Lincoln Electric Holdings, Inc. (LECO) Q3 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Lincoln Electric Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vince Petrella, Chief Financial Officer of Lincoln Electric. Thank you, sir. You may begin.

And thank you, Dan, and good morning to all of you joining us today. Welcome to Lincoln Electric's 2012 Third Quarter Financial Results Conference Call. We released results for the quarter and the 9-month period this morning prior to the market's open. Lincoln Electric Chairman and Chief Executive Officer, John Stropki, will start the discussion this morning and provide commentary on the quarter. Also joining the call today is Chris Mapes, Lincoln's Chief Operating Officer. Chris will have comments on the segments and after Chris gives his remarks, I will review in more detail the numbers. A slide presentation is part of today's discussion and is available on the Lincoln website under the Investor tab as part of today's webcast. The presentation will also be posted along with a replay of today's webcast on the company's website later this afternoon. But before we get started, let me remind you that certain statements made during this call and in our discussions may be forward-looking, and actual results may differ from our expectation. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the company's operating results. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. Now let me turn the call over to John Stropki. John?

Thank you, Vince, and good morning to everyone joining us today. Lincoln's operating results for the 2012 third quarter were excellent. We saw significant margin expansion and generated very strong operating cash flows. This strong operating performance was achieved even as the North American economy experienced slowing growth rates and we witnessed a weak macroeconomic environment in many of our international markets. Sales on a consolidated basis in the quarter, including a reduction of $21 million caused by FX translations, were down 0.6% to $697 million. Without FX, sales were up 2.4%. Operating income increased to 18.5% to $88.7 million, or 12.7% of sales. And adjusted operating income increased 22.6% to $91.8 million or 13.2% of sales. Net income was up 16.6% to $64.8 million or $0.77 per diluted share. And adjusted income increased 21.5% to $67.5 million or $0.80 per diluted share. These results reflect the hard work of our management team and our global workforce and their combined focus to our 2020 long-term vision, which focuses on global growth and operational improvement strategies. Before Chris Mapes takes over the results of the Lincoln operating segments, let me provide a quick overview and comments of what we see happening in the industrial segments. In Heavy Fabrication, the construction equipment industry worldwide is experiencing a slowdown. In addition, overproduction during the last quarter of 2011 and in the Q1 2012 have resulted in an overstock condition with high inventories, especially in the China market. Also following commodity prices are affecting the mining industry segment, and some manufacturers report that they are starting to see some order cancellations and pushbacks on the delivery dates for new equipment. As a result, heavy equipment manufacturers are announcing reduced build schedules and rolling plant shutdowns in response to lower demand for both earthmoving and mining products. The market has slowly started to reshape its size and is getting aligned to the expected growth rates of the future. However, we believe that the long-term prospects in this segment continue to look very promising. In the Automotive segment, the global market demand for light vehicles is softening, the exception being in the U.S. where sales remain quite strong. In Asia, China is also slowing, but overall, China will still show modest growth this year over last year, and this year-over-year growth trend is likely to continue for many years. In Europe, the automotive market, like the lingering euro-zone concerns, is deteriorating with demand reaching new lows. Despite the softer demand in this segment, we continue to expand and improve our Automotive customer relationships around the world and have recently hosted a number of important high-level visits for our key Automotive customers at our main manufacturing campuses around the world and at our R&D headquarters here in Cleveland. In the global Offshore segment, investment by the international super majors and the nationalized oil companies continue to grow double digits through Q3 2012. This activity is led by the emerging economies, like Brazil, who have set off on an aggressive path towards energy independence and are using local content requirements to aid their local manufacturing and construction economies. In these growth areas of the offshore construction market, our subsidiaries like Lincoln Electric Brazil are benefiting from a strong focus in this segment. And we are clearly becoming the preferred offshore shipyard equipment provider with good prospects for excellent consumable leverage. Today, our strategy has measurable success, as we have realized significant orders for new equipment and increased request to qualify our new Offshore focused consumable solutions with a number of leading subcontractors supplying the key exploration and production companies in Brazil and throughout the Latin America region. In the Pipe Mill industry segment, we have held a number of training seminars and visits with key customers in all regions of the globe, working to help them upgrade their facilities and to provide Lincoln welding solutions to meet their needs. Orders from a number of regional customers are increasing. In Russia, we received a significant pipe mill order for welding consumables, and we are seeing relatively strong activities from the pipe mills in India. In the Middle East, customer bookings continue to be strong, including a large equipment order for Uhrhan & Schwill, our German subsidiary. The Process & Power Generation industry segment continues to see significant movement in a number of key subsets. We had a successful quarter with the execution of our key projects across the spectrum of the Power & Process sector. In spite of the significant headwinds in some key markets, like wind power in the U.S., our strong technical representatives in North America and throughout the world, combined with our new products and welding solution offerings, continue to provide Lincoln with a competitive advantage to actively leverage sales at large, highly technical projects. On a global basis, we have achieved increased sales to energy-related projects all around the world. That's a brief look at the industry segments. Next, Chris will report on the operating segments.

