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Hubbell Incorporated (NYSE:HUB.B)

Q3 2012 Earnings Call

October 18, 2012 10:00 a.m. ET

Executives

Jim Farrell - Director, IR

Tim Powers - Chairman & CEO

Dave Nord - President & COO

Bill Sperry - SVP & CFO

Analysts

Christopher Glynn - Oppenheimer

Rich Kwas - Wells Fargo

Steve Tusa - JPMorgan

Nicole DeBlase - Morgan Stanley

Jeff Sprague - Vertical Research Partners

Mike Wood - Macquarie Capital

Noelle Dilts - Stifel Nicolaus

Operator

Good day, everyone. Welcome to the Hubbell Incorporated Third Quarter 2012 Earnings Conference Call. As a reminder today's call is being recorded. Now for opening introductions and remarks I will like to turn the call over to Jim Farrell. Please go ahead, sir.

Jim Farrell

Good morning, everyone, and thank you for joining us. I am joined today by Tim Powers, our Chairman and CEO; Dave Nord, our President and COO; and Bill Sperry, our CFO.

Hubbell announced its third quarter results for 2012 this morning. The press release and earnings slide materials have been posted to the investors section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note this discussion of forward-looking statements in our press release is considered incorporated by reference into this call.

In addition, comments made here also include some non-GAAP financial measures. Those measures have been reconciled to comparable GAAP measures and are included in the press release and the earnings slide materials. Now let me turn the call over to our Chairman and CEO, Tim Powers.

Tim Powers

Welcome everyone and good morning. I just have two overall comments before I let Dave do a review of the quarter and the current situation. First of all, the overall execution in the quarter by our factories and warehouses was just excellent. Customer service levels are reaching an all time high and I have to compliment the effort of all of our employees to have such a excellent quarter from an operating point of view. And as you know we had other positive elements as well in terms of cost price.

Some market comments. The markets slowed during the quarter while the harsh and hazardous, residential, transmission, relight markets remained strong. Other categories such as non-residential, general industrial and international slowed during the quarter. Our markets slowed but remained in a growth phase. Events in Europe and U.S. political situation, I believe are having a negative effect on our customers commitment to their future growth plans.

With those comments I will turn it over to Dave. Dave?

Dave Nord

Thanks, Tim. Good morning. I will echo Tim’s comments on the quarter, we are pleased with the performance in the quarter. Obviously, not pleased with some of the market dynamics and some of the slowdown that we saw, particularly in the early part of the quarter. But, while not totally unexpected, we felt that the back half of the year was going to be a little bit slower than the start.

More importantly, despite that slowdown and a little bit lower top line reported results, certainly some good performance on the margin side. And Bill will take you through a lot of the details in a few minutes but we are very focused and continue to be focused on margin, continue to be focused on execution, on maintaining price discipline and improving productivity. And I think that’s all demonstrated in the results in the quarter.

We have focused on our service levels and we have continuing improving service levels and factory performance is really outstanding. I spent some time recently with our lead manufacturing executives. I know they are very upbeat on the things that are happening. They are all very busy, they are all very positive on the actions they are taking and the opportunities for more actions. So that’s a good thing. I have also spent a lot of time over the last several months out in the field, spending a lot of time with our channel partners to get a feel for what they are seeing in the market as well as a sense of their perspective on Hubbell. Not surprisingly, they are seeing in the market the same things that we are seeing. The slowdown, the little bit of unpredictability. But at the end of the day they also feel that there is continued growth potential and we will talk about that a little more later.

They are also very positive on Hubbell as an organization and the things that we are doing. As you know that we have always said that what we really have focused on is the things that we can control in execution and in investing for the future. We can't control the market. We just have to manage through whatever market. And I think a couple of things that -- notable things in the quarter or around the quarter that talk to that, we perceived a couple of points of recognition.

One, from an organization, IDEA. And that’s the official technology service provider, an e-business standards body of the electrical industry. And we received sixth annual award for outstanding performance in the area of e-business. We are commended for our e-business leadership and the incorporation of technology. And I think a lot of this goes back to the forward thinking of Tim and guiding Hubbell to make data excellence their priority. It’s been very important and it’s important for our distributors because it helps in having master data to operate in an ecommerce environment, as well as for our vendor managed inventory. So I think that’s a very good recognition.

