Enerpac Tool Group Corp. (EPAC) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, June 19, 2013. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations leader. Please go ahead, Ms. Bauer.

Great. Good morning, and welcome to Actuant's Third Quarter Fiscal 2013 Earnings Conference Call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; Mark Goldstein, Chief Operating Officer; and Andy Lampereur, Chief Financial Officer. Our earnings release and the slide presentation supplementing today's call are available in the Investors section of Actuant's website. Before we start, let me offer the following cautionary note. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings. [Operator Instructions] And with that, I'll turn the call over to Bob.

Thank you, Karen, and good morning. We were pleased with our consolidated results for the third quarter. The inflection that we discussed on our last earnings call did, in fact, take place. EPS came in at the high end of the expectations on a comparable basis, aided in part by a lower-than-forecasted tax rate. Free cash flow was also strong for the quarter, as we expected. Obviously, we had a big change in our reporting, with the Electrical segment now in discontinued operations. We announced the decision to begin a sales process 2 weeks ago, allowing us to refocus on the 3 remaining segments. Andy will touch on some of the discontinued operation details shortly. From a continuing operations standpoint, our core growth way, while still negative, sequentially improved. Both Energy and Industrial had positive growth, and we believe the destocking is now largely behind us in Engineered Solutions. Despite the 2% core sales decline, our EBITDA margins remained flat at 19.6%, a good performance, especially considering some of the restructuring costs that we took during the quarter. We initiated our first look at 2014 guidance in this morning's press release. It does not reflect any capital deployment in M&A or stock buybacks, which would be additive when completed. I'll review guidance in more detail later on the call. But first, I'll turn it over to Andy to cover the financial results, and then Mark and I will come back and cover a few additional topics. Andy?