Thank you, John. Let's start in North America. There continues to be overall uneasiness about the macroeconomic landscape due to the international weaknesses. However, North America continues to grow despite these headwinds. Third-party sales improved 13.1% from the prior year to $390 million. The positive impact from acquisitions was significant, as we continue to execute on our strategy of aggressively pursuing strategic opportunities. As you know, since 2001, we've made 5 acquisitions in North America. In 2011, we acquired Arc Products, Techalloy and Torchmate. Arc Products, located in San Diego, California, manufactures orbital TIG welding systems. Techalloy, with operations in Baltimore, Maryland, manufactures nickel, stainless weld wire and electrodes. Torchmate located in Reno, Nevada, manufactures cutting tables. During 2012, we acquired Weartech and Wayne Trail. Weartech, located in Anaheim, California, and Port Talbot, Wales, was acquired in March and manufactures cobalt-based consumable products. Wayne Trail, located in Fort Laramie, Ohio, was acquired in May of this year and manufactures integrated automated systems. These 2 acquisitions made up the majority of the 7.8% sales growth related to acquisitions. As we have discussed before, we follow a number of economic measurements that affect our industry. Industrial activity representing key measures such as industrial production and capacity utilization across factories in the United States are running slightly ahead of last year and flat with second quarter 2012. Total manufacturing industrial production in the U.S, excluding the high-tech segment, was trending 2.8% ahead of 2011 as of September 2012, while capacity utilization was running at approximately 77%. The Purchasers (sic) [Purchasing] Managers Index and the Export Orders Index improved slightly in September after several months of slight decline. Looking ahead at Europe, Russia, Africa and the Middle East, sales in the third quarter were down 9.4% to $116.3 million compared to prior year, excluding FX impacts. This was primarily driven by reductions in general-purpose machine sales, which we believe is reflective of the economic environment and the general fabrication market throughout the European region. Excluding foreign exchange impacts, our year-to-date European sales were down 1.3% compared to 2011, with decreases in Spain and Southern Europe being offset by positive year-to-date growth in the U.K, Africa and the Middle East. Year-to-date regional sales of equipment products remain up over prior year, primarily driven by Lincoln's inverter-based power supplies, including the Power Wave technology products that continued to be in high demand for their ability to optimize the arc-welding process. In Q3, our sales of consumable products in the quarter were ahead of prior year as a result of demand for our European alloy consumables. The consolidation of our Russian manufacturing operations is on schedule and expected to be completed by early next year. Significant cost reductions, product optimizations and efficiency improvements will result, which we are confident will provide us with a strong and sustainable platform from which to continue to leverage our global product offering to the Russian welding market. Demand for our products remains strong in the Middle East, where sales, volumes and margins are well ahead of prior year. We expect to be established as a legal entity in Dubai in Q4 and are confident that this will accelerate our double-digit growth in this region. This is another example of following our global expansion strategy of leveraging a solid, imported product base with infrastructure that enables us to access more local markets in local currencies that are often constrained or even inaccessible from a purely imported approach. Asia Pacific. In Lincoln Asia Pacific during the third quarter, results reflected the economic headwinds prevailing, there with Q3 sales posting a decline of 22%. Ongoing weakness in several key geographies and segments continued to challenge our revenue base. However, our restructuring and price management efforts resulted in an additional progress in improving profitability levels in this tough environment. In China, the Construction Equipment and Shipbuilding segments, our 2 largest served markets, remain very weak, with most major customers reporting production levels well below prior year. The Automotive segment has remained stable but below our expectations, while the energy and Offshore segments are still showing some strength. Throughout the quarter, we made important progress in reshaping our manufacturing operations throughout the region and strengthened our commercial platform. When markets in the region do begin to recover, we believe we're well positioned to see disproportionate improvements in the results of our Asia businesses. In the South America welding segment, on a year-over-year basis, Lincoln sales increased slightly by 0.9% to $44.5 million with strong growth in Venezuela offsetting some weakness across other geographies in the region. On a sequential basis, sales for the quarter experienced a sharp increase of 20% from the second quarter of 2012, led by sales in Venezuela and Colombia. Weaker global demand continues to impact expectations of 2012 GDP growth for the region. Brazil, the region's largest economy, is now expected to grow between 1.5% and 1.8% in 2012, down from 2.4% expected just 3 months ago and 4% expected earlier in the year. The rest of the regional economy's expected growth rate remains within 3% to 5%. As in the previous quarter, we continue to see significant investment and growth in some of our key industrial segments, specifically in the energy segments of oil and gas. From exploration, extraction to transportation as well as all types of power generation, the demand for new energy sources continues in this market. Peru and Colombia have some large pipeline projects that are using our total welding solutions offering for both equipment and consumables. Though automotive production remains flat in the region, there are a number of new manufacturers entering Brazil, and our global Tier parts supply partners are following them using our patented Power Wave technology and welding consumables. Our Harris Products Group. The Harris businesses had net sales for the quarter at $81.9 million. This result is 4.9% lower than the previous year sales results, despite the increase in volume in all channels of the business. Variable metal prices, primarily copper and silver, negatively impacted global consumable sales along with negative impacts from foreign currency translation, which affected our global equipment business. Consumable volumes were up 7.8% due to strong international orders, predominantly in the Middle East and Latin America. The equipment business had volume increases of 6.6% worldwide. Increases in this segment came primarily from our international sales, which includes new business in South Africa, the Middle East and the Nordic region in Europe. The Consumable business, which is predominantly brazing and soldering alloys, is manufactured in our Mason, Ohio manufacturing plant. And this month, the Harris Mason plant was selected as a finalist in the Best Plants Program held each year by IndustryWeek. This recognition coincides with the recent award where they received the Lincoln Chairman's Award for Environmental Health and Safety excellence, among all of the Lincoln Electric facilities globally. And our company would like to congratulate them on this recent achievement. That's a roundup of the operating segments. Next, Vince will provide more financial details.