Another one, and we have to continue to focus on investing in new product development, in the lighting industry for the fifth running we received more acceptances in the Illuminating Engineering Society’s progress report. This committee of this group is the only group in the industry with the task of monitoring significant advancements in the science of technology. And we have more significant advancements for the lighting fixtures than any other competitor again this year. So again for the fifth year. So I think that’s indicative of what we are investing in. And that’s what I hear from our channel partners around our investment, our technology, our new products. So all very positive things looking forward.

I think we also have -- I had also spent time out in a lot of our factories and continue to do that. One of the things particularly in the lighting factory, it is abundantly clear that everywhere you turn, it’s about LED and the opportunities in LED. So we are very much engaged in embracing that and so that’s another point that’s bright for the future.

And lastly, we continue to invest in new business. We closed on an acquisition in our power business just after first week of this month. A company called Trinetics at a $27 million transaction, that makes high voltage capacitor switches. A nice bolt-on to our power business and actually the first acquisition done in that business in about four years. So I think that’s a good indicator and I think there is a lot more in the pipeline with a number of transactions that collectively in the works that like to close before the end of the year but could roll into next year as we work through integration plan. But all together that would be another $75 million to $100 million of investment in those transactions.

So all good things that we are working on as well as trying to navigate a very challenging market. So with that let me turn it over to Bill to take you through some of the details of the quarter.

Bill Sperry

Thanks very much, Dave, and good morning and welcome everybody. I am going to be using the slides just to guide our comments here this morning that hopefully you found on the website. I am starting on page three. Our sales increased about 3%. As Dave mentioned, a moderating level in the third quarter here, with acquisition providing about a positive 2 points being offset by negative 2 points from foreign exchange.

Operating profit margin of 17.1%, very attractive level for Hubbell. 70 basis points of improvement and being aided by favorable price commodity cost dynamics. Reported fully diluted EPS of $1.45, a higher tax rate in the third quarter of 12% gave us a $0.06 headwind compared to last year. We will talk about that as we get to that page more specifically.

Page four, we talk a little bit about some of the markets maybe diving into what Tim and Dave were alluding to. On the non-residential side we certainly see the new construction still being slightly negative which is really being driven by the public spending shrinking as a percentage of the total. Well, I think we are embracing that because I think we are getting to a much more sustainable balance between the public and the private. And as we have commented on several more recent quarters, the renovation and relight market providing a very attractive offset to that and again continuing to provide double-digit growth for us in the quarter.

The industrial markets were more mixed. Energy, we are selling harsh and hazardous products into the oil and gas and mining markets. Continued to be very strong. Some of the industrial production area is a little more flat and the high voltage test equipments which we have been talking to you about continues its trend of having a down year. In utility markets, transmission continuing strong and distribution pretty flat. And residential showing that they maybe finally here -- some decent legs here to the recovery. And I think we list resi fourth here because it’s the smallest of our four markets. But as a leading indicator it might actually prove to be very important. Our history suggests for us that the resi recovery should precede non-res in the 12 to 18 months kind of range. And so if resi is starting to pick up as well as it looks that bodes well I think for non-res starting to get there too.

So that reviews our markets. Digging down into the gross margin, we generated 34% gross margin. 100 basis points improvement. This is where you see the price cost kicking in at the gross line. At the S&A level we had 5% growth really being pushed upward by higher pension and benefit costs. The OP line, we generated $135 million of operating profit and from our perspective an attractive 17.1% level. And again, our drivers here were price costs pushing the gross margin up and some headwind from the pension and the benefits.

At the other expense line, we had some FX transaction gains in the third quarter of ’12 which drove that number down a little bit. And on the tax we had a little bit of headwind here with a tax rate of 32.1%. We had R&D tax credit embedded in that third quarter ’11 not in ’12 and higher levels of domestic income helping to push up that tax rate.

At the net income line, you have got 6% growth to $87 million. We have mentioned all the drivers and the earnings per diluted share also up 6%. Our share count being pretty consistent between the two periods, 59.7 million shares in third quarter of ’12. So I think let's break down the quarter and distinguish between our two segments and we will start with electrical on page nine. We reviewed the markets. Where that comes out in some business units is our harsh and hazardous business is up double-digits serving some of those energy markets which is the real bright part of the industrial versus the high voltage showing declines which is creating that mixed level.

For resi, for us, we have high single-digit growth in our lighting business there and that new construction slowdown in non-res has been offset and balanced by some of that re-light and rental business. So 5% growth for electrical and 90 basis point pickup in operating profits to 16.4% and a lot of that improvement in margin again being driven by the price cost dynamics that’s proving to be favorable, offset a little bit by some of the higher S&A costs that we mentioned.

