Lincoln Electric Holdings, Inc. (LECO) Q3 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lincoln Electric Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vince Petrella, Chief Financial Officer from Lincoln Electric. Mr. Petrella, you may begin.

Thank you, Kevin, and good morning. Welcome to the Lincoln Electric 2011 third quarter financial results and conference call. Our results for the quarter were released this morning prior to the market's open. You can obtain additional copies on the Lincoln Electric website or by contacting our Investor Relations department at 216-383-4893. Lincoln Electric Chairman and Chief Executive Officer, John Stropki, will start the discussion today by providing commentary on the quarter and segments. A Powerpoint presentation is part of today's discussion and will be available on the Lincoln website and posted as part of the replay. But before we start the discussion today, let me remind you that certain statements made during this call and in our discussions may be forward-looking, and actual results may differ from our expectations. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the company's operating results. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and Form 10-Q. Now let me turn the call over to John Stropki.

Thank you, Vince, and good morning, everyone. We are very pleased with the financial results we are reporting for the quarter. The strong sales and operating results were achieved despite the ongoing economic and political uncertainty around the world in many of the key markets we serve. Against this challenging backdrop, we continue to focus on our growth initiatives through strategic investments and new acquisitions, our new product introductions, increasing our commercial presence around the world, and adding new engineering and professional talent. During the third quarter, we recorded our 10th consecutive quarter of revenue growth. Sales rose 35.1% to $701.6 million, making it the highest sales quarter in our company's history. Equipment and consumable sales were both strong in the quarter, up over 30%. Net income increased 71% to $55.5 million or $0.66 per diluted share compared with the same quarter last year. Vince will get deeper into the numbers in a few minutes. But first, I'd like to touch on the quarter relative to our business segments and the general global economy. First, in North America, business conditions remained strong in the wake of the overall uncertainty in the macroeconomic environment. Sales for the quarter improved 35% from the prior year to $345 million. Export sales increased 27% in the quarter, and exports to the BRIC countries were up more than 37%. Economically, industrial activity continues to run slightly ahead of last year's comparables. Total manufacturing industrial production in the U.S. was trending 3.7% ahead of 2010 as of September. Capacity utilization was running at approximately 75.2%, nearly 15% higher than it was in June of 2009. The Purchasing Manager Index also continued to indicate a growing economy, although the third quarter measures were softer than the first half of the year, indicating a potential for some softening in the fourth quarter. Strong order trends have continued through the third quarter and into the fourth quarter. Our price increase of 5% for machines was implemented on October 3, and this likely contributed to some modest forward buy. During the quarter, we acquired Techalloy and Torchmate. Techalloy manufactures nickel and stainless weld wire and electrodes. Torchmate manufactures cutting tables. In Europe, the Middle East, in North Africa and Russia, for the third quarter, our European Welding segment sales were $128 million, an increase of 49% over last year. This strong sales growth benefited from the inclusion of our 2 Russian acquisitions. In the backdrop of increased macroeconomic uncertainties stemming from the sovereign debt challenges throughout Europe, Q3 demand was uneven from both the geographic and a market segment standpoint. Northern Europe markets remained steady while Southern European markets have softened. Positive sales growth in the Middle East and West African countries offset the impact of reduced demand related to the unrest in North Africa. Demand in the Russian market has remained strong for both imported products, for the energy market and those made at our recently acquired companies there, and the integration of our 2 Russian businesses is progressing according to plan. From a market segment standpoint, the automotive segments have remained stable. Longer cycle energy-related segments have continued to provide a source of strength. During the quarter, production commenced at our new electrode factory in Poland. This new facility allows us to further streamline our manufacturing footprint in the region, and position us well from both a cost and quality perspective to better serve the growing