Thank you, Chris. Our third quarter 2012 financial results reflected a significant quarter-over-quarter improvement in operating earnings from the third quarter of 2011. Consolidated sales were down slightly, partially affected by foreign exchange translation decreases of $21 million. However, operating income improved to $88.7 million, an 18.5% year-over-year increase. The third quarter did have one less billing day than the prior year, an approximately 1.6% detrimental impact to sales. The significant increase in operating margins, in spite of flat revenue, is attributable to an improved sales mix as well as our efforts to pay our less profitable business particularly in Europe and Asia. On a consolidated basis and compared with the third quarter of 2011, volume decreased reported sales by 2.2%. Pricing increased sales by 80 basis points, and acquisitions contributed an increase of 3.8%. Foreign currency affects decreased sales by 3%. The third quarter gross profit margins increased to 30.6% compared with 26.4% in the comparable prior year period. The increase in gross margin resulted from improved pricing and favorable sales mix. LIFO credits of $2.3 million were recorded in the third quarter, bringing the total LIFO credit for the 9-month period to $2.4 million. SG&A expense for the quarter was $121.6 million or 17.4% of sales, compared with the $110.6 million or 15.8% of sales in the prior year's period. The increase in SG&A expense was driven by higher bonus accruals and increased costs from acquisitions. Foreign currency translations decreased reported SG&A expenses by $3 million in the quarter. Operating income for the quarter at $88.7 million was 12.7% of sales compared with $74.8 million or 10.7% of sales in the same year-ago quarter, an improvement of 200 basis points. The quarter included rationalization charges of $3 million, and these charges include actions taken in Asia to restructure Australian manufacturing operations, in Europe to combine 2 Russian manufacturing plants and to rationalize a plant in Italy and in North America to consolidate 2 plant operations. We expect the rationalization actions to result in $9 million to $10 million of annualized cost savings, most of which will be fully realized in 2013. Excluding these special items, operating income was $91.8 million or 13.2% of sales. Net income for the second quarter -- third quarter, that is , was $64.8 million or $0.77 per diluted share, compared with a net income of $55.5 million or $0.66 per diluted share in the 2011 third quarter. That's a 17% increase in diluted earnings per share. Excluding special items, net income was $67.5 million or $0.80 per diluted share in the third quarter and that's a 21% year-over-year increase. The effective tax rate for the third quarter was 28.8% compared with 27% in 2011. The effective tax rate is higher than the prior year's rate primarily because of the mix of income that was earned in higher tax rate jurisdictions. The year-to-date effective tax rate was 30.8% in 2012 for the 9-month period. Now moving to the segments. On a year-over-year basis, sales in North America were up 13.1% as volume contributed 2.7%, price increases represented 2.7% and acquisitions added 7.8%. North America improved its adjusted EBIT margin in 2012 to 16.9% of sales, a 280 basis point improvement over the prior year. Volume leverage and good cost control drove this margin expansion. Sales in Europe were down 18.6% and volume decreased sales by 8.9%. Prices declined slightly over the prior year by 50 basis points. Foreign exchange decreased sales by 9.2%. The volume declines were more pronounced in Southern Europe and Russia with more stable