Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Karen Bauer - Communications & Investor Relations Leader

Robert C. Arzbaecher - Chairman, Chief Executive Officer and President

Andrew G. Lampereur - Chief Financial Officer and Executive Vice President

Analysts

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Charles D. Brady - BMO Capital Markets U.S.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Matthew W. McConnell - Citigroup Inc, Research Division

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

R. Scott Graham - Jefferies & Company, Inc., Research Division

Actuant (ATU) Q1 2013 Earnings Call December 19, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, December 19, 2012. It is now my pleasure to turn the conference over to Ms. Karen Bauer, Actuant Director of Investor Relations and Communications. Please go ahead.

Karen Bauer

Good morning, everyone, and welcome to Actuant's First Quarter Fiscal 2013 Earnings Conference Call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; and Andy Lampereur, Chief Financial Officer.

I would like to point out that our earnings release and the slide presentation supplementing today's call are available in the Investors section of our website.

Before we start, let me offer the following cautionary note. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings. [Operator Instructions]

And with that, I'll turn the call over to Bob.

Robert C. Arzbaecher

Thank you, Karen, and thanks for joining us today on our first quarter earnings call. The first quarter was more challenging than we expected going into the quarter, particularly from a core sales point of view. While Industrial and Energy continued to see positive growth, we saw significant declines in Engineered Solutions in on- and off-highway vehicles, as well as in Electrical, notably in the solar market.

As Andy will explain, an insurance recovery and favorable effective tax rates helped us mitigate most of the margin and EPS impact of the larger-than-expected sales decline. We responded to weaker conditions by controlling the things we can control, namely our cost structure. We pulled the trigger on a number of contingency plans we had in place, which included both structural and temporary cost actions. I'll provide detail on this more later in the call, along with guidance.

With that, I'll turn it over to Andy.

Andrew G. Lampereur

Thank you, Bob, and good morning, everyone. I'll provide some additional color on our financial results we reported today. Summarizing our results at a high level, we generated first quarter sales of $377 million, down 4% from the prior year, due primarily to weakness in the Electrical and Engineered Solutions segments, as well as modest foreign currency headwinds.

Our first quarter operating profit margins declined 100 basis points year-over-year and 70 basis points sequentially to 13.6%, due primarily to the lower manufacturing cost absorption, given the lower sales volume. Our EBITDA margin decline was slightly better at 60 basis points down, the difference due to currency activity in the prior year.

Diluted earnings per share was $0.49 in the first quarter, $0.01 below the prior year, which was the combination of lower sales and margins, partially offset by lower income taxes and financing costs.

Our effective tax rate for the quarter was about 18.5%, which was lower than we had forecasted. This reflects some tax reduction actions we initiated during the quarter and will help drive our full year tax rate to around 21%.

Now I'll provide more color on our results, starting first with the sales line. Our first quarter sales were down 4% on a year-over-year basis, reflecting a 7% core decline, a 1% currency headwind and a 4% benefit from acquisitions, being Jeyco, Turotest and CrossControls. The consolidated core sales reduction was driven by declines in the Electrical and Engineered Solutions segments, which were both down mid teens on a core basis. In contrast, core sales were up in both Industrial and Energy segments.

We experienced weak demand early in the quarter in several businesses but most pronounced in businesses that serve OEMs in the vehicle and off-highway equipment markets. These customers started notifying us in October that they were reducing their build rates for the balance of the calendar year in order to reduce inventory. Recently, they've now extended their slowdowns well into the first quarter of calendar 2013. This obviously played havoc with our production, supply chain and sales forecasts, causing a sales miss, inventory build and unabsorbed overhead in the quarter.

In addition to the inventory correction, solar sales were down 61%, a combination of a very high comparable last year, driven by feed-in tariff changes; and weak demand this year, the latter reflecting the spread of the recession from southern Europe into Western Europe, government feed-in tariff and regulatory changes, and weak consumer and business confidence throughout Europe. Solar was the main driver to the sequential and year-over-year core sales decline in Electrical.

From a sales standpoint, it's important to put the first quarter in context. We started off with a weak September and then saw demand stabilize, albeit at a lower level than what we would like, most notably again in Electrical and the Engineered Solutions segments. We're comfortable that the reduced first quarter demand was not the result of market share losses. Despite Electrical and Engineered Solutions challenges, it's important to note that our first quarter core sales did grow in our 2 most profitable segments, Industrial and Energy.

Due to the limited visibility of the production cuts by the OEMs, our ability to quickly rip out manufacturing costs and overhead was limited in the quarter. This hoard -- absorption in our facilities and adversely impacted our operating profit and EBITDA margins. It was most visible in the Engineered Solutions segment's results where margins took a hit -- a large hit sequentially and year-over-year.

Overall, our consolidated operating profit margins declined to 13.6%, which unfortunately broke our string of 11 consecutive quarters of year-over-year operating profit margin expansion.

