Enerpac Tool Group Corp. (EPAC) Q1 2014 Earnings Report, Transcript and Summary

Welcome to today's call for Actuant Corporation. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, December 19, 2013. It is now my pleasure to turn the conference over to Karen Bauer, Actuant's Director of Investor Relations and Communications. Please go ahead, Ms. Bauer.

Thanks. Good morning, and welcome to Actuant's First Quarter Fiscal 2014 Earnings Conference Call. On the call with me today are: Bob Arzbaecher, Actuant's Chief Executive Officer; Mark Goldstein, President and Chief Operating Officer; and Andy Lampereur, Chief Financial Officer. I would like to point out that our earnings release and the slide presentation for today's call are available in the Investors section of our website. Before we start, a word of caution. 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 thanks for joining us on our first quarter earnings call. As you probably know, this will be my final earnings call as CEO. And speaking candidly, something I frankly won't miss after 53 quarters as a CEO and a bunch more as a CFO. But onto business. To summarize Actuant's first quarter, we delivered consolidated results in line with our expectations for sales, earnings and cash flow. As we will discuss, it wasn't a good quarter for our Energy segment, which masked an otherwise great quarter for Engineered Solutions and solid execution by Industrial. While the economic environment can still be described as choppy, we did deliver 5% core sales growth in the quarter. We culminated several strategic actions in the quarter, including the closing of the Electrical segment last week, completing the 100-day integration report out for the Viking acquisition and celebrating the grand opening of our first plant in India. While we're never finished with portfolio management, I believe we've made significant progress over the last year in improving the quality of the Actuant enterprise. I just want to close by saying it's been my sincere pleasure to work with you all over the last 14 years. I really don't know where the years went. It's just amazing that we started out with sales of $450 million and a market cap of just $127 million. I know I leave Actuant in good hands with Mark at the helm and Andy and the rest of the executive team supporting him. I look forward to continuing to serve as Chairman of the Board. With that, I'll turn it over to Andy to go through the quarter in detail. Andy?