environments experienced in the U.K., Germany and France. Foreign exchange impact was caused by a significant year-over-year weakening of the euro against the dollar. Excluding special items, Europe achieved an EBIT margin of 7.9% of sales, an improvement of 10 basis points. The higher margins were the result of improved product mix and a better cost-price relationship. In Asia, on a year-over-year basis, sales in Asia Pacific were down 22%, volume contributed 19.4% of this decline, prices decreased sales by 1.1% and foreign exchange decreased sales by another 1.5%. The volume declines, as Chris noted, were primarily related to the weakness in Shipbuilding and the construction and related markets in China. Asia Pacific's adjusted EBIT margin was 2.6% in the quarter compared with 1.9% in the prior year. The improvement in EBIT margins was the result of a strong performance in Australia as well as an improved mix. Sales in South America were up 90 basis points, but volume reduced sales by 2.8%. Price increases contributed 11.6% to sales and foreign exchange decreased sales by about 7.9%. The volume decreases were the result of a softening demand in most markets outside of Venezuela. Price increases in South America are above the group average because of higher inflation rates, primarily again in Venezuela. Excluding special items, South America's EBIT margin increased to 17% of sales compared with 9.1% in the third quarter of 2011. A very strong operating result in Venezuela drove this margin improvement. A future devaluation of the Venezuelan currency will result in foreign exchange losses and lower earnings, prospectively. Compared with 2011, sales in the Harris Products Group were down 4.9%. However, volume increased sales by 7.5%, price decreases reduced sales by 8.4% and foreign exchange decreased sales by 4%. The volume increases were experienced across our product portfolio in both equipment and consumables, particularly in the international market. Price decreases were largely related to the decrease in metals cost, primarily silver and copper, from the prior year's same period. The Harris Products Group improved its EBIT margin by 360 basis points to 9.2%. The strong volume increases in the equipment product line as well as good SG&A cost control led to these margin expansions. Operating activities generated $82.5 million of cash flows in the third quarter, compared with $84.8 million in the same period last year. The quarter's operating cash flows were reduced by a $56 million income tax deposit related to a Canadian tax dispute. Excluding this deposit, operating cash flows would've been $138 million in the quarter. Cash flows for the quarter reflected improved year-over-year working capital management as well as higher earnings. Year-to-date operating cash flows totaled $243 million. The company closed the quarter with a cash balance of $341 million and a net cash balance of $320 million. The company invested $39.3 million in capital expenditures in the 9-month period. We now estimate a 2012 capital spend of between $50 million and $55 million for the full year. Through September 30, we have contributed $53 million to our U.S. pension plans and expect to contribute a total of $62 million for the fiscal 2012 year. During the quarter, we paid cash dividends of $14.1 million and $42.5 million for the 9-month period. Our weighted average shares outstanding for the quarter ending September 30, 2012, were 83,916,000 shares. Finally, we purchased $20 million of treasury stock under our existing share repurchase program in the quarter and $60.2 million for the full 9-month period. With that, I would like to open the call up to questions. Dan?