So power segment, we switch to page ten. It may be worth pausing for a minute here and going through a discussion of the components here. As you will recall, power has been growing pretty handsomely throughout the year and we are showing a flat quarter. And it’s probably worth disaggregating that a little bit. I think we spend quite a bit of time in the last two quarters, and Dave mentioned it in his comments, highlighting that we thought that the second half compares for power would be more difficult even though spending levels could be high. And let's dig into that a little bit.

So for us, we had FX unfavorable for a couple of points headwinds. And if you remember -- I think most of you had joined us in February earlier this year for our Investor Day, and when Bill Tolley was describing in more detail our power segment, he highlighted the component of those sales that go internationally as well as that go to what we would call here the construction market. So other utilities other than electrical light, water utilities, telecom utilities, cable utilities. The international component was down and those construction markets were down for power this quarter. So when you get to the North American electrical utility piece, there was some decent increases there with transmission providing most of the growth. Distribution being reasonably flat and the evidence to us appears that a lot of the distribution spending from the industry was probably a little bit front end loaded into the first couple of quarters of the year.

So I just want to give you a little bit of that extra color on some of the power sales dynamics. On the OP line you see 30 basis points of margin expansion to healthy level of 18.7%. Switching now to cash flow. You will see when you compare the third quarter of last year to third quarter of ’12, the two larger changes are in the working capital as well as in the other line. Within working capital we have a negative $14 million compare coming from a tax payable from prior year where because of hurricane Irene we actually made our tax payment at first week of October. And that creates a negative compare and how that working capital looks.

Then at the other line, we have made $15 million in pension payments in the third quarter of this year that we did not make last year. So that’s creating a negative compare there. So I think from a working capital perspective, we are hoping to deliver on our full year number of getting to net income.

Okay. So that wraps up the quarter and let's switch to the year-to-date perspective now. We are showing sales growth to $2.3 billion. 8% growth. Operating profit of $361 million. 15.8% margin and growth of 110 basis points. Again, very attractive increase. And we are able to lever that 8% sales growth to 15% net income growth. So very attractive, as Tim and Dave both alluded to, year-to-date financial performance.

Let's break that down between the two segments. Year-to-date electrical, just under $1.6 billion of sales, 7% growth. Again, some of the business unit drivers their being harsh and hazardous. The BURNDY business has been the big growth contributor there and the residential has been double-digit growth. So some good contributors to that 7% growth number. At the operating profit line, 80 basis point improvement to 14.8% helped again by price cost tailwind.

Year-to-date power results up 9%. Again, for the year you have got increases in distribution. Very active transmission projects and with that 9% growth really helping drive margin improvement to 18%, helped again by some favorable price cost by dynamic. Year-to-date cash flow has a very similar story to the quarter. The two lines to focus your attention to are the working capital line and again we mentioned the tax payment difference and the other line has that pension difference. So I think you could do the math, you will see that we still, we think there is room for us to improve on our working capital management and we are focused on that and focused on getting you our goal of getting to one times net income for the year.

Trade working capital, to focus on that line item a little bit. We are seeing the third quarter of ’12, we were just about 19% of sales. The third quarter for us is seasonally our highest and it looks a little bit larger than last year. And so I think again we have got a little bit of improvement and work to do there but we are focused on and I think we will have that in line by the end of the year.

Our capital structure on page 17, continues to be very solid. We have got cash balances and a debt to cap ratio of 27% and we are actually remaining in a net cash position relative to debt. So a very liquid and strong balance sheet to support a number of the initiatives that Dave was describing. Both from an acquisition and investment perspective.

So our outlook for ’12 is for sales to increase 6% compared to last year. As you will recall we had, last quarter anticipated a 6% to 8% range, so this is reflective of some of the slowdown that Dave described us observing in the earlier part of the third quarter. And as you kind of reverse out the math, you will see that it implies a relatively low growth rate for the fourth quarter in the low single-digits. And I think our experience has been that the fourth quarter can be hard to predict at times. I think this year’s fourth quarter is going to be characterized to some degree of market uncertainty relative to volume and I think for us customer behavior as they get into managing their inventories and allocating their purchasing habits as the year-end comes closer, can create a degree of unpredictability for us.

