Eaton Corporation plc (ETN) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Cooper Industries plc Earnings Conference Call. My name is Walter, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Mr. Dan Swenson, Vice President, Investor Relations. Please proceed, sir.

Thank you, and welcome to Cooper Industries First Quarter 2011 Earnings Conference Call. With me today is Kirk Hachigian, Chairman and Chief Executive Officer; and Dave Barta, Senior Vice President and Chief Financial Officer. We have posted a presentation on our website that we'll refer to throughout this call. If you'd like to view this presentation, please go to the Investor section of our website at www.cooperindustries.com. As a reminder, comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside the control of the company, and therefore, actual results may differ materially from those anticipated by Cooper. A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings. In addition, comments made here may include non-GAAP financial measures. To the extent they have been anticipated, reconciliations of those measures to the most directly comparable GAAP measures are included in the press release and the web presentation. Now let me turn the call over to Kirk.

Thanks, Dan. Good morning. We're very pleased to report today that our teams got off to a very strong start to begin 2011, reporting a strong combination of core growth, record earnings per share and ramping up our critical internal investments into our future. While there continues to be significant challenges in the global economy, domestic unemployment, European debt crisis, state and federal deficits, mounting global inflation, unrest in the Middle East and certainly, the earthquake in Japan, we still see global economic conditions on a slow but steady recovery. If you turn to Page 2 of the web pages, for the first quarter in 2011, we reported revenue at $1.28 billion, up 18%, with the core up 16%. Energy & Safety Solutions was up 19%, with the core up 16%, and Electrical Products Group was up 17%, with the core up again 16%. Our earnings per share were $0.93, up 33% over last year, and adjusted for -- excluding these discrete tax items, $0.87 or up 24% versus the first quarter of last year, both exceeding our peak earnings per share of $0.81 reached in the first quarter of 2008 so again, a nice return to record EPS profitability. Our total operating margin was 15.5%. Energy & Safety Solutions margins were 17.1%, and Electrical Products Group's operating margins were 14.8%. Our Tools equity earnings were $14.5 million or $0.09 a share, slightly ahead of our guidance last quarter, and our free cash flow was negative $26.5 million, of course, impacted by our revenue growth and continued investment in the core. If you remember in 2009, where our revenues were down 22%, we had free cash flow of $723 million or 14% of sales, and we had taken our working capital down 23%. So not surprising to see our core up 16%, increased investment in R&D, SG&A and CapEx up, not a surprise to see us go negative on the cash flow side. If you turn to Page 3 to talk about revenue trends, again really nice coming out of the fourth quarter at 14%, delivering 16% core in the first. But again, up against some pretty easy comps of the first quarter last year. A real positive, though, is we're $83 million or roughly 6% off record revenue, which is the first quarter again of 2008, and sequentially from the fourth quarter to the first quarter, about flat and again, most of you know that our first quarter is usually our weakest quarter. So clearly, our investments in the core over the last several years are paying dividends, but of course, we're also being helped by a nice recovery in the end markets. If you turn to Page 4, industrial and MRO remains strong. Our industrial production climbed 6% in the quarter. And in fact, the utilization increased to 77.4% but is still 3% below the 25-year average of 80.6%. And last week, you saw some really strong numbers on the oil services industry, the truck build industry, the hydraulics manufacturers and other industrials. Commercial markets continue to be resilient even at depressed levels. Vacancy rates are improving, quotation activity is way up, and we continue to see strong demand in energy efficiency and retrofit projects. Our new LED products are driving record vitality index at our Lighting business. And again last week, some positive news from the HVAC, elevator and other commercial construction-related industries. Utility markets continue to maintain momentum from the back half of 2010, with strength across all product lines and all geographies. We expect the strength to continue for most of 2011. And lastly, residential markets remain at depressed levels, with really no evidence of a near-term recovery. Recent estimates call for us returning to roughly 1 million starts, not to resume until probably 2013. So in summary, despite continued weakness in residential and nonresidential construction, we continue to show exceptional core growth and are investing in new technologies in new markets that we think will sustain our momentum well into the future. If you turn to Page 5 now, I’ll make comments about our 2 business segments on the Energy & Safety Solutions, which of course, is Cooper Power Systems, Cooper Crouse-Hinds and Cooper Safety. During the quarter, we had very strong sales growth in all 3 businesses, all up double-digits. Developing markets were up over 20%, our book-to-bill remains strong at 109% and excluding acquisitions and restructuring, our leverage was 24%, with segment margins again over 17%. We maintain a strong outlook for ESS as we continue to see strength in global energy and materials markets, utility industry increasing their spending on reliability and maintenance and the European economy is improving, as well as our backlog increasing. If you turn to Page 6, again for the EPG Group, these are our shorter-cycle, more construction-oriented businesses but still had a very solid quarter with core growth up 16%. Revenue for all 4 businesses was again up double-digits, and our backlog was up slightly with a book-to-bill of 101%. Total international was up over 20%. Retail was up mid single digits, and our margin leverage was 19%, excluding acquisitions and restructuring, hurt by higher commodity inflation with little realization of the pricing actions implemented into the quarter. We're very pleased with the overall performance of EPG, capitalizing on improved industrial and MRO markets, energy retrofit and expanding international opportunities. We see continued upside in EPG as our pricing actions take hold and domestic construction returns to more normal levels. Now let me turn the call over to Dave to provide you additional details on the quarter and update you on our full year guidance.