[Operator Instructions] Our first question comes from Joe Mondillo of Sidoti & Company. Joseph Mondillo - Sidoti & Company, LLC: First question, just regarding the South America segment. You talked about how the Venezuela margins really propped that segment up. Could you just give a little more color on that and how big does Venezuela make up of that segment? And what you sort of expect looking forward?

Okay. Well, first, Venezuela is a hyper inflationary economy with a government-controlled exchange regime. So that means there's an official rate, and that rate is 4.2%, and then there's an unofficial rate, and that rate is now somewhere north of 12%, 13%. And so what that means in terms of operating our business is that we operate under the premise that we would price our products more in line with the unofficial rate. And that unofficial rate has moved significantly and has accelerated upward in the past 6 to 9 months. What that means is that we're raising our prices very rapidly there to try to maintain a very high margin, realizing that eventually there will be a devaluation in the local currency, the bolivar. And so looking forward, we believe that certainly in the near term, the Venezuelan government and Chávez will need to revalue that currency and devalue the currency significantly. Depending upon what that devaluation might be, our earnings will be compressed from that 17% EBIT margin that we achieved in the third quarter. And then secondly, we will need to take a relatively significant foreign exchange loss as a result of that devaluation. There is a great deal of speculation of when that will occur. Most recently, many of the commentators on the Venezuelan economy has said that once Chávez was reelected, that sometime after his election and perhaps early in the first quarter of next year 2013, we will see that readjustment in the currency. Joseph Mondillo - Sidoti & Company, LLC: Okay. So is it fair to say that the fourth quarter could be up near this middle-teen margin until maybe early next year, when we start seeing that sort of turning down to a more normalized 8%, 10% range?

Yes. As long as the currency doesn't devaluate, we don't see anything in the Venezuelan economy or broadly the South American economy that will take us off a higher type of EBIT margin in that kind of a range. Joseph Mondillo - Sidoti & Company, LLC: Okay, great. And then second question, in terms of the Asian market, you saw a pretty big sequential downcline and you described that as being the Shipbuilding and just overall activity in China. Sort of directionally, how are you looking at that part of the business? Are we expecting sort of stabilization around this range? Or do you expect further deterioration or how are you looking at that?

Well, that's not an easy question to answer, Joe, but I would say that most of the economists that we follow and most of the commentary that we see coming out of China is probably more positive than negative, from the standpoint that they're going through this power transition and most people believe that they'll want the new premier to get off on the right foot in terms of the economic model that's in place. But either way, upward or downward, is pretty speculative at this particular point in time. And I think the best metric to really follow what's happening in China and even on a global footprint is what's going on in the steel industry, particularly there. My view is, it has stabilized and they seem to be increasing the production schedules slightly. So we're mildly optimistic that the thing has bottomed out. But as you know, there are a lot of dynamics that go into that market and none of which are within our control.

I would just add to that, Joe. In terms of the declines in the third quarter on a year-over-year basis, those are relatively consistent with what we saw in the second quarter. So our view would be that it hasn't been a material continual deterioration, but there has been a trending slightly down third quarter versus the...

And maybe just one follow-up for it, Joe, is that we have recognized that it's not likely that the Shipbuilding industry is going to have a material turnaround in the short order. So we're really refocusing our sales efforts and our marketing efforts looking at those segments, which we think will do better in this softer China economy.

Our next question comes from Walt Liptak of Barrington Research.

I wonder if we can kind of continue the question throughout, I guess, that talked about Europe and maybe and maybe not China bottoming out, what do you think about Europe? Your volumes year-over-year were -- the 8.9% volume decline was a little bit better than last quarter, right, net down 9.1%. I wonder if Europe, you think, is bottoming out.

Yes, Walt. This is Chris. We just recently completed a broad business review in Europe over the last several weeks. And although certainly there's still some caution around various segments across the European community, I do think that we feel confident that we've probably seen the significant portion of that compression across the segments that we're participating in. And then we've seen some strength in some of our higher value-added Power Wave products and some opportunities, especially in Russia. So I think it's unfortunate. It's much like John's comment towards Asia, there are a host of elements that could become more detrimental relative to the European solution for the euro crisis and a couple of other elements there relative to leadership within a couple of those countries. But I feel that we've probably seen the significant compression in those markets and actually begin to see some stabilization there quarter-to-quarter.

Okay. Was there any discernible trends during the quarter, where one month may have been better than another? And how did you end the quarter? Was it better than how you entered it?

I don't think so. August is always a very weak month in the quarter in Europe, as you know. But I wouldn't say that there was any discernible trend that would give us a better view of anything other than a stable and slightly declining environment in the fourth quarter.

Just as a follow-up, Walt, if you remember, our European segment includes Russia and the Middle East and Africa. And while the European continent surely has issues that are being addressed, that are likely to be addressed for some time, we've seen some very positive trend lines in the Middle East, some very positive trend lines in Africa. And we're quite pleased with the progress that we are making in consolidating the businesses in Russia, that Chris touched on in his prepared remarks. Very soon, we'll be operating one plant instead of 2. That will come with some nice headcount reductions and also a reduction in rent that will help improve the margins in our Russian business. And we also think we're getting some very good traction in establishing the sales organization there that look more like a Lincoln sales organization than that, that we inherited from the acquisitions that we made.