Thank you, Bob, and good morning, everyone. I'll provide a few summary level comments on our first quarter financial results and then provide more color and detail by line item as well as segment. We exceeded our sales and cash flow targets for the quarter and delivered earnings per share in the middle of our guidance range. First quarter sales totaled $340 million, which is up 10% from a year ago, reflecting core growth and the benefit of the Viking SeaTech acquisition. EBITDA grew about $4 million year-over-year to $58 million, while our operating profit was essentially unchanged as a result of the heavy depreciation and amortization from the Viking acquisition. EBITDA and operating profit margins declined year-over-year by 40 basis points and 120 basis points, respectively. Our earnings per share from continuing operations increased 7% year-over-year to $0.44 a share, benefiting from lower income tax expense in the current year, which we had discussed in our guidance discussion on our last earnings call. And lastly, free cash flow in the quarter was strong at $34 million, much better than the prior year. Turning now to Slide 5, I'll provide a little bit more color on our results, starting first with the sales line. First quarter sales were approximately 10% above last year in total, 5% from core growth, 6% from acquisitions and a 1% headwind from foreign currency rate changes. It was the first quarter in the last 5 that we reported consolidated sales core growth following destocking, economic headwinds in Europe and softer demand in China over the last year. All of the core growth came from our Engineered Solutions segment, which was up 15% from a year ago. Industrial and Energy segments were down modestly on a core basis. I'll provide additional color on sales when we review segment level results in a few minutes. Our operating profit margins declined from a year ago, reflecting unfavorable mix between the segments, the inclusion of Viking's results and lower margins in the Energy segment. Margins in our other 2 segments were improved year-over-year. From a mix standpoint, we had 15% core sales growth in our lowest EBITDA margin segment, while our higher margin segments reported relatively flat sales resulting in unfavorable mix. Additionally, Viking entered the mix this quarter, and with its higher G&A, its operating profit margins are below the average for both the Energy segment and all of Actuant. I'll provide more color in margins by segment in a few minutes. Now let's dig down one layer and discuss sales, profits and margins by segment, starting first with the Industrial segment on Slide 7. Industrial reported a 2% core sales decline in the first quarter, the result of lower Integrated Solutions sales in the current quarter versus a strong volume a year ago. Enerpac's base industrial tool product line sales were up slightly year-over-year in the quarter and reflected mid-single-digit growth in Europe and modest growth in the Americas. Asia Pacific sales continue to trail the prior year due to cautious demand in the region. The tough Integrated Solutions comps we're encountering are consistent with our guidance from the last call. On the margin front, operating profit margins improved 60 basis points in the Industrial segment, the combined result of favorable mix shifted toward the Industrial tool product line, as well as good cost control. We were encouraged by the high level of quoting activity in the segment later in the quarter, as well as the year-over-year margin improvement. We remain optimistic about a solid year for the Industrial segment in fiscal '14. Moving on to the Energy segment now, I'm on Slide 8. Market conditions remained attractive. However, the segment had challenges in the quarter with margins at Hydratight and deferrals of some large mobilization of mooring systems at Viking. The combination of these items resulted in a disappointing Energy segment quarter. Overall segment sales increased nearly 20% as a result of the Viking acquisition. Core sales were off 1% from the prior year, reflecting low-single-digit growth at Cortland and low-single-digit decline from Hydratight. The modestly lower sales of Hydratight came primarily from lower revenues on a couple of large projects that are winding down this year but were at peak run rates a year ago. This includes large maintenance jobs in both Kazakhstan and in the U.S. Sales mix at Hydratight was also unfavorable, with lower rental revenue and higher service revenue, which adversely impacted margins. Additionally, Hydratight incurred some cost overruns on the completion of some large jobs, including freight, unfavorable technician mix and travel, and in general, it fell short on the performance side. Cortland margins, meanwhile, were in line with our expectations. Given its rental profile as well as its seasonality, Viking's operating profit margins in the first quarter adversely impacted overall Energy segment margins. Viking's largely fixed cost structure and approximate $20 million of first quarter revenues also did not help the year-over-year comparisons. Viking had a few large new mooring jobs that were delayed by its customers into the second and third quarter, and with the high incremental margin nature of the mooring rental business, we should see revenue and profit improvement as the year unfolds, most notably in the third quarter. Mark will provide additional comments on Viking and the integration efforts there in his prepared remarks later on the call. On Slide 9, I'll cover Engineered Solutions, which was the top performer for the quarter and, again, earned the highly coveted CFO Gold Star Award. The segment posted 15% core sales growth from the flat core sales performance that it posted last quarter. The improvement came from a number of end markets, most notably the heavy-duty truck market in Europe due to an emissions pre-buy and nice volume and share growth in China, which was up 30%. We also saw decent off-highway and ag sales growth on a year-over-year basis in the quarter, which is good to see after the OEM inventory destocking throughout most of fiscal 2013. Incremental profit margins in the segment at 35% were strong, and when combined with the 15% organic growth, it resulted in an excellent profit growth quarter for Engineered Solutions. We expect continued growth in the segment in future quarters as the European truck pre-buy growth gives way to easier comps from a year ago in most other markets. So wrapping up comments on operating results for the first quarter, in summary, we had good performance from the Industrial and Engineered Solutions segments. We're off to a slow start in the Energy segment due to customer delays, operational issues, Viking's seasonality and unfavorable mix. However, in total, we did beat our consolidated sales guidance and we met our profit guidance range despite the puts and takes. EPS in the quarter did benefit from a discrete tax planning gain, which was forecasted. Switching gears now to cash flow and capitalization. We had a very good quarter ending with a stronger balance sheet than at the start. We generated $34 million of free cash flow and we've deployed $15 million of it on additional stock buybacks. Our net debt-to-EBITDA leverage at quarter end was 1.3x. Our availability to fund growth on a go-forward basis is even stronger now with the completion of the Electrical divestiture last week. As you can see on Slide 11, reflecting the Electrical divestiture, we will have nothing drawn on our $600 million revolver and over $200 million of cash available to fund growth, including acquisitions, growth and innovation investments, as well as stock buybacks. That's it for my prepared remarks today. I'll turn the call now over to Mark.