Thank you, Bob, and good morning, everyone. There's 2 items that I want to cover before providing our normal color on quarterly results. The first is the overall accounting for the Electrical segment divestiture, and the second are some comments on income taxes. Our third quarter results included $150 million noncash net write-down, or $2 a share, of the carrying value of the Electrical segment, as well as $11 million in net income attributable to the segment's results in the third quarter. This net $139 million loss is reported in discontinued operations in this quarter's P&L. The results of the Electrical segment for prior periods have also been reclassified to discontinued operations, net of applicable income taxes. Our results for the third quarter of 2013, including the Electrical segment but excluding the noncash write-down, totaled $419 million in sales and $0.76 a share of EPS. The sales were at the top end of our original $410 million to $420 million third quarter guidance range, and EPS was well ahead of the $0.63 to $0.68 EPS guidance. These adjusted results include about $0.05 benefit from lower than guidance effective tax rate, as well as $0.02 benefit from an Electrical segment fire insurance settlement in excess of what we had assumed in the guidance. Excluding these items, our EPS is about $0.01 above the top end of our guidance range. So in terms of performance versus guidance or expectations before factoring out the Electrical segment, the quarter came pretty much together as on forecast. Core sales growth improved sequentially, and EPS was up year-over-year. A part of this improvement in EPS for both continuing and discontinued operations was the lower tax rate in 2013. We had anticipated unusually low third quarter tax rate when we provided guidance on our last earnings call, but we ended up with an even lower effective tax rate. Third quarter taxes benefited from reversing a tax reserve due to the foreign tax statutes lapsing. Additionally, we had a $0.02 true-up benefit to 2012 taxes when we filed our federal tax return for that year last month. A few more comments on income taxes. Our go-forward tax rate for continuing operation should be in the 19% to 20% range other than the current fourth quarter, which will be closer to 25%. The lower continuing rate results from the removal of Electrical segment profits and income taxes, with the majority of Electrical segment profits generated in the U.S., which has the highest tax rate of any country that we operate in. So that's it for taxes and discontinued operations. Let's review results from continuing operations now in more detail. I'll start first with Slide 6, which tracks quarterly year-over-year core sales growth. This trend graph, which we have used each quarter for the last several years, has been adjusted to include just core sales from continuing operations, with the Electrical segment removed for all periods. We generated third quarter sales from continuing operations of $344 million, essentially even with the comparable number from last year. That equates to a year-over-year core sales decline to 2% but an improvement from 5% core sales decline last quarter. Energy and Industrial core sales were up 2% and 5% from a year ago, respectively, while Engineered Solutions 10% core decline was a sequential improvement from last quarter and reflects less destocking impacts. I'll provide more color by segment in a few minutes. Moving on to the next slide, which is Slide 7. Our third quarter operating profit margin for continuing operations was 16.6%, up nicely from our seasonally weak second quarter. On a year-over-year basis, operating margins declined 50 basis points, an increase in restructuring expense in Engineered Solutions this quarter, as well as a shift in sales toward lower margin product lines within each of our 3 segments weighed on the margins. However, third quarter margins were the highest we've seen in the past year, and we expect fourth quarter margins to increase both sequentially and on a year-over-year basis. Now I'll step down one layer of detail and provide some color on our results by segment, starting first on Slide 8 with the Industrial segment. Industrial generated 2% year-over-year core sales growth in the third quarter, which is a touch better than the 1% from last quarter. As has been the case all year, the Integrated Solutions product line within Enerpac outperformed the standard industrial tool product line, with both solid quoting activity, as well as revenues. Other sales details in the quarter in the segment include low single-digit core growth in the Americas and continued softness in Europe, which didn't get worse but frankly didn't get any better. Bolting product line sales were very robust globally as Enerpac continues to have success with its Growth + Innovation initiative. Also encouraging were margins, which despite unfavorable product line mix, were up 120 basis points year-over-year in the quarter and at their highest level in the last 5 years. Moving on to Slide 9 in the Energy segment. Core sales in the third quarter improved 5% year-over-year, with gains in both Cortland and Hydratight. On a regional basis, Asia was strong, Europe and the Middle East healthy and the Americas flattish on tough comps from a year ago. Operating profit margins improved sequentially from the seasonally weak second quarter and were up 70 basis points year-over-year due to first half cost reduction actions and the incremental flow-through on the sales growth this quarter. At nearly 20%, they were the best we have seen in the last 12 months. Now onto our third and final segment, Engineered Solutions, on Slide 10. We were encouraged by a number of things in this segment in the quarter. First, year-over-year core sales improved sequentially compared to the 17% decline in quarter 1, 12% quarter 2 and now 10% in quarter 3. Second, we saw European heavy duty truck sales increase over last year for the first time in a number of quarters. Third, we picked up several nice wins in ag in North America and vehicle airflow in China. And finally, our operating profit margins, while still lower than we would like, were at their highest level in the past year. A few more comments now on sales in Engineered Solutions. Despite difficult comps in a number of end markets, sales did show sequential improvement. We have seen a definite change in OEM destocking activity in several end markets and believe the worst is behind us. Sales comps in the fourth quarter and into 2014 get easier, and we're expecting continued improvement in the next several quarters. Now before wrapping up my prepared comments, I'll quickly cover cash flow, liquidity and financial position. To summarize, our balance sheet and liquidity position have never been better. We had a good cash flow quarter, with $77 million of free cash flow, part of which was generated from reducing working capital that was built in the first half of the year. We did spend about $5 million of cash in the quarter on the repurchase of 162,000 shares of our stock. We have our entire $600 million revolver available today and $161 million of cash on the balance sheet to fund growth going forward. We plan to reinvest these funds in acquisitions or return it to shareholders in the form of stock buybacks. That's it for me. I will turn the call over to Mark.