Okay. All right, that sounds good. Vince, I wonder if you could -- in your commentary about Europe, I think you were talking about profitability. You've mentioned mix and price costs as 2 of the things that were better this quarter. I wonder if we can get a little more color on that.

Well, the mix is simply the shedding of some of the business that we had in Russia that was unattractive to us, as well as the mix in the product portfolio towards our equipment line as compared with our consumables. On the price costs side, raw materials are continuing to slide in -- particularly on the steel purchases around our world, and certainly, Europe is no exception to that. And so there's an element of that as well in our improved margin in the face of a 9%, 10% decline in volume.

Okay. And then if you don't mind, I'd like to ask one more. Just about -- if your international businesses look like they're bottoming, and certainly, the profitability is improving. North American volumes decelerated again from earlier in the year. And are you thinking of this as -- are we bottoming out in North America, too, in terms of that deceleration? Or how are you thinking about North America?

I think, Walt, there are a lot of people sitting on the sidelines in term of equipment investments. I think everybody's concerned over what's going to happen with the election and the outcome, both of the Presidential election and the balance of power in the Congress and the Senate and then the House and what that might mean in terms of how and when the fiscal cliff issue is addressed. So there's -- I believe there's pent-up demand. When that demand is released, I think, will depend a lot on what happens in the election. Clearly, these aren't the best of economic times in the U.S., and it's, I think, evident in a lot of sectors. But the U.S. is clearly the strongest global economy right now, and we're hopeful that the outcome of the election will allow us to take advantage of that.

Okay. Did you see any kind of inventory drawdown during the quarter in North America from distributors?

I don't think so. No, I think we've had those questions a lot. Our distributors I think were on a pretty lean operation. We are very efficient in resupplying them. We have 95%-plus same day kind of delivery. We have a number of warehouses that are strategically located. So we don't see big inventory builds or downgrades based on short-term economic models.

Our next question comes from Brian Rayle of Northcoast Research.

Most of the questions on the sales trends have been answered. But I was just wondering with the slowdown you're seeing more outside the U.S., if this changes any of your thought process on acquisitions, are people more likely to deal, less likely to deal? And if so, where they're targeted?

Well, I'll certainly make sure that we make it clear that it certainly doesn't change our opinion about continuing to be an acquisitive company, as we expand our portfolio and continue to execute on our 2020 vision that we've shared with all of our employees in the market. I'm not sure at this point that necessarily the economic activity that we see out there has significantly changed the market's perspective on acquisitions or whether we have any more market participants that are interested in potentially entering into discussions. We are very active globally. We will continue to be very active globally in identifying and finding those products, those markets and those other strategic values that we might be able to find from properties or people around the world. And I certainly would hope that these economic shifts would create more opportunities, but I certainly can't share with you today that I feel that that's necessarily the case.

Brian, it just makes valuation that much more difficult. I mean, most people that are selling their businesses or companies that are selling their business like to paint a very pretty picture about what the future is going to look like, but there has to be some sense of realism in that. And I think that we've demonstrated for many years now that we can be a very patient and we're a very diligent acquirer. We pay fair valuations but we won't outreach the fair valuation for any short-term benefit that it might provide.

That was kind of what, I guess, what I was driving at was we've seen in some other markets, people's expectation of the long-term viability or -- not viability, but profitability of their businesses make the acquisition market a little more, I guess, liquid than what it's been in the past. I was just kind of wondering where that puts you guys, which, I guess, has really not changed.

Well, we've -- we operate businesses all around the globe. I think we are as sensitized as anybody to what the economic conditions are, what the short- and near-term futures look like. We know how to make money in welding businesses, and we know when we acquire companies, what we can do to turn around their model. And we've demonstrated that with a number of acquisitions that Chris talked about here in North America, and we've demonstrated that in a number of acquisitions on the global footprint. And we will stay true to our course and our convictions as we look to acquire companies.

Our next question comes from Liam Burke of Janney Capital.

John, in your earlier comments, you spoke about the general outlook on the Automotive industry worldwide, particularly Europe being weak, not surprising. But you did mention that your relationships are improving. Could you give us some sense as to why the Automotive customers are coming more towards you, implying that it's at the expense of competitors?