Now I'll provide some color on our results by segment, starting first with Industrial. The Industrial segment generated 2% year-over-year core sales growth in the quarter, a continuation of the trend of moderation we've been seeing. During the quarter, as expected, the growth experienced in the Integrated Solutions product line more than offset the slowing economy's impact on the base industrial tool product line.

Despite the recession in Europe, the Industrial segment generated modest year-over-year growth there on account of robust Integrated Solutions project business. This same mix, however, hurt margins as the IS projects don't generate as high a margins as the standard industrial tools.

Within the Industrial segment, end markets with better-than-average demand in the quarter included bolting, energy and mining, where we continued to capitalize on our vertical market strategy and took market share.

Shifting now to the Energy segment. Market conditions there remained steady. Although at first glance, the 4% core sales growth was a noticeable decline from the 14% core growth we reported last quarter, Hydratight core sales growth were again in a healthy double-digit range. Cortland, however, had a lumpy first quarter with a year-over-year sales core decline despite very strong bookings and quote activity. We remain confident about the outlook for Cortland and expect solid growth for the full year. In fact, we've recently won at Cortland a $5 million umbilical order from a new customer that will ship later this fiscal year.

On the margin front, the report is good within the Energy segment, where we had a 60-basis-point year-over-year operating profit margin expansion. This was due to in part to favorable segment sales mix, as well as the additional volume.

Turning now to the Electrical segment. Year-over-year sales declined 16% on account of the drop in the European solar demand that I discussed earlier. Within North America, we saw positive core sales growth in the retail, business-to-business and utility channels. However, OEM volumes were below last year, especially in transformers, and resulted in an overall mid-single-digit decline in North America for the Electrical segment.

Electrical segment operating profit was up sharply over last year's first quarter low-water mark, attributable to the savings from a transformer plant consolidation project that was wrapped up last quarter, as well as the insurance recovery from a fire at Mastervolt's Dutch facility.

Now onto the final segment, Engineered Solutions. This segment clearly felt the biggest impact from the inventory corrections, which impacted nearly all of its end markets. Coupled with the Engineered -- the fact that the Engineered Solutions has the heaviest proportion of its sales from Europe of any of our segments, this resulted in a tough quarter and a 17% core sales decline.

Bob will elaborate on the contingency actions we took in the segment during the quarter in order to reduce costs, but it wasn't enough to make up for the reduced sales volume in the quarter, resulting in a sizable decline in Engineered Solutions' first quarter operating profit margins.

Before turning the line back over to Bob, I'll quickly conclude with a snapshot of our cash flow, liquidity and capitalization. Now as is typical in the first quarter, our free cash flow lagged earnings on account of the payment of annual expenses that we accrue throughout the year, including prior year 401(k) contributions and bonuses, as well as annual insurance premiums. Although not impacting first quarter free cash flow, we also paid our annual dividend in the quarter, and we repurchased an additional 260,000 shares of stock under our buyback authorization.

We're still comfortable with our existing $200 million free cash flow forecast for the year. Our net-debt-to-EBITDA leverage is at 1.2x, still below our long-term targeted range of 1.5x to 2.5x. Liquidity and availability both remain in great shape, with our full $600 million revolver available and ready to fund growth investments.

With that, I'll turn the call over to Bob.

Robert C. Arzbaecher

Thank you, Andy. As part of the 2013 annual planning processes, our business has put together contingency plans, and we began acting on a number of those as the quarter unfolded. In general, they can be classified in 3 broad areas: temporary cost reductions, structural cost reductions and accelerated acquisition integration activities.

The actions varied by business, with the most extreme actions taken in segments that are seeing the biggest top line weakness, Electrical and Engineered Solutions. In total, we reduced headcount by about 100 people or 2% in the quarter, with about another 100 headcount reductions planned for the balance of the year. Depending on the business, we've delayed or reduced annual raises, we've reduced work weeks, had furloughs, cut back on travel and other discretionary spending.

Plans are in place at a number of the low-cost country expansions in order to structurally shift capacity from higher cost areas. For example, we moved a number of Maxima's product lines from U.S. facility to a Mexican facility. In addition, we've taken actions at recent acquisitions to better leverage functions between sites, which is leading to some consolidation. For example, we consolidated our Power-Packer truck facility in Brazil into Turotest's nearby plant. The cost of these downsizing actions are incorporated into our outlook in fiscal 2013 and represent a net hit to EPS this year, but will benefit earnings in subsequent periods.

Two additional things to keep in mind on the cost front. First, our teams do an excellent job of executing these types of actions, and we proved that in the last recession. Second, in the Great Recession, we took out about $40 million of structural cost, reducing our headcount from 8,000 to 6,000 employees and closing about a dozen facilities. Very few of these positions have been added back.

While we focus on cost reductions, we aren't losing sight of growth and innovation investments at Actuant to support our long-term sustainable growth. We have demonstrated success with growth and innovation, and you can see some recent examples on this slide. In a low-growth environment, it's more important than ever for Actuant to gain share and expand our global reach. We have and will continue to balance the short-term cost reductions with investments in the long term.