Thanks, Andy. Turning to Slide 12, I wanted to take a minute to talk about our strategic focus on several secular growth trends and to provide more clarity around how our 3 remaining segments are capitalizing on these long-term macros. The first secular growth trend is increased global energy demand. I think the connection with Actuant is pretty straightforward, especially as it relates to Cortland and Hydratight and their focus on the oil, gas and power gen markets. Within Enerpac, the business is having success with bolting tools and energy markets, as Andy mentioned earlier, but many Integrated Solutions projects have been in the energy space as well, for example, skidding systems for launching oil rigs and strand jacks for heavy lifting applications in power gen. In addition, Power-Packer provides stabilizer legs for trailers used at frac-ing sites. The second macro focus is global infrastructure. This not only includes Enerpac with its construction-related projects but Power-Packer, which provides cab-tilt and latching systems for the heavy-duty truck market, that facilities the efficient transportation of goods both to and from emerging markets. It also includes maximatecc, which serves construction, material handling and cargo equipment OEMs with displays for their capital equipment. Farm and food productivity is the most recent secular trend that we have focused on. Actuant's approach to capitalize on this trend involves Weasler's driveline products, as well as maximatecc's products for smart farm digital display technologies and Elliott's newly launched efficient ag seeder systems. The final targeted trend is natural resources and sustainability. Mining is a big piece of this, and what we are doing is facilitating quicker and safer maintenance to critical equipment in these harsh environments. Time is money in these applications and preventing or minimizing downtime is critical. From our specialty design bulldozer lift system to rail alignment tools for underground mining, Enerpac has launched a number of new products, creating increased market share in this maintenance area. Cortland also gets into the action here with the bog strops it offers for mining equipment recovery. We also target this macro trend with our Gits business, which provides emission control airflow valves for various on- and off-highway applications. Today, we generate well over 50% of our revenues in these secular growth areas. These examples illustrate how our segments are focused and fit the secular growth trends that we believe will provide above average core growth over the long term. In addition to the 4 secular growth areas that we are pursuing, we are also trying to increase our presence in sales in high-growth geographic markets, shown here on Slide 13. Each of our 3 continuing segments has opportunities to capitalize on the long-term growth in these critical areas, which include regions such as the Middle East, Southeast Asia, Africa, India, China and Brazil. Examples include the dozer lift systems that I just mentioned, which are drawing interest from customers in China. Similarly, Enerpac's rail alignment tools have gained traction in mining on a global scale. Engineered Solutions examples include emission control and airflow valves for China, heavy-duty truck cab-tilt systems in India and ag equipment solutions in Brazil. Energy is also capitalizing on significant oil and gas projects in Asia, Brazil and the Middle East. Admittedly, we are starting from a relatively small base. We have 20% exposure to the broadly defined rest of the world. So while sales today in these high-growth regions are small, we are clearly gaining traction with recent successes and have a lot of upside potential. I'll now turn the call over to Bob to walk through our guidance.

Thanks, Mark. Let's start with the guidance for the remainder of fiscal 2013, which is summarized on Slide 14. We are zeroing in on fourth quarter sales of $320 million to $330 million, which assumes year-over-year core sales in the range of minus 1% to plus 1%. EPS from continuing operations is expected to be in the range of $0.48 to $0.53 a share. That's versus $0.48 last year. This will result in full year fiscal 2013 EPS from continuing operations of $1.85 to $1.90, an improvement over last year's $1.83 per share. We are still shooting for free cash flow of $200 million, meaning we'll need to be at near high end of our fourth quarter fiscal '13 guidance range of $75 million to $85 million. In terms of foreign currency assumptions, our fourth quarter guidance is based on a euro of 1.3 and a British pound of 1.55. As Andy mentioned earlier, we are expecting a fourth quarter tax rate of around 25%. And finally, our guidance does not include any fourth quarter of stock buyback or acquisitions. Now turning to Slide 15, which is our first look at 2014. We are initiating sales guidance from continuing operations of $1.315 billion to $1.340 billion and an EPS of $1.95 to $2.05 per share. I'll cover a number of important assumptions with these estimates, but it has been our practice in the past. We won't be providing segment level detail until our year-end earnings call. We are assuming a continuation of the low-growth environment that we see globally. We expect basically a flattish European GDP, some modest improvement in China and other high-growth markets over the year and the U.S. to continue in the 2% to 2.5% GDP growth trajectory. Our Growth + Innovation program will provide incremental sales above these GDP forecasts, with the carryover benefit of new products and initiatives already launched and the impact of some new products -- projects. Finally, we also see some favorable sales comparisons, given the destocking impact in the current year not repeating in 2014, most notably in Engineered Solutions. If you take all this into account, we're expecting core sales growth in the 3% to 5% range for fiscal 2014, with all 3 segments in positive territory. Average incremental profit margins on the sales growth will be about 20% to 25% range, more modest than normal as a result of some incentive compensation expense built in for '14 compared to very little in fiscal 2013. In total, we're expecting 70 -- 50 to 75 basis points of improvement in our EBITDA margins next year. Andy covered the tax outlook earlier in the call. We're projecting 19% to 20% effective tax rate, which is up 200 to 300 basis points from fiscal 2013. We have not included in the expected benefits of future acquisitions, stock buybacks or the Electrical segment proceeds in our guidance. Slide 17 here tries to give you some perspective of both the acquisition horsepower and the stock buyback potential on various assumptions. We will factor them in when they happen. As a result, we are assuming about 76 million to 77 million shares outstanding for the EPS calculation. We have not baked in any potential interest income or savings from the Electrical divestiture in our financing costs and are currently projecting about $25 million of interest expense for 2014. Our free cash flow target is $175 million, roughly 110% of net income. This excludes any free cash flow that the Electrical segment will generate prior to the sale. Our priorities for deploying capital in Actuant remain the same. Number one, to fund internal growth initiatives; two, to fund acquisitions; and three, to fund buyback -- stock buybacks. With $160 million of cash on hand, free cash flow over the next year and proceeds from the Electrical divestiture, plus revolver availability, we have over $1 billion of capital we could use -- put to use. It is not a question of if we will deploy capital, but how and when. In summary, growth is clearly our priority as evident by our business model, which you can see on Slide 17. We continue to execute the same business model we have followed for more than a decade. Our capital allocation priority for growth remains unchanged. Our pipeline of acquisition ideals remains decent with deals in a variety of sizes and in timing. It continues to be skewed towards the Energy segment. We have a number of interesting ideas in the other segments as well and also in high-growth markets. Some deals have moved out of the funnel and others have moved in. A number of ideas have been in active -- have been active in the funnel for nearly a year. There will be deals, but the timing and magnitude of them is dependent on many factors outside of our control. We're going to continue to be disciplined in acquisitions. That's it for our prepared remarks. Operator, I'll open up the phone lines for the Q&A section of the call.

