Eaton Corporation plc (ETN) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2011 Cooper Industries plc Earnings Conference Call. My name is Rassenia, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Kyle McClure, Director of Treasury and Investor Relations of Cooper Industries. Please proceed, sir.

Thanks, operator, and good morning, everyone. Welcome to the Q3 2011 Cooper Industries Earnings 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 will refer to throughout this call. If you'd like to view this presentation, please go to the Investors section of our website at 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. Now let me turn the call over to Kirk.

Thank you, Kyle. Good morning. We're very pleased today to report the best quarterly earnings per share in our company's 178-year history. While over the past several years, we've had tremendous economic volatility and uncertainty, it's a tribute to our 26,000 employees and their commitment to our long-term prosperity that allows us to make the right long-term investments while delivering record results during such difficult economic times. In addition, from a process perspective, it is our policy to give quarterly and annual guidance. When there are macroeconomic changes; internal investments; restructuring; sales, margin and execution updates; modifications or refit that need to be communicated, we will pre-release updated estimates during the quarter as we did mid-September before the Citigroup conference in Boston. With the heightened economic volatility, it is more difficult to give accurate estimates quarter-to-quarter, but at the same time, we will not be constrained in how we run the company during our quarter because of our guidance. We focus on our long-term competitive position and long-term shareholder value, and we'll react quickly to changes in global market conditions. If you turn to Page 2 of the web pages now, I'll summarize the third quarter. Our total revenues were up 12%, with the core up 7%. Energy & Safety Solutions was up 15%, with the core up 9%, and Electrical Products Group was up 9%, with the core up 5%, solid performance. Our third quarter earnings per share, as I said, were $0.98, up 15% from last year and is the best earnings per share on a quarterly basis since the second and the third quarters of 2008, again on slightly less revenue from those periods. Consolidated operating margins were 14.8%, down 60 basis points from the third quarter of 2010, not a great result. The Energy & Safety Solutions operating margins came in strong at 16.7%, Electrical Products Group margins were 13.9%, down 220 basis points from last year. We laid out several of the issues on our September 15th update, and as you'd expect, Dave will have a detailed page walking you through both the segment margins year-over-year later in the presentation. Our tools equity earnings were $16 million or $0.08 a share, in line with our guidance, and our free cash flow was strong again at $358 million year-to-date or $25 million ahead of last year, and we've laid out about $1 billion year-to-date on a variety of different activities that we'll walk you through. And again, we maintain great flexibility on the balance sheet. All in for the third quarter, our performance was strong given the tough macroeconomic environment, with record earnings per share and continued strong cash flow. If you turn to Page 3, the core electrical growth trends. First is that the third quarter was our sixth consecutive quarter of solid strong core growth despite 40% of the portfolio tied to construction markets that are still at very depressed levels. As you also note, looking at Q4, we come up against very difficult comps of a 14.1% core growth rate year-over-year. If you turn to Page 4, this is a new slide that we want to describe the macroeconomic environment by geographic region first. Clearly, the U.S. is entering the late stages of the economic cycle, still growing but at a very slow rate. Unemployment remains high, federal-state deficits remain an issue, and required legislative policies seem to be uncertain in the election year. Europe is at or near recession levels with negative or 0 GDP growth. China's still forecasted to grow high single digits but accelerated inflation and tough lending standards will dampen the overall growth and investment outlook. The good news is that other emerging economies seem poised to still grow mid-single digits. Healthy balance sheets, growing middle-class and an effective monetary policy seem to be the backdrop to modest sustained growth for these economies. If you turn to Page 5, we'll go back and review the end markets now. Industrial MRO remains strong, with strong project business at MRO business in the energy, oil and gas sectors. We see some softening in factory utilization in general industrial but still growing modestly. Our utility markets, we had strong shipments in the quarter, switchgear and regulators, but modest growth in other product lines. EAS was down just modestly in the quarter. Our Commercial Construction business was flat again. We continue to see strong demand in retrofits and energy efficiency products and our controls business, but the overall new construction projects remain very, very depressed. And lastly, the residential markets flat to slightly down, again with high unemployment, stalled foreclosures and falling housing prices, we see no evidence of any recovery this year. In summary, the U.S. economy seems to have stalled, while pockets of growth remain around our Industrial and Utility businesses. Europe has gone flat to slightly negative and developing economies remain one of the few bright spots around the world. Despite this overall gloomy outlook, we remain confident we can continue to grow because of our relatively small share in the $140 billion global market we serve and because of the heavy investments we've made in expanding our geographic presence and new product introductions we've made over the last several years. If you turn to Page 6, let me comment now on our 2 business segments: Energy & Safety Solutions. During the quarter, 2 of the 3 divisions in Energy & Safety Solutions had double-digit core growth, with Cooper Safety, our European headquarter business being down just slightly. Global energy, oil and gas and utility sales were solid, developing markets were up over 20%. Our book-to-bill was 100% and again margins were healthy at 16.7%, down just slightly over last year on some additional restructuring, stepped up investments and global vertical sales initiatives and increased R&D spending. If you turn to Page 7, Electrical Products Group highlights, all 4 divisions had positive core growth, but obviously a very difficult macro environment with continued construction weakness and our electronics business down mid-teens. Developing markets were up mid-teens. Retail was down slightly, our book-to-bill was 100% and again, margins were down over 200 basis points due to some recent acquisitions, material inflation, stepped-up investments in both SG&A and R&D, and again, Dave will give you the specifics. Overall, we're very pleased with investments we've made around growth, international, new products and M&A, and our competitive footprint. We're equally confident that we will see the benefits of these investments and improved execution around productivity, restructuring and pricing, and hence expect to return to more normal operating leverage increases on revenue increases as we head into 2012. 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, and we'll start to Slide 8. Just recapping the performance for the company, sales for the third quarter were $1.39 billion which as Kirk mentioned, a 12% increase over the third quarter of last year. Our core revenue increase was 7.1%, revenue increasing 1.6% because of currency and acquisitions increased sales by 3.3%. The quarter price was 1.9% positive so certainly seeing some positive move there as we had expected and planned. But I'll add at this time, because of the pricing actions, material cost stability, overall, we were positive from a material inflation gap but a little different results by segment. The ESS group was net positive, however, the EPG group as you'll see later, was negative. Our book-to-bill in total was 100%, with both groups ending at 100%, I would say the bands were fairly narrow from 99% to 102% so all the business is still showing decent order rates despite some of the macro concerns that are out. Sales outside the U.S. were 40% of total sales in the third quarter, with core U.S. sales being up 7.4%, core international sales being up 7.8%. The core international sales, we saw nice growth in Latin America, Russia, Eastern Europe and Asia, improving sales in Africa and the Middle East. As Kirk mentioned, a little tougher picture in Europe, weak sales there. As shown in this morning's release, we reported $0.98 per share from continuing operations as compared to $0.85 per share in last year's third quarter. And as Kirk mentioned, the $0.98 is a record for Cooper, which we're quite pleased with especially considering we're still not back to record revenue levels. Now we'll turn to Slide 9. Our gross margin was 33% in the quarter as compared to 33.8% last year, and we'll look at some of the margin drivers in a few slides. On an incremental basis, the $39.4 million of additional gross margin dollars on the $149 million sales increase is all within a published 26.4% leverage. Including gross margin was about $5.7 million of restructuring, which is above last year's level, as well an incremental $5.6 million of R&D investment. So adjusting for those 2, leverage would have been 31%. Our SG&A expense for the quarter as a percent of sales was 19.4% as compared to 19.1% last year. We continue to support investments in new product development, marketing and commercial, especially international and other resources, as we step up the organic growth profile which we think continues to be extremely prudent, given that strong indications that global growth is slowing. General corporate expense was $24.6 million as compared to $22.9 million a year ago. This increase is a result of some of the growth initiative spending and cost related to legal and M&A matters. Turning to Slide 10, operating earnings increased 7.3% to $205.3 million. Our operating margin decreased 60 basis points to 14.8% from the third quarter of 2010, and operating margin last year being 15.4%. Again, I'll cover the drivers of the margin change in a few slides. On Slide 11, interest expense increased