Thanks, Andy. Turning to Slide 12, I want to first cover the Viking 100-day integration report out, which took place yesterday. There were 2 primary takeaways from the integration efforts to date. First, we have identified more cross-selling and collaboration opportunities than we originally anticipated in due diligence. A good example is a recent award in Australia for a cyclone mooring solution that was co-bid by Jeyco, one of the Cortland businesses, as well as Viking. Their combined expertise, footprint and rental availability allowed them to collectively garner this $1.1 million contract, which wasn't assured by either one individually. The second takeaway is around culture and the close fit Viking has with Actuant and the Energy businesses in particular around safety, process and customer focus. The teams have gelled in a way that will provide long-term value. It's encouraging to see a management team pulling integration activities forward versus having to push them for progress. While it is still early, we are pleased with the integration thus far. Despite the fact that Viking revenue was weaker than anticipated due to customer delays in mobilizations, we remain bullish on the long-term prospects of this acquisition. Turning to Slide 13, as Andy reviewed, we completed a major portfolio management action with the sale of Electrical. Meanwhile, we continue to target potential acquisitions that capitalize on our 4 macro growth themes and high-growth market strategies. This focus on reshaping our business is paying off on the quality and transformation of our portfolio over time, as you can see on this slide. While these are some of the most visible items, there is a tremendous amount of work and activity going on within the organization, and I wanted to remind you of just a few of these actions that I would put into the category of controlling our destiny. We are wrapping up a number of quiet restructuring actions, largely associated with shifting more manufacturing to low cost countries such as China, Turkey, India and Mexico. We've expanded our physical presence in several high-growth markets in the last year, including new facilities in India and Turkey and commercial resources added in Brazil and Africa. Where we can, we've combined duplicate facilities into shared sites in order to leverage costs and processes. We've invested in ERP systems, infrastructure and best-in-class processes, including the recently completed Enerpac facility in Columbus, Wisconsin, which you can see on this slide. Investments in growth through growth and innovation, high-growth market penetration and M&A continues to be our top priority. This investment is paying off as our revenues in high-growth countries grew 20% year-over-year in each of the last 2 quarters. Lastly, we remain very active in the M&A arena. The pipeline is still robust, with acquisition targets in all 3 segments. While the number of larger M&A funnel items is down in the last 90 days, the quality and fit of the deals we are reviewing are very solid and more slanted towards tuck-ins. Despite the strongest balance sheet in our history, we are continuing to maintain discipline and only pursuing deals that make sense financially. Finally, opportunistic share buybacks will continue as they did in the first quarter. My last topic is an update on guidance. While everything did not go according to plan in the first quarter, once again, the diversity of the Actuant portfolio enabled us to deliver solid core growth, free cash flow and EPS. With 1 quarter in the books, we are very focused on delivering earnings per share of $2 to $2.10 per share in fiscal 2014 and are reaffirming our full year sales, EPS and cash flow guidance. We have confidence in our businesses and management teams to achieve these goals and fully expect to hit them. At this juncture, we believe we have a lot going right in Engineered Solutions and Industrial and are taking appropriate actions to address performance of the Energy segment. Investor questions over the past 45 days have focused on whether we have seen signs of improving economic conditions. We clearly have seen an improvement in Europe based on our sales trends and quoting levels in the last 6 months. However, we have not seen any discernible change in the Americas. We feel it's off the bottom but just not improving in a meaningful way. Customers, similar to us, remain cautious on adding people or costs to their businesses without clear signs of recovery. In light of the foregoing, we are reaffirming our full year sales guidance of $1.41 billion to $1.45 billion, EPS guidance of $2 to $2.10 a share and free cash flow of approximately $190 million. The consolidated and segment level core sales growth assumptions we reviewed on our last earnings call also remain unchanged. For the current second quarter, we are projecting sales in the $330 million to $340 million range and EPS in the $0.29 to $0.33. Compared to the just completed first quarter, profits will decline as a result of the impact of the normal seasonality and an increase in the effective income tax rate to the 25% range. In summary, we expect to overcome the slow start in Energy with a better second half, the result of recent wins, incremental volume from delayed mooring and service jobs, cost reduction actions and other process improvements. We are also confident that both Engineered Solutions and Industrial will continue to successfully execute to their plans. While this does mean a back-end-loaded forecast for fiscal '14, it's similar to what we just saw in fiscal '13 and something we have successfully managed in the past. That wraps up our prepared remarks. So, operator, please open up the line for questions.

[Operator Instructions] And our first question comes from the line of Matt McConnell with Citi Research.

First, congratulations, Bob. I'm shocked to hear you won't miss these calls, but the best of luck in your retirement. So just to start off, can you give a little more insight into the resolutions that you're working on for the Energy inefficiencies? And is it mainly having these deferred projects start to ramp over the next few quarters or is there something else we should be looking for?

Sure. There's a couple things here. First of all, there was a -- there's a mix issue within Hydratight and the Viking as well. When we're adding Viking into the mix, the impact is at the operating profit level not EBITDA. On the Cortland piece, there's a mix issue because we're selling more rope than umbilical, so that is moving in there. And then on the Energy side of it, there was an unfavorable mix as well relative to less rental than we typically would have. So we got that issue. Then the other issue was we had some decommissioning or labor that -- for Gorgon, some of our larger projects, that was initially done in the lower-cost countries and then moved to Barrow Island, which is where the actual site is going, so we had some labor issues there. So there's -- these are some -- there's some mix issues and then there's some cost inefficiencies and operational issues, and that includes a conversion on the funnel of activity, as well as pricing areas that we are working into. So we're digging into all these areas, Matt. We've made some changes in order to support that.

Okay, great. And I know you would normally see a sequential margin decline in that business into 2Q, but if a number of these factors are going to be alleviated, how would you project Energy margins 1Q into 2Q?

Well, I think for many of the activities that we're talking about, that's going to be a second half. We're going to see the pickup in the second half of the year. And so the second quarter is going to look similar from an Energy standpoint to what we saw in the first quarter.