[Operator Instructions] And our first question is coming from Allison Poliniak with Wells Fargo.

On the Industrial segment, obviously, margin's impressive as always. When I look at '14, I know one of the things you said that would, I guess, cause it to be a little bit higher was low incentive compensation. Should I assume that, that comes back a bit more in '14?

Yes, definitely, Allison. I think we've got just a couple of million dollars built in there for '13 and a normal year if we hit our target and whatnot would be closer to $20 million. This is for all of Actuant, yes, not just Industrial so...

Not Industrial, okay.

Yes, that's clearly impacting each of the 4 segments, yes.

, Okay, perfect. And then if I think about restructuring -- the quiet restructuring you talked about, is that mainly Engineered Solutions that the margins might not materialize as significantly as we would expect just with that quiet restructuring?

Yes, in the quarter, in particular, we probably had 150 to 200 basis point impact from restructuring in ES in the quarter. Some of that will continue on into next year's lows. As a matter of fact, that's where the majority of this is as we move some manufacturing out of high-cost areas into low-cost areas. So that's what's going on. I think if you peel that out, we're encouraged by the trend we're starting to see in Engineered Solutions.

Our next question comes from Matt McConnell with Citi Research.

Just a little more insight into that 3% to 5% organic revenue growth target. Is there a measurable contribution from the Growth + Innovation initiatives? And maybe how much of that is coming from market growth versus your outperformance?

Yes, it is measurable. You always -- when you're doing Growth + Innovation, it's difficult how much you want to attribute that you might have gotten before. We started that initiative a couple of years ago. We're guessing we're about 100 basis points of growth from G + I initiatives in that '14 guidance. It's probably a little more skewed towards Industrial and Engineered Solutions. But really, all 3 of the segments are participating. If you recollect, we were saying 200 to 300 basis points in total. So we'd say we're seeing about half of the benefit that we targeted there. And I think that's probably on schedule, maybe a little ahead of schedule of where we thought it would be.

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

We're going to stay away from the segment pieces, but I think the one [indiscernible] to look at if you were going to do it would be Engineered Solutions, where you're coming off -- just getting back to '12 would get you above 5% -- to add the fiscal '12 will get you back to 5% more.

The destocking...

Yes, the destocking -- I'm sorry, go ahead.

Yes, destocking, right.

And our next question comes from Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Could you just give us a little bit more color on what you are seeing out there that gives you confidence in the destocking? And I think by what you just said right now, it's not that you're anticipating any significant restocking, I think you're saying that if we're just [indiscernible] customer.