But at the margin line you will see that we are expecting a 70 basis point improvement. Again to recall when we were with you last quarter, we were thinking that was 50 basis points plus. And so that’s an improvement to where we were. Again if you try to solve for what that implies for our fourth quarter, it’s a fairly modest margin expansion for the fourth quarter. And it may be worth highlighting a couple of points to recognize that we won't be expanding margins as much as the first three quarters.

The first item is we had a gain on sale of some land surrounding our headquarters in the fourth quarter last year. That gain on sale isn’t repeating and the acquisition that Dave mentioned of Trinetics while will be next year a very attractive margin contributor to Hubbell, for its first quarter of our ownership some of the acquisition accounting causes us to recognize the sales without any real OP contribution. So those two factors create some dampening on what otherwise underlying operating wise is a little bit better margin expansion. So when we net those two out, our earnings outlook is reasonably consistent with where we were at the halfway mark.

Again, I mentioned a few times we are still focused on getter you free cash flow equal to net income. And I think our tax rate, I mentioned some of the unpredictability on the sales side in the fourth quarter, for us taxes tend to have some volatility in the fourth as well as you get a number of factors coming together. It is worth noting out that our expectation of 32% does not have an R&D tax credit embedded in that. Many of you may have more insight of predicting something there, to give you an order of magnitude if that were to get past, that would be in the sort of $0.05 nickel range for us in terms of helping EPS.

So we add all that up, I think I echo what you heard very clearly from both Tim and Dave is a record EPS year. Something certainly from our perspective, Hubbell’s very proud of that performance. So that kind of wraps the numbers up. And I was going to hand it back to Dave to give you more of a market and longer term outlook.

Dave Nord

Thank, Bill. Certainly a lot of moving parts. I think Bill gave you a lot of color and we will take questions in a minute. But let me put it in perspective. First, I am going to go back to look at the third quarter. The third quarter was, from a volume standpoint, weaker than we thought but certainly a lot of that was attributable to when we look back July and August. July and August was particularly weak. But we saw that start to recover a bit in September. So a better finish to the quarter, better rate exit. And what we are seeing so far in half way through the month of October, you know the volume is up year-over-year. So that’s a positive.

The challenge is that, and there is no -- I don’t think anybody is surprised, there is a lot of uncertainty in the market right now. There is a lot of apprehension certainly in the space that we operate in. That’s what we hear from our customers. And I think it certainly affects most significantly those things that are CapEx related on the industrial side. Industrial production is still up so the MRO piece of the business is still performing well and there is a lot of activity. But there is pockets of uncertainty that I think are certainly weighting to see the outcome of our political environment and the election in three weeks to figure out what the direction is going to be, as well as what the outcome in the resolution of some of the fiscal cliff elements are. So all those from a business perspective are certainly putting a lot of clouds out there that we just have to wait to part.

But in the meantime we are executing well and we are performing well. Looking beyond that, that’s what I am focused and where we are investing is really looking out to the medium in long-term. And when we look at our markets, I can go market by market but on the utility side, transmission project activity will continue to be bullish. It’s driven by the aging grid and the focus on reliability and connecting to these new lines of renewable power. The distribution business, it has to continue to grow. The grid needs to be upgraded but it will probably be more at a modest level. Probably around GDP. And international growth will continue. As Bill mentioned on the residential side, recovery is clearly underway. You saw it yesterday, it came out and housing starts up another 15%. But they are still well below the normal range of the 1.2 million to the 1.5 million starts. So still room to growth there so we are very optimistic and more importantly that becomes a leading indicator for the non-residential part.

You know in that market, new construction remains and is bouncing along near bottom. The recovery keeps slipping to the right. I think that’s a function of the residential having been slower than anticipated. But certainly the renovation and relight part of that business has good growth prospects and is in the early stages. And lastly on the industrial side, the extractive industries remain positive but they are slower than they were. They had great growth but they are still positive. The core industrial cycle is still growing and the high voltage part of that business for in industrial continues to be volatile.

So overall, we strongly believe that we have got growth prospects medium to long-term. And the question is what the magnitude of those and that’s what is still uncertain and I think waiting. Some of that will hopefully have more clarity as we exit the year and see where our political environment and our fiscal policy ends up. But all in all, we are planning for ongoing growth going forward.

So with that, let me turn it back to Jim and we can open it up to questions.

Jim Farrell

Okay. Jennifer, we are ready to take the audience questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

I was interested in, Dave, your comments about the cadence where July and August were kind of slow. I think we were pretty well through in your last call when you expressed the bias to the high end of the range, so I take it August was where the real surprise to you was. Anyway you can parse what was destocking versus end-demand, really just a channel adjustment maybe?

