each of our business segments and we continue to focus on transactions that meet our financial hurdles and offer a good strategic fit. With that, I'll open the floor up for questions and answers.

[Operator Instructions] Our first question is from Nathan Jones of Stifel, Nicolaus. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: If I could just focus in on your guidance for a minute. You reduced the full year revenue guidance only by about $25 million and the third quarter came in about $20 million below where consensus was. So that implies a pretty big sequential revenue increase in the fourth quarter, but I think the implied guidance for margin is flat to maybe down slightly. And I guess even when you include the $0.03 from those acquisitions maybe only up slightly. Can you just provide a little more color on the fourth quarter margins?

Let me make one observation about the fourth quarter sales. There is -- and it's on Page 34 of our slide deck. The new sales does include $20 million to $24 million from the acquired entities, so perhaps the reduction relative to the base business might be a little higher than the number you quoted in your introductory comments. And as far as the margin side goes, it's largely a reflection of the mix of the business. As we mentioned, we're not going to have the large fourth quarter in Fluid Handling that we were expected. As you know, Fluid Handling is our highest-margin business. So that will reduce the overall profit margins for the business as a whole and simply that and then the lost margin on the lower volumes pretty much attributes for the entire decline in margins. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Great, that makes perfect sense, thanks. And I think also based on the updated guidance, it looks like you've increased your target for restructuring expense this year. Can you talk about where that's going?

There's a modest increase of about $8 million in our restructuring target. We are, as we mentioned on the last call, we are in the process of closing -- well, we completed some of them, the 6 facilities that we scheduled for consolidation. And we have moved the final 2 up a little bit and have refined the cost estimates associated with that, as well as some additional reductions in SG&A. So it's not really a change to the overall program. It's just that we're taking some of the actions, although quicker, and we will do that to assure that we meet our targets in 2013. There's not expected to be any material benefits in the fourth quarter. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: And so you're...

Sorry, Nathan, I just wanted to add to what Scott has indicated there. I think it's consistent with -- we recognize the markets have softed a bit, and so we're trying to aggressively look for opportunities to make sure we deliver the margin that we've committed to. So we feel confident about our execution. We've talked before in our past calls about 6 different plants. I think in our last call we identified specifically 4 that were underway. We also mentioned 2 additional. At this point, 4 have been closed, the remaining 2 have been announced and are well underway in terms of closure. So we're making good progress against those things that we can control in terms of cost takeout, SG&A controls and a number of other areas, which maybe this is a good place to highlight that for you. We -- as a part of the ESAB strategy of cost reduction, we talked about a number of different things beyond those 6 plants to include significant headcount reductions, which were tracking very much to plan. We've also talked about improving the efficiency and effectiveness of that European distribution strategy that was implemented a number of years ago and making good progress with that. We're well ahead of where we'd anticipated. And I guess there's another area that we talked about in a very general way, but the overall indirect spend, which includes marketing, HR, IT, professional services, all the things that you would typically associate with that, travel, utilities, we're doing very well in that category as well. So we've seen a little bit of an increase in restructuring. We're trying to move some of those projects up as we can. We are committed to offsetting as best we can with the top line softness of the economy is throwing at us. But we believe we're going to be able to deliver the kind of margins that we've talked about in the past. So I just wanted to add that to Scott's comments. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: And it sounds like you're making very good progress on the cost reductions. Is there any update on your targets for 2013, 2014, 2015 in terms of cost out?

Not really. I think in our last call, Nathan, we talked about a range next year of between $55 million and $65 million in sales -- I'm sorry, costs, and we also talked at the time that the balance would be split sort of between the next few years. We're still in that zone. We feel confident about our commitment for next year.

Our next question is from Mike Wherley of Janney Capital Markets.

I was just wondering if you could talk a little bit about ESAB. And in this current environment, are you competing more on price there or is brand more important to that business?

As I think I mentioned, Mike, in the comments earlier, we feel that our pricing is holding on reasonably well, which is, I think, a little bit of a breakthrough for ESAB versus its historical performance. Our pricing is holding in. Excuse me, we will be, by the way, introducing a number of new products at ESAB, at SEMA in Fab Tech later this month or early November. So I think it's a very competitive game that we're involved in here, but our pricing is holding. Some of the activity that we've been trying to push with Clay and the team over at Fabrication. And [indiscernible], the accelerated product development process, we've been working on, you'll see some of those fruits start to come to fruition here with the big show at SEMA and Fab Tech. So brand is important. New products are going to be even more important. We're going to try to hold on to this price as best we can. We'll promote on a selective basis to make sure we're driving volume appropriately. But right now, we're trying to focus on some areas to grow the business while taking out cost.