markets in Central and Eastern Europe. While our overall results in the region held steady in what was a seasonally weaker third quarter, the future direction of the market remains quite uncertain, as the ongoing debt crisis clouds the view for many of our key segments and customers. As I mentioned in our last call, Lincoln is a key global partner for the WorldSkills organization. The organization's global competition event was held in London a few weeks ago, and was attended by more than 200,000 people. Lincoln was the exclusive supplier of welding equipment and consumables in the welding and brazing competitions, and we demonstrated our advanced welding solutions, as well as our virtual reality welding system, the VRTEX 360. For Asia-Pacific Q3, Lincoln made modest but important progress, with sales rising 23% to $98 million year-over-year. In China, the summer season brought its normal softening along with some anecdotal evidence of more than seasonal weakness in some key segments. The tightening credit markets are being felt throughout many segments, as the Chinese government thrives hard to tame the sovereignly [ph] high inflation rate. In addition, weakening demand in the western export markets has provided for additional constraints to growth in China. Lincoln's China third quarter sales grew by more than 15%, but with profitability improving substantially more. During the quarter, we launched our shared service commercial company in Shanghai, which is an important milestone in configuring our China operations for maximum fixed cost leverage and market effectiveness. Despite the weakening external environment referred to above, our exports out of China continue to make very good gains. In other parts of the region, our young Indian company made important progress along its growth and profitability development curve, while our Australian company delivered its best quarter for quite some time. Going forward, the long-term outlook in Asia continues to look promising. The Chinese government continues to demonstrate discipline in controlling inflation, while focusing on long-term growth prospects, and the important energy and infrastructure needs of its region. According to the flash numbers from HSBC, the Chinese Manufacturing Purchasing Managers Index in October was at 51.1, up from 49.9 in September, marking a 5-month high. Another metric, the China Manufacturing Output Index, is at 51.7, up from 50.3 in September, and is at a 6-month high. In South America, Lincoln has benefited from our focus on key industry segments and our value-added solutions approach. The region continues to be driven by infrastructure investments and large-scale projects in the oil and gas, mining, shipbuilding, as well as overall infrastructure buildout. We have also continued to leverage our complete global product portfolio of products in South America, gaining key share in key markets in both equipment and consumable product categories. Our South American welding segment, sales were up 29.7% to $44 million. On a sequential basis, sales for the quarter increased 17% over 2011. Robust growth in Brazil, Venezuela and Argentina led the results. Changing over to the results for our Harris Product Group. The Harris Product Group finished the quarter strong with sales of $86 million, up 34.5% from the same period last year. However, this business segment continues to be challenged by the stagnant home sales, which are not forecasted to show a significant change until late 2012. Harris equipment sales remain strong with significant growth in the U.S. market. Momentum from the acetylene shortage with customers shifting to alternative fuel equipment, moderated through the third quarter as acetylene supplies stabilize. Retail sales for the segments retail business, WCTA, remained consistent in a very difficult market. Sales were up 13.5% over the third quarter of last year. As I mentioned, there are a number of events and activities that contributed to our growth in sales. Several of our welding industry segments where we participate showed strong growth in the quarter and improving potential for the future. The Heavy Fabrication industry, for example, continues to recover as the overall global construction increases and a high commodity demand drives investment in the mining market. The most recent update in the earthmoving and construction equipment manufacturers global production suggest that 2011 will exceed the production of 2006. Many construction equipment OEMs are reporting strong backlogs and significant investments in new capacities. For the agricultural market, we see a very similar story. Increases in global population continue to drive the market, and it is projected that the agricultural output must double by 2050 just to keep up with population growth. Activity in the automotive sector is improving, pegged to market-specific geographies. Globally, light vehicle production