EnerSys (NYSE:ENS) Q3 2017 Earnings Conference Call February 9, 2017 9:00 AM ET
David Shaffer - CEO
Mike Schmidtlein - CFO
Noah Kaye - Oppenheimer
Michael Gallo - CLK
Brian Drab - William Blair
Howard Rosencrans - VA
Good morning, ladies and gentlemen, and welcome to the EnerSys Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to your host for today's conference Mr. David Shaffer, President and CEO. Sir, you may begin.
Thanks, Bridget. Good morning, and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer.
Last evening, we posted on our Web site, slides we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to go to the webcast tab in the Investors section of our Web site at www.enersys.com.
I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements.
Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance, and are applicable only as of the date of such statements.
For a list of factors, which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 2017, which was filed with the U.S. Securities and Exchange Commission.
In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated February 8, 2017, which is located on our Web site at www.enersys.com.
Now, let me turn it back to you, Dave.
Thanks, Mike. On Wednesday, we announced our third quarter results of $1.18 per share, which was above our guidance range of $1.12 to $1.16, and the quarterly dividend of $0.175 per share payable on March 31st.
You will notice on Slide 3, we had another very good quarter, and achieved third quarter records for as adjusted gross profit percentage of 27.6%, as well as earnings per share of $1.18. The increase year-over-year profitability was due primarily to lower manufacturing costs, improved pricing and mix, and for earnings per share from lower tax rates and shares outstanding. These as adjusted results do not include the third quarter charge of 17 million for the German competition matter. We believe it was appropriate to take a charge at this time and in our recent 10-Q we have presented a financial range of possible outcomes. Unfortunately, we are unable to discuss these issues any further as this matter is still ongoing. I would refer you to our fiscal year 2016 10-K and subsequent 10-Qs for additional commentary on this issue.
Please turn to Slide 4. I now want to focus on our current business activities and fourth quarter guidance. During the quarter, I was pleased to see our Europe, Middle-East and Africa and Asia regions improved their year-over-year sequential operating earnings percentages. The EMEA region was once again able to exceed our 10% minimum operating earnings percentage target at 11%. This was primarily the result of increasing year-over-year Motive Power premium product mix and the benefits generated from our cost reduction programs without which the EMEA region would not have exceeded 10% operating earnings.
In Asia, we experienced improved results in India, an increase in ICS profitability in Australia and China's organic volume was higher. On a year-to-date basis our Asia region operating earnings percentage is approximately 6%, which is about 500 basis points higher than last year's comparable year-to-date percentage of 1%. In addition, Asia is a net inter-company importer and therefore assists the other regions, especially EMEA in increasing their local profitability.
Please turn to Slide 5. During the fourth quarter our global lead cost will continue to rise sequentially and year-over-year by over 10%. In addition, other raw material costs such as steel, plastic and copper are also rising. To comeback this increase to our cost of goods sold, we have initiated price increases effective in January through April and will automatically realize lead pass through increases on approximately 30% of our business. Additional price increases are likely given that LME lead prices have exceeded a $1.05 per pound.
The Americas region will not realize any material price increases until the first quarter of fiscal year 2018, while EMEA and the Asia regions will realize the majority of their price increases in our Q4 fiscal year 2017.
Please turn to Slide 6. I want to briefly cover the remainder of our global businesses. In Motive Power we continue to experience slow growth in the Americas and Europe, but still at historically record levels with good premium products mix. In Reserve Power we continue with trends of; One, strong uninterrupted power systems sales and orders in the U.S. and Europe; Two, lower telecommunication sales and orders in emerging markets which slows especially our EMEA region; Three, higher Americas and closure business; Four, increase sales in the U.S. of Odyssey TPPL batteries to the trucking industry. And finally five, our aerospace and defense business in the U.S. is seeing good demand across all product sectors, while Europe's A&D business is off due to some pushouts of business.
Based on the above trends and information our earnings per share guidance for our fourth quarter is between $1.19 and $1.23. We anticipate a sequential increase in sales volume and pricing and reduction in operating expenses all to be offset by increasing lead costs.