Okay, does the Soldex brand have -- will you keep that brand or will you kind of roll that into the ESAB brand?

Well, we're still working through that, but that brand is very, very well known throughout the Pacific coast for Latin America, it's one of the great things that we acquired with that business. So it will continue to a play a role inside of the business, but I think, Mike, one of the most powerful things that we give with Soldex in addition to their very strong position in Peru, Colombia and growing positions in Venezuela, what we really get is an outstanding team of associates. Their work with the end users, their work with the end markets throughout Latin America is fantastic, and frankly, is an area that we've been benchmarking here at ESAB. So we think that not only do we get a great brand, but we have a very strong team that will help us from a end-user standpoint, not only in Latin America. I think as I mentioned in our previous call, there are a number of things that they do in Peru, and particularly, Colombia that we hope to roll out into other regions around the world for ESAB. So that's a great acquisition for us.

Great, And then just a little bit more on the Covent Fans. What end market does that primarily address?

Industrial. As I mentioned it's really a major focus in the industrial fan market. Their forte, obviously, has been largely North America. We believe that the combination of the product range that they have, the very strong competitive cost base that they have, combined with our distribution network globally will give us the chance to do some very good things here in terms of growth, while improving profitability of our own business. So a very nice acquisition. I think it's a classic definition of a bolt on. We'll be able to integrate our industrial business with theirs, leverage our existing distribution and leverage their brand name in a couple of key markets, but obviously take advantage of Howden as well.

Our next question is from John Inch of Deutsche Bank.

So can I start with Power Generation's order growth rate? What's the duration or lead time for that? Because if you exclude it, your -- I mean, obviously, Power Gen's the biggest segment, right? You exclude it in your overall organic growth in terms of orders is significantly reduced. So when do you expect to kind of begin to book those types of orders?

Particularly on the Howden side, the typical time period between order and shipment is a year or slightly more than a year. But as you've noted, we've had very strong order trends in that segment all year long. So we are well -- we are -- in that particular segment, we are situated for strong revenue growth in 2013 and some of this business that we booked this quarter. And then a couple of the real large orders we booked in October will affect our 2013 and '14.

And remind me, Scott, was it October you said was -- you also been booked some other incremental orders? Where was that segment? And what roughly is the magnitude?

The segment's really in a couple of different areas, but for the most part, they were within sort of our coal-fired plants, and they largely at Howden. The magnitude -- these are relatively large orders, which fortunately did come. We'd hope, of course, that they'd be there in September, but they kept feeding into the first couple of weeks of October. They range anywhere from a little over $11 million to $21 million. And they'll ship, as Scott just mentioned, somewhere between late 2013, early 2014. They were a little bit balanced, John. I'd say probably a little more than half were here in North America, and the balance, a very large order in the mining sector, was in Australia.

Do you think these order trends in Power Gen based on your customer discussions are sustainable? I don't mean the absolute value of order growth rates, but I mean the overall sort of outperformance in terms of robust activity? Because it's, obviously, pretty important to your mix.

Right, it is. And remember, John, when we were together, the key thing about what we're experiencing now is not only the growth that -- the natural growth that underlies the power generation market, but we're also the beneficiary of a long-term environmental push to upgrade compliance at a number of facilities, not only in North America, but very importantly, in China. So in addition to the normal or existing underlying trend within power generation, the environmental push is significant. That's been a big, big push on the overall line and big pressure on the volume. And we see that as a trend that we -- as best we can see will probably be with us for the next 5 to 7 years.

And just switching to margins, I want to start with the third quarter gas and fluid. Why again were the margins down sequentially and down pretty meaningfully year-over-year? I think, Steve, you said they were in line with expectations, but they weren't really in line with our expectations. What's really going on there?

Well, if you'll recall, the best way I can answer that question is to give you an illustration of the first quarter versus the second quarter. The Howden overall margins are very sensitive to volume because of the significant level of fixed engineering costs that they have. So the Howden margins do move around based on the level of sales. The sales were higher in the second quarter, therefore, they generated a higher margin in the second quarter. There was a -- as Steve mentioned, we were spot on our internal expectations. It is simply a timing of orders. And you'll see the margin in that segment increase in the fourth quarter as we have higher volumes.