in 2012 is forecast to grow over 7% to $80 million units, with most regions predicting an increase in output above GDP. Production capacity investments continue to be strong in China, India, Latin America, Mexico and United States. Adding to the increased forecast and output is the fact that in the U.S., the average age of cars and trucks on the road is more than 10 years old, and those drivers will need to replace their vehicles much sooner rather than later. In Power Generation, nuclear is still the focus for several countries, including Poland, Lithuania, Finland, India, China and Saudi Arabia, which just announced plans to build 16 nuclear reactors over the next 20 years at an estimate cost of $7 billion per plant. We have received welding consumable orders for the 2 plants under construction in the United States, in South Carolina and Georgia. Lincoln is the preferred supplier of the arc welding equipment and consumable products for both of these nuclear plant projects. Wind energy, although the growth is slowing, is still moving forward. The French government recently announced plans for investors for a $13.6 billion project to build the country's first offshore wind power facility. This project calls for the installation of over 600 wind turbines at a number of sites along the French lengthy Atlantic coast. Wind farms are set to become an increasingly important source of energy for European Union. It is predicted that wind farms could supply as much as 49% of the EU's electricity by 2050 from today's current 5%. If true, wind would outstrip coal and nuclear combined. I should mention that we dedicated our own wind tower here in Cleveland at Lincoln Electric's world headquarters and major operations. The 2.5-megawatt system will supply electricity to our main manufacturing campus and will save approximately $0.5 million in electrical cost annually. In the pipeline sectant, Keystone XL pipeline project is moving through a thicket of issues. Approval of this $7 billion project is crucial to aiding our country's energy needs, creating jobs and having significant economic impact in the U.S. and Canada. The pipeline would carry crude from the Alberta oil sands to Texas refineries. Looking at the offshore. Emerging countries like Brazil are focused on exploring their own oil and gas reserves, so tapping these reserves is resulting in new offshore construction. In the more mature markets, North America and Western Europe, expertise for sub-sea engineering is high and these regions are also benefited from supplying critical components to the emerging markets. All of this provides opportunity for Lincoln Electric and our welding solutions especially developed for this segment. One important issue that will have a positive impact on several of our industry segments and our customers in those segments is the recent approval of the free trade agreements with South Korea, Colombia and Panama. That's a look at the segments. There are several key metrics that remain an effective barometer for economic impacts on the industry, and global steel production utilization is one of the most important. The World Steel Association, in its short-range outlook for 2011 and 2012, is forecasting that apparent steel usage will increase by 6.5% in 2011, following a 15.1% increase in 2010. The World Steel Association is also forecasting that the world steel demand will grow by a further 5.4% in 2012. According to the World Steel Association, in 2012, the emerging and developing economies will account for 73% of world steel demand in contrast to only 61% in 2007. As I mentioned a moment ago, we acquired 2 new businesses in the quarter, Torchmate and Techalloy. Torchmate gives us an entry point into the plasma cutting table market and Techalloy strengthens our specialty alloy consumable offering. During the quarter, we added to our existing strong executive management team by naming Chris Mapes Chief Operating Officer. Chris is an extremely capable manufacturing executive with broad industry and international experience, and is no stranger to Lincoln. He joined the Lincoln Electric board while a member of the executive management at A.O. Smith. An opportunity came up where we could secure his talents and we did. Chris joined our team on August 1, and is already actively involved in our global business. I would also like to announce that just last evening, Vince Petrella, Lincoln Electric's Senior Vice President and Chief Financial Officer, has been named CFO of The Year by the Crain's Cleveland Business magazine, a local business news weekly. One last note. We'd like to extend an invitation to all of you to visit our booth at Fabtech, the industry's trade show, being held November 14 through 17 at McCormick Place in Chicago. You'll have an opportunity to see our latest welding solutions and products showcased to a large customer audience. With that, let me turn the call over to Vince.