Thanks, Kirk. Before I begin my comments, as in the prior quarter, many of our slides have been adjusted to exclude the Tools business from the prior year for comparability. We've noted that on the impacted slides. Let's turn to Slide 7. Revenue, as Kirk mentioned, for the first quarter was $1.28 billion, which is an 18% increase over the first quarter of 2010. The core revenue increase was 16%, which is a new record core quarterly growth rate for Cooper. Revenue increased 0.5% as a result of the impact of currency translation, and acquisitions increased sales by 1.5%. For the quarter, price was just under 1% positive, and I'll add at this time, as we expected, the net price material inflation gap had a negative impact on margins on a year-over-year basis. The positive was that the gap was less than it was in the fourth quarter and totals just under $10 million, and we saw improvements as the quarter progressed and the price increases took effect. The gap was more significant in the EPG Group. Our book-to-bill was also strong at 105%, with our total backlog up 10%, obviously, both these on a strong revenue base. The ESS Group recorded the strongest book-to-bill. However, both segments were over 100%. Sales outside the U.S. were 40% of total sales in the first quarter. Core U.S. sales were up approximately 15%, and core international sales were up about 18%, led by Latin America, Russia and Eastern Europe and Asia. And I should mention that our sales in Africa were down although it's on a low base. In the Middle East, sales were up 3% despite the unrest that is present there. As shown in this morning's release, we reported $0.93 earnings per share from continuing operations, including the $0.06 discrete tax benefit items. That compares to $0.70 per share in last year's first quarter. Turning to Slide 8. Gross margin was 34% in the first quarter as compared to 33.7% last year. And I should note on an incremental basis, the $69 million of additional gross margin dollars on the $196 million sales increase resulted in a 35% incremental leverage, resulting from the price, productivity, sales volume, positive absorption, and that's despite the material inflation drag that I mentioned. The gross margin also included $3.5 million of restructuring, which although consistent with our Q1 2010 results, last year that was shown below the line so you need to move that up to make it apples-and-apples. Selling, G&A expenses for the quarter as a percent of sales were 19.6% compared to 19.8% in the prior year first quarter. The results included additional investments in new products and marketing and commercial resources as we continue to step up the organic growth profile, which we consider very prudent especially in this difficult acquisition environment. General corporate expense was $21.8 million as compared to $18.9 million a year ago. This increase is also primarily a result of growth initiatives. Turning to Slide 9. Operating earnings increased 24% to $197.6 million. Our operating margin increased 80 basis points to 15.5% from the adjusted first quarter 2010 operating margin of 14.7% due to the drivers that I mentioned previously. On Slide 10, interest expense increased to $16.3 million as a result of the debt issued in the fourth quarter of 2010, and our effective tax rate for the first quarter was 14.1%, with 19.4% excluding the discrete tax benefits versus 19.2% for the first quarter of 2010. So our first quarter income from continuing operations increased 31% to $155.8 million. Now I'll touch on the segments as well. Turning to Slide 11. From a segment standpoint, sales for the Energy & Safety Segment or ESS increased 19% to $680.9 million, with currency positively impacting sales by 0.5% and acquisitions adding about 2.8% to sales. This performance is driven largely by the Power Systems products. However, Crouse-Hinds and Safety businesses were also up double digits. The segment operating margin increased 20 basis points to 17.1%. Margins for this segment were positively impacted by volume, price and productivity, offset to a degree by material inflation. Additionally, there was $2.9 million of facility rationalization costs included in gross margin for the segment. On Slide 12, the Electrical Products Group. Segment core sales increased 17% for the quarter. Currency translation increased revenue by 0.5% and acquisitions added 0.2%. This segment continued to benefit from strong demand for MRO products, industrial, electronics and other energy-efficient lighting products. Electrical Products Group operating margin increased 50 basis points to 14.8%. The story was basically the same as with the ESS Group as volume, price, productivity were a nice lift to margin and a headwind from material inflation. We don't have a page on Tools, but I should mention that the results from the Tools business were slightly above our expectations. Sales were up again in the high teens and continue to be strong across most geographies and channels. And I should add that the integration and synergies are all proceeding extremely well. Now turning to Slide 13, it summarizes my comments on the various impacts to operating margin. Focusing on the green pluses, the impact of volume, productivity and leverage on growth was very evident. I’ll also point out what while we show the bottom 3 as red minuses, we are consciously investing in the core and continue to address our worldwide footprint, and we view these as short-term increase in cost with excellent future return profiles. Therefore, the only red minus that we really don't like is that price inflation economics line. Turning to Slide 14. I'd like to briefly discuss the impact of the settling of the Pneumo Abex litigation. As discussed in prior filings, on February 7, we entered into a settlement agreement with Pneumo Abex related to litigation between Pneumo and Cooper arising from the respective parties' obligations under a contractual indemnification agreement from 1994 related to certain products which contain asbestos. The settlement agreement was subject to a number of closing conditions including court approval and a favorable tax ruling from the IRS. These conditions were satisfied near the end of the quarter, and the settlement was consummated in a lawsuit dismissed April 5. In connection with this settlement agreement, Cooper paid $307.5 million into a trust, $250 million in cash at closing and the remainder in a note payable over 4 years. And Cooper's obligations under the 1994 indemnity agreement were terminated. Plans, which Cooper previously indemnified, will now be resolved solely by the trust. The impact to our March financial statements was the reconciliation of our net accrual, which have been maintained on an undiscounted basis, with the amount of cash in the note payable under the settlement. The initial payment of $250 million was made on April 5. So at the end of the second quarter, our balance sheet will reflect only the remaining amount payable for future contributions. I should add at this point that all the amounts discussed are all pretax in nature. The result of this transaction is the removal of a distraction for management, settlement of the lawsuit with Pneumo Abex and to provide potential claimants with a direct path to resolution of their claims. So some likely questions that I'll answer. The trust that results from this transaction is different than a 524(g) trust. In this case, claimants will continue to resolve their claims in the tort system just as they had before, instead of receiving a more formula-based amount in a 524(g) trust arrangement. It's also not the result of any bankruptcy, which is often -- which gives rise to a 524(g). The resolution of this matter resolves the Pneumo Abex portion of our asbestos docket, which is the only material portion in the financial sense. Cooper still has other unrelated asbestos claims, but we do not believe those claims will have a material impact on our financial statements or consume much management resources. The transaction is a result of years of effort involving many outside experts on both sides, and has consumed an incredible amount of management time. While the fact pattern and transaction are somewhat unique, we believe the matter is fully supported and the liability closed, and this allows management to refocus this time on running the business. So turning to Slide 15. The quarter was certainly a challenge, as Kirk mentioned, with regard to cash. We'll see on the next page that while our working capital turns improved, we were not able to improve those metrics enough to offset the impact of the sales growth. In addition, capital spending for the quarter, while in line with pre-2010 levels, was an increase of $10 million over last year's Q1. The net was the negative free cash flow of $25.6 million for the quarter. Nevertheless, our balance sheet continues to be in great shape, with our debt-to-total capitalization net of cash at 10.7% at the end of the quarter. We ended the quarter with over $1 billion of cash, and we continue, even after the trust payment, to just be in fantastic shape to fund the core, pursue attractive M&A opportunities and return cash to shareholders. Looking at those working capital metrics on Slide 16. The teams continue to improve our working capital metrics to offset the use of cash resulting from growth. Inventory turns increased to 7.3 from the year ago 6.7, and DSO, although it inched up to 62, it’s due primarily to the international sales distribution and timing of collections. DPO also improved to 51 days. And we continue to believe we have significant opportunity in this area. All this results in our operating working capital turns improving to 6.1 turns compared to 5.6 turns in the first quarter of 2010. Turning to Slide 17. Our capital expenditures for the first quarter were $25.8 million as compared to $14.7 million for the first quarter of 2010. We did repurchase approximately 100,000 shares of our stock during the quarter, with issuances of about 1 million shares for option exercises, 401(k) and other programs. And the board, as previously announced, did approve a 7% dividend increase at the February meeting. So now turning to guidance on Slide 18. For the second quarter, we are forecasting revenues to increase 10% to 13%, with the ESS segment up 12% to 15%, reflecting the continued strong utility and industrial end markets and we expect the EPG segment to be up 7% to 11%, reflecting continued strength in industrial products and energy-efficient lighting products. We are projecting GAAP earnings per share to be in the range of $0.90 to $0.95 per share for the second quarter. The second quarter tax rate that we used in arriving at this is a range of 19% to 20%. We expect an income from the Tools equity investment to be approximately $12 million for the second quarter. For the full year, we are increasing our revenue forecast to reflect 8% to 11% growth in earnings per share, including restructuring of $3.75 to $3.90 per share. I should also add this estimate does include the Q1 discrete tax item benefit but excludes, obviously, the discontinued op gains of $1.14 per share. We expect the price inflation gap to be neutral to earnings in the last 3 quarters of the year, meaning the Q1 variance will carry through the year. While we see a better environment for capturing the announced price increases, it still remains a very difficult process. We continue to expect the income for the Tools investment to be in the area of $60 million for the full year, and we expect the full year tax rate to be roughly 17%, with the third quarter being 18% to 19%, and the fourth quarter being more in the 15% to 17% range. We're maintaining the CapEx guidance we previously gave of $120 million to $140 million. So this, with our Q1 start, will make the target of 100% cash conversion a difficult goal, although it does continue to be a company objective. Before I turn the call back over to Kirk, I would like to comment that although we have started the year with very good performance, we remain the most excited about the future. As we look back over the past year, we have completed the Tools JV, reduced our share count, increased the dividend, closed the Pneumo Abex asbestos matter, completed 5 acquisitions, taken advantage of the debt markets to raise $500 million to strengthen our balance sheet and provide flexibility, and we've managed our U.S. pension liability to a 94% funded status. All these significant opportunities and activities have positioned us extremely well for the future. Now I'll turn the call back to Kirk.