Right, but you said -- didn't you say, Scott, that fourth quarter sort of is sequentially kind of comparable? When you -- you sort of intimating that the fourth quarter is the big quarter for Howden. You're not going to see the big margin quarter, I'm presuming because of volume. I'm just trying to square all this up. And then Howden's doing really well with its Power Gen orders so what's...

That's not what I -- what I said John was that we're not going to see the big fourth quarter in fluid handling.

I'm sorry, okay.

We are going to see a big fourth quarter in the Howden business as expected. I believe the comments were -- for Howden is there's no real change in the underlying expectations there. That is a longer-cycle business. The orders are pretty much in hand at this point of the year, so we're highly confident that Howden will be delivering the larger fourth quarter as in the original guidance. The 2 segments that have the stress on the top line are the fluid handling. That business had a couple of large orders that were pushed out. And we haven't seen the recurring book and shift type of demand that's been somewhat weak all year, and then the welding business, which is much more aligned with the general economic conditions. But no, there's no expectation of not meeting the volumes for Howden.

Our next question is from Kevin Maczka of BB&T Capital Markets. Kevin R. Maczka - BB&T Capital Markets, Research Division: Steve, can I just follow-up on the pricing question? You touched on it, you said that it was improved in ESAB, it actually contributed to the margin improvement there. You're doing a little bit better maybe than what you would normally expect out of ESAB. I guess, can you just review again, why is that? And do you expect to see some price pressure there as we go forward, given the kind of sluggish order rates?

Sure, Kevin. The -- historically, I think ESAB has struggled to implement pricing. I believe we've talked about that in one of the other calls. And so the team under Clay and Ken Konopa put together a very disciplined strategy of executing pricing in virtually every market around the world and really recreate it and implement it, an entire pricing process which didn't exist before. And so I think one of the reasons we've been able to get the pricing in is, because we had a stronger process in place; two, we've been much more clear about what our expectation is for our own organization to execute price. Historically, that's been a little bit of a debate apparently, and it's also been something which could be challenged in. There was a lot of, believe it -- there were a lot of regional decisions made, whether they were going to implement the recommended price increase or not from the center. So what Clay and Ken have done is to do a pretty thorough analysis of the global market and by -- on a market-by-market basis, put together pricing that we think makes sense and make sure that we track that price increase on a week-to-week basis and make sure that it gets implemented. Any deviation to that pricing has to come back to the center to get any kind of approval at all, which, again, is a difference in the past. In the past, local operations had the flexibility to discount as they chose. And so it was difficult, as you might imagine, to hold onto those price increases, where they were implemented. So it's a complete overhaul of the pricing strategy that was there when we inherited the business. As I mentioned before, we certainly will be aggressive in promoting, particularly our new products, our value-added products, areas where we think we have an advantage. But we hope to hold on to the price increase. We hope to hold onto the pricing work that we've done. The key for us is to continue to drive productivity in our manufacturing sites. We're doing a much better job on procurement. We haven't talked a lot about that, but, again, this was an opportunity area that we were working on, which is looking at opportunities to reduce our procurement costs across commonly shared materials across the entire company, whether it's corrugated or motors. A number of different product areas where they are -- have been negotiated with suppliers on an independent basis. We're now doing that as a corporation. So we're looking for a number of ways to improve our cost. He hope that the pricing is an area that will remain solid. We'll improve our margins through manufacturing productivity and positive purchase price variance. Kevin R. Maczka - BB&T Capital Markets, Research Division: And much of that, Steve, I'm sure applies to the gas and fluid handling side as well? Can you just talk about what your expectations there are for price, again not seeing the big Q4 on the fluid-handling side, a little bit softer orders? Same type of question as it relates to price.

Well, I think there, what we're trying to do is to continue to drive our overall margins, particularly through manufacturing productivity and procurement. We are seeing an improvement in overall margins on a year-on-year basis for fluid-handling. I should say essentially flat year-on-year, slight improvement. We will see how that pans out. But sort of flat on a year-to-year basis. And so we're going to drive that through mix management, we'll drive it through manufacturing productivity and procurement.

It's slightly a project business, so we don't have a pricing comparison metric as we do on the ESAB business. But that's -- we -- as Steve said, our primary goal is to continue to improve margins largely through the things within our own control. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. One more from me. Can we go back to the Oil and Gas segment? It sounds like it's a big part of your lowered outlook here, expecting lower volumes in Q4. And I think, Steve, you said that'll probably persist for several quarters. Can you just talk about what's changed there? Is this something project-specific or something just more simply tied to a softer macro environment?