Yes. Why don't I start, Andy, and you can chip in behind me. I think what we've always said, our kind of canary in the coal mine is European truck. It seems to be for us the first one that goes down and kind of the first one to come back out. And we indeed saw that this quarter. It was up in single-digit range. Volvo, in particular, had a nice quarter. We handle Volvo really across the world, across their platforms, and so it's a good proxy for us of the totality of a market. We saw some recovery in other truck accounts as well, still a little negative in our OEMs here in North America, particularly the off-highway guys more than the truck guys. So that's been weak. And then auto has been -- has also been weak. And I think we've talked to you guys at length about what's happening in auto, at least in the convertible top part of the business, is it's elongating. You're staying with older models longer so you don't get the kind of the new model push that results in some extra inventory in the system it gets put in. And we are expecting '14 to be somewhat of a light year also in auto for new product launches, things like that.

From a chronology standpoint, I guess my 2 cents is I think November, December were kind of the worst through the bottom of the barrel, so right at the back end of first quarter, beginning second quarter. Orders just totally canceled, nothing, I mean -- or production. Nothing was going on. In tail end of January, February, we started seeing production start again, actually making some products, certainly not where we were at in the first quarter. And this continued to inch up a little bit over the following months or so. Bob was right. I mean, what we're feeling right now still lingering is North American construction equipment. But a lot of -- it's much better than where it was.

Yes, it's running its course. I mean, we can see the end of the tunnel. Ann P. Duignan - JP Morgan Chase & Co, Research Division: So the canary is coming back out of the mine as opposed to not.

Correct. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Yes, okay. Just to follow up on your comments on Volvo and European truck. Are you concerned at all that this is prebuilding for pre-buy or inventory buildup prior to the emission standard changes in 2014? Or do you think it's really was so bad that it's just recovering from significant weakness?

Where our cab system -- tilt system goes into the truck is very late in the cycle, so they don't keep a lot of inventory. So it would really be, I think, too early to be attributing it to the December emissions change. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. And just real quick, a follow-up. Are you seeing any weakness in Europe, particularly in Germany right now on the back the floods. We just got an email suggesting that the PMI out of Europe could be very weak tomorrow as a lot of that production and manufacturing activity may have slowed in Germany on the back of the floods. Have you seen any of that or you think it's too localized?

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

Yes. But our guidance for '14 is a roll up of the businesses. We spent some time with the businesses within the last month. We didn't hear a lot of effect of the flood.

And our next question comes from Charley Brady with BMO Capital Markets.

Bob, just on the Enerpac business. Can you segregate out the growth you saw in the legacy Enerpac business and the IS business?

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

Yes, the IS portion of this is up 7% -- 7, 8-ish percent during the quarter. IT probably inched -- eked out 1% or so on itself. Certainly, North America was up through the quarter. Asia doing okay in some areas, a little bit softer in Australia with mining. Europe continues to be down year-over-year but certainly not getting worse than what we've seen in the last quarter or 2.

What has been great about the integrated solutions, the IS business, in this quarter we really saw this in spades, is what we started to see is business that is customized for an application but really from a manufacturing point of view is a standard product. So this would be like a gantry crane or a strand lift. And these products are starting to -- what's happening is somebody sees an operation and says, "Hey, that will work for my application." So success brings more success in this area. And all of a sudden, we're seeing gantry cranes being sold globally, where in the past, it was really much -- pretty much a European market. That's one of the reasons that the margins have been doing better in that IS product line from when we started a couple of years ago, is we've had a concerted effort to really try to standardize some of the components, still customized for the application but standardized componentry allows us to really get some efficiencies in the manufacturing. Had a great [indiscernible] Show, it's a big European show dealing with a lot of the heavy lifting. And we just created a lot of excitement. I think that's going to feed into next year. So that IS business strategy has really worked well over the 3 years we've kind of put it together.

Just a quick follow-up, on the share count I look for fiscal '14, it's up on '13. Is that just incentive-related comp being factored in there?

That's correct.

Yes.

Our next question comes from Brett Linzey with KeyBanc Capital Markets.

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

So the -- I'd say the comparable is just -- it's a sequential improvement. Cortland, I think we were talking last quarter how some of the bigger programs were getting pushed later in the year. We saw some of those start to ship and gives us confidence again kind of in the future going forward. The nuclear piece relates to Hydratight, and we will anniversary that probably within the next quarter to 2 quarters in that zip code. Now when we say anniversary, this was a maintenance turnaround. This was not tied to new nukes or anything like that. It was tied to some things that were going on in power generation down to South and North America. We are seeing a little more nuclear maintenance activity going on outside of North America that gives us a little bit of confidence. Anything to add, Andy?