Our next question comes from the line of Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Best wishes, Bob. I can only imagine how much you love these calls. Anyway, can you talk a little bit -- or give a little bit more detail on the customer postponement of delivery of the order in Viking, I think you said it was. What's going on there? How confident are you that, that comes back in the third quarter? I mean, is that at risk given where oil prices are going? Just a sense of how sure are we that, that's actually going to come back and get delivered?

Yes, it can. So Viking, as we talked about last quarter, Viking has some larger projects and some lumpy demand out there. And so in this particular case, the major project is Wheatstone, we've had a several month delay in the deployment there. And so that's going to -- that has begun to occur this month, and it will get into the second quarter, and we'll see it ramp into the second half of the year. So we're very confident of that. We also have several smaller jobs that have the same type of situation occur.

Up in the North Sea.

Right, up in the North Sea, out of Norway. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. And then my follow-up question would be, could you provide us a little bit more detail on specifically where and what you're seeing the improvements in Europe, and whether you've seen any acceleration in any countries there other than, let's say, German industrial production. But any color on what you're seeing in Europe would be helpful.

Sure, I'll take that, Ann. It's reasonably broad-based. Enerpac is probably our best proxy for it. We were up 5% core in the industrial tools portion of that business that was -- it was reasonably widespread or broad across Europe, including Spain, Italy, Southern Europe as well, which have been challenges in the past. We saw a decent growth certainly in truck, there's no question about that. In Europe, some off-highway, some ag over there also looked better on it, so I think it is not isolated to 1 particular segment. I mean, we saw it across Energy in Europe actually wasn't bad for the quarter even the softer spot was actually in the Americas. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay, interesting. And just on the truck side, when would you expect to see the negative impact of Euro 6 hit demand or production?

We'll see that in the -- beginning in the third quarter. The pre-buy was very strong in the first quarter. We're going to see a little spillover into the second quarter, and then we'll see the impact of that into the third and fourth quarter, the negative aspect of it.

The volume or that pre-buy, I mean, we're seeing there's an article in a journal today -- I mean, Volvo is one of our customers, they've done very well. We're enjoying that. Our understanding is they will continue to produce these trucks into January as long as the orders are in-house. So we definitely will get a spillover effect within -- interesting anecdote out of our operations in the Netherlands, they are working overtime and working through the holidays to keep up with this stuff, so the demand there is quite strong right now. So we -- it's important for the business, we are expecting growth for the full year, and there'll be some growth in the back half, but clearly, there'll be a bit of economic tail, and we're looking at February, March, April time frame within truck in Europe.

And we won't see -- certainly, we won't see the same level of core sales in the second quarter in Engineered Solutions that we saw in the first quarter. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Yes. And I was just curious whether it'd be literally a December 31 cutoff or whether it would spill a little bit, and I suspect it would spill a little into January.

We're definitely being told it's going to spill over, yes.

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

With respect to the Ag business, can you give us a sense of just kind of what magnitude of strength you're seeing on the Ag side?

Yes. We break it in 2 different pieces. We've had a lot of nice growth because of some new product introductions in Ag in the back half of the calendar year, in the back -- really, the back-half of fiscal '13. That's been coming out of Elliott with the seeder program that we have out there. And that has continued to ramp. We've been seeing the volumes there up 25%, 30% as a result of that new introduction. The more interesting thing, or I would say the change in this past quarter, Charlie, is the rest of Ag particularly with the Weasler. They had a very good quarter. Their backlog was up 15% from the end of the quarter versus the beginning of the quarter and their sales were not up as high as that, that bodes well, I think, for the future here. It was not just Americas, we saw it in Europe as well. There was OEM and aftermarket as well. We're getting some success down in Brazil, as well, as we roll out more product down there and benefit from that Turotest acquisition a few years ago. So this is one of the spots within the portfolio that I've been a little bit pleasantly surprised 90 days into it. I was not expecting to see as much growth as I'm seeing right now.

Yes, so we're seeing that kind of growth, the backlog is growing. And I think the benefit of Turotest and combined into Maxima Tech is really adding value to our customers.

All right. Switching gears, on the Hydratight business, you spoke about the rental part of that being down. And that generally has been typically about 1/3 of that business, correct? I'm just wondering kind of where it is today. And is it a trend issue dragging their rental business down or is it just a function of a broader macro picture where that level's going to be a bit lower for some time?

I think a lot of it, Charlie, is just the mix within the quarter on this stuff. I don't -- we don't see it as any kind of a change or some kind of new trend that's going on. A couple of those big jobs that we talked about did not have as much rental in them at the back-end. They were ramping up on other stuff out there. So it's just a mix issue, and as you know, our rental margins are very high and the depreciation on those within Hydratight, just like the depreciation within Viking, continues on whether that kit is out there generating revenues or not. So the incrementals in both businesses on rental are, like, 80%, 80%, 90%. So it's quite impactful when you just have a weak mix quarter like we did this past year, this quarter.