Dave Nord

Okay. There is a couple of parts to that. I think there was weakness at the beginning of July but I think as I have often said, you can't draw conclusions in this business by a week or two, sometimes not even by a month. And more recently there has been more volatility. What we were surprised by is that weakness actually accelerated as we exited July into August. So it was really the back half, really a summer slowdown. And I think a lot of people were certainly frustrated, and maybe even surprised, I think depending on the market when we talked to the distributors about the utility side I think everybody had the view of kind of what might play into it. And that was the early activity because of the warmer weather that might impact the summer activity. And I think that’s probably what's played into it.

We had some -- there was some storm activity early in the quarter but nowhere near the level of activity that we had last year. So we had some negative implications with the slower storm season, interestingly than we had last year at least for the business that we serve. So I think that’s largely what contributed. And then you come back after labor day, everybody comes back after summer and there starts to be an uptick, although still with caution. I am not sure that we saw at least through the third quarter, any destocking going on. Although that certainly is something that we are looking out for and I would expect we would probably see some in the fourth quarter as distributors are looking out with a more conservative view. And so that’s another thing that is more likely impacting our fourth quarter. Does that help?

Christopher Glynn - Oppenheimer

Yeah, that’s great. Thanks for all that color. And then just lastly with -- a little bit of change in the pace of business activity out there. Is that changing the pricing dynamic or the stability of your pricing?

Dave Nord

Well, I would say that one of the pleasant surprises in the quarter is that we were able to hold price longer than you might expect in a slowing market. I am not sure that we expect that to continue. So I think that’s what helped us. But again, we have been and our operating folks have been keenly focused on price discipline and trying to maintain price leadership. And so we expect that to continue but obviously we have got to balance that with market conditions.

Operator

We will take our next question from Rich Kwas with Wells Fargo Security.

Rich Kwas - Wells Fargo

Dave, on high voltage, it’s been volatile. I think Ken mentioned last quarter there were some signs of stability, what are you seeing there now?

Bill Sperry

You know Rich, it’s a very long lead time order business so we tend to not try to find economic indicators but rather kind of give you how our book looks. And I think as Tim and Dave were giving color in terms of more the capital side of our customer base is where we are seeing more of the softness. And high voltage is kind of a good example of something where our customer is going to be a transformer manufacturer. And we are actually seeing orders that are getting sort of delayed and pushed. So I think this softness that we are seeing on the industrial side is probably across Hubbell’s portfolio maybe being most acutely felt by high voltage for us.

Rich Kwas - Wells Fargo

That’s helpful, Bill. And then on the residential side, could you just clarify for us if you have gotten any benefit on the start side from the utility infrastructure. I think if I recall, the first half of the year you hadn’t gotten any benefit and I assume that third quarter probably wasn’t much. But how are you thinking about the leverage from the higher housing starts and how that could affect the power positively as you look out over the next six to 12 months?

Tim Powers

Rich, we haven’t seen any of that yet. But we certainly view that as additional opportunity. It will come. There will be, as you start to work through some of the pre-developed property, start to put in some new developments. And I think at this level of activity that we are starting to get to, it becomes much more new development, new grading, new infrastructure. And that’s where we will start to see that. But we don’t expect that until sometime next year. Maybe early next year but we are kind of planning for middle of next year to start to see some benefit.

Rich Kwas - Wells Fargo

Okay. Great. And then just last question on price cost. What’s within the margin outlook for the fourth quarter are you assuming that it gets back to neutral because you are facing tougher comps?

Bill Sperry

It doesn’t go all the way back to neutral the way we are thinking of it. But it is, let's call it narrowing expectation Rich.

Operator

We will take our next question from Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

On the balance sheet, one of our companies recently paid out a pretty significant one time dividend in front of concerns around the tax rates situation. Are you guys considering that? Do you guys consider tax policy in your kind of balance sheet planning and would that at all impact the timing on decisions on what you may do with your cash?

Tim Powers

Rich, we would not consider a onetime dividend in the face of the change in tax policy. We have a longer view of the value of the cash in our balance sheet. We have a near term opportunity for acquisitions and just a balanced view of return of money to shareholders overtime either by dividends or by share buybacks along with our investments in the expansion of our portfolio and capital. So this isn’t something that we would take short-term action as you are suggesting here in the face of, perhaps the tax change perhaps not.