Great, thanks, Dave. Again, 2011 is off to a very strong start with great momentum in our end markets and our teams executing extremely well, delivering growth, earnings and positioning us for terrific results for years to come. We believe we've made aggressive investments in new technologies, new business platforms and our global footprint are all now paying dividends. In addition, our financial health and flexible balance sheet allow us to increase our investments in SG&A, engineering and new facilities while we continue to deliver exceptional returns to our shareholders. Despite continuing challenges in the global economic recovery, we think Cooper Industries is poised for long, steady revenue growth and continued margin expansion. We're more focused, better aligned and more competitive than at any time in our recent history. We also see endless opportunities to grow profitably, both organically and through bolt-on acquisitions. As I stated when we started the call this morning, Q1 is off to a great start, and it's nice to be returning to record financial results. Now let me turn the call back to Dan to take your questions.

Thank you, Kirk. In order to give everyone the opportunity to ask questions, we ask that you limit your initial questions to 2 per caller. If you have further questions, simply re-insert yourself into the queue and we will answer those additional questions as time permits. Operator, we're now ready to open the lines for our first question.

[Operator Instructions] Your first question comes from the line of Bob Cornell with Barclays Capital.

Yes, a number of questions. I guess, to go back over the price costs, I mean, the comment I just heard was price cost neutral in 9 months, the gap, about what was expected in the first quarter but narrowing. Maybe, Dave or Kirk, you just go back over that point and give us a little more color, please.

Right, the first quarter gap, as I mentioned, was just under $10 million. I think the positive was it was a slightly larger number than that in the fourth quarter. And as the quarter progressed, so January to February and February to March, that gap was narrowing, which really reflected the price increases that we had put out in the market as they went into effect. So we still would have some price increases that would go into effect in the early part of the second quarter. And our expectation, based on our view of current price of materials and we think the guardrails are where they could go, those price increases would be sufficient to neutralize the inflation impacts in the second quarter. And again, our current guidance would include neutral impact second quarter, third quarter and fourth quarter.