And a lot of that's driven off the nuclear business, we talked about it over the last couple of quarters where we're anniversarying some of that at the -- going into the second quarter. So we saw the impact of that in the first quarter.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Bob, best of luck. I was hoping to ask an RV question, but too many other things to ask about here.

Why don't you go ahead and ask him what the performance was in RV?

This is the time to ask it, Jeff.

It was up 25%, and it's not because I'm retiring and buying all the RVs.

Okay. Just on Energy. I guess, can you revisit seasonality in Viking because I had thought this quarter is, per your last quarter's comment, was the seasonally strongest. And I think you were guiding to $100 million in revs in Viking. What does that number look like with the deferrals?

Yes. It's a great question on that. I did. I didn't remember, and I went back and looked at the transcript and what I said on that. I think I have to eat a little bit of crow on that, especially when you look at the full year, I mean, we forecasted about $100 million of revenue for the full year. We just came in at $20 million in the first quarter. And you're going to see a similar quarter in the second quarter, a similar range. So you're going to have 40% of the revenues in the first half of the year. The big difference is a lot of the revenue growth in the back half of the year is these big jobs that Mark talked about, with Wheatstone, that have high incremental margins coming through. So when you look at that first half versus second half on it, you put a high incremental margin on that additional $20 million in the second half of revenue. You can see why we're still comfortable with the profit number for the year on that. But there's -- we are expecting a little bit more growth in the back half of this year versus prior year because of some of the new business that they have, the new product lines, being the surveying business, as well as the people business as well. But the big part of it clearly is this Wheatstone that we talked about, a couple of other jobs up in the North Sea that are going to be mobilizing in the North Sea in the next few month or so.

Yes, and just to add on that, we've got the inventory in place for Wheatstone, let's just use that as an example. That's going to be generating about $1 million in revenue per month as it gets ramped up. We've got very high incremental EBITDA margins on that, 70%, 80% on that. So these are the kinds of flow-throughs that we're going to see as these big jobs come up and running. So that again, it was delayed out in the first quarter, but we see that and we're comfortable and confident that it'll come in, in the beginning, the end of this month.

Okay. And then Industrial, I mean, you're kind of starting the first quarter in a hole. And can you just talk about Integrated Solutions comps as we go through the year? And then what gives you confidence in the 3% to 5% growth, and that's still intact in Industrial?

Andy, let me just start off and then you can come in on the back side of it. Yes, let me just mention it, there's 2 parts of the Industrial business, the Enerpac business, the IT Industrial Tool business, which is our traditional MRO business and then the IS business. The Industrial Tool business, if you just peel that out, was actually slightly up in the first quarter. And so we had a good, positive mix there. The IS was down. It was mainly because of some of the larger projects that are on the -- that have gone to completion. We've talked about Novarka which is a Chernobyl project and the High Roller project in Las Vegas. And those 2 have really come off, and we've been focusing on filling the funnel with some new activity, but also selling more of the standard gantries and sync lift systems, which are actually higher margin from an IS standpoint. So that's -- those are some of the major trends going on. And then, Andy, maybe you can follow up with the rest of that.

Yes, essentially when you look at this year, I mean, our first half revenues that we're expecting from IS are in the $25 million range. A year ago, $30 million, but when you get to the back half of the year, we're expecting it to flip-flop, where you're going to see more than $5 million of growth in the back half of the year relative to the first half of the year. So not a big surprise when it's happening. We actually talked about a little bit on the last quarter call. But that's really the dynamics that are going on. If you look at the integrated -- the non-integrated solutions, being the Industrial Tools, and getting into some of the tensioning equipment and whatnot, we did have a growth overall for the -- globally in the quarter, but it was masked by IS.

But are there signals that the traditional Enerpac business is starting to accelerate from an order perspective, or a rebound to kind of get to that 3% to 5%?

Yes, back to those comments that we talked about in Europe, as part of the trend that's coming up in Europe right now, we're up 5% core in the first quarter, in Europe, we were up last quarter as well. There is momentum, I would say, when we kind of did the -- our internal channel check, if you will. I know you do an external channel check on this one. Our guys were probably most optimistic as far as -- right today on the European stuff, because they are just seeing a tremendous amount of quoting activity. We are also seeing good momentum within high-growth markets. China's starting to come to life. We fixed and changed some of the sales organization there as well. India, other markets there as well. So I think we have a pretty good confidence level as far as the balance of the year here.

Our next question comes from the line of the Mig Dobre with Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: You guys covered a lot of ground, so I think I'm just going to shift to some things -- some housekeeping items, if you would. On the Engineered segment, organic growth is decelerating going forward per your guidance and the margin comps are getting a little more difficult. Can you give us any color about incremental margins and the way you're thinking about it for the second half of '14?