Steve Tusa - JPMorgan

You talked about the uncertainty in some of the retrofit projects in non-res or perhaps some of those are being pushed around. Can you give us any anecdotes around the magnitude of that? Can we think about maybe that you said 6 to 8 the high end before, now that’s 6. I mean can we take some of that difference and think about that as what you had in your funnel before and kind of what's in the funnel now. I mean is there any, a lot of companies are talking about these delays and we are trying to get our around the magnitude of this and what could -- it’s important as to what could come back on to the board when things get a little bit better if they ever get better. Can be maybe give us a little bit anecdotal evidence around that?

Bill Sperry

Yeah, Steve, just to clarify. If I misspoke, on retrofit, reno, relight, those kind of projects, were actually not any impact or any slowdown. Those are double-digits. We are seeing the paybacks. Very strong. We are seeing the people who are making those decisions, do the retrofit. Are some of the best real estate owners in the country in terms of owner-operators and are trying to run their properties more cost effectively, more efficiently and have that fundamentally improve their cost to goods sold. So that’s big box retailers, that’s large express companies, that’s large makers of industrial equipment. All those kind of categories of customers of ours are continuing to make that reno or retrofit, relight decision. So we are actually -- that’s actually kind of defying some of this. But so where you see it....

Steve Tusa - JPMorgan

I guess where you are seeing the delays? Can you maybe describe some of those and whether it’s in industrial or.....?

Bill Sperry

Yeah, I mean for us then it comes across in large capital projects where we might be selling wiring devices into. We referred to the high voltage test equipment, so someone might have been planning something on the transformer side and they are making a more cautious decision. Perhaps waiting for some of the clarity that Dave’s kind of describing it, as hopefully being on the horizon. And some of those new construction project buildings, maybe they are slowing that down a little bit. A hotel company that you were going to do. So we just see some caution in our customer base that, as Dave said, inflected for us sort of in that July and through August. So for us it’s a little bit difficult for us to extrapolate that six weeks order pattern and tell you that we have perfect insight into how everyone is going to react to the election and everything else. But in general we have taken a more cautious tone for this year as we wait for some more clarity to some out.

Operator

(Operator Instructions) And we will take our next question from Nicole DeBlase with Morgan Stanley.

Nicole DeBlase - Morgan Stanley

So maybe just a question on 4Q. So you guys have guided for low single digit organic growth. Can you parse it out a little bit between power and electrical, do you expect kind of similar trends to what we saw during the third quarter?

Dave Nord

Yeah, you know Nicole we haven’t -- we would like to quit the practice of giving your quarterly guidance. I think for the -- as you think about how we roll forward, I don’t think we are anticipating a lot of dramatic change for you in either the power or electrical segment really from Q3.

Nicole DeBlase - Morgan Stanley

Okay. Got it. That’s helpful.

Dave Nord

I know that you should think of any, yeah.

Nicole DeBlase - Morgan Stanley

And then you mentioned pension. How much of a drag was that on your margin and then what is the outlook for pension expense based on where we are today on a year-on-year basis into 2013?

Bill Sperry

Nicole, the pension impact on the SG&A line inclusive of the benefits was the whole difference, the 30 bps that you are looking at.

Nicole DeBlase - Morgan Stanley

Okay.

Bill Sperry

The pension is, call it a $12 million headwind or so.

Nicole DeBlase - Morgan Stanley

And outlook into 2013? Initially I know it’s a little bit early we don’t have discount rate information yet.

Dave Nord

Yeah, I mean certainly at this point it doesn’t appear to us that that’s going to be anywhere near that kind of headwind. A lot of factors as you know with rates and expected returns but it should be anywhere near that magnitude next year.

Nicole DeBlase - Morgan Stanley

Okay. Thanks. And if I could just sneak one more. Is it possible to quantify the price cost benefit that saw within margins during the quarter?

Bill Sperry

Yeah, it was around a point, Nicole, of tailwind.

Operator

We will take our next question from Jeff Sprague with Vertical Research Partners.

Jeff Sprague - Vertical Research Partners

Could we just dig a little bit further into kind of what the deal pipeline looks like? You kind of foreshadowed maybe there is 75 million or 100 million that may happen in Q4 or in the very near term. Is the pipeline fairly active looking beyond that? Certainly your comments about the dividends and those things suggest that they are but maybe just a little bit more color on how acquisitions versus share repurchase gets balanced in to 2013?