Please turn to Slide 7. I want to shift the discussion to our M&A strategy. We continue to be very active on the M&A front. Even though under my tenure we have not executed a large acquisition to date, there was a lot of activity going on behind the scenes. We are looking at a broad range of companies. In different battery technologies and chemistries, globally bolt-on and complementary businesses. In order to assist in managing these opportunities, we have recently added a Vice-President of Business Development. We are doing a lot of work to find and execute the right deal for EnerSys' shareholders.
Please turn to Slide 8. I wanted to provide an update on our leaned initiatives program. We have began our lean deep dive at four of our facilities that impact $900 million in annual sales. This is the beginning of the global harmonization process that will lead to eliminating waste, increasing productivity and cycle time compression which will ultimately lead to organic growth in cost savings. In fiscal year 2017, most of our efforts have been made in the cost reduction part of our business. We estimate that approximately $25 million to $30 million of savings will be achieved this year. A portion of these savings will be offset by annual cost increases such as wages. We estimate that the net savings to EnerSys this year from our first year of lean initiatives will increase our operating earnings percentage by approximately 50 basis points.
Please turn to Slide 9. A final reminder that our next Investor Day will be held on Tuesday, February 28, at the New York Stock Exchange. We look forward to seeing you there as we highlight the Company's accomplishments, strategies and goals.
In closing, I am very pleased with our third quarter performance. We are experiencing profitability improvements in Asia and EMEA and continue to drive our mix of premium products. Our lean initiatives has started in earnest and the initial savings are already impactful. I remain excited about EnerSys' future and the short-term and long-term market opportunities we are pursuing.
And now, I'll ask Mike Schmidtlein, to provide further information on our results and guidance.
Thanks, Dave. For those of you following along on our webcast, I'm starting with Slide 10. Our third quarter net sales decreased 2% over the prior year to $564 million due to 1% decrease in volume and a 3% decrease from currency translation offset by a 1% increase in price and 1% from acquisitions.
On a regional basis, our third quarter net sales in the Americas were up 3% to $314 million, while Europe's was down 6% to $186 million, and Asia decreased 10% in the third quarter to $64 million.
In the Americas, a 2% increase in acquisitions and 1% from volume offset a 1% currency decline. Europe had a 1% decrease in volume and 5% in negative currency. In Asia, volume decreased 9% and currency declined by 2%, while pricing increased 1%.
On a product line basis, net sales for Motive Power was down 3% to $293 million, while Reserve Power was flat at $271 million. Motive Power had 1% increase in pricing overcome by 2% declines in volumes and foreign currency. Reserve Power had a 3% currency headwind offset by 2% in acquisitions and a collective 1% in pricing volume.
Please now refer to Slide 11. On a sequential quarterly basis, third quarter net sales were down 2% to the second quarter from 2% negative currency. The Americas region was down 3%, while Europe was 3% higher and Asia was down 10%. On a product line basis, Motive Power and Reserve Power were both down 2%.
Now, a few comments about our adjusted consolidated earnings performance. As you know, we utilized certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning the operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.
Please refer to our Company's Form 8-K, which includes our press release dated February 8, 2017 for details concerning these highlighted items.
Please now turn to Slide 12. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $10 million to $69.3 million with the operating margins up 190 basis points. The increase in operating earnings from the prior year reflects higher pricing and lower manufacturing costs. On a sequential basis, our third quarter operating earnings were down $2 million on lower revenue and higher lead and manufacturing costs with the operating margins flat at 12.3%.
Operating expenses, when excluding the highlighted charges, were at 15.3% for the third quarter compared to 15.0% in the prior year. The full year's operating expenses for fiscal 2017 should be comparable to fiscal 2016 at approximately 15%. Excluded from operating expenses recorded on a GAAP basis are net charges of $14.8 million, primarily related to the $17 million charge with a German competition matter and EMEA restructuring or exit charges and credits.
Excluding those charges, our Americas business segment achieved an operating earnings percentage of 14.3% versus 13.6% in the third quarter of last year, primarily from the impact of higher volume and lower manufacturing costs. On a sequential basis, Americas third quarter decreased 120 basis points from the 15.5% margin posted in the second quarter due to higher commodity and manufacturing costs.