No, no.

Okay. And then on Engineered Solutions, the decrementals, I think were, relative to our model, maybe a little bit worse. It sounds like you guys had some onetime reorganization of sales, et cetera. Would you be able to quantify that? And then I guess as we think directionally into fiscal '14, I mean, how should we think about incrementals as that business starts to comp positive?

Yes, about a couple of million dollars in Q3 relative. Last year was almost nothing, so roughly a $2 million increase year-over-year. Next year, there will be -- there'll continue to be some restructuring activity going on in the first half. It's going to be largely front-end loaded on this. However, the incremental volume that we're expecting to see year-over-year also will kick in, in the first half, so that will offset some of it. So we are expecting margins to improve next year, both first half and second half in Engineered Solutions.

Okay. And I guess, just given some of the acquisitions you guys have done in that segment, I mean, should we think about historic incrementals as it...

You're pushing it to question 3.

Go ahead.

Go ahead and ask. Karen is trying to be the enforcer today.

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

Well, anyways, it was still on Engineered Solutions, not just about the incrementals. I mean, I guess given the acquisitions, how should we -- should we think about historical incrementals in that business similar going forward?

You should think about historical incrementals. When we talked about more modest recovery in total for 2014, I think Engineered Solutions will do better than that. It had a fairly steep drop of over -- in double-digit sales decline. It's got some element of fixed cost structure. Our assembly light business model, that's what it has, and we will be leveraging that going into next year. So I think if you look back at how we recovered from the '08, '09 recession and we had good margin expansion, I would expect to see similar type incrementals.

And our next question comes from Scott Graham with Jefferies. R. Scott Graham - Jefferies & Company, Inc., Research Division: So the acquisition pipeline, you guys indicated some went in, some went out. If we go back to the analyst meeting, one of the things I think you guys said, particularly, I think you, Bob, was that there was a larger deal in the pipeline at that time. I was just wondering if that was one of the ones that went out of the funnel and if something similar in size has come back in.

No, one of the deals that is a little larger in size, that I'm guessing I was referring to, is one of those deals that we've said has been in the funnel for over a year. So that would not probably be the one that exited the funnel. So just to try to summarize, when we say large, we're in the Weasler and a little bit above Weasler size, $150 million, $200 million, $250 million zip code. That would be a large deal for us. Obviously, we've looked at bigger things than that. We told you about one last year that we did stop looking at. But that would be in that range. In addition to that, we have kind of our more middle down the fairway, $25 million to $75 million deals. We've got some things in emerging markets that look a little more exciting, so we're trying to spend a little more time there. It's not a very developed M&A market so it's difficult, but we've been spending more time and effort in those kind of areas. So that would kind of give you the color I hope you're looking for. R. Scott Graham - Jefferies & Company, Inc., Research Division: Yes, very much so. The other question I had was on the mix comment that you made earlier about within segment mix. Were you talking about sort of the ISI type of mix product line versus product line? Or are you talking about within the product lines, the mix went negative?

Largely between businesses within the segment or within major product lines. So in Industrial, as an example, IS grew faster than industrial tools. IS margins are lower. Within energy, Cortland grew faster than Hydratight. Cortland has -- no, Hydratight has higher margins. And the same thing within Engineered Solutions as well, some of our higher-margin businesses there were more challenged from a top line standpoint this quarter.

And our next question comes from Bob Franklin [ph] with Prudential Financial.

Let me see, I guess Slide 9, the deepwater umbilical ropes and cables, is that all market strength and catch-up? Or are you picking up market share from anybody?

I think that's largely...

Market share and catch-up.

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

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

That is -- largely, those are workover umbilicals for maintenance in the subsea applications. They might be connected to a ROV, could be just a diver down there, that sort of stuff doing maintenance subsea.

And our next question is coming from Mig Dobre with Robert W. Baird.

This is Brian Brophy in for Mig. Last quarter, you mentioned that the slope of the recovery was modestly lower than your prior view. Can you give us an update or any color on your view regarding the pace of the recovery versus 3 months ago?

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

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

Yes, typically, what we're selling on the ag front is the farm implement as opposed to the tractor or the combine. We're seeing 2 different challenges right now. First, from a spring planting standpoint, planting was late this year, therefore, replacement cycle was slower to materialize when it came through. The second piece actually relates to the drought last fall. The harvest was lower in some areas on the grains, if you will, which is an important part of the ag for us. Less handling of grains; less, therefore, replacement parts as well. So we're definitely seeing replacements -- replacement part down and a little bit of volume down in grain handling type applications right now.