Tim Powers

Yeah, sure, Jeff. Certainly the pipeline, the near-term pipeline is very active, we have got some things. But looking out we see a lot of opportunities. There are a lot of businesses that we would love to have in our portfolio. One of the things I have found interesting from my travels with channel partners is they are all full of ideas of different businesses that would be nice to add to our portfolio. So as active as we have been in identifying, I am getting an additional list that it’s good to know. So I think there is tremendous opportunities. As you know, shaking them loose, finding them, getting them to the sellers, are all part of the activity. And we are clearly focused on larger, and I said larger than what we have been doing the 25 to 50. Looking more in the multi-hundred million dollar type of transactions. It takes time. It takes a lot of effort. We continue to add to our resources. We continue to add to the focus of our whole management team. And so I think I am seeing a lot more energy in activity and emphasis that I think will -- I am certainly pushing and I expect that we would have a lot more activity into next year.

Jeff Sprague - Vertical Research Partners

And just -- you know the answer to this question obviously isn’t totally answerable until to actually know what you bought and what you paid and all that sort of thing. You know I think Bill pointed out the purchase accounting pension that you have possibly in Q4 with deals. So the kind of the stuff that you are looking at that I guess you should still say larger for you but not specially large. Do those have an opportunity to be year one accretive even if they are (inaudible) in the quarter of acquisition or a quarter or two necessarily?

Tim Powers

Absolutely. Absolutely. I mean our objective is to not be dilutive and most of the ones we look at or the way we look at have the possibility absent some unusual transitional and transaction associated cost, to be accretive in the first year.

Jeff Sprague - Vertical Research Partners

Right. And then just switching gears, a couple of items. Can you tell us what percent of your lighting business is now LED?

Bill Sperry

We are up to 16% now, Jeff.

Jeff Sprague - Vertical Research Partners

And just thinking about T&D and I guess maybe T specifically. Tim or Dave mentioned interconnect to renewables. Do you see any particular challenge in ’13 on wind if kind of wind installations cliff here on us on the production tax credit dynamic?

Tim Powers

I think that there are so many opportunities to improve the grid that while some of the bigger lines so far the bigger jobs have been connecting renewables. If there are substantial opportunities to connect different parts geographically and we are seeing a number of those jobs come forward. Now whether we are going to see a huge amount of growth this high level of transmission spending remains to be seen. But it’s going to remain at this level with some slight growth and I think that the wind or the renewables is only one part of that story. I think there are so many other needs to improve the grid and to streamline it and to update it. For instance high voltage DC replacing line AC lines. Coming down in voltage classes from the highest to 345 KV and so on, that the part of the utilities who recognize how important this can be in reducing line losses and increasing reliability will continue to invest. And I am expecting this high level investment to continue for quite a few more years.

Jeff Sprague - Vertical Research Partners

Do you see any activity around coal plant closures? You know the prospective disruptions to the grid as it stands as coal plants go down and any positive feedback in the T or D from that?

Tim Powers

They are enough isolated so it’s not to cause any overall big pattern. I think you have a number of things going on which is fuel switching. So you have some oil fired coal plants converting to natural gas. The legislation and regulation around greenhouse gases are forcing some of the older plants to be taken offline. But if you listen to the manufacturers who are selling gas turbines such as General Electric, the demand is up and they are going to be substituting those kinds of combined cycle plants. But I would say this is more in the range of a smooth transition than anything that represents a significant move. I think probably the best opportunity for reshaping the grid beside the transmission side is certainly the expansion of new housing.

As Dave indicated the national home builders really haven’t reached the stage where they are procuring land now, they are getting it permitted. And as soon as they began to consume land, that’s when the shape of the distribution grid begins to change. And following on that comes the commercial construction that goes with the expansion of houses and then schools and so on. And really that is what changes geographically where the demand is. And so that’s really coming, as Dave indicated, in ’13 and then on in the ’14. So it’s just a ways away but we can see it now. We can see it coming.

Operator

We will take our next question from Mike Wood with Macquarie Capital.

Mike Wood - Macquarie Capital

Our utilities team at Macquarie here is thinking that we may have a peak CapEx here driven by California renewable trying to suspending a lot this year to meet the 2015 mandate. Can you just talk about your exposure to that, specifically to the California renewable utility spending?

Dave Nord

Well, I would say that -- we referred to a broader category called [nurk-work] and this is federal requirements for reliability and safety of the grid. And across the country there is diversion of some spending towards improving the reliability standards of the grid. In California, it’s hard to say at this point if we reached a peak this year or it’s next year. You know I mean there is more to be done and in our case where we participate in the grid, you can really have that spending still come into place right up to the last minute because what we have is easily installed. So we are not talking about the apparatus like power plants and large substations. We are the piece parts along the line, so the spending can remain high for that for a number of years.