Yes. I will take that out. If you can maybe move on to your next question, and I can come back to that. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Then I'm going to ask about corporate expenses. They came in below our expectations, I guess, and they were flat year-over-year. Is flat a good assumption for the rest of fiscal '14 or should we think something different?

I think you're going to...

There hasn't been a lot of deals.

Yes, we didn't have a lot of deal costs at all. People-wise, we're definitely down a few heads right now relative to the prior year. We've got heads -- some heads built in for the balance of the year. So I think you're going to see it come up a little bit, probably into the $7 million, $7.5 million range, up from where we're at this quarter. And just give me 1 second on the Engineered Solutions side. I think you had -- on the margin side there, we did have a very good conversion quarter this quarter versus a year ago. And when you look at the -- where it's coming from, from trucking and ag, that's a good thing as we move forward. I don't think you're necessarily going to see it accelerate from where it's at, but I feel pretty comfortable that for the full year, we're going to be up in Engineered Solutions. And I think we were up 150 or so in this past quarter. We'll be up not as much, not as much.

You're at EBITDA.

I'm at EBITDA margin, yes. I mean EBITDA margin, yes.

We'll report that in '15, that year.

Yes.

In Q4.

Yes, in the quarter, we are up 270 basis points. But at the EBITDA line, we have less at the OP line.

Yes, or [indiscernible] because it's incremental. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: But to be clear, you're still expecting some margin expansion in the back half.

No, absolutely, yes.

Without question.

Yes, the message is you will see growth year-over-year in margin probably not at the same pace. We were up 270 basis points in EBITDA margin this past quarter. It's probably going to be more in the 100, 150 basis point range as we get into the back half of the year.

And Engineered Solutions has a benefit of some of that quiet restructuring that we've done, some of the move to low-cost country that we've done over the past 12 months, and that's going to kick in, in the second half.

Yes.

Our next question comes from the line of Scott Graham with Jefferies.

Congratulations, Bob. The question I had was simply if you could tell us kind of the sizings of these 3 factors that hit Energy, just for my own modeling purposes, base business, sales mix, these cost issues versus the impact of Viking in the margin dilution. Could you maybe give us, Andy, an idea of what each one was or even if you just tell us which was the biggest versus the smallest?

Let me just talk a little bit about some of the higher-level trends that are going on while Andy's thinking through that piece of it. We talked a little bit about the mix with Viking and the fact that we've got a number of larger projects that are delayed to second half. We've got the cost -- it's a fairly high fixed cost base and the volume really drives a high incremental EBITDA margin, and so that's moved to the second half. So that's one piece of the bucket. The other piece was the mix between Cortland and Hydratight as well as Viking. So Cortland was up about 5%, but the mix within Cortland was more rope, which is a lower-margin business in general. So that mix was there. Then there was the piece around some inefficiencies, labor inefficiencies, on some of these jobs that we were talking about, more operational issues that we're on top of and making the appropriate changes for right now. So those are the pieces of the impact within the Energy segment.

When you look at the overall, what happened on a year-over-year basis, we were down a little over 500 basis points at the EBITDA line. You look at that, I would say about 100 basis points of that is just the mix of Viking coming into play relative to what our normal rate normally is. And then of the remaining 400 basis points or so, about half of that was the mix within the product lines, within the Hydratight and within Cortland. We had shifts away from our more profitable business, we had unfavorable mix within there. And the other 200 basis points, Scott, is just, I call stubbing our toes, just some of the operational…

Operational issues.

The performance issues, the cost side and stuff like that. I think the key takeaway from our standpoint is we are absolutely still forecasting back half EBITDA margins in this business in the mid-20s. I mean, this is -- we're not -- it's going to take us to the back half to get back to that level because, I mean, we are up against a seasonally weak second quarter here but nothing has changed our view on that. It's just the way the ball kind of bounced in, in the quarter and stubbing our toe on this. Again, the mix coming in second half, what we just talked about with Viking, goes from a negative to a positive as well.

Right. On that though, isn't it just the basic math that Viking is 100 basis points dilutive to the margin of the segment? And then wouldn't the further math be that the pushbacks of the projects, given the fixed cost structure, is an increment to that, no?

Yes, well, just to reiterate what I just said, I was talking about EBITDA margins. And EBITDA margins were definitely below where we wanted to be within Viking in the first quarter. They were way off of the full year expectation because you've got the depreciation for all of these kits that we are in the process of deploying right now. We own that stuff. That has been depreciated in the first quarter, 0 revenue against it, and that'll be coming on from an EBITDA margin as we move forward. So everything I'm talking about here is EBITDA.