Europe's operating earnings performance of 11% was up from last year's 8.4%, and from last quarter's 9.4% on better price, mix and cost reductions. The operating earnings percentage in our Asia business improved in the third quarter of this year to 6.3% operating profit from a 2.4% income in the third quarter of last year, and from last quarter's 5.1%. Asia's improvement reflects better mix and manufacturing cost.
Please move to Slide 13. As previously reflected on Slide 12, our third quarter adjusted consolidated earnings of $69.3 million was an increase of 16% in comparison with the prior-year with the operating margin increasing 190 basis points to 12.3%. Excluded from our adjusted net earnings for the third quarter was approximately $16 million in after-tax highlighted charges, the largest being the $17 million for the competition matter in Germany. Please see our press release issued yesterday for details of those items.
Our adjusted consolidated net earnings of $52.0 million increased 25% from the prior year or $11 million and improved 200 basis points to 9.2% of sales. The $11 million increase reflects the $10 million higher operating earnings, and a lower tax rate.
Our adjusted effective income tax rate of 20% for the third quarter was lower than the prior quarter of 24% and the prior year's third quarter rate of 23% due primarily to better performance and lower tax jurisdictions. We believe our tax rate for the fourth quarter of fiscal 2017 will be approximately 23% and through the full year we expect that rate to be approximately 24% on our as adjusted earnings.
However, this assumption anticipates no significant changes in our tax rate or legislation in the countries we operate in. EPS increased 28% to a $1.18 on higher net earnings with 0.8 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks last fiscal year. We expect our final fiscal quarter of 2017 to have approximately 44.2 million of weighted share outstanding.
Please now turn to Slide 14 and 15. As usual, we have provided information on the year-to-date basis similar to that of our third quarter on the prior pages, these two pages are for your reference and I don’t intend to cover the year-to-date results.
Please now turn to Slide 16. We’ve added this slide provide investors with additional insights to our business and how potential U.S. tax changes might impact us. In light of our modest net import of position we would expect an initial negative U.S. tax impact which we believe we could mitigate relatively quickly. If overseas profits are taxed, it would have a larger negative one time consequence but would free up nearly $400 million in cash for general corporate purposes and potentially lower interest expense. In general, we believe our global footprint and strong capital position allow us the flexibility to adapt to any future tax changes.
Please now turn to Slide 17. Now, some brief comments about our financial position and cash flow results. Our balance sheet remains very strong, we now have $467 million of cash on hand and short-term investment as of January 1, 2017, with over $451 million undrawn from our credit lines around the world. We generated $167 million in cash from operations in our year-to-date in fiscal 2017. Our credit agreement leverage ratio is at 1.5 times and will likely drop further by year-end, barring any significant acquisitions.
Capital expenditures were $36 million in the first nine months of fiscal 2017 compared to $46 million in fiscal 2016. We expect to generate adjusted diluted net earnings per share between a $1.19 and $1.23 in our fourth quarter of fiscal of 2017, which excludes an expected net charge of $0.04 per share from our continuing exit in South Africa and our other restructuring programs and acquisition activities. We anticipate our gross profit rate in the fourth fiscal quarter will decline approximately 100 basis points from higher led cost and our interest expense to be approximately $5.9 million.
In conclusion, we remain excited about our future opportunities. Now, let me turn the call back to Dave.
Thanks, Mike. Bridget, we can now open the line the for questions.
Thank you. [Operator Instructions] Our first question is going to be from the line of Ben Hearnsberger from Stephens Incorporated. Your line is open.
Thanks for my taking my question, this is actually Hue on for Ben. In regards to the geographical performance you all have seen some nice growth tailwinds from the Asia region before this quarter and we saw this close to a 10% decline in this quarter. Can you talk about anything noticeable that lead to this decline and the near-term and long-term opportunities in this region going forward?
Hue this is Dave. Lot of the growth that you noted in the Asia region was business at a very large telecommunications provider in China. And as you probably know China -- telecom tends to be a very lumpy business. And so it was just a slowdown from this customer in terms of the number of sites and the amount of capital they wanted to deploy this quarter. In the long run, we know that this customer still has a lot of work to do and we anticipate this business will cycle back up at some point.