So a lot of Weasler, something like 40% of Weasler is really based on usage, hours used in the field. As these drivelines get utilized, they get banged up and they need to be replaced. That should bode very well long term. A, it's a recurring revenue, it's not tied to new pieces. The vehicle doesn't perform -- the vehicle or the implement doesn't perform its work without the shaft. You can't shortcut it at all. So that's going to bode well. When you step back and look more at that macro growth driver that Mark talked about, and you think about 6 billion people on the planet going to 8 billion and the productivity required to get that out of farm, we feel great about it. So while it's got -- it will have these periods where if you get a late spring or a drought, you'll get some aberration in this aftermarket product. We couldn't be anymore pleased than we could be right now with the position we have with Weasler there.

And our final question comes from Jamie Sullivan with RBC Capital Markets.

A question on Energy. Is there more sort of catch-up or how long will the deferred projects kind of continue on? And maybe you can just talk about how the bookings were in the quarter.

We did have some catch-up, I would say, in some projects that were moved out from first half into the second half. We did -- we definitely had one particular umbilical, I'm thinking a pretty decent size one, that shifted from Q3 into Q4 largely for the same reason again. So it's natural that there's kind of pushing and pulling around within here. Orders were pretty good in the quarter, I would say, particularly in Hydratight, good quarter there. Umbilicals still going very strong for it. Some of the nondefense type revenues that sound strange to be in Energy but that's -- there's a small part of Cortland that is a non-energy and defense one. Now that certain is much weaker than it was a year ago. But all in all, I'd say the orders were pretty decent.

When we do give segment-by-segment guidance in the fourth quarter, one of the things I'm certain we'll be talking to you is we're up against a very tough comparable on Gorgon. This is that project in Australia that we've been talking about. We had -- it's a multiyear program, but we are at a point now where it's flattening to be down maybe a little next year versus what it's done this year. So there are a couple of those bigger ones. So I wouldn't guide you there. When I look at it going forward, I'm going to say there's a pent-up demand. I think it's normal energy. Some of these things that got delayed will be offset by some of this large programmatic activity moderating a bit.

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

Well, I could spend the next hour on that question alone, Jamie. It is -- probably, it's our largest acquisition activity. I put it in 3 broad areas today. I put, number one, is to do more around the joint integrity product line. There is a lot more we can do around that product line in terms of leak detection, maybe sealing material, doing work on the inside of the pipe, moving upstream more toward asset integrity, not just joint integrity. So that's the Hydratight platform. It's resulted in us buying 5 or 6 acquisitions put together all in the Hydratight brand name. And I could easily see how that could double again and still be joint integrity right where we're at, probably some geographic growth there. So that's probably our largest opportunity. Number two, I would say would be the umbilicals and doing more subsea environment. I was just amazed at the OTC Show this year, if anyone was down there, how much is going on in processing on the bottom of the ocean floor. That's the big trend right now is how can we do more on the bottom of the floor, and that is -- straightaway, you have to have the power get to the bottom of the floor. It's going to get there somehow, and that is right down our umbilical power cable product line. It plays right into what Jeyco does in mooring and holding vessels in place as you're doing more in subsea environments. So I would say subsea would be the second one. And as a derivative of that outside of the umbilicals, we do see more going on with this rope business that we have. It's a smaller part of Cortland, but we see a continued shift from wire cable to more rope cable. That was one of the things that really impressed us about Jeyco. We have our Puget Sound rope business, which is a subsidiary of Cortland, out in Washington, and we have Selantic, which does some heavy lifting. All of that focused on rope and kind of the conversion from wire to rope, and the weight and properties make a big difference there. So 3 broad strategies that I would put my energy acquisition focus on there.

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

Okay, great. Well, thanks, everyone, for joining the call today. We will be around all day to answer any follow-up questions you have. Just from a calendar standpoint, we will release our Q4 earnings on Tuesday, October 1, so a tad later than usual, but mark your calendars for that. And then our Annual Investor Day will be held on Monday, October 7, in New York. The invitation will go out for that shortly. Again, mark your calendars in advance. So thanks a lot.

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