So Dave, does that mean in the second quarter, guide is neutral? Is that what you meant?

Correct.

Okay. And then presumably, neutral for the balance of the year. Maybe with this good quarter, and Kirk mentioned some of this in the preview, but maybe just go back over some of the order and the inquiry and the backlog data to just sort of give us an idea of the momentum that carried out of the first quarter and into the second quarter, and really what's embedded in the outlook.

Yes, as far as the book-to-bill, in the fourth quarter, we were just slightly under 1. So we saw the book-to-bill, obviously, on a pretty strong sales quarter go to 105%, and that resulted in our backlog up 10%. And that really was -- we saw that -- I'd say the trends there are similar to the sales trends, strong in the utility, strong in our -- actually the Crouse-Hinds business, which is nice to see that business really coming on stream, strong. Again, across-the-board, there really wasn't a division that I could point to where we didn't see strong order intake. And none of that do we believe had anything to do, minimal amount to do with any of the price increases. So this is all, we think, underlying activity in the market that's driving the sales.

And around the world, Bob, as well. South America, Mexico, Asia-Pacific, all very strong. Middle East was kind of flattish. That was the only part of the world, because of Egypt and some of the other issues out there, was sort of flattish so pretty broad-based.

I guess 1 comment and I'll push my luck. I mean, you took your growth guidance for the company up and you took your tax rate down, but the guidance for earnings wouldn't seem to have gone up as much as the combination of the sales increase and the tax rate decline. Any sort of words of wisdom there?

Yes, I think 1 of the – a couple differences I had mentioned, if you go back to the outlook, we actually thought we would be neutral for the year on price costs. And now I'm saying that the variance we had in the first quarter, again a little bit under $10 million, will carry through. That's about roughly $0.05 a share that -- so our outlook has changed there a bit so there will be $0.05 a share. And then I think there, we have stepped up some of the investment, organic growth investment. We've stepped up the effort around new product engineering. We've stepped up commercial resources. We're putting more commercial resources in, particularly in emerging markets. And I would say that, that it would be at the high end or slightly above. And again, part of that bet is that the return profile there is pretty compelling versus some of the M&A opportunities we've seen. So we were probably at the high end or slightly over in terms of some of that organic investment as well.

Your next question comes from the line of Jeff Sprague, Vertical Research Partners.

Just first, I guess, Kirk, could you elaborate a little bit more on what's going on with the R&D spend and how long -- presumably it will equalize at some level and therefore, stops being kind of a drag on the spend and is in the base. And then what kind of growth payback or return are you expecting?

Yes, so it's a good question. I think, Jeff, if you go back in time, we didn't even have a metric around what we call this vitality index in the company. And it was 4, 5 years ago we started sort of saying to ourselves, "Look, we ought to be able to do a much better job on the organic side of this thing." I think second, as we not only put in a metric but we started buying higher growth platforms, you end up with more technology and a need to be more innovative. We've put in structure. So we've hired VPs of engineering for all the business. Several of our businesses had engineering and marketing collapsed into the same function. And so we've put in more investment in leadership and in resources there. The Wall Street Journal just came out with this patent review. Whether you like it or don't like it, you can certainly punch holes in it, but it had us rated #1 on quality of patents, number of patents and a number of different metrics. So from a company that couldn't sort of measure or talk about it 5, 6 years ago, we're pretty excited to be a 24%, rough math, of the products that we sell today didn't even exist in this company 3 years ago. And we see it as probably 1 of the best uses of capital. Our IRRs on most of our organic activities are north of 20%, and so it blends up our ROIC, and we don't mind the drag, actually. So we want to do more internationally for the local markets. You can't sell the U.S.-made stuff or the European-made stuff, necessarily are designed in a lot of the emerging markets. Putting in these new factories around the world and putting in more engineering and local capability on the design side. So I don't know where it ends, but I like where it's going and I'm going to put more money behind it.

But Kirk, should we think as a percent of sales, it continues to go up or have you found kind of the...

We think it plateaus out a little bit at that 25% mark, but I'm not so sure. I'm not ready to yet -- there are a number of businesses that are significantly below that. Now for example, Jeff, Lighting is at 30%. The problem there, of course, is you have this massive transformation in LEDs. And so once you convert your product line to LEDs 3 years out from now, that's going to come back down to a more normal level. But there will be the organic LEDs, there will be lighting controls out. Hopefully, we can continue to innovate. But I think 25% to 26%, yes, maybe it plateaus at that level.

I'm sorry, you partially misunderstood my question. I wasn't really speaking to the new product vitality but the level of R&D to drive what you want to accomplish. Has that kind of reached its level as a percent of sales? Or is that continuing to drift higher?

I would say it's probably close. I mean, in the first quarter, it's 1 of the massive increase in R&D spending. We were in the neighborhood of 3.5% in the first quarter. And it's not a...

2.2%, 2.5%.

And that's double what it was 5, 6 years ago, but probably close to where it's going to run going forward. But again, versus a year ago, it's still an increase of, I guess, over $8 million in R&D and engineering-related spending so not inconsequential but certainly doesn't move the numbers in a big way.

Then finally, just for me, a quick one on tax, Dave. The tax guidance, I guess, includes Q1 on an as-reported basis, that 14% or so. Should the historical framework of your earnings being taxed incrementally at somewhere in the neighborhood of 35% still hold off this level? Or is there some other dynamic as we move...

I mean, it should hold. There's nothing significantly different, any kind of discrete items, obviously, moved that as they did in the first quarter. But the 30% to 35% incremental is the right way to think about it, I guess, on a long-term basis.

Thanks, guys.

Your next question comes from the line of Scott Davis, Morgan Stanley.