That's helpful. Thank you. And then can you just put some more color around the growth opportunities from some of your newer products like OptiGrid?
Yes, Hue. We remain very bullish long-term on the OptiGrid and just energy storage systems in general and I hope you can join us later this month at the New York Stock Exchange because you would have a chance to meet our new Chief Technical Officer and he is going to rollout our new products roadmap. And you would see in the different components of where we think the market is going to be. It's never fast enough and I've said on many calls in the past the energy storage markets have evolved very slowly, but in general we are very optimistic, we are excited about it and it should be an important part of our product portfolio coming over the next five years or so.
And then in terms of other growth opportunities, we've talked a lot about getting a deeper into the heavy truck market, we've seen some great growth in that arena with some of our premium products, we've got some new Motive Power products we're going to be talking about later this month. So in general energy storage continues to be an exciting opportunity, and we look forward to it.
Great. Will try to meet you guys and best of luck.
And our next question is from Noah Kaye with Oppenheimer. Your line is open.
Thanks for having me on and it's great to be with you for the first time, I'm looking forward to seeing you at the Exchange for the Investor Day. So just to talk about the quarter first. Obviously you had improved profitability across all the segments and it seems like a lot of that was coming from some of the cost reduction and frankly kind of the contracting discipline across the lines of the business. But going forward you mentioned some of the puts and takes in Asia how much pressure are you seeing right now in some of the key end markets, whether it's materials handling or telecom. And do you think that maybe there is an opportunity for a bit more uplift to pricing as we go into the future quarter?
Noah, welcome to the team. And we look forward to working with you in the future. I'll just take the different pieces. On the Motive Power, again we have no indications from any of the industrial truck association data, current order rates, the conversion rates of a gas electric in China, everything seems and continues to be healthy in that regard. We’ve talked a lot about -- on prior calls about the complexity of today's material handling, about the velocity of goods and transactions and inventory turns and all of this continues to be in our favor and a lot of focus for our guys, because these aren't extraordinary growth rates. But it's been steady and solid business for us, and lot of the focus for us is improving the price mix with premium products and that will continue to be the opportunity.
On the Reserve Power side, we’ve talked a lot about and we often do about telecommunications and the cycles, that’s really been a disappointment for us for several quarters. We did have some great opportunities in Asia. In China specifically, that slowed down this particular quarter, but again I think one of the other important things to mentioned in that regard is, it does we feel like we found bottom in the EMEA region, when it comes to telecom. So, we’re now on our sales per day basis been at a fairly flat part of the curve for probably three quarters in a row now. And so, we feel like that hopefully is going to start to tick up as peak start to invest further in the 4G and the 5G, as maybe some of these developing markets shore up a bit. So, that’s always a frustrating piece of our business to forecast, but long-term we still feel like we have the right product solutions to help the customers.
And then in the other parts of our market growth lines, again -- we our customers still continue specially in the heavy truck markets to realize and recognize the superior performance of our products. And as we’ve talked about in the past, that’s a billion-dollar adjustable market of which we have very, very small share and a lot of upside growth potential. So, did that help.
Yes. And I mean, just to follow up on the last point. Can you kind of update us your expectations for how you’re thinking about adoption of these premium products in the heavy truck market maybe over the next year or so? You talked about that in the past, kind of what you thought the cadence would looks like, is that still sort of pretty much the same track?
Yeah. I would say that we’ve done a great job, I just looked at this number, we historically have said that, and if you've looked at several of our desks, that our premium products were about 25%. That was sort of the normal run rate. We just ran the numbers yesterday, just to double check, and it's actually trending close to the 35% today. So, that again, it's been a real focus for us, and it's been critical especially in EMEA to help protect against just the normal everyday pressures of a competitive business.