And thank you very much, John. As John highlighted, our third quarter 2011 financial results reflected a significant quarter-over-quarter improvement in revenue and operating earnings from the third quarter of 2010. Consolidated sales were up 35% and our operating income improved to $74.8 million. On a consolidated basis and compared with the third quarter of 2010, volume increased reported sales by 16.3%, and foreign currency effects increased our sales by 3.7%. Pricing increased sales by 6.9% and acquisitions contributed an increase of 8.2%. The sales increase from acquisitions is the largest impact on the top line since 2005, when a 7% increase in sales was recorded for acquisitions. Second quarter gross profit margins decreased to 26.4% compared with 27.7% in the comparable prior year period. The decrease in gross margin resulted from the acquisition of lower margin businesses in Europe and North America. Acquisitions and the related initial acquisition accounting effects reduced gross margins by 130 basis points in the third quarter compared to the prior year. The prior year did include a $815,000 charge related to the devaluation of the Venezuelan currency and the change to a highly inflationary accounting policy. SG&A expense for the quarter was $110.6 million or 15.8% of sales, compared with $95.6 million or 18.4% of sales in the prior year, an improvement of 260 basis points. The decrease in SG&A expense as a percentage of sales is a result of fixed overhead leverage in the underlying business, as well as the addition of acquisition businesses with lower SG&A expense structures. The increase in SG&A dollars were primarily driven by higher bonus accruals of $8.2 million as operating profit increased substantially on a year-over-year basis. Foreign currency translations increased reported SG&A expenses by $2.6 million in the quarter. Operating income for the quarter at $74.8 million was 10.7% of sales compared with $48.2 million or 9.3% of sales in the same year ago quarter, an improvement of 140 basis points. Acquisitions and the related initial acquisition accounting effects reduced operating margins by 70 basis points in the third quarter. The prior year's quarter included $1.1 million of special charges. Excluding these prior-year special items, operating income was $49.3 million or 9.5% of sales in the 2010 period. Net income for the third quarter was $55.5 million or $0.66 per diluted share compared with the net income of $32.5 million or $0.38 per diluted share in the 2010 third quarter. That's a 71% increase in diluted earnings per share year-over-year. Excluding special items, net income was $33.6 million or $0.39 per diluted share in the 2010 third quarter. The effective tax rate for the third quarter was 27% compared with 33.2% in 2010's third quarter. The effective tax rate is lower than the statutory rate and the prior year primarily because of the mix of income earned in lower tax rate jurisdictions. Now moving to the segments. On a year-over-year basis, sales in North America were up 21.6% due to volume, prices increased sales by 4.2%, acquisitions added 8.8% to sales, and foreign exchange increased sales by 50 basis points or 0.5%. Acquisition revenue primarily relates to the July 29, 2011 acquisition of Techalloy, the company that John mentioned in his comments, the specialty alloy consumable business. North America's EBIT margin was 14.1% of sales in 2011. That's a 110 basis point decline from the prior year. The effect of the acquisitions and the related initial acquisition accounting effects decreased EBIT margins by 120 basis points in the quarter from the prior year. Sales in Europe were 12.1% due to volume. Our Russian acquisitions added 23.5% to the topline sales figures, and price increases over the prior year contributed 4.4% to sales. Foreign exchange increased sales by 9.4% due to the year-over-year weakening of the U.S. dollar. Excluding special items, Europe achieved an EBIT margin of 7.8% of sales compared with 6.4% in the prior year, same quarter. On a year-over-year basis, sales in Asia-Pacific were up 14.2% due to volume, prices decreased sales by 1.4% and foreign exchange increased our sales in Asia by 9.4%. Excluding special items, Asia-Pacific EBIT margin was 1.9% in the quarter compared with a loss in the prior year. Sales in South America were up 19.3% due to volume. Price increases contributed 6.9% to sales and foreign exchange increased sales by 3.4%. Price increases in South America are above the welding segment's average because of higher inflation rates, primarily in Venezuela. Excluding special items, South America's EBIT margin was 9.1% of sales compared to the same amount in the prior year. Compared with 2010, sales in Harris Products Group were up 2.1% due to volume. Price increases contributed 30% to sales and foreign exchange increased sales by 2.2%. The price increases were largely related to the significant increase year-over-year in metals costs, primarily silver and copper. Harris Products' EBIT margin was 5.6% compared with 6.3% in the prior year, same quarter. Margins declined as a percentage of sales due to the margin compression effect of higher metals costs. Operating activities generated $84.8 million of cash flows in the third quarter compared to $56 million in the same period last year. Cash flows for the quarter reflect the much higher levels of earnings in 2011 compared with 2010. The company closed the quarter with a cash balance of $321 million and a net cash position of $227 million. Our cash to invested capital ratio is a positive 16.9%. The company invested $50.7 million in capital expenditures for the 9-month period ending September 30 this year. We estimate that the 2011 capital spend should finish the year at about $65 million. That's roughly in line with our annual depreciation and amortization expenses. During the quarter, we paid cash dividends of $13 million, and our weighted average shares outstanding for the quarter ending September 30 were 84,549,000 shares. And finally, we purchased $14.3 million of treasury stock under our existing share repurchase program. That's a total of over 455,000 shares at an average price of $31.43. That's the extent of our prepared comments. Kevin, I would like to open up the call for any questions today.