I'd say it's mostly tied to the softer macro environment, Kevin. It's not specific projects. There's a number of pipeline projects in North and South America that have been under discussion for quite some time and are still not been -- an order has not been given to anyone. There's been a little bit of softness on the refining side, although not as significant. And the overall secular trends for this business, both in heavier oil, which benefits our pump business, as well as the expanded refining capacity in places like Russia and Brazil. We expect the -- this business to bounce back. But based on the orders we have in hand, we can, at this point, confidently state that we're probably going to have some pressure on revenue for the next few quarters.

Our next question is from Jeff Hammond of KeyBanc Capital Markets.

So it sounds like -- to kind of close a loop on 4Q. Just general softness in fluid handling and fabrication technology. I mean, are you seeing anything within fluid -- like deferrals or cancellations that's impacting there, or it's just kind of the softer demand trend?

It's -- we've seen no cancellations at this point. We've seen things sort of pushout, but no cancellations.

Okay. And then you mentioned extended shutdowns. I mean, you mentioned kind of the weakness being broad, but you also mentioned in the 4Q extended shutdowns. Where are you seeing extended shutdowns, either geographically or by market or both?

I could look at it on 2 ways. The reductions that we flagged and have noted here in the script is really around our ESAB business. And what we see in welding and largely in Europe, where we've seen a number of automotive manufacturers already announced a longer intended shut down in the December timeframe. What we saw, Jeff, in coming up is that the July, August timeframe was a little slow for our ESAB business -- slower than anticipated. September was late coming around, but when it did, the order rates were quite good, but not enough to really offset some of the earlier declines that we experienced in the quarter. And what we saw was that a number of facilities, particularly in the automotive area were slow in coming up from summer improvements, and we've also seen announcements that, that'll be a continuation of December when they experience their normal shutdown.

Okay, that's helpful. And then you seem pretty happy with pricing on ESAB, but I think in the presentation, you mentioned price mix is negative, so maybe mix is the culprit there. Can you just help me understand what's going on with mix?

Yes -- no, that's primarily mix. It's -- the overall ratio between electrode solid wire and equipment. The unit pricing is actually a positive contribution in the quarter.

Okay. And then can you quantify -- I don't know if you've pulled this out in any of the onetime items, but what was -- can you quantify what the consumable plant start up disruption cost was?

It's probably a couple of million dollars in costs and would be $5 million or $6 million in revenue, something in that range.

And that's pretty much behind us?

Well, no. I think it's going to continue to challenge us into the fourth quarter. Obviously, our highest commitment is fixing this and getting our customer service level back up. As Steve mentioned in his comments, we are fixing it at the moment. It's not completely fixed at this point, so it is going to have a similar effect on the fourth quarter expectations as well.

And that was included in your reported results, that was not a onetimer that you pulled up?

That's correct. That's included in the results, and it's also factored into the guidance.

Our next question is from Jason Feldman of UBS.

Going back to the gas and fluid margin dynamics again. It's tricky when we don't have a lot of historical data for the segments. I just want to make sure I understand, looking forward, kind of what the main elements we should think about when trying to think about where the margins are going to be moving. I think what you've identified is that the fluid business is structurally higher-margin business, that Howden though is more sensitive to volume, given the operating leverage. And then, obviously, there's restructuring and cost saving activity. Are there anything else in terms of mix between end markets or other factors that we should think about?

No, I think that was a very nice summary of it. That is the main things that are necessary for modeling the -- fortunately, once we get past next quarter, then there will be more historical levels below sales that we'll be able to talk about, but I think you've hit on all key ones.

Okay. And you've now talked for a couple of quarters about the low, mid, high teens kind of targets for the respective businesses. When we think out, given all the macro uncertainty, how confident are you on those numbers? Well, I guess, the question is in a 3- to 4-year period, what kind of underlying macro growth or sales growth do you need to be able to hit those? Or is that really primarily driven by the cost-saving progress you have identified?

I think what we focused on for the most part of those projects that we can control, that area that we can control and deliver. So much of the margin improvement we've described in our commitments is focused on taking out costs and the restructuring along the areas that we've outlined for our ESAB business. There are opportunities in Howden. And certainly, those are also available to us at fluid-handling as well.