Mike Wood - Macquarie Capital

Great. And the international piece of the utility business. Can you characterize what you are seeing there? Is that deferrals or driven by something else?

Dave Nord

It is deferrals driven by slower economic growth in Asia and slower economic growth in Brazil. And it isn’t that they are putting the plants on hold or terminating the plants. It is that the demand for power, increased amount of power is being slowed by their slowing economies. So they are just shifting the projects to the right. So you can imagine what the difference in China is between 7.5% and 10% growth. It’s a number of different high voltage lines. It’s a number of different power plants. The same would be true in Brazil and other developing parts of the world. So it just means the same plants are in place but they are sliding to the right until such time when those economies begin to rebound.

Operator

(Operator Instructions) And we will take our next question from Noelle Dilts with Stifel Nicolaus.

Noelle Dilts - Stifel Nicolaus

I have a couple of questions that actually just kind of expand on some of the questions that have been asked earlier. On the LED side, I know you talked about that being about 15% of your lighting business. Can you discuss the trends you are seeing there in terms of margin? We are hearing that margins are getting better on those products. And also going into the next couple of quarters you might actually have a tailwind from some lower end costs, particularly the bulbs. So can you comment on what you are seeing there in terms of profitability?

Dave Nord

Sure. You know Noelle for us, we have had and we have been pretty consistent in describing the margins for the LED products as being very comparable to the legacy technology that they replace. I think some of our friends in the market are saying they were getting inferior margins and those have been improving. But for us, they have been pretty comparable on a skew by skew basis. The units cost more, so you make more dollars. But the margin is comparable. And I think going forward, you are right to say that a lot of the inputs are expect to come down and the way we view that is the product itself becomes cheaper and in effect things like the payback and those kinds of decisions. And to be able to make comparable margins on those products as opposed to -- and instead as cost input declines it really helps increase the adoption rate for us essentially.

Noelle Dilts - Stifel Nicolaus

Great. And then back on your acquisition and the pipeline you are looking at, potential acquisitions. Trinetics, it sounds like it’s the first acquisition in a while, kind of focused more on the power side. You know as you look forward, are you favoring the power sales on the utility side more or will that be kind of balanced in terms of your current business?

Tim Powers

I would say Noelle that our approach is actually quite balanced. I don’t think the power guys had been on a four-year drought because of lack of bookings. And it certainly wasn’t because of lack of our view of positive outlook for power. It’s just the nature. As Dave was describing, the pipeline sometimes is hard to predict. But going forward, certainly we would love to do more power deals. We think it’s a very attractive space. As Tim was just talking, power for us because of its more global standard lends itself in ways to a more international kind of level of expansion, the harsh and hazardous business. Similarly, it can lend itself to a more international expansion, but I think Dave described it right to say that our balance sheet is very well positioned and we would love to enhance parts of our portfolio. So it’s much more when the opportunities with the compelling fit and the right value present themselves that we can do them as opposed to us pushing in one direction or the other. We would love to add to all of them.

Noelle Dilts - Stifel Nicolaus

And final question. Our work suggests that we are seeing transmission projects to accelerate in the back half of the year, at least relative to the first half. I know you said you expect trends to be relatively consistent in the fourth quarter in terms of power but are you seeing any type of pick up in quarters or enquiries that you think maybe related to this kind of (inaudible) excursion activity?

Tim Powers

Your analysis is correct. I think there have been more awards as the year has gone along. What's different about the nature of business as it becomes sales for our company is last year there were a number of immediate large releases coinciding with the awards. This year the cadence is more of a traditional nature meaning that you get an award which is very large and spread over let's say 18 months to coincide with the construction of the line. And unlike last year we are getting more of the incremental releases at the beginning which would be more traditional than last year when we got large releases earlier. But our market position in our space obviously puts us in a number one market position and we are doing very well in the market on transmission system jobs.

Jim Farrell

Okay. Jennifer, I think that takes us up to the hour.

Operator

That does. And there are no further questions. Thank you.

Jim Farrell

Okay everyone, thank you very much for joining us today. Again, if there are any follow-up questions you may have, feel free to contact me after the call. Thanks again for joining us.

Operator

And that does conclude today's presentation. Thank you for your participation.

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