Rather to go through these wins from the slide, which are measured in millions, let me make the following comments. Our Growth + Innovation efforts have led to product innovations in all 4 segments. Similar to our OpEx continuous improvement efforts, we've created standard processes that now focus across all Actuant ATU business units regarding Growth + Innovation.

And finally, a big part of Growth + Innovation is emerging market opportunities. We made a major step forward this quarter, opening an Actuant office in Bangalore, India. Similar to our successful China facility, this facility will support Actuant business units worldwide. This includes sales to third parties and sourcing engineering and IT services internally for Actuant.

So in summary, we're getting traction through our Growth + Innovation initiatives, and we're committed to this effort even in the current challenging economic environment.

The other growth focus is acquisitions. We have a high level of activity in the funnel, heavily weighted towards the energy space. There are a number of both tuck-in and midsized Weasler-like deals at various stage in the process, and we feel good that some will cross the finish line.

You may recall we talked about a bigger deal in the pipeline. We took a pass on that deal recently due to integration complexity. As we've communicated many times, we believe the integration phase, the I in our AIM process, is so critical to an acquisition's success that without it, it didn't make sense to go forward with this deal at this time.

Now let's turn to guidance. As we discussed in the release, the current macro environment is definitely more challenging than it was on our last earnings call. There is increased global uncertainty, which results in customers essentially delaying decision-making on purchases, investments and new projects. We see this in most of our businesses. Many customers are highly focused on reducing inventories at the dealer or retail level, down through the entire supply chain. You've all heard a number of well-known OEMs publicly acknowledging this in recent earnings calls and investor conferences. We believe the bulk of the inventory corrections will be completed in early calendar 2013.

We see good momentum continuing in Energy and have a solid backlog in Enerpac IS. So at this point, we're leaving our full year guidance and free cash flow unchanged but recognize that it will be more backend-loaded and likely to be at the lower end of the guidance range versus the upper end. As I explained earlier, we are triggering contingency plans in the first quarter in order to protect earnings.

We are, however, reducing our 2013 full year sales guidance to $1.6 billion to $1.625 billion. We now expect full year core sales to be down 1% to 3% compared to the earlier guidance of 3% to 5% positive, with the back half up and the first half down. The change is largely driven by the lower solar sales in Electrical and inventory corrections by the Engineered Solutions OEM customers. Core sales outlooks for Energy and Industrial are generally in line with our earlier guidance, although at the lower end of these ranges versus at the top.

For the second quarter, we're expecting sales of $360 million to $370 million and EPS of $0.34 to $0.38 a share. In -- the second quarter is usually our seasonably weakest, and it will be magnified this year by the customer inventory destocking efforts, as well as some of our downsizing costs.

Obviously, you can do the math. To achieve the midpoint of our full year EPS guidance, we need about 20% year-over-year improvement in the second half earnings. So why do we believe this is possible? There are a number of factors to consider, as you will see here. A better balance of OEM production schedules and end market demand is probably the largest piece. Easier second half comps, cost reductions -- savings from the cost reductions we've done, coupled with the prior year we had restructuring costs that are not repeated; and lowering finance costs, the result of the refinancing and debt conversion in the third quarter of fiscal last year.

So despite the growth-challenged first half, we are optimistic about the year-over-year second half earnings growth, and we are ready to reduce costs further if the economy worsens. As Andy stated earlier, we believe our free cash flow will be around $200 million for the year.

Finally, as always, future acquisitions and stock repurchase activity are not included in the guidance. But we -- but as we've already discussed, we have a pretty robust pipeline, and we'd expect to deploy capital on both as we move forward.

That's it for my prepared remarks. Operator, please open the lines up for question and answer.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ann Duignan of JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

It's Ann Duignan. Could you give us a little bit more color on the customer inventory corrections? And we're all well aware, I think, of the Caterpillar's announcement that they have a lot of inventory to cut. But is it -- does it go beyond that, across more industries or more regions or more customers? Any color would be greatly appreciated.

Robert C. Arzbaecher

Yes, so let me tackle that. Andy, and if I miss any comments, please help me out. Basically, when we looked at the guidance that we gave at the beginning of the year, I think we had already -- and we were already in a decline in the European OEMs, so the truck and auto. And what we saw this quarter was really some of the North American markets starting to do the same thing. And that was in agriculture, off-highway equipment, construction equipment. So it was something that I think was kind of compartmentalized to Europe and China last quarter and moved to more of a global inventory correction in this quarter.

Andrew G. Lampereur

Yes. What I would add to that, Ann, is in Europe, we had seen it in the back half of last year in -- certainly in truck and auto. We saw it in the newer acquisition, CrossControl. They serve mining and forestry as well. It happened there. This is globally. We're seeing this as not just Americas but the big shift was in the Americas. Fourth quarter of last year -- fiscal year to first quarter of this year, most of our OEM accounts, off-highway, construction equipment, mining, 20% to 25% lower production rates than the fourth quarter.