I'm with you. Got it, okay...

You will see Viking go from being a negative mix impact in the first quarter, first half, to a positive, totally flip-flopping the other way in the second half.

Okay. Well, I pray that Karen still counts that as one question, so my follow up would be -- the follow-up question is could you tell us a little bit more -- Mark, you told us a little bit about a shift in the mix of the M&A pipeline. Some of the larger ones, I'm assuming 1 or 2, maybe, are off the board but it sounded like you were saying the quality was maybe better. Does that mean that the quantity is better at the Viking size and below level, is that what you mean? Could you explain that a little bit more?

Yes, we've talked in the past, and you hit it right on the head. We had looked at several larger acquisitions over the past several months and several quarters. And we had talked earlier about the size of the M&A, the average M&A opportunity for us, how there were some smaller ones, we talked about it last quarter, that we're getting more of the smaller opportunities out there, not as many larger opportunities, and that has continued, and we are looking -- we've got the $50 million to a couple of hundred million dollar range, good pipeline across all segments, and several tuck-ins that would go right into the individual businesses. And so that's what I meant by my statements earlier.

Our next question comes from the line of Jamie Sullivan with RBC Capital Markets.

Congrats, Bob, and hopefully, the Bob-isms will remain after you leave.

There will be some Mark-isms, don't you worry.

Good, good. So most of my questions have been answered. Just a couple, on Energy, you talked about – sounds like you talked about some cost reductions and fixing some operational issues. Maybe you can just give us a little bit more detail on that, if there's anything quantifiable in terms of savings maybe you expect to see in the second half of the year?

Yes. And again, we've had a number of operational issues. Majority of them are in North America, and we're working through those. We had some -- we talked a little bit about the mix, but as far as the operational issues, it's just better planning, it's a quote to conversion and really managing that funnel more effectively, and it's pricing management, and taking a look at the way we estimate jobs and our costing models. And so those are the areas that we're focused on and making the necessary improvements to take care of those operational issues.

And is there anything going on with the cost structure itself? I mean, you mentioned a fair amount -- the fixed costs associated with the businesses.

Not as much within, I mean, like, any kind of planned shutdowns. Certainly, there are things that we have visibility on for the whole segment, as a result of integration savings and those sorts of things, with Viking coming on, where we are using our sourcing operation for them, we're combining certain facilities on a go-forward basis. But these are really relatively small in the scheme of things. It's $100,000 here, $250,000 there. There isn't like a $4 million pop that you see in the back half of the year because we close a facility or something. These are all very incremental, small items.

And Jamie, when any of our businesses doesn't meet their commitments, there's a significant amount of work that's done around discretionary costs, variable cost and doing what we can do to more effectively manage that. And so those actions are in place right now within the Hydratight business.

Yes, I think the punchline on Energy and certainly understand all the questions on it, we do not view this as something long term. And we make sure, I mean, we're looking at it, it's short term and we – it's specific to a job winding down, specific to a bad quote that we put out there, specific to just bad execution that we think is short term in nature, it is not systemic that's going to roll into the back half of the year.

That's helpful. And maybe just a quick one on M&A. On the larger deals, is there anything of note on those falling out of the pipeline? Is it challenging integration, valuation? And then maybe just some commentary on how you're looking at the pipeline as it stands today, how bid-ask looks relative to what kind of the whole industrial landscape has been seeing over the last year or so.

Yes, from the deals that we have decided to walk from, there's -- each one is a little bit different, but it could be anything from cultural to parts of the business that we didn't have -- we didn't feel we had long-term growth opportunities to just the amount of -- we talked earlier about one relative to a de-integration and just managing that piece of it. So those are the main areas that we've walked away from.

And largely, this is not really new business. I mean, we had our investor conference in early October. We haven't walked away from a big deal in the last 60 days. I mean, what we were referring to is where's the backlog today versus where it was 90 days ago or 180 days ago. There are just fewer big deals, which were kind of stretches along the way. And it's just -- it's more normalized relative to maybe what we saw in 2012 in terms of the mix of businesses out there. It's just less of these bigger type deals. From a valuation standpoint, your question on that, I mean, we see it a little bit all over the map. I mean, nothing to stand out this quarter. Some are -- they have delusions of grandeur in terms of valuations. Others, deals are getting done in reasonable ranges. But nothing that I would call out as incremental change in the 90 last days.

Good activity in the Private Equity arena. We talked about that at the investor meeting, but there's just a tremendous amount of assets that are in the hands of private equity owners. And these guys have a 3- to 5-year time horizon, and we're seeing a fair amount of churn coming through that. What's good about those kind of deals is there's no emotional attachment to the asset. They're going to monetize it some way, either in a quiet deal with you, like they did with Viking, or in a more public auction.