Trying to get a little bit of an update on kind of what got you to the point where you wanted to do this deal with Pneumo Abex. I mean, for years, you basically said it was a lot cheaper just to pay as you go. What was the catalyst? I mean, what got you to pull the trigger here?

Scott, I think it's more of a distraction. A lot of effort, a lot of administrative work, you end up becoming a -- you have a number of people focused on this. It becomes a large administrative task. You're managing cases all over the country, and it really ends up being just a giant distraction. You're right. We could've managed it ourselves, and we have been managing it. There was not a single event. It was just sort of a nuisance factor, more than anything else.

Okay. Not to harp on price, but can we drill into inventories a little bit? And I guess, the crux of my question really is, given that you've been out there with pretty serious price increases for several months, I mean, is part of the big organic growth numbers you've seen in the last 2 quarters really related to folks building some inventory, buying ahead of some of these price increases? Or are you just not seeing that?

Not seeing that any material -- I mean, it's not even significant overall material. My guess is it's hard to always identify exactly why someone places an order this week versus next week. But if I went out and talked -- we did; went out and talked to all of our businesses, the number is insignificant. Their feeling was -- it was measured in millions, not tens of millions that they felt like may have been buying ahead of price increase.

And it didn't all fall in the last -- the order trends didn't jump up the last 2 weeks of the quarter either, Scott, which would indicate that it wasn't a pre-buy. So I think pretty level-loaded throughout the quarter, and I'd suggest where Dave ended up, pretty modest, if anything.

Okay, That's good. And just as a final question, where do you still get pushback on prices? Is it still kind of commercial construction-related products or is there any...

Yes, where you have the lowest utilization, right? Retail, because that's mostly residential that we'd sell into retail. And then on anything to do with construction, not really on the utility side, not really on the oil and gas side, not in the industrial space. But we have underutilized factories and excess absorption in the construction markets primarily.

Your next question comes from the line of Deane Dray, Citi Investment Research.

Kirk, would love to hear you follow up on the comments on commercial construction because in the prepared remarks, you called out a couple of end markets, HVAC, elevators and then some overall commercial spending retrofits. But it sounded a little more upbeat than some of the pain that we've been through in that sector for the past couple of years.

Yes. I'd say that, first of all, our Lighting business is the predominant business there. It came up against some pretty easy comps for us on a year-over-year basis. But if you look at the activity of the Lighting agents, the designers, the quote activity, a number of reasons to be optimistic. If you look at what's driving the business, the retrofit, the energy efficiency activity around LEDs and lighting control so all good stuff. So we called that to improve modestly over the course of the year, still think we could get off the bottom. We're still down 25% on total nonres, but believe that begins to get better in the back half of the year. And again, we look at these other companies to look at tracking. And so if you look at some of those guys on the HVAC side, on the elevator side, new construction, order rates there, pretty positive. Honeywell had pretty good numbers even on the security and services side as well. So I don't think we're the only ones seeing that. I think it's pretty broad-based.

But it sounds as though you didn't see any weakness on the Lighting side and the retrofits that some of your competitors might have reported this quarter.

I think you got to be careful up against some comps. I mean, we don't have as big of a space in retail. Our Lighting business tends to be a little bit heavier, what we call commercial industrial, little less retail over the years. If you go back 5, 6 years ago, we had a pretty big position over there and a little bit more growth internationally on the Lighting side. So I'd just be careful in kind of looking at the comps as well. Some of those guys were up pretty strong a year ago and didn't go down as probably as far as we did first quarter last year.

Your next question comes from the line of Julian Mitchell, Credit Suisse.

Yes, I just wondered if you could give some more detail around the Utility segment. I mean, you've seen a good pick up in, I guess, sort of replacement-type demands since sort of August, September last year. Maybe just an update on what you're seeing on larger projects, the quote activity and how you see sort of large products in the U.S. playing out in Utility.

Yes. It's surprisingly, across the world, all very strong and so very strong, strong order rates from transformers to switchgear, capacitors, really, almost in every product line so a couple of things. I mean, again, I think they were under spending for the duration of the 18 months over the crisis. I think they're seeing the economy improve, industrial demand improving, talking about alternative energies, buying more sophisticated hardware, capable of being remotely monitored. So that would mean all that distribution automation that we showed at our outlook meeting, capacitor banks, substation automation, the whole line of it, and I think the software piece is still to follow with more self-healing networks and again, remote diagnostics. So we were out with a couple of utilities, some co-ops and an IOU in the last month, all of them increasing their capital spending around both maintenance and reliability. So we think it has legs, and as Dave pointed out in the quarter, it was 1 of the businesses that book-to-bill for the quarter was 110%. So despite being up strong on the revenue side, the order rate was even stronger so that bodes very well.

Thank a lot. And then my second question, I guess, on sort of capital allocation and M&A. I mean, you mentioned before, I think, about potentially around sort of $300 million sales potentially to be acquired, that sort of number. But you mentioned in your prepared remarks at the beginning that it's a difficult M&A environment. So could you just maybe give an update on how you think about that?

Yes. I mean, the good news is we're seeing a lot of good properties come to market from private equity and a lot of different sources. I think Dave and I would say it's never been more active. We have very good M&A people out in our divisions. We're seeing a lot of deals. We probably go through almost 5 deals a week, it seems. The problem is the expectations of the seller have gone through the roof, 13x forward EBITDAs, and some of the terms and conditions that they're asking, which are no reps and warranties, you take it as is from private equity. We've got to be very careful around that. So while there are deals to be done, we're very conscious of about the prices you're going to pay for these things, and we have to be very disciplined around that. The good news is there's no shortage of where we look and where we can find properties. And so we're looking at about $140 billion served market. And so there's a lot of other things that we can kind of go out and do. When we go international, if we can't find the properties that we want, of course, we have organic-based plans as well and we try to execute those simultaneously so that we're not dependent on doing a deal for penetration. But it's active, it's exciting, we're engaged. But I would say the expectations are way up.