Robert C. Arzbaecher

So Ann, I know you cover a lot of these companies. What we're seeing is basically what they're saying publicly. That they're trimming -- it's the back half of this year. That they're going to trim -- depending on the market, they're going to trim into the first quarter. But they're all also saying 2013 calendar year is going to be somewhat flattish, not necessarily down and certainly not down what we're seeing at the production level. So we're pretty optimistic that we've seen a big chunk of this. There'll be some more carryover into the second quarter, and then things will moderate and we'll be back to production equals sales. And that's what we didn't see this quarter.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay, that's very good color. I do appreciate it. That helps. And then just a more philosophical question. You noted on the larger opportunity for an acquisition, you took a pass because integration, by your measure, was going to be too complex. Does that imply that this was a spinoff of a larger corporation, and therefore, those always get messy and that's what caused you to change your mind? I mean, a little bit more color on what you define as the integration was too complex.

Robert C. Arzbaecher

Yes. You're somewhat precisely right. It was a spinoff of a bigger company, and a lot of the shared services had been centralized at the bigger company level. So first, you're going to have to de-integrate from the business -- from the parent and then reintegrate into our business. And that seemed to us to be a kind of a double integration with a lot of complexity.

Operator

Our next question comes from the line of Allison Poliniak of Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Bob, just going back to your acquisition comments, and you seemed a little bit more optimistic about the pipeline in terms of Energy. If I remember correctly, some of the issues recently have been multiples. Has that changed somewhat, that you're a little bit more optimistic here?

Robert C. Arzbaecher

No, I wouldn't say there's been a big change. In fact, during the quarter, a couple of Energy assets went away from us because the multiples were too big. So I wouldn't say the things that I'm optimistic or getting close to the finish line have any change in what we're -- our normal kind of 6x to 8x EBITDA.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Okay. And then I guess just absent the acquisition, can you just touch on -- I guess maybe Andy this is for you, sort of your capital deployment ideas for '13 in the absence -- say, the acquisition market just still remains out of touch here?

Andrew G. Lampereur

Yes, I think we definitely expect to deploy capital on acquisitions as you said. Beyond that, we'd put cash on the balance sheet and wait for an acquisition. If we like the situation where the stock price is, if there's a dislocation from a buying standpoint out there, we'd act on it. So those would be the priorities out there. We certainly wouldn't be prepaying any debt.

Operator

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

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Can you quantify the restructuring costs in the quarter, what you think they are for the year and how you think about the savings? And then also quantify the insurance recovery.

Andrew G. Lampereur

Sure. In the quarter, it was roughly $1 million. For the full year, it will be...

Robert C. Arzbaecher

That's the restructuring.

Andrew G. Lampereur

That's the restructuring we're in. [ph] Yes, thanks for the clarification. Full year, looking at restructuring of roughly $6 million of hits on that, looking at roughly a 1-year payback, but a lot of the payback will be next year just given the timing and whatnot. Roughly, of that $6 million, by looking at $3 million coming at us in quarter 2, and the balance in the back of the year. With regard to the fire gain, it was a couple of million bucks. That was the gross amount. We also had costs, obviously, that went the other way on it earlier in the quarter, but those are pretty difficult to quantify. [ph] But discretely, it was a couple of million bucks.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then you mentioned -- I mean, you're not changing your top line assumptions for Industrial and Energy, but you mentioned maybe towards the lower end. Where are you seeing variation, I guess, in those businesses or, I guess, resiliency versus what you're seeing elsewhere?

Robert C. Arzbaecher

Yes, I think when you look at Industrial, I think Andy's comments were somewhat clear. The moderation is in the standard distribution industrial tool business. The IS is offsetting that and also, specialty distribution tends to offset that. So things like mining distributors or people like that tend to be a little more robust than a general full-line distributor. Over on the Energy side, Cortland was the place that we were weaker. Hydratight right where we expected it to be, didn't really see any weakness across anything. But Cortland, it is a lumpier business. We sell large things that, as Andy talked about, you can have a $5 million umbilical. Things were moving around between the first quarter and the second quarter. We're really not that concerned even though it was negative for the quarter. We're really pretty confident it's coming throughout the rest of the year. It's one of the reasons we get a little more comfortable with the back half.

Operator

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

Charles D. Brady - BMO Capital Markets U.S.

Can you just -- on the Enerpac business, the base business, how much was that down?

Andrew G. Lampereur

Like, a couple points, right?

Karen Bauer

1 to 2.

Andrew G. Lampereur

1, 2, maybe. 1 to 2 points.

Robert C. Arzbaecher

Yes. Little more in Europe and a little less in the U.S., but in that zip code.

Charles D. Brady - BMO Capital Markets U.S.

Okay. And on the Energy...

Andrew G. Lampereur

[indiscernible] was actually up. U.S. was up...

Robert C. Arzbaecher

So Andy's saying the U.S. was up and Europe was down in the base.

Charles D. Brady - BMO Capital Markets U.S.

Okay, that's helpful. On the Energy business, on the Cortland business, can you -- what was the magnitude of how much it was down? And then what's been the order intake that you think is going to give it some growth going forward?