Yes, Liam. I think there's a major shift in what's happening in the Automotive segment. I was in Europe 2 or 3 weeks ago and visited all of the major manufacturers in Germany. And a very consistent theme or themes; one, is automation is absolute in terms of how cars are welded today and very sophisticated automation. And we can play exceptionally well in that with our power source technology that most other companies do not have and, more importantly, don't have the service structure behind to support. And then secondly, the consistency of our welding consumables fill a demand where you need exceptionally high uptime in order to be successful in these automation endeavors that the companies are going through. And other particularly local, small, family run manufacturers of welding consumables can't offer that kind of consistency and global support. And then the third, and which I think is even as, if not more, significant, we are the only company, from my perspective, that can offer a global service and quality, consistent, product in any location where automotive companies are expanding around the globe. So we're the preferred supplier for all 3 of those reasons, and we are gaining significant traction in that segment and at a very profitable pace.

Our next question comes from Stanley Elliott. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Quick question. Did you all mention what the exports were in the quarter relative throughout the business? Was it up, down, et cetera?

No, we didn't. But they were flattish out of the U.S. on a year-over-year basis. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: And when I think about the pricing environment, you talked about the raw materials being a benefit in the quarter to margins. But as we're looking at expectations through the remainder of the year and into 2013, how difficult do you envision it being able to pass through pricing if you have a raw material kind of deflationary type environment? Or is this a situation where your margins can continue to benefit from the mix improvement that you have within the company and also the prior restructuring efforts?

Well, Stanley, I would say that if you look at our sales mix over the past several quarters, you will see, sequentially, that the welding businesses around our world have narrowed their year-over-year price improvement profile. And I believe that, that will continue going into the fourth quarter and into next year. It'll become increasingly more difficult with the macroeconomic backdrop in terms of declining volumes in the international sector, as well as more difficult comps, from a North American perspective, for volumes to provide the backdrop for price increases. So that, coupled with continuing declining important raw inputs, would suggest that as we go forward, that, that trend of narrowing price increases in our welding model will continue. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And as far as energy, how big a piece of that, of your overall portfolio, is that now about 25%, something like that?

Yes. We would estimate 20% to 25%. Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division: And then finally for me, you all had mentioned the significant Pipe Mill order in Russia. When will that start to flow through into the numbers?

Well, it's a consumable order for a fairly large project, and we're filling those orders right now will be through fourth quarter and maybe a little bit into the first quarter. But the activity in Russia has picked up nicely with the pipe mills, and that's positive news for us. A lot of the pipe laying there takes place in the winter months because they need it to be frozen tundra to get the equipment in and out of there. And you would think it would be the summertime. It's really a winter cycle that's most fulfilled.

[Operator Instructions] Our next question comes from Steve Barger of KeyBanc Capital Markets.

John, you started the call with a walk-through cement market conditions that were cautious for heavy equipment and mining machines. We've all heard about lower production for the next few quarters. I'm wondering, are you guys really proactively adjusting your own plan? And where, specifically, in some of the regions to get production and inventory in line? Are you flexing hours or anything like that?

Yes. It doesn't require a major shift for us. I mean, these are mostly consumable issues. And so we'll build -- slow down the build schedule on consumables. But as we discussed a lot, I mean, we -- it just -- we build to order almost, on the welding consumable sides of things. So yes, I mean, we would reduce our production levels in half in places like China, where there's clearly less demand.

Should we be thinking that, that drives any margin pressure in the near term? Or can you kind of adjust your cost schedule in line with that?

Well, we've -- it's all a matter of relativity and degrees. And so I think we've done a very good job, Steve, during the course of this year, particularly in the international arena, adjusting our productive labor and our costs to align ourselves with existing volumes. Europe, volumes down 9%, 10%; margin expansion, I think they're down 22% margin expansion. So we're every day tweaking and adjusting our cost structure to align it with the world's capacity requirements. We're still in a positive situation here in North America. But we have demonstrated in the past, time and time again, that our North American business is probably our most flexible cost relationship of any business in the world. But there is a time where volume declines can exceed our ability to take out costs. And there is a baseline, a fixed overhead that cannot be removed, unless you start making bigger decisions on plant consolidations. But we like what we've done. We think, in this kind of environment, that we can continue to put positive results on the board, but it depends on much more volume deterioration we have going forward.

Got it. I guess though, in North America specifically, just volume and price were both positive. But are you seeing -- I guess, is the decline in volume that you might be seeing in the North American markets moderate enough that you feel like you're in a good position to be able to stay in front of it? Or have you seen indications that things could slow more rapidly?