Our next question comes from the line of James Kawai with SunTrust.

It's on Engineered Solutions. Terrific quarter. Core sales up 15%, but full year guidance calls for up 6% to 8%. And I'm just kind of curious if you could provide maybe underlying core growth, excluding Euro 6? And are we -- is that implicit in the guidance that the second half, we're going to be looking at low-single digit, mid-single-digit growth or we're just 1 quarter in and you're just being conservative at this point?

Yes. I think you've seen the best quarter of the year from ES, double digits. When I'm looking at our forecast page for the balance of the year, I'm not seeing a double-digit out there again. We could do it in the second quarter on this, but it's probably high single digits is what we're looking at, and the mid-single in the following quarters. That is inclusive of – that's all of Engineered Solutions, I don't have truck broken out of that number, or European truck broken out of that number. But I still feel comfortable with that. While European truck will not grow as much in the balance of the year as what we just saw, expect more growth coming out of Ag, we definitely have easier comps as we get into the back half of the year as well. All this destocking that we've talked about for the -- it seems like the last 3 quarters of last year, that is largely done. We're seeing normal production levels come forward here as well on that, so I feel pretty good about decent growth in ES going forward.

Yes, and in general, if you take a look at Actuant in total, if you take a look at our first half versus second half on a historical basis, we're a stronger second half of [Audio Gap] and that pretty much goes through most of the businesses. And so that's going to come into effect as well as we move into this.

Got you. And then just to kind of be explicit on the off-highway exposure, is that -- that has, I guess, been the area of the most destocking. Are you sensing that you're now producing to your customers' end market demand? And as you speak to the OEMs, are their inventories, at least in-house, fairly leaned out at this point? And we're actually hearing from some of your peers that there is actually some upside in the first half, where some of the OEMs are a little bit more confident in standing up with some orders in anticipation of things getting better.

Yes, I think your comment is fair. We think it is largely done. We think the production levels, for the most part, are in balance. With the sell through on that, there are a couple of pockets that are more specialized that might relate to mining, as an example, both here and in Europe, but that's a relatively small vertical on the OEM side for us.

Okay. Great, that's helpful. And then finally, your free cash flow is terrific this year. With the Electrical proceeds in-house, you're kind of headed towards being debt-free at the end of this year. Can you kind of share your thoughts on your kind of mindset relative to being possibly in a net cash position? And maybe address your appetite for share repurchases versus all other options, like acquisitions. I just wanted to understand kind of how you're thinking through the balance sheet and the cash flow as you go through the year?

Sure. Our balance sheet and cash flow is in an envious position. It's great to be in this position at this time. As we look at growth, so from a core growth standpoint, we'll continue to invest in growth innovation internally and M&A from an external standpoint. So M&A continues to be a very important part of our strategy moving forward. We were active in stock buybacks over the past quarter, we have been over the past 18 months. We will continue with that as we move forward as well. So those are the use -- primary uses of capital as we move forward.

I think the punchline I would say is, you shouldn't come away with and you shouldn't walk away with, hey, they're going to be ramping up stock buybacks and as a result of that -- as a result of where we're at now, there is not a change there. We will continue to do buybacks. If the market is more conducive to that, we will step it up, i.e. price and whatnot, but there's not a set goal. I certainly do not expect to be net debt free by the end of the year. I think we're under-levered already when you look at excluding or pulling out the Electrical sale and whatnot. So I fully expect to be deploying capital in acquisitions throughout the year. And that is, by far, our #1 priority, without question.

And Ms. Bauer, there are no further questions at this time. I will turn the call back over to you. Please continue with your presentation or closing remarks.

Yes, I just want to, in summary, just a couple of points to put out. One, I want to thank Bob for his tremendous leadership over the past 14 years. And we just looked at a picture of him today from when he started this in 2000 to recent. And, my god, if that happens to me, we're going to be in trouble. So anyway, on behalf of the shareholders, investors and employees, Bob, thanks so much. I feel we had a good first quarter, strong core sales, plus 5%, led by Engineered Solutions. We're very happy with that performance. Two out of 3 segments delivered improved operating margins. We've delivered EPS in the middle of the guidance range, strong free cash flow of $34 million for the quarter, maintained our earning guidance for fiscal '14. We're focused on improving the results in Energy. The issues are short-term. There is no change from a competitive standpoint or from a market share standpoint. And so we are tremendously focused on turning that around, and we should see those results in the second half of the year. So thanks for your continued confidence and support and have a great holiday season. And I'll pass it over to Karen for a couple of remarks.

Yes, again, just thanks for joining the call. I'll be around all day to answer follow-ups you have. You could see on the slide there, our second quarter call will be held March 19. You can get that on your calendars. And again, on behalf of everybody, a very safe and happy holiday season to all of you. Bye-bye.

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