Andrew G. Lampereur

Yes. The -- it was down roughly 10% in the quarter. We had a very high order month coming in, particularly in the umbilical space, ropes and the non -- I mean, there's portions of Cortland in the Energy segment that really are nonenergy, some defense in there as an example. Our backlog at the end of the quarter was up 10% from the beginning of the quarter. So I mean, that gives us pretty good comfort level where we're at.

Robert C. Arzbaecher

And also importantly, I think the backlog and things are in the higher value-added umbilical side of the business. As you know, we have a rope business there. We have some industrial umbilicals. The -- a lot of this was the oil and gas umbilicals, which are predominantly U.K.-based, but they carry a better margin profile.

Operator

Our next question comes from the line of Ajay Kejriwal of FBR Capital Markets.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Just maybe a clarification on your guide. So you've taken your rev core sales guide down by maybe $90 million, $95 million, but you're maintaining your EPS guide, of course low end of the range. And then there are a couple of tailwinds, tax rate lower, and you'll be doing a lot of these cost savings work. But just maybe help us. Directionally, are there any businesses that you think will be better? I mean, that's a lot of operating income dollars that you've got to make up for using a 30%, 35% decremental on that $90 million, $95 million of revs. I mean, what are the other positives? If you can help there, that would be helpful.

Robert C. Arzbaecher

Yes. Well, a couple of comments in this area and Andy can give some color behind me. The first is this is pretty typical with what we've done on the upside. When we beat analyst expectations in a quarter, it doesn't mean we necessarily change the year. Well, we're in a bit in the reverse this quarter. Just because the first quarter was weak, we don't feel inclined that this is the time to change it. I think we've been self-admitting and very transparent that the lower end is better than the upper end given what we see. So what are the things that give us comfort in the incrementals, if you will, that you're saying? Well, the largest piece is really those OEM customers, and the fact that we have a high degree of confidence that the inventory correction is going to be over in the second half and you're going to have reasonable production levels. That business is -- in Actuant is a difficult business to cut costs. The incremental margins are good in that business. They're bad when it goes down and they're good when it goes up. And you guys saw this in Engineered Solutions over the recovery in the last recession. I think the other things I kind of already talked about: We have lower interest expense. The lower tax rate is structural. As we said, we're bringing down our full year guidance from kind of 22%, 23%, down to 21%, 22%, so it's not just a one-quarter thing. It's structural. The cost reductions we talked about, Andy's saying $6 million for the year, about a 1-year payback on a lot of that. We'll see some of that in the third and fourth quarter, full year effect going into '14. And then the last thing and an important one, I think, we commented on is the mix. The 2 most profitable businesses are still growing. That's Industrial and Energy. We expect that to continue for the rest of the year. So the mix makes a pretty big difference in that kind of that first half to second half view.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Okay, that's helpful. Yes, and then just on share buybacks, so you're not assuming additional buybacks in your guide, are you?

Robert C. Arzbaecher

Correct.

Andrew G. Lampereur

That's correct.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Okay. And then restructuring, that $6 million is included in the guidance, not excluded.

Robert C. Arzbaecher

Correct.

Andrew G. Lampereur

That is correct, yes. Yes, it's about -- just incrementally, just as a reference point, incrementally, that's about $3.5 million to $4 million incremental to what we assumed on our last guidance.

Robert C. Arzbaecher

Yes, which is one of the reasons your second -- and the second quarter is the worst, so it's one of the reasons the guidance in the second quarter might look low to you guys.

Operator

Our next question comes from the line of Matt McConnell of Citi Research.

Matthew W. McConnell - Citigroup Inc, Research Division

Could you maybe differentiate this period versus 2008 when demand really fell off? And I know a lot of your markets are still kind of below prior peaks, so there might be less room to drop. But anything else that gives you confidence, because this is probably expected to be the low-water mark for each of the segments, I would assume, based on the guidance. Any confidence in that re-acceleration would be helpful.

Robert C. Arzbaecher

Yes, it's an excellent question. And I'll tell you, there were times in this quarter, probably late September, when -- as we said, September was -- it seemed like the world stopped, that I felt like we were going back to '08, '09. I don't feel that today. I think the inventory correction -- like I said, I think we're seeing where that's going to hit the end of the tunnel, if you will, in the first quarter. It's not been as global as the last one. Like I say, we've seen pretty good declines in Europe, but there's places that I think are improving. We're not back to -- we haven't even recovered the housing market from the '08, '09. I don't see a major market like housing that is going to lead everything down like it did the last time. So I just don't see how much lower electrical can go in that regard. Certainly -- we certainly saw the bottom of the solar market in the quarter, as we discussed. So that's the top line things. What's structurally different? We went into the last recession close to 3x leverage. It was right after the Cortland acquisition. We're going in at just the opposite this time. We're going in at 1.5x -- or 1.1x, 1.2x leverage, $200 million of free cash flow we're generating this year. I think it's a very different dynamic in that side. We spent a fair amount of time in '08, '09 chasing around with banks and amendments, ended up doing the equity offering in '12. None of that is in the cards with where our balance sheet is now. And the final thing I would tell you is Growth + Innovation. It was a big initiative. It started after the last recession. We reinvested into that part of the business. As you heard from my prepared remarks, I'm quite excited about the progress we're making there. I think that is going to be something that's going to be able to mitigate. I think it's already mitigating, but I think it will mitigate more if you have more downturn.