[Operator Instructions] Our first question is coming from Mark Douglass from Longbow Research.

Was there a LIFO expense in the quarter?

Yes, it was about $1.3 million, and the year-to-date LIFO expense was about $7.5 million. So we brought down our expectations of the inflationary impact of input cost, in particular, materials, so that $7.5 million should give you an idea of what our annualized run rate should be for the full year. But $1.3 million in the quarter.

Okay, and then, are you starting to see some cost relief on steel? You weren't really seeing it last quarter, but an indication that that might be coming down the pipe?

We're certainly seeing a flattening of the cost curve on the major material inputs. We've yet to see, at least on our major buys of rod and steel, a decline, but certainly a mitigation of the increases that we were seeing earlier in the year.

But certainly copper is...

Well, copper's not our biggest input, obviously. We buy hundreds of millions of dollars of steel rod a year, and copper's relatively inconsequential compared to steel.

And much more volatile, too.

Right, right. Looking at the North American EBIT. Are the acquisition expenses there -- any of them onetime, or is that mostly amortization?

Yes, there's about $1.8 million that I would categorize as onetime in the quarter. $1.8 million. That won't repeat itself. That represents a step-up with accounting and rollout of the step-up of inventories.

Okay, that's helpful. So assuming volume levels are maintained, you would see a little bit -- because the leverage was a little light, I think, relative to what maybe you would expect with an acquisition, so okay. That's helpful.

[Operator Instructions] Our next question is coming from Holden Lewis from BB&T Capital Markets. Holden Lewis - BB&T Capital Markets, Research Division: In Asia, talk a little bit about -- the operating margins held up very well, which is kind of surprising only because it looks like the pricing was somewhat negative. And so I think you made some illusions to various businesses in the Asia-Pacific region performing perhaps better than anticipated from a margin standpoint. It's just that historically, it's been usual to see sort of pricing weak and margins improving, so I want to get a little bit more feel for what's taking place in that region.

I would say first, Holden, we've focused -- and I mentioned in my comments about our central services company, we've had a lot of focus over the last 6 months on the cost base in Asia, with the idea that we were probably a bit ahead of the curve on a capacity and in investment side of things in the sales and marketing arena, and we want to pull that back and get a clearer view of what the middle-term view of the Chinese economy, in particular, was going to be. So that's had an important impact. Secondly, the type of business that has remained strong in China, the infrastructure business, mining and expansion in the mining arena in Australia, has had a big impact on our high-margin type of products that we import and sell into that region, and good profitability associated with that element of it. Holden Lewis - BB&T Capital Markets, Research Division: Okay, so mix was part of it, but you also sort of reevaluated, I guess, the spending behavior and just maybe scaled back that investment. Is that sort of what I'm hearing there?

Well, I think, Holden, we're making a steady, albeit slow progress on improving our business there, building our infrastructure, building our product portfolio, gaining competencies on our manufacturing operations. And so it's a reflection of us just slowly improving the business in China. And then, John, in John's prepared comments, he mentioned that our Australian business had a very good quarter, and one of the better quarters that we've seen out of that business in sometime. And they had a nice margin expansion, that's a very mature business in Australia. It's been around for the better part of 75 years. It can gain a leverage and good incrementals when volumes improve and sales increase. So it's a collection of improvements in the region, but in terms of China, we're making slow and steady progress.

The last element I would add to that is -- and it was also covered briefly in the remarks, is that we've had very good success on exports from China into other markets of the world at very good margins on the export side. Holden Lewis - BB&T Capital Markets, Research Division: Okay. So I guess on a broader picture, we've talked before about -- I mean, when do you sort of slow the rate of investment and begin to farm all the heavy investments that you've made? I mean, is this sort of what we're seeing, that you're sort of in that sort of farming mode? Or is this maybe reflective of just sort of some doubts about the sort of intermediate-term growth in those markets, what you're doing on the cost side?

I think it's a little of both. I think that we buildout a lot of capacity footprint, and after we get the brick and mortar side of it, we get a much better flexibility on adding the actual capacity increases that we need so we don't have the heavy investments there. We've matured in terms of our local competency and that's allowed us to redefine the cost base from a expat side of things, and focus more on our local resources. And as the economy has taken a bit of a pause, we have slowed our growth expectations for the future and the investments. But in no way would I want to leave the impression that we're not still strongly committed to that being a very important growth trajectory for the company, and we will continue to invest there as needed. Holden Lewis - BB&T Capital Markets, Research Division: And is this sort of philosophical shift, if you will, also true in the other areas where you're investing heavily? Where you're maybe sort of getting to the point where you can start farming it, like Eastern Europe and Latin America, or are those still more heavy investments and maybe earlier in the investments sort of curve?

Well from an investment standpoint, Asia will continue to lead the way and will attract the bulk of our investment, albeit that from a relative standpoint, at perhaps a little slower rate than what we've experienced over the past 2 or 3 years. The other markets we'll need to continue to mature in their development that I outlined earlier in my comments. But certainly, I would emphasize that Asia and China, in particular, will continue to attract a disproportionate amount of our investment, at least for the next couple of years.

Our next question is coming from Shivangi Tipnis from Mountain View (sic) [Barrington] Research Associates.

This is Shivangi for Walt. I actually understand the softness in China and the seasonal weakness that you spoke about with inflation index and stuff. But Asia has always been quite low and it's been like quite low for a long time. What new strategies or initiatives do you have in place to ramp up Asia in the coming future?