And in terms of how we did the projections, we, obviously, took account of the backlog we have. So in the gas and fluid handling, you will have higher growth rates than GDP next year, similar to what we've shown this year. But outside of what's in the backlog, we assumed a very modest growth rate in coming up with those targets.

Our next question is from Joe Mondillo of Sidoti. Joseph Mondillo - Sidoti & Company, LLC: In terms of the restructuring, I was wondering if you could just talk about what more you need to do to get to that $55 million, $60 million -- $65 million, if anything next year. You talked about the 4 plants already closed, 2 plants expected to be closed, but if you could talk about what more you need to do to get to that sort of expectation, that would be helpful.

Well, we do have quite a bit more to do, that we are not completed there. There are additional consolidations, as well as additional SG&A reductions. And we plan to have a more complete discussion of that on the next call when we introduce more specific guidance for 2013. But we do have a very precise plan as to how we're going to get that. It does address all the particular areas and it does require more than just a carryover of the things we've done this year. Joseph Mondillo - Sidoti & Company, LLC: Okay, so you'd rather just wait to the next call to go into detail there?

Correct, when we give that guidance for 2013 we'll give a lot more clarity on the specific components of the restructuring. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then the Power Generation, the orders on an absolute basis were down 3 quarters -- or 2 quarters in a row. You mentioned that you still think that, that business is very solid. Should we expect orders to bounce back in the fourth quarter? What are your expectations?

Was that Oil & Gas, Joe? Just want to make sure we're ... Joseph Mondillo - Sidoti & Company, LLC: Power Generation.

Power Generation, orders are up.

Yes, I don't know, if I -- maybe I was less than clear, but it should also be in your deck. I think you'll see that Power Generation is up organically and in total. Joseph Mondillo - Sidoti & Company, LLC: Right, on an absolute basis though, I believe it declined from the first quarter to the second quarter, third. I believe it's $182 million in the first, $164 million in the second, $146 million in third. Is that correct, or...

I would have to take that question off-line. And we typically don't track this stuff sequentially due to the significant seasonality throughout the ordering pattern. We've seen very strong order patterns, greater than expectation in that particular segment. So no, I don't believe we're expecting any decrement in that order. As Steve said, the environmental projects continue to be very strong. We're beginning to see much more activity in the U.S. than we have seen earlier in the year. So, no, I think our outlook for Power Generation continues to be pretty bullish. Joseph Mondillo - Sidoti & Company, LLC: Okay, good enough. And then lastly, I know Commercial Marine's a smaller part of your business, but I believe ESAB has some exposure to. Just wondering sort of what you're seeing in ESAB with Commercial Marine. First is fluid handling. Fluid handling seems to be doing really well, but I know it's a much more longer lead time business. Are you seeing a significant slowdown in ESAB? And if that's so, are the end users potentially slowing down, given the economic weakness? And could we maybe eventually see that in fluid handling?

I think as far as ESAB goes, one, we don't -- because we sell significantly through distribution, and we serve the shipbuilding market, a substantial portion, through a joint venture that we have in Korea, we don't have the precise percentage type of information that we have elsewhere. I think, generally, from a macro standpoint, what you said is correct. The welding businesses is going into the -- into shipbuilding is definitely down. I just can't give you a specific percentage. We've already seen that in the third quarter. Joseph Mondillo - Sidoti & Company, LLC: Does fluid handling generally lag, just in terms of the scheduling on when they sell those type pumps to the ships versus the welding?

It's sort of -- it's difficult to answer that question because of the very difference in customers and market composition. The welding business pretty much serves the entire shipbuilding industry across the board, across the geographies. And on the pump business, we are much more concentrated in certain segments, including certain geographic shipyard segments. So there's not a direct comparison between what's happening in welding and what's happening in the pump business. Generally speaking, we see the pump business as essentially flattening out this year. We've seen 2 consecutive quarters of orders actually picking up. The conversion period from orders to sales is typically 6 to 15 months in the marine side. So we actually think there might be a little bit of a bounce back in the -- on the pump side from the higher order rate we've seen. The welding side is much more immediate with the economic conditions, and we did see a drop-off in the third quarter and have factored that into our fourth quarter guidance, so we don't have much visibility beyond that.

Our next question is from John Moore of CL King. John R. Moore - CL King & Associates, Inc., Research Division: I was hoping you could provide the EPS contribution for -- or an operating income contribution from the acquisition in the fourth quarter.