Andrew G. Lampereur

Matt, the thing that I would -- the way I would answer the question is it really feels a lot different than back then. I mean, back -- when I think about November, December, January of fiscal '09, in our case, we went from flat to minus 10 to minus 20. It just -- every week, the businesses were coming into my office, taking their numbers down further. There was no bottom. It was like trying to catch a falling knife. And what happened here after we saw September results in the middle of October, they re-forecast the numbers. They hit their numbers. They hit them for October. They hit them for November. So it's -- the ability to forecast, they're hitting the numbers, it's not like catching a falling knife. It's a very different feel right now.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. That's really helpful. And going back to the leverage difference versus last cycle, is it tough to complete deals? If -- is there any lack of visibility, when you're forecasting out, what your target companies are going to do? Is that an impediment to getting deals done here? Or did that have anything to do with the large deal going through? Or was it strictly the integration?

Robert C. Arzbaecher

Yes. It had very little to do with the large deal. Because of the stuff we're looking at are primarily in the same markets that we're in now, meaning they're not a fair way over, they're the kind of businesses we do now, we really have the ability to calibrate our business against whatever that acquisition is. And because we can do that, I think we have more confidence in our ability to know what the business is going to do. Where you do see a disconnect is you still have sellers' expectations trying to price off 2012 or earlier trailing EBITDA and where we're going in, saying, "Gee, guys, that's not the outlook that's going to be out there, and I'm not sure we believe your forecast up 20% in 2013." And so that in [ph] lies, the issue is the sellers' expectations have to become reality. And as I said, a couple of deals happened this quarter where either other buyers bought it or the sellers simply pulled the process because they had valuation expectations higher than people were willing to go to.

Operator

Our next question comes from the line of Mig Dobre of Robert W. Baird.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

So my first question is on the cost reductions, just trying to kind of separate it into buckets. As I understand it, the $6 million that you talked about primarily relates to structural cost reductions. Am I right?

Andrew G. Lampereur

Correct. The reserve of returns [ph], yes.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Okay. So can you provide any sort of color on the temporary cost reductions and how those might impact the second half of the year? Because the $6 million, as I understand it, will primarily impact the fiscal '14.

Andrew G. Lampereur

Yes. Well, just to clarify, the $6 million is the cost of -- that would include -- to the extent that we had reductions in force where we are releasing employees and paying separation pay, that would be in there as well. It is not purely a plant shutdown. It's a combination of the 2. If you look at the temporary items, that would include reduced work weeks, furloughs, 4-day work weeks. It's going to be cutting back on travel expenses, other discretionary-type stuff. That's pretty quick. You've already seen a dose of that come through in terms of savings in November, and when you look at our P&L, that's a big reason why our SAE [ph] expenses -- our SG&A expenses were down, and especially at corporate, were down year-over-year even though we've done some acquisitions in the past year. That's why they're down, so you're already seeing those.

Robert C. Arzbaecher

Yes. I mean, variable comp is a pretty good issue in itself. Last year, I think we paid out $17 million, $18 million worth of variable compensation. This year might be half of that, $10 million, $12 million, I don't know, somewhere in there. It's going to be a function of what earnings we deliver. But a lot of those are self-policing, right? They're part of the structure. The board agrees them at the beginning of the year. Our variable comp tends to be tied to our guidance and so forth. At the low end of the guidance, you should think we're probably going to be lower end of the bonus. These things are self-policing. So that's a sizable chunk if you look at the back half of last year, how much you were accruing for bonuses and what you'll likely accrue this year. It's just -- those things come into play too. We didn't include those as reductions, right, because they're just part of the cost structure that's variable.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Right. And that's what I was trying to get, trying to understand that dynamic. Then my next question is going back to the Energy segment. I guess I'm trying to understand what your updated expectations for the full year organic growth would be. Previously, you said 8% to 11%, and I know you talked about solid order intake at Cortland. Are you expecting to be maybe towards the lower end of that range? Or is that range not applicable any longer after the quarter?

Andrew G. Lampereur

No, you're correct. The expectation going in was 8% to 11%. We're holding onto that expectation, but it will probably be at the lower end of that range as opposed to the higher end, based on the first quarter miss here in Cortland.

Robert C. Arzbaecher

And the same is true in Industrial.

Operator

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

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

I guess my question is on the Electrical segment. If you strip out Mastervolt, which seemed to add 300 basis points, you get to somewhere in the high or mid-8s in terms of operating margins. I was wondering if you can kind of give us some color as to the margin goals for that business for the year. I know you did a bunch of restructuring last year. And then also, if you can help us understand sequentially how that solar business may play out. I know we had a very tough comp, maybe when comps ease up on that business.