Your next question comes from the line of Shannon O'Callaghan with Nomura.

I wonder if you could just give a little more color on the pickup in Crouse-Hinds. I think you said that, that was double-digit this quarter. Maybe just compare how that's been tracking and add a little color on the dynamics.

Yes, I mean, I think again you kind of went back to the crisis, I mean, people pulled everything back. If you look at the oil services, if you look at the activity that's going on, a book-to-bill again, as Dave sort of pointed out, about 110% for the quarter all over the world. I mean, the only place it was a little soft for us was Europe. But Middle East was strong, Asia was strong, domestic was strong. You're seeing a lot of backlog with all the service companies. We've got this new organization that we're out implementing, trying to work with the EPCs, the global drillers, the upstream, the downstream guys. And we're finding, as we get out there and look, there's just a whole bunch of stuff that we didn't see before. We've made what, 5, 6 acquisitions around the space, the Hernis business, the CCTV business, the Raxton business that we acquired, all blend nicely to this full offering and package. I think all-in, now we're probably over $1.5 billion in that space and it continues to be a spot that we focus M&A. And it continues to be, as Dave sort of said, a spot that we're going to put more commercial resources around the world. We're focused on some of the Eastern European countries, places like Turkey and Iraq, South America, a lot of opportunity out there.

Okay, and then just -- just so on the tax rate, you gave the quarter as it kind of bounces around a little bit. I mean, are there more discrete things kind of baked in, in the fourth quarter of the year? Or what drives it to be sort of lumpy that way?

Yes, generally, there are. So there are certain things that we can anticipate that would cause the fourth quarter to be as low as it is.

So when we think about the incremental 35%, I mean, what would be the kind of correct adjusted base rate to be using x discrete items for the year?

I guess on a go-forward basis, that 35%, or I would say 33% to 35% is probably the right -- but then excluding for this year, if we're talking about excluding discrete items this year, we're more -- I guess, our effective rate is going to be more 19%, 20%.

Okay. So yes, we're not running it off the 17%, we're running it off the 19% to 20%, right?

Exactly.

Okay, all right. Thanks, guys.

Your next question comes from the line of Christopher Glynn, Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc.: Thanks. On the CapEx plans, just kind of goes back to the issue of tough M&A environment. You've ramped up some of the spending and investment through the income statement. What about abandoning the kind of free cash to net income conversion targets and maybe really deploy some CapEx globally? Is that something that enters your equation a little more seriously?

Don't help any of our divisions on that 1, Chris. We do have a CapEx plan, as we announced, $120 million, $140 million, which would put it at the high end of what we've done in certainly recent years. So we're not, in any case, shutting down capital spending to hit that type of goal. We've got a great track record on cash conversion, but we're not going to be shortsighted in our view of investing. And as Kirk mentioned and I alluded to, with the M&A market the way it is, there very well will be and there are investments we're making in certainly emerging markets, where we've chosen the organic path versus acquiring our way into our market position. So at this point, the $120 million to $140 million is a lot. We're not spending on that rate through the first quarter. But again, we have, as we've mentioned, a couple of big projects, 1 in Asia, 1 in South America that are pushing those numbers up. So our businesses aren't constrained. They have as much capital as they can prudently deploy.

It usually it ends being, Chris, people, design engineers, equipment engineers, things like that, that more limit us than the actual capital itself. So I think that's where we'd be a little bit harder to spend anymore, much more than the $140 million. Christopher Glynn - Oppenheimer & Co. Inc.: Sounds great. Thank you.

Your next question comes from the line of Terry Darling, Goldman Sachs.

Thanks. I'm just trying to understand guidance, elements to guidance a little bit more. I wonder if you can update us on what you're assuming on FX, the segment corporate item and that accelerated investment component that, Dave, you called out when you talked about some of the puts against where guidance has been moved to.

Yes, I guess, in terms of corporate expense, I would expect the corporate expense to be a similar percent of sales as it was in the first quarter, so probably rises as it normally does. But again, no expectations anything out of the ordinary at this point. And again, the kind of the incremental investments that were made in the first -- usually, the first quarter is the basis. I mentioned the R&D was about an $8 million incremental. So if you go back and take that and then the SG&A investments or the commercial resources, marketing resources and so forth that we've deployed. If you add those back, the leverage is certainly well within our range. We've said we're below that, given those investments. So expecting a similar type of, I guess, incrementals thrown all that in going throughout the year with the price inflation being the 1 add-back that I would say would be warranted.

Okay. And then in terms of the changes you made to the revenue assumptions for the segments, you beat the first quarter high end of the guidance range for EPG by 500 basis points. You're only taking full year up 300 basis points. And then I think for ESS, I think you actually missed the high end by 100 basis points, yet the full year is going up 100 basis points. I'm wondering if it's just some timing maybe on the EPG side. Maybe just talk through what has changed for the segments with regards to those full year guidance assumptions, and maybe start with where that first quarter upside on EPG came from. Was it Lighting? Was it Bussmann? Was it B-Line? Was it even? Take us through that.

Yes, I think on the EPG, continue to be positively surprised with how robust the markets are for Bussmann. We've, I guess, expected in the fourth quarter and somewhat expected in the first quarter, their sales to maybe slow into a more normalized pace, I guess. But they continue to see strong demand across all products: industrial, transportation and other electronics business. The Lighting business was a positive. I would say that they were at the upper end or above our initial expectation in the first quarter. And on the ESS group, as Kirk mentioned, utility looks strong, although they've got a tough Q4 to comp. But what we're seeing there is the Crouse-Hinds business continued to move forward so it's certainly a positive there. They were up high single digits in the fourth quarter, and as we mentioned, up double digits in this quarter. And in the Safety business, again mainly a European-based business, although not in Southern Europe, I would say that business probably at the low end of our expectations there so holding that group down a little bit.