Well, I think we've probably given you roughly enough information to get close to that. There's $0.03 a share in costs, and there's $0.02 per share in margin contribution for a negative $0.01 of after cost. So I think with that you can get a pretty rough estimate of what the profit contribution would be. John R. Moore - CL King & Associates, Inc., Research Division: Okay, and then it's been a little while, since we talked about Soldex. I'm just curious how that business is performing since we talked about the deal in the spring. And have you seen a material slowdown?

I wouldn't describe it as a material slowdown. I think they are sort of close to budget on top line, holding the bottom line. They have not experienced the kind of softness that we've seen in other markets for ESAB. John R. Moore - CL King & Associates, Inc., Research Division: And correct me if I'm wrong, but that business has been -- the Soldex business, has been growing double digits, and the margins, if I remember, are quite a bit higher than the -- quite a bit higher than ESAB, and I think the company as a whole. Is that right?

Margins have been higher than ESAB, stronger -- yes, stronger presence in consumables.

And your growth rate numbers are correct. They have -- they are slightly down from 2011, but they are significantly better than even in ESAB's year-to-date. The rate of growth is significantly better, but not quite as high as 2011. John R. Moore - CL King & Associates, Inc., Research Division: Okay, great. And then ESAB during the quarter, I know you guys monitor this business on a weekly basis. I'm just curious, when you, I guess, started to see things turn down -- and if you can give us an update as to what you're seeing today, and if things are still declining, or if you think it's stabilized at this point, that would be helpful.

I think, John, it was -- I may have mentioned that earlier is that during the summer is when we actually saw the business slow down a little bit. And it was slowly coming out of the summer months. We expected a bigger ramp up in September. We did get a nice bump in sales, but it occurred later than we anticipated. I say the trends that we saw in quarter 3 are sort of the trends that we're starting to see and expect in the fourth quarter, the continuation of that. John R. Moore - CL King & Associates, Inc., Research Division: Okay. And then just lastly, on the Oil & Gas business and fluid handling. And I apologize if I'm asking a repeat question here. Trying to digest kind of a lot this morning. It sounds like the weakness there still primarily contained to the upstream side of the business. And is the downstream business still holding in?

Well -- and it's initially one that we talked about before, but for fluid handling, their focus is -- so much of the businesses on upstream and midstream projects that it's a totally different picture that we see on Howden. Almost 90% of their business is focused on the downstream side, particularly in terms of where investments have gone for capacity expansion, desulferization. All those things are a great fit for Howden and Thomassen. So what we've seen on the fluid handling side is a general slowdown in investment on the upstream and midstream side of things. And I think that's probably consistent with what you're seeing throughout the industry. John R. Moore - CL King & Associates, Inc., Research Division: Okay, that's perfect. And then final question, Howden, I know has been benefiting from this retrofit of the power plants in China. I'm just curious, that -- I know it's a multi-year opportunity, you guys are working on there. But does that start to fade at all in 2013, or do you expect the...

No, no, no, John. I tried to reference that earlier on. I think in response to one of John's question earlier, John. That has a very long tail on it. It goes well beyond 5 to 7 years in our early forecast. It's not unique to China. China, surprisingly, is probably one of the most aggressive in the world right now, but North America is right behind it.

Our next question is from Jim Krapfel of Morningstar.

I'm curious to hear your thoughts on your acquisition plans. Would you consider making another transformational acquisition sometime in the next 12 months? And what are your long-term views on expanding the number of platforms beyond your current 2 platforms?

I think as we've indicated before, we certainly -- as you can see from the last quarter's activity, we are very aggressive in pursuing smart bolt-on acquisitions. I don't think we will see a transformational acquisition in the near term. We have wonderful opportunities to expand within the space that we're in today, whether in fabrication or gas fluid handling. Its major, major opportunities, smart bolt-on opportunities that give us good growth and tremendous synergies from a cost and profitability standpoint. So that's really our focus. And that's where we will, we believe, we'll get some great benefits here over the next year.

Okay. And I believe you mentioned the $9 million higher restructuring that you had in the second quarter slide deck assumptions for 2012 guidance. Were there any other changes?

In the -- there's no other significant changes in the nonoperational metrics. The operational metrics are laid out in detail on Page 32 of the slide deck.

I'm showing no further questions at this time. I would now like to the call back over to Scott Brannan for closing remarks.

Well, thank you, everyone, for joining us today, and we hope look forward to speaking to you again with our year end results. Again, thanks for joining the call. Goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.