Yeah, yeah. And I think that clearly shows in the margins as well. And so maybe just a last question, is more in the cost side. You’ve seen and you talked to lead prices kind of creeping up over the quarter. Maybe seen some stabilization at this point, but it kind of seems to be coming off of sort of a cyclical bottom over the past year or really returning to more normalized prices. We actually heard, I think a pretty material announcement from a very large lead acid battery manufacturer this morning on a new innovative lead recycling process and I was just wondering how you are thinking about managing your lead exposure from this year and whether or not you sort of see any potential changes or disruptive technologies out there that would kind of help give you a little bit of a buffer against the volatility in the commodities beyond just of the hedging strategy that you have in place?
It's a great question and we're excited about the AquaMetals' technology and we're certainly rooting for them to be successful, and it clearly sources especially domestically of high quality environmentally friendly recycled lead is a net positive for the industry. So we look forward to that.
And smelters are a tricky business, sometimes you love them, sometimes you hate them. It depends on which part of the curve you are on. For us right now just we'll come back to the strategic question and just talk more about the price management side. This industry has matured since maybe a decade ago in terms of the discipline of price recovery and it's good to see, but it's always hard to catch up.
So I would say that as you noted, commodity pressures are still -- they hit us fairly hard in Q3 they are going to hit us really hard in Q4 and there is just tremendous pressure on our sales teams right now to continue to push these things, push these prices through and then there is continued pressure on our Chief Operating Officer to continue to drive cost and waste out of the business so that we can stay ahead of this. I would say one of the things I would note, one of the reasons I think Europe had a pretty decent quarter, is they tend to be heavy on a lot of the price pass-throughs and they're automatic in nature, that a higher percentage of their sales are using that. And I think they got out a little sooner then maybe our U.S. business did in terms of price recovery.
So we never catch it on the way up, we never catch it fast enough, but we will catch it, we'll eventually get that recovery where we need it to be and Europe got out ahead. So in terms of our smelters part of our acquisition strategy, is AuqaMetals something we would consider investing in, absolutely, nothing is off the table in that regard. But we have to make sure that these are good investments and that market has changed dramatically overtime as the price of -- in the old days scrap batteries used to be free, and so smelters, that was a very good business preposition to be made there. But today scrap isn’t free, users have realized the value of those and so the economics are not quite the same any more. But it's definitely not off the table. Is that enough?
That's extremely helpful. Thanks for the color and see you in a few weeks.
Our next question comes from the line of Michael Gallo with CLK. Your line is open.
My question is just on the margins. Obviously as you look forward, you have the -- up to 8% pricing increases going in. I was wondering; One, if you see any signs of any kind of trade loading ahead of those increases. And then two, whether you have any concerns that price increases may be offset by some declines in volume. And then the follow up question, if you have the latest ICA data that would be helpful. Thanks.
Okay, Mike its Mike Schmidtlein, I’ll try to take that one. So, on margins, in my script I mentioned our fourth quarter gross profit, we would expect to decline about 100 basis points. So, we will be seeing sequentially, call it, 15 million or so in additional lead cost pressure. Those price increases that we discussed probably are going to offset two-thirds of that numbers. So that’s the net 100 basis points reduction is kind of taking what the pricing and as you know pricing, when costs are going up the prices always lag behind by a quarter or two.
So, that does put pressure on us from a margin standpoint. Our fourth quarter is always our strongest quarter, that has -- some of that has to do with our customers, mostly being on a calendar year basis and their capital budgets get refreshed. It generally has the most days, working days and has fewest holidays. So, you get the benefit of those items which then allows the volume that we anticipate to be in our fourth quarter to overcome the net price cost differential. So, we’ll see an expansion in gross profit dollars in our fourth quarter despite a decline in the margins as a percentage of sales.
In terms of data, I think if you’re referring to the WITS data which is the industrial truck market, it remains a very robust market. We typically look on the trailing three months and comparison with the prior year and when we do that on a global basis, new truck orders were up 11%. And that is not outside of the order intake increases year-over-year that we are currently seeing. Now to your point about whether our customers getting ahead of upcoming price increases that could be the case, but we’ve seen relatively strong growth, double-digit growth in our orders. In the last 16 week period. So in every, we measure four weeks, eight weeks, 12 weeks, 16 weeks and in all those we’ve seen good solid growth which I think the ITA data supports.