Your next question comes from the line of Rich Kwas, Wells Fargo Securities.

Dave, quick question on Tools. Did you say $12 million is the forecast for the second quarter?

Yes.

Now if you go look back historically, that business usually grows sequentially. Is there something where there was a pull-forward in first quarter and some payback in the second quarter?

No, nothing like that. Just again, a strong overall performance in the first quarter or so, nothing out of the ordinary.

Okay. And then the guidance is $60 million for the year, is that correct?

Right, at this point, we're keeping that unchanged.

Okay. And then Kirk, on utility, so there was some pushout last year, and we're gaining steam on that front on the CapEx front this year. You started to face difficult comps late in the year. But is the order book and what you're seeing out there, it seems like it's giving you confidence that things are starting to set up. I mean, I know it's early for '12, but things are starting to set up okay for '12. Or do you have any read on that yet?

No. I think they're setting up well because if you get construction back, Rich, that's going to be another kick, of course. I mean, we're booking these kind of rates and shipments with all that catch-up, with new construction still in the trough, both residential and nonres. So if you get construction that picks back up, of course, you have to bring in the power on the distribution side and hook everything up, and that's always good for demand as well. So no, I think it bodes well and I think we got a bigger international presence with that business, and that's going to help us. One of the new facilities going into South America is for Power Systems, and I think the work that they've done through these acquisitions on the software/hardware side is unrolling nicely as well. So I think it's a combination of all the pieces. You saw Mike at Outlook. I thought he did a nice job of walking through how the business is different this cycle.

Right, okay. And last quick one. What was transformer pricing in the quarter?

I just don't have that split out in front of me. But I think it was slightly positive to neutral so no issues there.

Yes. The Power business overall was a slight negative, I think, overall. But I think transformers weren't too bad. I mean, we're indexing there and we're pulling some price there so not too bad.

Actually, pricing was a slight positive, their net was met. So pricing was positive overall in Power Systems.

Your next question comes from the line of Ajay Kejriwal, FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co.: So just a clarification on the guidance. The $0.06 gain tax items in the first quarter, is that embedded in your full year tax rate or what's the treatment?

Yes, that's embedded so it will be included. Ajay Kejriwal - FBR Capital Markets & Co.: So it's embedded in that 17%?

Correct. Ajay Kejriwal - FBR Capital Markets & Co.: Got it, good. And then maybe on Lighting, obviously, a very strong first quarter and you took price increases early in the year. Talk about pricing. Have you seen competition followed through to increases? And then what's the expectation?

No, I think we've seen a good following across all of our businesses and all of our industries. The Lighting guys, the top 3 have all announced increases. And I think we'll move in tandem. I think the thing that helps us well is the new product lineup that we have. Our service rates are improved, our lead times are down, and our new product pipeline is very, very attractive in that business right now with the investment we made in that LED center. So I think we're going to continue to expand margins, and I think we're going to continue to see strong growth as we go into the back half of the year. Ajay Kejriwal - FBR Capital Markets & Co.: Thank you.

Your next question comes from the line of Noelle Dilts, Stifel, Nicolaus. Noelle Dilts - Stifel, Nicolaus & Co., Inc.: Going back to pricing a little bit, when you implemented these price increases early in the quarter, you were looking at about roughly an average price increases of about 3% to 7%, and then we're looking to realize about half of it. Now that you've actually gone out and implemented the pricing and seen kind of the reaction in the market, what are your thoughts on the realization of the price increases?

Yes, I mentioned that price for the first quarter was just a little under 1% overall so that would be a weighting of those increases when they went in and then the capture rate. So I would say the capture rate, from all indications, has been pretty good. You obviously don't get it on 100% of your revenue. You've got certain things that might be under contract or quotes for projects that you might have put in place some time ago so those are obviously more difficult to go back. At this point, I think we feel very comfortable with the increases that we've put out there and always evaluating the material inflation dynamic to make sure we went soon enough with enough. So that's probably the bigger question here is being more forward-looking and thinking about material cost increase coming at us in the back half of the year and make sure we're out in front on that.

And I think on 2/3 of the business, the utility business, the industrial businesses are all seeing strong demand. And so I think the probability, of course, of getting their price increases in an increasing demand environment is certainly a lot better than it is on the decreasing side. So I think we'll be okay. Noelle Dilts - Stifel, Nicolaus & Co., Inc.: Okay, great. And then can you just give us some updated thoughts on how you're feeling about your footprint? And also, you've been talking about different sourcing actions, how you're kind of proceeding on that front.

I think as we've probably mentioned before, from a footprint standpoint, you're not going to hear about huge facilities that are being moved. I think the company did a great job of that over the last 5 years and particularly, when the economic downturn hit accelerated. So what you're seeing now are more optimization, getting the right product lines and the right centers of excellence and taking advantage of some labor opportunities and also, moving that footprint to more better accommodate the commercial side of it. So you need to be where your customers need your product. So I think that's more what you'll hear about from us going forward. So there's restructuring going on now. Next quarter, you'll hear about restructuring in the numbers, and we'll continue to adjust that footprint, again to take the optimum advantage of what we have to offer.

Yes, I think the new facilities are not to move things from the U.S., too. I think the new facilities are to accommodate additional growth we expect to get from those emerging markets. Noelle Dilts - Stifel, Nicolaus & Co., Inc.: Okay, great. Thanks so much.

Your next question comes from the line of Eli Lustgarten, Longbow Securities.