Andrew G. Lampereur

Yes, the margins -- if we look at Electrical margins in total and we back out the fire gain margins, we're still up year-over-year. If we look at Electrical margins in North America, they were up a couple of hundred basis points. EBITDA margins were up a couple of hundred basis points year-over-year. That's reflecting the now-completed consolidation of the Lumberton transformer plant, shifting it down to a low-cost country. So we saw improvement coming through in that business. So I think -- I believe that, that answered the question on those 2. As to solar, maybe if you can restate that question, I'm not sure I totally understood.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Well, it seems like a lot of the organic growth decline was attributable to solar. I'm just kind of curious when the comps ease up through the year.

Robert C. Arzbaecher

Probably third and fourth quarter. And we had a pretty robust solar year all the way through last year, so -- but the big U.K. order was first and second quarter, so I don't think...

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

I know there's some lumpiness from last year.

Robert C. Arzbaecher

Right.

Andrew G. Lampereur

Yes. Let me -- I can dig that up and I can come back to it if it's any different than what Bob said here, but I think he's right. And this clearly was the big -- the biggest bump in the year was -- single bump was this U.K. order. I mean, you -- just in the first quarter alone, as a reference point, our sales in the U.K. in solar were down $8 million year-over-year. And because probably the year reported, they were probably up $6 million, so it had to do a lot with the single order there.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Got it. That's helpful. And then just kind of a larger picture relative to the destocking that's going on. I think most people accept that it's pretty broad. Is your sense that the OEMs had too much inventory going into this soft patch and they're reducing to normal levels? Or is your sense that they're kind of getting ready for, just in case, contingencies and taking inventories down below what would kind of promote smooth operations? If you have any color there, that would be helpful.

Robert C. Arzbaecher

I don't think we have much color other than to say what we read on all of these customers, and you guys cover a lot of them, seems to be consistent with what we're seeing as a supplier to these customers. So most of them are telling you that it is trimming fourth quarter in expectation of a somewhat flat year in '13, with a truck prebuild that comes late in calendar '13 in Europe. That is a pretty consistent message. And I would say, we don't see a lot of difference between what they're saying publicly and what we are seeing as a supplier.

Andrew G. Lampereur

Mig, just to provide you a little color on the solar last year. Directionally -- James, I'm sorry, $15 million quarter 1 of a year ago, down to $8 million and then $10 million in '10. So you get an idea of how big the first quarter was a year ago and then it -- the back half was pretty consistent.

Operator

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

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Question on Industrial. Just in terms of the mix and the margins, how we should think about that dynamic throughout the year based on kind of what we observed in the first quarter here.

Andrew G. Lampereur

Yes. I'm glad we have a question on something that's doing pretty well, which is Enerpac here. What played out in the first quarter was almost to a tee what we expected from a margin standpoint. I think we got a little bit of grief when we laid out the guidance. People said, "Hey, your margins aren't going up." It's because of this mix. We knew that solar was going to -- excuse me, solar. We knew that IS, Integrated Solutions, was poised to have a very good growth here based on the backlog that we had out there and that's playing out. The margins in that product line certainly are up from where they were at a couple of years ago when we bought the business, but they're well off of or well below the -- close to 30% EBITDA margins in the base -- or north of 30% in the base business. So you're getting that dynamic going on. I would expect that to continue on. There's no really difference in view as far as the way the year is rolling out here. I think our IS will lead from a growth standpoint in that segment, will lead industrial tools for the balance of the year.

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

That's helpful. And then I guess just a question maybe on the portfolio. Bob, you talked about where you're focused on acquisitions. Are you thinking at all about any divestitures or where you might trim some of the portfolio?

Robert C. Arzbaecher

Yes, we're always looking at that. We're always debating that with our Board of Directors. There's not really much to update you on. There's nothing imminent that I want to update you on. It's -- these are topics that they happen when they happen. They don't get that pre-advertised, so I don't really have much to tell you there.

Operator

We have a follow-up question from the line of Charley Brady of BMO Capital Markets.

Charles D. Brady - BMO Capital Markets U.S.

I just want to go back on the corporate expense line, some of the commentary. You've taken some costs out, but the corporate expense line this quarter was a good bit lower sequentially and year-on-year. And kind of what should we be thinking of for a normalized run rate for the remainder of '13?

Andrew G. Lampereur

Yes. The corporate, Charley, was the impact. When you look at it sequentially from Q4, it was clearly -- the incentive comp was down. That was the biggest factor on that. As far as what we think for the balance of the year, probably $7 million to -- $7 million to $8 million or so quarterly, so probably $1 million or so higher than where we're at right now.

Operator

We have a question from the line of Scott Graham of Jefferies & Company.

R. Scott Graham - Jefferies & Company, Inc., Research Division

I just wanted to ask a little bit more about Enerpac. And I know that your distribution does not carry much inventory. But obviously, in the last downturn, we saw something happen there with inventory. I just want to make sure that you guys are still feeling the same way as you did a quarter ago, that the inventory in that channel is nominal, there's nothing excessive out there that has you -- that is a cause of concern for the next couple of quarters.