Yeah. I would say certainly some of that, it's hard to separate, how much is the result, but just going back the 12 week data probably doesn’t have a lot of the impact of the price increases. And it was over 10% globally in terms of order rate growth. So, the orders continue to be in decent shape, and so volume should be all right in the quarter, it's really a question about and I hope all my guys are listening, it's all about price recovery, price recovery, price recovery.
Yeah. And just a follow up to that Mike. I think I was asking more maybe as in clarify on the margins that you get in sort of the first half of next fiscal as you start to put this $1.5, $1.6, $1.7 lead through. I was wondering should we still assume two-thirds is a profit, I think it's what has been historically on price recapture or does that get to be a level where it increased so much in a short period of time that you might see less price realization than that?
Well, I think the continued -- we will see a continued pressure from led costs based on current spot prices that's certainly going to continue on into our first fiscal quarter that's when we'll start seeing the price increases that we announced in the Americas, that's when those will start to have a benefit. Europe will be one quarter further along in that process with their past through.
So I would hope that, while I don’t know that we would get a 100% recovery on lead cost increases year-over-year, I think we will be narrowing the gap between what our pricing is lagging on. But having said that the margins that we get in the fourth quarter probably, I wouldn’t anticipate exceeding that in the first quarter, but as you know one of the reasons we only give guidance one quarter out is, we simply don’t have enough visibility with our order book and our lead costs to really have a lot of confidence in those numbers at this point in time.
[Operator Instructions] Our next question comes from the line of Brian Drab with William Blair. Your line is open.
Mike, I was wondering that if you could fill in a couple of holes in the WITS data would you mind giving us the North America, Europe, Asia and then also is this the three month period ending in January or in December?
This would be the December information. The January numbers typically don’t come out for another week or two. So there are not as fresh as perhaps we hoped, but to your question, Brain, the total Americas were up 3%, total EMEA was up 13% with Western Europe at 12%, and the Asia was up 15% from that total worldwide 11%.
What was the Europe number again one more time?
So EMEA was 13%.
13%, thank you. And then, a look back at the Motive segment, this is I think the first quarter in a few years where you had a decline in volume year-over-year and I'm wondering is this temporary and how do you reconcile that with still continuing good truck order data?
Brain, if you look at the year-to-date numbers, Motive for us is a fairly steady business, this quarter we stepped off little bit, I dug into that, it was a couple of particular brands that were off, but now we look at the order rate for those brands and they have come back strong. So I don’t see any underlying issues based on the WITS data Mike just quoted based off the current order book. I think we just had some to get some big orders, maybe some comp issues, but in general everything looks solid on the Motive Power front.
Okay, thanks. And then I don’t know if you've touched on this, but any color on this anti-competitive situation in Europe that you could offer?
So you missed it early, but as I've said in the prepared remarks, we just really can't comment on it because it's an open issue and I'll just refer you back to the Qs and the K for about all the detail we can provide at this time.
Understood. Thank you very much.
We do have another question from Howard Rosencrans with VA. Your line is open.
I'm curious regarding the use of the -- you gave some color sort of on the scale of the capital that you have overseas and I believe you said $400 million, if I'm not mistaking that you would hope to bring back, but it sort of mitigated by the international tax situation or might have missed a little of it, or that sort of nets out. Can you give us some color on your plans for what you might do with that capital? And just broadly what are you seeing on the acquisition front. Do you think there are possibly more substantive acquisition that calendar 2017 might bring than in the past? Thank you.
Yeah. I've said for a couple of quarters now that our focus is to be on maybe larger deals, get the average deal size up. We’re bullish on the opportunities we have in the pipeline today and that is clearly our number one choice for use of cash. In terms of the repatriation, I don’t know what strings would be attached yet, we’ll have to wait and see what the tax rules come out as. But as you know we do some debt and some interest expense, that it might make some sense to pay that down and get that interest rate down. We’ll just have to see what rules apply. But the number one choice is the M&A pipeline and we’re optimistic.