Can we go back a little bit over your guidance again? I guess, I'm having trouble. I look at 109% book-to-bill in ESS yet the 12% to 15% basically is putting the volume not materially higher in the second quarter than the first quarter, even though you do have $16 million of acquisition in it, and you got positive currency in it. And unless some of this stuff is way out in deliveries, I mean, it looks like we have this -- we're setting up for the same thing that happened, where you beat the number by 500 basis points. You should be at least the upper end if not a bigger number. You do the same thing in Electrical Products, you're basically almost predicting a flat volume, a very slight gain in volume, which is in a seasonally stronger quarter. I guess, I'm having real trouble. What's going on that's causing the second quarter volume forecast you have to be not materially different than the first quarter? It's a little bit higher, but not that by anywhere by the strength of the business.

Yes, I don't think there's anything out of the ordinary. We're going to definitely see the sales increase, Q1 to Q2. And I think again reflects all those factors that Kirk mentioned. You've got a lot of things going on in the world that our guidance obviously try to bring in, what's going on in the Middle East, what's going on in Africa, what's going on in Asia with Japan. So those are all factors. We are starting to anniversary tougher comps. It was last year in the second quarter where we started to see the utility business turn. As I mentioned earlier, the Bussmann business has been really on fire now for, I guess, 18 months, so they're expecting that to settle into a more normalized pace as well. So I wouldn't say there's anything out of the ordinary is our guys' best view of their markets and then obviously, on a year-over-year basis anniversary-ing tougher numbers as we proceed throughout the year.

Okay. And can we talk a little bit about profitability of the 2 segments? You went up a bit in the first quarter. It sounds like you're sort of expecting the current level, the first quarter levels of profitability to be pretty similar for the rest of the year, where you're expecting much improvement from it. The 17.1% and then the 15%, I mean, I expect it to go up a little bit but not a lot from the first quarter levels. Is that what I'm hearing from you guys because of all the investments?

Yes. I think our plans are to take actions to continue to improve margins, and certainly the price actions being part of it. But there's certainly an investment going on as well in terms of some of the restructuring, in terms of the SG&A investment on the engineering side and on sales and marketing. So that may mute it a little bit, but from an incremental standpoint, we're still holding them accountable for delivering some decent incrementals.

So do you expect to buy back much stock the rest of the year because it was 100,000 in the first quarter? Or has that sort of been shelved because of better opportunities?

No, the buyback program, we've got a good buyback authorization. I think we're still over 8 million shares on that authorization, so we'll continue to look at that as we always do as an opportunity to deploy cash.

Your final question comes from the line of Brian Langenberg with Langenberg & Company. Brian Langenberg - Langenberg & Company, LLC: Thank you very much. Just a couple of things on the tail that I don't think are a big part of your mix but would like to know what the impacts could be. Number 1 is whether the Halliburton or anybody that can sell energy, hearing a lot of evidence, and in fact, pretty obvious that at least in terms of upstream, that activity is probably going to tick up eventually or sequentially. Just review for us how much of your business mix is exposed to actually punching holes in the ground, oil services, things like that. And the second question is solar is all of a sudden becoming something worth focusing on in a couple of other companies. Just kind of review how much you have there, if anything, or stuff that might be even on the come.

Good question. So our oil and gas exposure is predominantly through Crouse-Hinds. But our Safety business in Europe also -- and that's $1 billion business for us. The Safety business in Europe has got what we call MEDC, which is the signals and alarms, and then they also bought the CCTV and a couple of the other pieces. So I'd say about a $1.2 billion, $1.3 billion of our total revenues so that puts it just over 20-odd percent, and that would be in our industrial segment. But to your point, we're seeing good strong order trends and even with the revenue up double digits and we mentioned that the book-to-bill there was 110%, and in Safety, seeing strength there. So I think you're right. I mean, whether it's Halliburton or Schlumberger or Baker Hughes or anybody, the Nabors, the Nobles, anybody in that space is continuing to see increasing demand, so we're very optimistic there. Margins there are very rich, and it tends to be 1 of our higher international mix businesses so that's all good news. On the solar side, mostly organic. You got Power Systems there. You got Bussmann there and you have Cooper B-Line there predominantly. Cooper B-Line doing the roof tray mounting support systems. Of course, Bussmann doing the protection inverters and then Power Systems, of course, wind as well. But I'd say about $60 million to $80 million of business growing very strongly but it's still a small piece of the overall pie. Somewhere between that $60 million to $80 million, we'll probably do this year in that vertical called solar. Brian Langenberg - Langenberg & Company, LLC: Okay, and then just 1 quick follow-up. In terms of the, let's call it, discretionary investing for growth in the quarter, how much did you spend more than you thought you were going to as the quarter progressed? Did you release another $2 million, $3 million, $5 million, $10 million? Or is this really you were kind of planning on it already?

We certainly had our businesses, just to give you a little idea on the process, put together their plans with somewhat of an accelerated organic growth mix, and then obviously tell them to be a little cautious. So we throttle it and released that as they basically justify the investments. But I mentioned R&D was up $8 million. And I would say if I went through sales and marketing, that we're over and above probably again in the neighborhood of another $5 million to $8 million roughly. So again, we've given them the green light to expand certainly in its emerging markets, as long as they're getting the payback on the investments just like the capital, they have the funding they need to grow their businesses. Brian Langenberg - Langenberg & Company, LLC: And just to make sure I understand right, that total is $13 million to $16 million more than you're originally planning? Or that's the absolute year-on-year number?

That's the absolute year-on-year number. Brian Langenberg - Langenberg & Company, LLC: Okay, thank you very much.

This concludes our Q&A session. I would like to turn the conference back over to Dan Swenson for closing remarks.

We will be filing our Form 10-Q at the SEC sometime the first week of June, so keep an eye out for that document. Also, we will be presenting at EPG on May 17, and we look forward to seeing all of you there. Thank you, everyone for participating in today's conference call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.