First off, Steve, there weren't declines in volumes. We're still growing. It's a deceleration in the rate of growth. But we have solid orders and revenue levels in the third quarter as compared to the second, as well as, certainly, the prior year. So we're not in a contracting situation here in North America. The business is stable and still growing, albeit at a more modest pace. And then -- and certainly, the comps are difficult and will be difficult for the next few quarters.

Yes, I know. I meant for the whole company. Obviously, you had good volume and price in North America in the quarter. Of the $27 million in acquisition revenue contribution in the quarter, can you split that out between Wayne Trail and Weartech?

Well, Wayne Trail is about half of it.

And then Weartech is the bulk of the remainder. We do have Torchmate and Techalloy, that are contributing this year that weren't contributing last year. But roughly speaking, Harris -- or Wayne Trail is about half.

And EBIT contribution, in general, from the acquisitions? I want to ask you to break it out by individuals.

I don't have that at my fingertips in terms of EBIT contribution. But I would tell you that the -- at this time, there is a detrimental impact between the acquisitions on the core business of 40 basis points in the quarter. So our EBIT margins are 40 basis points lower on a North American basis, if you blend in these acquisitions.

Got it. That's great. Last one for me. Is there typically an impact, a positive benefit from cleanup or rebuilding after a big hurricane or storm comes through? Does that give you a bumper? Or how should we think about that?

I think it's going to depend on what kind of damage. I would expect construction activity in the east coast is clearly going to have to pick up. I mean, there have been a lot of destruction of homes and highways, and I think a lot yet to be known. So the construction activity is going to pick up there. What short-term impact that's going to have is difficult to say. If you remember the hurricane in the Gulf Coast area, we got a tremendous benefit because there was a lot of destruction of manufacturing assets from a lot of our large coastal customers. I don't expect that in New Jersey or New York. There aren't heavy fabrication or manufacturing facilities located there because of the cost elements of it. But I would assume there's going to be a lot of contractors who lost manufacturing assets, and they'll be looking to replace those. And clearly, they -- the insurance companies will pay for that. So there should be some moderate benefit, but nothing like what we experienced, I think, along the Gulf Coast a few years ago.

Our next question comes from Jason Rodgers of Bake -- Great Lakes Review.

Looking at your opportunities now in Dubai with the local market presence, I wonder if you could talk a little bit about that and how large these opportunities might be.

Well, I think the important thing is to recognize the strategy associated with our further development of the products and services that we provide into the broad Middle East marketplace. Dubai has been known and is currently a central hub for commerce for many elements of that region. By us expanding our presence by placing a legal entity in Dubai, it's also going to allow us to put more feet on the street. It's going to allow us to expand our presence and our products and services in those key markets. It's going to allow us to more easily have product there on-site for distributors, as well as OEMs, that have immediate demand. It has been more challenging for us to meet some of those needs as we've been a market participant in that region for many, many years. So this is not a -- this is just an acceleration of our strategy and our presence in that marketplace. I'm certainly not comfortable in trying to estimate what that impact will be. But we're confident that this will continue our ability to show very significant growth in our business in that region, which we've been experiencing there, really, for the last several years.

One other positive element of our strategy in the Middle East and headquartered in Dubai is the fact that we have substantially grown our headcount there to take advantage of the opportunities that exist in many of the countries in the Middle East and in Africa. But unlike a lot of our international competitors, we've done it with local people who are very accustomed to the local countries of which we're doing business with there. So they speak the language. They can move around freely and not have some of the challenges that expats, be they European or U.S., would have. So we're very confident in what we've been able to do and the great talent that we've been able to acquire in that region. It's going to fit our model of value-added selling in a very professional and dynamic way.

Okay. And then looking at the tax rate, assuming there's no significant changes in the international markets, would you expect your tax rate in the fourth quarter to be around the same level as the third?

No. That's why I mentioned what the year-to-date rate was at 30.8%. That would be a better indicator, at the end of the third quarter, of what the full year and fourth quarter rate might be. So I would say that a higher rate than the third quarter will likely prevail, something between 30% and 31% would be a good estimate at this point in time.

Okay. And then looking for -- into 2013, do you have any early estimates for CapEx?

Well, at this point in time, we're in the process of completing our operating plan for 2013. I wouldn't expect us to be in excess of what our depreciation and amortization is for this year. So it'd be somewhere around $55 million or $65 million, if I were to give a broad estimate for next year.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Well thank you, Dan, and thank all for joining us on this third quarter call. We're looking very much forward to talking to you in reviewing the fourth quarter and full year, sometime towards the end of February 2013. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.