Well, as far as new strategies, I would say that we have a fairly long-standing strategy of building our business in Asia through 2 avenues. The first being searching for applications that make sense, that fill a geographical need, as well as a product line's need, to carry out the company's long-standing tragedy of providing a complete solution selling approach to end-users and through marketing channels in whatever geographies we participate in. And then secondly, developing on an internal basis our own capabilities in those markets. And so by way of history, at China, we've done a little bit of both. We've bought some businesses there, and we've also started up some new greenfields and those take a fair amount of time to mature and execute that strategy. India is an example of where we follow the path of greenfield. We have not acquired any businesses in India, but about 2.5 years ago now opened our first consumables plant in the Indian marketplace. And we're in the process of building that business around our manufacturing capabilities, supplementing those manufacturing capabilities with import products from around our world, and we will continue to follow that strategy of building out a complete and fulsome capabilities from a product selling, marketing and manufacturing standpoint. So that process will continue into the foreseeable future.

Okay. That's very helpful. Another one, as far as Europe, and as you know the conditions are quite uncertain, but then with the wind power technology that you spoke about in France, how do you plan to take advantage of that?

Advantage of what? I didn't catch...

The wind power technology in France, about the 600 windmills that you were talking about?

We have a very, very strong position in the wind tower segment on a global basis, both on the welding equipment and on the welding consumables side. So we're well ahead of the curve in the opportunity or the ability to take advantage of any opportunity in the wind tower segment. And as that unfolds, in whatever part of the world it unfolds, I assure you we'll be there with a very strong portfolio, again, both in equipment and consumables.

That really sounds helpful. The last question, for the tax rate, can you comment on the tax rate for the full year?

Well the tax rate for the full year should be in the high 20s.

Our next question is coming from Greg Halter from Great Lakes Review.

I wondered if you could comment on your relationship with IPG Photonics from maybe a products, revenues, application standpoint?

We're very early in the relationship and in the development of our strategy as it relates to hybrid laser and our association with IPG. I would say that the early returns from a market receptive side have been quite strong. That we've had continuous flow of customers from very different types of industries coming in and wanting and suggesting the opportunity to work with Lincoln in the development of hybrid lasers on a go-forward type strategies. From a revenue side, there's been very little at this point, and quite frankly, we wouldn't expect a lot in the short order but we do view it as being something that's got a lot of upside and a long track yet to run.

And any particular application that you can talk about?

Overlay has been a particular area. We're replacing powders with the hybrid lasers and traditional wire usages. It appears to offer some significant advantages. The welding of light gauge and nonferrous type of materials. I mean, it's a fairly expensive portfolio of things, Greg, that we're looking at. But again, it's still very early in the development side, and I wouldn't commit that any of those will be the absolute strength of the process, but we're quite optimistic that we'll find a sweet spot and be able to take advantage of it.

Okay, sounds intriguing. Relative to competition -- we're obviously all aware of the ESAB situation. Any commentary that you may have on disruptions on their end that may have had a positive impact on your business?

No, I mean, we generally don't comment on the competitive landscape other than talking about our success. There hasn't been much recent news about what the status of that transaction might be or in what part of the cycle they're in in completing or finalizing or whatever the transaction might exist with. We focus on the market regardless of the competitive activities and think that we're perfectly capable of competing with our existing portfolio of competitors or any change in the landscape of our competitive portfolio.

Okay, and I think earlier in the year, there were 120,000 miles of pipeline planned. Is that figure still accurate or has there been some bias upward or downward, or is it progressing along the way you thought it would?

I don't recall the exact number, Greg. I'd have to go back and pull up my notes. But I would say that based on what I'm seeing in terms of incoming orders for welding consumables and equipment for pipeline activities is it appears to be very robust. Now it's market-specific, but in most areas of the world it looks quite promising. Obviously, we're quite excited about the prospects of the Keystone project here in North America. We think that that would be very good for the U.S. and Canada in total, but it would be exceptionally a good opportunity for us on both the equipment and the consumables side, and we're quite hopeful that the State Department will approve that project and get on with it. That the U.S. needs to be better aligned with Canada as a source of supply for our energy and this is a great opportunity to do it.

Okay, that sounds like a very good opportunity. And obviously, there's been a lot of discussion about welder shortages and you've come out with some products on the trading side and so forth. Any update that you can provide there, whether or not it's having some impact in terms of helping the shortage, or this is going to be something that continues for years, maybe?