I’ll ask one quick follow on in that regard then. Dave, what would you and your board and your management team feel comfortable with in terms of a leverage ratio. I've always considered the leverage ratio, very, very modest considering how exceptionally well and I mean that in all sincerity you guys have run the business over the years. So, where would you -- where might you go to if the right acquisitions were to turn up in terms of leverage ratio? Thank you.
So, Howard this is Mike. I’ll try to answer your question. And this is some insights that we plan to give in our Investor Presentation Day at the New York Stock Exchange at the end of the month. In terms of size, we believe that we could make an acquisition as large as $2 billion. The leverage ratio that would come up from that would be somewhere slightly over three times. You have to keep in mind that typically when you make big acquisitions you’re acquiring very established companies that have a fairly well defined and demonstrated cash generation of their own. So, you’re fairly quickly paying down that leverage ratio, and I think assuming that everyone is comfortable with the quality of the targets that we might be looking at, I think that is not outside of the realm of comfortable operating ranges with the expectation that within two or more years you’d probably back down somewhere comfortably in the twos.
Okay. And then I’ll one more if I might. And let's say that on the that in '17 you aren’t successful in identifying some meaningful acquisitions, would you consider a meaningful return of capital either in the form of maybe a onetime dividend or a meaningfully higher ongoing dividend or -- and if you would in the same context would you update me where we stand on the buybacks.
You guys have always done a -- you guys have always been price sensitive and then in that regard you've done a spectacular job in supporting the stock, but I'm just wondering with the stock at these levels, whether or your -- what your thoughts here might be? Thank you.
Yes, it's going to come down to what the stock price is at the time. We'll always make that assessment, it will depend on what the likelihood if it's not 2017, what the likelihood of a dealers in 2018. So it's very difficult to give you a favor for that as we sit here today. But we'll assess it, we're open minded, onetime dividends, changing our dividend rate going forward, it's all on the table, nothing is off the table and we'll just see what the situation is. But obviously the job, our job is to emphasize the M&A, that's what we are trying to do.
And Howard, as you know, if I could add just a little color to that. Sometimes if we were looking at a large transaction that would be the material non-public information which would preclude us from being out in the market buying our shares. So sometimes even if the share price looked like it was below its intrinsic value of our stock we may not be able to participate and as you know there is a better part of the year where our window is closed anyway just for normal operating results and the timing of the window and when that those are made public.
But today's point, M&A would be first. There is so much uncertainty right now on what the tax situation might be, not only in the U.S. but throughout Europe with the [indiscernible] initiatives. We have no idea what type of reactions other countries might have if the U.S. makes changes in their trade policies. So I think it would cause us to really want to assess the situation carefully before jumping out in a big way.
I know I could compute this easily, but I don’t have it in front, so you guys are 1.5 times net levered including the cash oversees or is it close to one times, if you would just ballpark that for me?
That's the credit facility in which we don’t get full credit for those overseas funds and the logic there was, if you brought the funds back to pay down the debt, you would have to pay that U.S. tax rate that is largely gone untaxed at. Now if overseas profits were taxed under any of the plans that are being discussed on the U.S. basis then you suddenly taken that off the table and that's where you would say, okay in that case you may, and if interest expense, I think whether that gets grandfathered as -- if it ever become non-deductibles, certainly that would make interest expense a much higher priority if you had an expensive that was not tax deductible so.
You could have debt repayment, you could be looking at dividend changes, M&A as we discussed and of course share buybacks are still an option.
During the quarter did you purchase any stock, I'm sorry I didn’t catch that?
So, we did not acquire any shares in this quarter. We have an authorization that's available and its approximately $20 million. So, relatively modest, it's the annual acquisition that we typically will try to make to offset the dilution that comes from just our stock compensation programs. But other than that, we have nothing further and have not made anything in this fiscal year-to-date.
Okay. Great color. Thank you so much.
And I'm not showing any further questions. So, I’ll now turn the call back over to Mr. Shaffer for any closing remarks.
So, thanks Bridget. And I just want to thank everyone for attending the call today. We look forward to seeing you at the New York Stock Exchange on the 28th. And have a great day everyone. Take care.
Ladies and gentlemen, this does conclude the program. And you may now disconnect.
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