to $16.4 million as a result of debt we issued in the fourth year of last year. Effective income tax rate for the third quarter was 15.2% versus 20.9% for the third quarter of last year. The actual income tax rate for the quarter was slightly better than our guidance, due primarily to the final accrual adjustments resulting from the completion of the 2010 tax returns. Our third quarter continuing income increased 13.1% to $160.2 million. Slide 12, I'll touch on more details on the segment performance. Our Energy & Safety segment sales of $752.2 million were an increase of 14.7% as compared to last year. Currency positively impacting sales by 2.5%, and acquisitions positively impacting sales by 2.9%. As Kirk mentioned, the performance is due to particularly strong sales on the Power Systems and the Crouse-Hinds business. The segment operating margin decreased 20 basis points to 16.7%. The positives for the operating margin were volume, productivity and price, which unfortunately was more than offset by the impact of acquisitions, restructuring cost, as we mentioned in our September 15th release, inefficiencies related to the restructuring and then also the investments we're making in strategic growth initiatives. With regard to those inefficiencies, I should add that we do see a little light at the end of the tunnel with regard to finally getting past those issues, and we should see those results this quarter. We had a pretty significant plant move, as we mentioned in the pre-release, and I guess the learning curve, the start-up curve was a little tougher. So we got behind a bit both in terms of sales. We probably thought $10 million to $15 million of sales get pushed because of that, and then we saw operating inefficiencies due to labor, scrap and running the plant. And that probably cost us about $2 million in the third quarter as well. So again, we do think we'll be past those in the fourth quarter which again nice wind in our sails, I guess, for next year. We'll see the benefits of the restructuring, and obviously not have these inefficiencies to deal with. On Slide 13, Electrical Products Group. Sales were at an increase of 9% for the quarter. Currency increased revenue by 0.7%, and acquisitions added 3.7% to sales. The segment continues to benefit from strong demand for MRO, industrial and in energy-efficient lighting products. As Kirk mentioned, our Residential and Commercial-facing businesses and our Electronics business continue to see tough end market environments. The Electrical Products Group operating margin decreased 220 basis points to 13.9% as compared to the record margin of 16.1% last year. As we look back, the 16.1% was certainly an all-time record for that segment and above their normal run rate. And we'll look at the margin drivers on the next slide. Before we turn to that slide, I'll provide an update on the Tools JV. The business results were slightly below our initial guidance but certainly a nice improvement from the third quarter of last year. Sales in the JV continued to be strong for Power and Professional Tools and strong for International Hand Tools, with softer sales seen in North American Hand Tool business. And the integration and synergies continue to proceed well. Now turning to Slide 14, we’ll spend a little more time looking at the operating margins. We've discussed the ESS segment margins were positively impacted by volume mix, price that of materials, so it's nice to see the corner turn particularly on price versus materials. There were negative offsets as a result of the impact of acquisitions, inefficiencies, as I mentioned, related to the factory move which unfortunately negated the positives from the productivity. Certainly, restructuring costs continuing and then the growth investment impact. With regard to the EPG segment, we saw a negative impact from the acquisitions, but in addition, we continue to chase material inflation with price. This issue is specific to certain product lines within 2 businesses. And I'll add, given the focus on other earnings call, that Lighting is not one of those businesses. And so we continue to address that and we will look at further actions to address that in the coming quarters. In addition to the growth investments, FX and net productivity also decreased margins. We're certainly not happy with these results. We're committed to the restructuring and strategic growth initiatives, committed to offsetting inflation impact with price and the productivity. Turning to Slide 15, cash flow and debt. It was a much better quarter for cash flow. So on a year-to-date basis, we're slightly ahead of last year's free cash flow results. Free cash flow year-to-date is $358 million as compared to last year's $334.5 million. The growth of sales particularly in the international front continues to put pressure on working capital. However, our teams continue to do a good job addressing their effectiveness by focusing on the working capital metrics. As Kirk mentioned, our balance sheet continues to be in great shape. Our net-debt-to-total-cap is at 22.4% at the end of the quarter. The increase is primarily due to the over 7 million shares we bought back during the quarter. So we ended the quarter with over $400 million of cash. So we continue to be in fantastic shape to fund the core, pursue attractive M&A opportunities and return cash to shareholders. On Slide 16, we look at the working capital metrics, which again is a focus for our operating businesses. Inventory turns were 7.4 from the year ago, 7.1 so we're making nice progress there. Plan to continue to push inventory down the fourth quarter. DSO increased slightly from 61 days to 62, due in part to the mix of international sales and timing of some collections, and DPO was flat with a year ago. And all these resulted in our working capital turns and total remaining flat. Slide 17 is a familiar slide as we've used in many of our investor presentations but we have not used on a quarterly call. It's an update of our year-to-date cash deployment. As Kirk mentioned, over $1 billion deployed. $85 million of CapEx compared to $58 million last year so as we have guided all year, we continue to step up the investment to support our teams and their growth. We did repurchase over 7 million shares of our stock during the quarter, with issuances of about 300,000 shares for option exercises 401(k) and other programs. So we continue to exercise what we believe is a well-balanced and disciplined approach to capital deployment with one goal in mind, deploying cash for the long-term benefit of our shareholders. Now I'll turn to the guidance slide on Slide 18. This is our full Q4 and full year outlook. For the fourth quarter, we are forecasting sales to increase 4% to 7%, with the ESS segment up 3% to 7%, reflecting the goods, utility and industrial end markets and the EPG segment up 5% to 9%, reflecting continued strength in industrial products and energy-efficient lighting and both segments reflecting the impact of the businesses we've acquired this year. As Kirk mentioned on an earlier side, core sales are expected to be up low single digits due to some of the macro factors we've discussed, and to a degree last year's tougher comp. Projecting GAAP earnings per share to be in the range of $0.91 to $0.96. The fourth quarter and the tax rate assumption rates were 13% to 15%. We're expecting income for the Tools equity investment to be approximately $19 million for the fourth quarter. And we're expecting the price inflation gap to be neutral to earnings in the fourth quarter as well in total. We expect our full year CapEx to be in the range of $110 million to $120 million, and we continue to push to the target of 100% cash conversion, although we've said all year, a difficult goal, given the growth and the increased CapEx. Slide 19, we'll turn the attention to our 2012 outlook. We provided a month ago a preliminary outlook regarding 2012. I think the positive news is we've not made any significant changes to the outlook we previously provided. I would say that the continued global macroeconomic concerns have made us a bit more cautious however. We see the industrial and utility markets still to be growing although likely at a slower pace than what we saw this year. We expect residential to be up but obviously off a very small base. And we believe commercial construction will be a flat end market. However, we should continue to see growth as a result of the remodel retrofit activity and the impact of energy-efficient products. We also expect developing markets to be a solid source of growth, but again, likely at a lower rate than we saw this year. We're still rolling up our plans that would suggest that we would expect to see top line growth still in the mid-single digits. This is driven from the muted view of the end markets. From a macro perspective however, we think supplemented by the growth resulting from harvesting the benefits of the investments we've been making over the past year. From an earnings standpoint, we'd expect to translate mid-single top line growth and the double-digit earnings per share growth as a result of volume, productivity, neutral price and inflation and the benefit of a lower share count. On Slide 20, I'll provide an update on the M&A environment before I turn the call back over to Kirk. A couple of acquisitions noted here, the Martek acquisition, which was previously announced, provides a nice addition to the Bussmann transportation power management product offering. And we're very excited about the addition of this business, an outstanding team of people that are a part of this business. Also, in this morning's release, we announced the acquisition just last week of TOLCO. TOLCO is part of the B-Line business now, and it brings a portfolio of highly-engineered products to the B-Line business portfolio, with a focus on seismic bracing and solutions. Again, very excited about this business and very excited about the management team that came along with this business. Overall, I'd say we remain committed to finding M&A opportunities that we'll build on the core. We continue to be very busy in the business development area, evaluating opportunities. However, we're remaining very disciplined in terms of our process and our criteria for completing the deal. And certainly, with the volatility and uncertain economic backdrop, it makes that evaluation very difficult at this point. But again, a lot of activity there and confident we'll continue to supplement the core with acquisitions. Now, I'll turn the call back over to Kirk.

Thank you, Dave. Page 21 in summary on the quarter. Our core growth rates reflect the key investments we've made in the portfolio over the past several years. 7% core in the quarter and again our sixth consecutive quarter of strong positive core growth rate. The portfolio continues to be well-positioned. Developing markets are maintaining their momentum. And again, our 20% of sales was now 40% of our sales outside the U.S. Utility upgrade demand continues, with heavy investment around reliability, late-stage industrial. Oil and gas are still strong around our theme of safety and protection. Energy efficiency products continue momentum with alternative energy still expanding. Our new product portfolio or pipeline is in outstanding shape. We hit a record Vitality Index year-to-date of 28%. We were also recognized for the second time by The Patent Board as the #1 innovator. We've doubled our R&D spend over the last 5 years and remain committed to the new product portfolio. We continue to focus on operating margins headed into 2012, and we'll get our leverage back to respectable levels of north of 20%. And we maintain an exceptional balance sheet and strong cash flow. We repurchased 4% of our outstanding shares in the quarter, made 2 acquisitions for $240 million, and as Dave said, still have $430 million of cash and an uncapped credit line of $500 million. So lots of flexibility despite spending that kind of money on our repurchase plan. All in, we're on track to report another record year, with EPS up over 19% over last year. Thank you, and I'll turn it back to Kyle for your questions.

Thanks, Kirk. Now that Kirk and Dave had given their commentary on the quarter, we would like to open up the call for questions. Operator, the first question please?

[Operator Instructions] Your first question comes from the line of Jeffrey Sprague from Vertical Research.

Jeff Sprague. A couple of questions. First, just getting back on the idea of getting back on the incrementals, Kirk. To what extent is it growth-dependent? Obviously, you can't get incrementals on 0 growth but can you get 20% incrementals on 2% or 3% or do you need to be at 4% or 5% to kind of leverage at that type of rate? Any context there?

Look, I think we can get incremental growth and earnings and margin, Jeff, without volume, actually. I think that we've made significant investments in the R&D side, which goes in the cost of goods sold. We've made significant investments on the SG&A side. We've taken out exceptional restructuring in the third and the fourth quarters as we headed into the back half of the year. And so we're going out with sort of 2 variations to the budget. One variation says that you kind of get that mid-single-digit core growth rate. Some of the industrials even higher core growth rate and we'll play with that. But we'll have a second deck in our back pocket that says if you get no growth, what are you going to do with earnings? And so I think given where we are in the investment cycle, CapEx, new plants, relocations, there's a lot of stuff that doesn't repeat as we head into next year. So I think we feel pretty good about getting some base cost productivity and variable cost productivity without any incremental volume.

And some of that stuff that doesn't repeat, the difficult stuff like the plant disruptions but on the growth spend, is that something that you're planning to toggle quite actively? In other words, is it coming down regardless of what happens or...

Yes, I think that's fair. We're not building another global oil and gas vertical, so that sort of stays kind of flat year-over-year. But there are some additional things that we're combining some different jobs and looking at some additional productivity in some other areas to help pay for some of those investments. Plus those investments, Jeff, that went in this year now start generating benefit next year. So I think we took a big slug of investment this year but I'd see -- I think you could think about us tapering that off going into next year. So it's not going to repeat.

And can you give us a sense of how significant the restructuring tailwinds might be for next year?

I guess I don't have a handy summary but we probably -- in terms of spending and restructuring costs, we're in the $15 million to $20 million zone. As mentioned earlier, we don't have our financial planning completely wrapped up, and we're expecting continue to still deliver productivity. So that means more restructuring that will be in their plans, then in addition, some of the inefficiencies. For example, I mentioned in the one situation we had over the third quarter, tailwind there, for example, of a couple of million dollars, a bottom line impact next year, we should see the savings which is $3 million to $4 million on an annual basis. So we'll see. These projects traditionally have had a 18-month or less payback. I would say we're into some may be a little longer, 18 to 2- or 3-year paybacks. But we'll see some positive impact there and we'll address if there's anything we need to do to address the cost structure issues going into next year. So it will be a help but I'm not expecting that we will be reporting that productivity that's got up the brackets around it going forward.

And then just finally for me, the difficulty achieving price in EPG obviously will be largely tied to kind of construction weakness. But has your growth spending also been disproportionately in ESS? Just trying to kind of think about the spending versus the price realization and...

No, that's right. I mean, with the higher margins and where we're seeing the growth on the industrial utilities side, Jeff, that's where the spending increases have picked up. It's the European businesses, it's Crouse, it's Power Systems. Bussmann has been doing a lot on new products and new engineering. Lighting has spent a heavy amount on new products. We've talked about the record Vitality Index with a solid-state adoption and penetration coming on, so we're really well positioned there. We've been adding electrical engineers to design labs. So there's been an increased spend there, but I would say disproportionate to international and probably ESS is a heavier load.

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

First, I have a question on the core growth outlook both for the fourth quarter at 1% to 3%, and I'm trying to reconcile that with 2012 at mid-single digits. So it looks like fourth quarter has got a big comp. But are you expecting an acceleration into 2012 or is that part of your 2 scenarios in bridging those 2?

I think it's a combination of things going on. Certainly, we do expect to see benefits from the investments we've been making this year, so a lot of situations you're putting commercial people in now. We haven't got to the point of quarterly breaks next year in terms of that core growth outlook. But we're going to see benefits from having sales people, commercial people and marketing people in geographies and markets we've not had before. From a market standpoint, I think you can tell from the comments, not expecting a lot of tailwind at least initially. The construction markets are very difficult. Housing market's difficult. And I did mention and I think we mentioned in our pre-release, the electronic space now is not a huge business for us but it's one we saw a significant decrease in the coming out of June into July impacting the quarter, impacting the fourth quarter. And many of the folks in the industry expect it to be slow into probably the early spring. So there are a couple of areas where we say markets are going to pick up a little bit. Certainly, a lot of the view that next year is going to accelerate off the fourth quarter is more due to the investments we've made, the right products, the right people and the right geographies.

Okay, that's real helpful. And then going back on Slide 6 and 7 when you went through the channels and regions update for the segments, one thing struck me is both electrical distribution, which is a big part of your mix, you called out as being stable. So maybe it's how you're defining stable but we just heard some pretty solid double-digit results out of Wesco, which is one of your key distributors. So can you just talk about the channel, distribution channel and your ability to get price through that?

Yes, so I would call stable sort of mid-single-digit growth, so that's good. Again, Wesco, a little bit of a different mix in that they're a little bit heavier industrial and not as heavy on the construction side or residential side. So I think when you blend it all together for us, you still got to pick up that 40% that we have tied to construction. Plus, don't forget, Deane, what we call electrical distribution, we got a big piece in Europe and that was actually negative in the quarter. So when we talk to electrical distribution, we talk on a global basis, not just North America. And Wesco wouldn't have a European piece to it.

Great. And then just last question for me relating to M&A. We've had the dust settling on the layered acquisition interest. And you just got -- as you walked away from that, what are the lessons learned in terms of and messages for investors. What's the sweet spot for you in M&A? Is it the whitespace on adjacent markets or is it further geographic opportunities?

So what I would say is we stack right to the knitting. If you look at those 12 platforms that we talk about, which is a heavy emphasis on technology, heavy emphasis on international, classified products, Laird really kind of picked up 2 spaces for us: the Industrial Wireless and the electronics. It was a direct fit over about $150 million business we had in Bussmann. It was breadth of our product portfolio. It was European-based but again, it was sort of St. Louis run. So it was a business for the kind of where we already had a Bussmann headquartered. But I'd tell you, we saw a weakness even when we were talking to them early in that process in our business. We had pretty good diagnostics of what was happening out there. We mentioned that our Electronics business is down hard. You saw numbers out of Fairchild and Vishay and some of the other people in that space. And so, our aptitude or ability to look at different spaces and draw from a wide range of businesses is, I think, part of a lessons learned, and we can look at a lot of different areas for a lot of different kinds of businesses to bolt on to what we have. But I think that second piece is that we remain very disciplined. That thing kind of took on a life of its own. I thought the numbers we were offering were very attractive. I mean, look where the stock has traded since then. So I can’t imagine, that was a great decision for their shareholders. But life moves on. We spent a lot of money on our own stock at a very cheap price in the quarter, and as Dave said, we've got a fantastic portfolio of opportunities that we're looking at. So I think you go on from there. It'd probably be tougher if you're in a limited space and you don't have as many things to choose from but I think we can cast a pretty wide net in things that we look at that add and complement the portfolio that we have today.

The next question comes from the line of Julian Mitchell from Credit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I guess I just had one question around the sort of the price and material economics segment in your sort of your margin bridge. I mean, thinking about EPG, if you take the price efforts that you push through and that you're thinking about and you look at material prices, where they are now, what's your sort of view on how that 70 bps headwind, how that should trend through the rest of this year and sort of into early next, just based on cost today and what sort of price measures you've enacted?

Yes, I would say -- I would tell you that certainly, we're glad to see the material costs stable. I don't think material costs actually have to go down, it just have to be stable so you can catch up. That's always the challenge. And then in certain end markets, more difficult than others. So the businesses where we're having issues, more retail, more residential-type focused in one case; in the other, a little more related to construction expansion. So again, tougher end markets and tough competitors in both cases. So with the raw material costs behaving themselves a bit, we're certainly putting things in place to make this be a nonissue and something that we don't want to talk about, but that's going to take some time. Again, when you're facing retailers and so forth in the competitive market, tough but we'll see that get better. I think we have some things in place. We've done some things already that should make that gap look better in EPG, and there'll be more to do, and we're talking about exactly what and when on those actions.

I think the other piece I would add, and Dave and I were talking about this earlier, Julian, is that you got to remember, the volume running through those construction businesses are still about 50% or 75% of what they were through several years ago like housing starts and new project construction. So we still have absorption issues and are hanging on to the capacity in those factories. We're not willing to resize ourselves and not be able to handle the uptick in construction when it comes. So I think that's another piece of it. You look at the industrial utility side, easier to get price when volumes are kind of back. If you look at Crouse, if you look at Power Systems, if you look at Bussmann, volumes are kind of back to '08. If you look at Lighting, if you look at Wiring Devices, if you look to B-Line, the construction-related businesses, you have still 10% off, 15% off of the revenue levels that we achieved back in '08. So as you get a construction market that begins to pick back up a little or a housing market that picks back up a little bit, it will make that math a lot easier. Julian Mitchell - Crédit Suisse AG, Research Division: Okay, got it. And then just on the Utility business, you mentioned that at the end, now that it has sort of retraced back to volume levels sort of 3 to 4 years ago, how are you thinking there in terms of -- I know your exposure to sort of larger projects and so on is less than some other people in the field, but how are you thinking about -- or what are your conversations with utility customers telling you about the environment there in terms of projects and capital spending from here?

So the book-to-bill remains strong in the quarter. With sales up 10 book-to-bill with 100% for the quarter, been tracking pretty solid for the course of the year. The EAS, we showed you guys, distribution automation, substation automation, network optimization, some of the reconfiguration on the lines, the Yukon system all making that property much more attractive. So I'd tell you sort of mid- to high-single-digit core growth next year. Again, as Dave said, we haven't done the specific budgets but I've been talking to the division down there. International still grows. Again, we're building a new facility in Brazil so we still have some continued expansion we're making there. So I think the outlook for that is real strong for the next couple of years. Age grid, improved reliability and then electrification of emerging markets and increased spending around the world on energy efficiency.

Your next question comes from the line of Nigel Coe from Morgan Stanley.

Just wanted to dig into the 1% to 3% core growth in 4Q. You mentioned that Europe was down during the 3Q. I'm assuming it's going to be down in 4Q. I was wondering if you could maybe perhaps give a little bit of color on what you expect by region? And maybe secondarily if you could talk about how Europe tracked during the 3Q, i.e. did it drop off in September?

So yes, August negative -- no, excuse me, July negative, August positive, September slightly negative. We did have one issue with some labor in the month of September that caused us to lose almost a point of production in the quarter. So that kind of goes away, that labor issue has been solved, and so that irons itself out. So I think you can kind of think about Europe for us -- now again, I'm just looking at the Safety business. If you put in the oil and gas and some of the industrial stuff, it was probably net up. But I still think in the fourth quarter probably flattish to slightly up for Europe. The U.S. again still growing albeit at a slower rate but see no improvement in the construction or residential markets. China bounces around a little bit for us but still positive in China because we're still relatively small in the overall scheme of things. And then the other emerging market's still positive. So I think you got some acquisition, you got some FX in there as well so the printed number will be a little better than the 1% to 3%. But the September finished a little better for us, and so maybe we're being a little bit conservative in the estimate on the growth in the fourth quarter, if anything.

Yes, that's very helpful. If the 1% to 3% proves to be a conservative target, what are you inclined to do with any upside? One of your peers this morning raised their structuring target for 4Q to get ahead of what might be a more difficult 2012. Are you inclined to do that as well, Kirk?

We did it in the third quarter. It was part of our pre-announcement on September 15. We stepped it up. We had some additional things that we didn't call out. A lot of the stuff is normal sort of stuff, it's $0.01 here, it's $0.01 there, some stuff acquisition-related. Again, I mentioned the strike and some labor unrest in Europe. But we absorbed all that sort of stuff. It's normal course of business. Now I think we're in pretty good shape. We've been taking some additional moves in the third, in the fourth quarter on labor issues. And so I think as we head into -- I mean, I think we're going into this with our eyes wide open, and so I think our businesses have been taking those necessary actions to get their SG&A and some of their cost structure in line as we head into the fourth quarter already. So I don't think -- and as I sort of said in my opening comments from process perspective, just because we give guidance doesn't mean we won't step on the gas and take additional actions in the quarter because we've given guidance. Somebody sort of said about the $0.98, if you take out the restructuring, it prints almost $1. Well, it's all optics. I mean, at the end of the day, we got a business to run and we'll do what's necessary to run the business. So I think we're in pretty good shape. I think we'd kind of walked you through where we are.

And then just finally for Dave. The tax rate's coming obviously a little bit lower than you expected. Is the exit rate for 2011, is that a good base for 2012?

The tax rate?

Yes.

Yes. We haven't got the budget complete yet so I would tell you, until I see the distribution of income on a global basis and so forth, that's probably going to move around a little bit. But this year's rate certainly included some discrete favorable items. So where we've always advised people is to take the incremental income and taxed at more of a 35% marginal rate. I think if you just go through some rough math, it probably takes you closer to 18%- to 20%-type range as a very, very preliminary number.

The next question comes from the line of from Shannon O'Callaghan from Nomura Securities.

So Kirk, you had the Vitality Index that's come up nicely, and you've added people and you sort of feet-on-the-street for selling. What else gives you confidence that this is actually going to materialize next year and sort of a pick up towards that mid-single off of the fourth quarter? I mean, are you starting to see some either bookings or customer indications or some other flavor that these investments really are going to pay off next year?

Yes so I'll tell you 2 things. I mean, if you look at where we've been putting the bet, on the international, Shannon, I mentioned we're up 15-odd percent total international, I just pulled the number. We were up about 2.5% in Europe overall when you include Crouse and Power and Bussmann and everybody all in. So Europe was actually positive but the safety business was negative. So if you look at where we're performing on the international side, I just came back from the Middle East, we were in Asia, we're leaving for Europe next week. And then if you flip over to the new products and you look at the acceleration there, we started at 7% and we're pushing 28%. If you look at the margins associated with our new products, they are generally accretive. And so I feel pretty good about that. I think there's a significant way for us to go out and get into spaces, the solar business will be close to double this year versus last year. We continue to see great bookings on the oil and gas initiative, getting to the EPCs, calling on guys who are building rigs and platforms and marine ships and things like that. I think these new acquisitions give us the ability to look at customers that we've not looked at before. And so whether it's 3% or 4% or 5% next year at the core, I feel good about all that because we've been making those investments. And then Shannon on the other side of it again, I think we can kind of feather some of the other cost back a little bit, and we'll beat the guys a little bit to take some extra cautionary steps on the SG&A and the R&D side. And then we'll stop pouring the fuel on the fire, so to speak, and we'll set that back a little bit. And if you look at the share count, some of the productivity actions, I think we've got this thing in a pretty good position as we head into what we admit to is going to be a difficult year next year.

Yes. And so when you think about those other items, feathering back, I guess, when you think about the net of some of the production issues but also the gross investments, I mean, just to be clear, I mean, are those things actually going to be a tailwind because they're declining next year? Are you saying they're going to be flat as a percentage of sales? Or I mean, how do you actually see it next year?

Well, we're going to look at some places where we have redundancy built in, and we're going to take out some of that redundancy, right? So when you put this oil and gas sales team, the question is, "Is there other redundancies and things that you can kind of feather in and consolidate back?" We have looked at even the IR job merging that with the treasury job. Dave has picked up extra responsibilities on the operations side as we move the leader from the operations initiative down to one of our divisions. So we're looking at moving some of the corporate responsibilities down, taking some money out of some redundant functions and such. We're not going to unplug or unwind the investments that we're making in places like Central America. We put in a sales leader in Venezuela, Peru, Panama, Kazakhstan. We're not pulling any of that investment back because the world slows down. But there are other places that we can feather back and not have doubled up as much as we probably could have or we should have in the first place. So I think we feel pretty good about being able to do both things at the same time.

And I think the other thing is we're being obviously, you can imagine at Cooper, there's got to be a return on the investment so we're monitoring very closely. And those are great stories already. There's a fairly mature market out there that we weren't well-represented in. We put a new leader in. This person built the team, sales were up 30%. Another market I could talk about is we didn't have a single Cooper employee anywhere in the country. There's now 5 people there. Their sales are up 85%, albeit off a low base. So we certainly are tracking and monitoring and insisting that we see a return on investment. It's not unlike a CapEx or an acquisition that we would invest in.

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

So Kirk, as you think about pricing net for 2012 in just EPG, are you still anticipating that you'll see some pressures there? It's just a little unclear to me as whether you think the mix effect, pricing and so forth, as it relates to the -- does that component of the margin outlook does turn positive. I know you've got some -- you talked about the positive effects but I'm just wondering if core pricing, kind of gross pricing, you think you're going to actually be able get some traction there?

Yes, I think it's an overstatement to say it's ever going to be easy. I mean, the pricing is very tough. And then the EPG business, as Kirk mentioned, a little more residential/commercial-facing so you don't have the market helping you. And I would add in some of the bigger projects that you might see in non-res, pricing is still tough. I mean, people are going after these project quotes very aggressively. So I would say, as I mentioned earlier, the Lighting business, feel pretty good about that. I think they do a very good job of managing their margin, they price their new products, get the value out of them. They're very creative in dealing with their customers and try to come up with a win-win. Wiring Device business is a tougher win residential more retail-facing. So we've been -- Bussmann's done a nice job overall with their diverse markets and when you have nice technology, high spec-type products, lot easier. So not going to be easy, I expect it to be a challenge. But again, it's not acceptable in our company not to offset inflation with price.

I think the other issue, Terry, that we had is probably, hopefully not going to repeat, is one of the businesses takes in steel, and then when prices fall as fast as they have fallen, they get caught with higher inventory of steel and unfortunately the market prices start reflecting the lower steel prices. And so you kind of get caught in this gap a little bit. And so the best environment is a flat environment or a slightly modestly improving environment or inflationary environment. And this volatility isn't really great on our existing inventory and then our ability to take price in the market. So I think that subsides as you head into next year as well.

And in one of your, well, I guess another player in construction markets yesterday talked about a significant slowdown that they're seeing in energy efficiency retrofit activity. I don't think I heard you talk about that but I'm wondering if you could address what exactly is going on with energy efficiency retrofits. And if it is slowing, what do you think the drivers of that are?

No, we're seeing, -- I don't know who said that. I must have missed that. I listen to a lot of different -- but it could have been somebody in the adjacent space. But no, we're up strong. I mean, very strong. I mean, near 50% kind of strong on energy efficiency. We still had positive growth in our Lighting business for the quarter. We're positive growth year-to-date and still think that we stay positive through the end of the year. Again, we've made significant investments in the Vitality and a terrific sales team, agency base, work closely with electrical distribution on the Cooper connection. We've got a nice award in the quarter from one of our largest national distributors so I would say I haven't seen any weakness there.

Okay and just lastly. Dave, do you have share count that you're assuming in the 4Q guide?

I think we assume that to be pretty consistent with where we were year-to-date.

You mean, where you ended 3Q?

Correct.

Next question comes from the line of Adam Uhlman from Cleveland Research.

Could we follow-up on the Lighting comments that were just made? Could you put a finer point on exactly what kind of growth that you're seeing in the Lighting business overall? And then secondly, regarding LEDs, how the penetration there is progressing? And are you still being able to hold margins in line with other business as you had indicated before or is it getting better or worse?

Yes, so the growth rate there, again in a backdrop of a macro construction market with housing and non-res being still negative, probably 25% off of even a year or so ago, we're still growing albeit the last quarter at low single digits. We've made significant investments in our competitive position both on a restructuring and new products. You mentioned before we put in this LED lab that gives us the ability to do our own testing optics, heat. We have improved our Vitality Index to north of 30%. Our LED penetration continues to grow in energy efficiency products, not just around LED but around T5 fluorescent and all the lighting controls are up. Our controls business is up 30% kind of numbers. And so we continue to see a terrific, both core growth because of the new technology, and I'll repeat it, upsell on margin. We focus on upselling higher-performance products for a higher price, and we focus on returns that we can reinvest in our core, and of course, we'll reward shareholders for that. So Dave had a slide in the deck last quarter. If you don't have it, Adam, we can send it out to you. But it kind of walk through how we see the penetration progressing over time, what happens to the net growth rate and what happens to our net margin rate. And we still think that holds intact, that we can continue to grow margins as we grow the core growth and in an environment with no new construction.

Okay, thanks, everyone for participating in today's call. As a reminder, we will be filing our Form 10-Q with the SEC sometime the first week of November. Keep an eye out for that document. Everyone, have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.