Well, I think that there's a lot of investment being made on the part of the trade unions and of all educational facilities, and then those training institutes that focus just on welding and the adding [ph] capacity. And I'm quite optimistic that those needs will be addressed. I commented about the WorldSkills event, which had 32 different countries competing in the welding competition. I talked to a lot of the experts that were there, and the educators that were there, and they're quite optimistic that those shortage needs will be addressed. And they're seeing that the technology in welding has shifted, that it's making a much more exciting career path for people. So there's good news on that front, and our virtual reality welder continues to be the most exciting training tool ever introduced into the welding industry.

Okay, yes, that's good. And then relative to the Fabtech that's coming up, I think I read that the attendance figures -- expected attendance figures are supposed to be up, and I think way up. Just wondering what we could possibly expect from Lincoln from that? Although I'm not sure you want to put that out there before the show.

Well, what you should expect from Lincoln will be to have the most professional booth in the show, the most dynamic display of equipment and consumables, and the most professional group of technical sales people to support those products in the face of our distributor and end-user partners.

[Operator Instructions] Our next question is coming from Holden Lewis from BB&T Capital Markets. Holden Lewis - BB&T Capital Markets, Research Division: Just unclear on the gross margin. So I mean, the gross margin declined from 28% in Q2 to 26.4% in Q3. It sounds like 30 basis points of that is from sort of a onetime -- that's $1.8 million, going up 30 basis points just from onetime. Are you saying that the rest of the decline is largely just the blending in of these transactions?

Yes. The rest of that decline that I discussed in my prepared comments are adding lower margin businesses to the mix. The acquisition businesses that we added at the end of July have lower margins than the base business at this point in time, and that was the degradation in margin and operating profit from acquisitions. So that's obviously not considered onetime. But certainly, our objective will be to integrate those businesses and work in improving their margins and profitability. Holden Lewis - BB&T Capital Markets, Research Division: Right, got it. And margins are reasonably stable versus Q2 if you make that adjustment, right?

Down slightly. Stable with the prior year, down from Q2. The other factors that affect us between Q2 and the third quarter is some seasonality factors that we've talked about in previous years. That sales can hold up, and maybe even improve, but we have a number of factories around the world that are not making products and therefore not absorbing overhead and therefore, having more period costs that depress margins. So -- but instead of seasonality, our second quarter holding, as you know, is always our best from a margin standpoint. And then third, it will tend to tick down a little bit, and then contributing to that tick down is some acquisitions that just came in in the third quarter. Onetime items and continuing lower operating profit base. Holden Lewis - BB&T Capital Markets, Research Division: Okay, but we should be thinking about it as sort of a base that's kind of in that 26.5 range with the acquisitions in there?

That's what we did in the third quarter. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And with respect to pricing, you said you're sort of seeing raw materials flatten at this point. You've put in a pretty good increase in October on the machinery side, I guess it was. You're seeing flattening conditions. What's the impetus to put the price increase through, and at this point -- what was sort of the price cost relationship in Q3, and what are you anticipating in Q4 and going forward?

Well, on the equipment side, you can appreciate, Holden, there's a lot more input costs that affect what our equipment might cost other than steel. That's actually a -- and commodities are a relatively minor part of our equipment portfolio. Electronics and the like are -- can have a much bigger impact. And that's also a realization that we needed to catch up a little bit on cost increases that had occurred earlier in the year that were necessary to pass through to the market to recover the input cost escalations earlier in the year. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And with regards to the consumables side, do you feel like you're caught up there? Even though I think things like rutile are still moving up, right? Do you feel like you're...

We don't look for any major changes in the consumable pricing in the fourth quarter, unless there's some major shift in the current landscape on either the steel or high-value nickel, stainless kind of products. I think that we're fairly well positioned for the rest of this year. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And in terms of that price cost relationship. Does it slip [ph] positive in Q4 and beyond, based at current levels of pricing cost, or -- how do you look at that versus Q3?

We believe it will improve in the fourth quarter. The dynamics of input costs and pricing should give us some incremental improvement on price costs in the fourth quarter.

Thank you. It appears there are no further questions. I'd like to now turn the floor back over to Mr. Petrella for closing comments.

Thank you, Kevin. And thank you all for your continuing interest in Lincoln and joining the call this morning. I look forward to speaking to you after our fourth quarter, and in the New Year in 2012.

This does conclude the teleconference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.