Robert C. Arzbaecher

Yes. There is nothing out there that gives us any cause of concern. It's one of the fundamental differences, as we talked earlier, from the '08, '09 slowdown and this one, is it just -- we did see something in the last one. And our distributors are focused and we have no indication that they're doing anything other than stocking the top movers and placing orders for things that aren't top movers and normal levels of inventory.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Understood. I wanted to also ask you about the passing on the large acquisition. Was any of that having to do with not wanting to take on additional debt into what's a little bit of a murkier environment look in the first half of next year?

Robert C. Arzbaecher

Well, we've certainly gotten beat up for Cortland, timing it at the wrong time, right going into a slowdown. I don't think that caused it -- the thoughts were going through our minds, Scott -- they couldn't not go through our minds -- that, "Gee, are we buying at the wrong time in a cycle?" As I said earlier, I think we've got that -- that should be reflected in your forecast, what the business has given you and what you think you can do in the early years, so -- but it was a big deal and it was happening at a time that it was north of $500 million. It was happening at a time where we were concerned about the economy. The reason we went away was integration, though.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Understood. Last question, Growth + Innovation. Is the increase in the restructuring not just a factor coming from a weaker environment, but also your desire to keep Growth + Innovation spending at that $20 million level? Or has that number come down as well?

Robert C. Arzbaecher

Well, I don't think that number has come down. But what happened is it's being annualized, right, so it's not an increase in our cost structure year-over-year because we were running a good deal of that last year.

R. Scott Graham - Jefferies & Company, Inc., Research Division

But that number has not come down, though.

Andrew G. Lampereur

No. I mean, no, our pace is in the last [ph] sort of $25 million. And if anything there, it's up a little bit from that as far as what the forecast is...

Robert C. Arzbaecher

Going on [ph] a full year rate.

Andrew G. Lampereur

Just for the year. I mean, our -- if you look at our headcount, what's interesting is a year ago, from the end of November of last year to this year, ignoring the acquisitions, our headcount's down 100 people but we're up 100 in the SAE area, which is where the marketing engineers and the sales folks are, and that's G+I, so -- and that's really what you're seeing.

Robert C. Arzbaecher

That's exactly what I said in my prepared comments. It was -- the $40 million of cost takeout is real. We've added back some costs for Growth + Innovation. I like the fact that we're spending the cost on the front end of the business.

Operator

We have a question from the line of Mig Dobre of Robert W. Baird.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Just a couple of quick ones. Sticking with Growth + Innovation, has the mix in the way you're allocating the spend changed amongst the segments, just given what you're seeing out there as near-term opportunities?

Robert C. Arzbaecher

No, I wouldn't say the mix has changed. We evaluate ideas that come in across all 4 of the segments. Clearly, I think there is more runway in Energy and Industrial. They have bigger, more global opportunities, and so the projects are bigger and articulated well. And so they get it. Just like they have the lion's share of the profit in the business, they have the lion's share of the opportunity in the business. And so it tends to follow that split.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Okay. And last question is for Andy, more of a modeling thing. On the tax rate, in the past, you've spoken about 23% is kind of a good longer-term tax rate. Now we're talking 21%. Is this sustainable and we should be thinking about that looking at '14? Or are we drifting back towards a more normal tax rate?

Andrew G. Lampereur

Good question.

Robert C. Arzbaecher

I'm waiting for this thing. This could be good, because I'm going to hold him to it.

Andrew G. Lampereur

Yes, I'm -- this is really a good question because I'm trying to figure out what they're doing in Washington right now, so I'm really going to punt on that one. I would say, I mean, what we are expecting this year, our rates will be lower throughout the year. This isn't a onetime blip and the other quarters are going to be higher than last year. I need a little bit more time. I mean, we're getting, from a mix standpoint, we're getting more pressure on our rate because more of our profits are in the U.S. right now than in Europe. And clearly, the U.S. rates are at 35% versus the European rates are down, 22% to 25%. So that's weighing against it, I'm on it...

Robert C. Arzbaecher

But on the other side, we have an emerging market strategy that -- China's rates are quite a bit lower. You've got Energy growing and that's a place where we're deploying capital and that's a very global business. It's not a U.S.-centric business at all. If it's anything, it's more global. So those things work in our favor. Just the fact that you have more income obviously works against the fact that you're under the statutory rate in the U.S.

Andrew G. Lampereur

My advice to you at this point is stick with the 21-ish this year, but don't bank on that next year yet. That's still early.

Operator

Ms. Bauer, there are no further questions at this time.

Karen Bauer

Great. Well, thanks for joining our call today, everyone. We'll be around all day to answer any follow-ups you have. Just to note that our second quarter call will be held on March 20, so you can plan on that. And finally, we hope you all have a very safe and happy holiday. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. Have a great day, everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Actuant Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts