Altra Industrial Motion Corp (AIMC) 2010 Q3 法說會逐字稿

Greetings and wHGreeelcome to the Altra Holdings third quarter 20120 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Calusdian for Sharon Merrill. Thank you, Mr. Calusdian. You may begin.

Thank you and good morning. Welcome to the Altra Holdings third quarter conference call. On the call today is Chief Executive Officer Carl Christenson and Chief Financial Officer Christian Storch.

To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to slide one.

During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations.

Please refer to the risks, uncertainties, and other factors described in the Company's quarterly reports on Form 10-Q and annual report on Form 10-K, and in the Company's other filings with the US Securities and Exchange Commission. Except as required by applicable law, Altra Holdings, Inc. does not intend to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

On the call today, management will refer to non-GAAP adjusted earnings per share, non-GAAP income from operations, non-GAAP adjusted net income, non-GAAP free cash flow, and non-GAAP net debt. These metrics exclude any restructuring charges and any other items that management believes should be excluded when reviewing continuing operations. The reconciliation of Altra's non-GAAP measures to the comparable GAAP measures are available on the financial tables of the Q3 2010 financial results press release and accompanying slides on Altra's website.

I will now turn the call over to Altra's CEO, Carl Christenson.

Thank you, David. And please turn to slide two, third quarter 2010 highlights.

We reported our third consecutive quarter of year-over-year revenue growth and delivered another quarter of solid bottom line performance that demonstrates the excellent operating leverage in our business model. Sales grew 23% over the prior year to $128.9 million, and we reported a 333% increase in non-GAAP adjusted diluted EPS to $0.26.

We are pleased to see the demand environment continuing to go in the right direction. We had strong sales from our early cycle end markets like turf and garden, transportation, farm, and material handling. And we're also beginning to see increased demand, or at the very least, healthy order activity from our later cycle markets such as energy, power generation, and mining.

The effect of our permanent cost reductions and our ongoing productivity initiatives are clearly evident in our bottom line performance this quarter. We reported a 270 basis point year-over-year increase in gross profit margin and a 400 basis point increase in non-GAAP adjusted operating income.

We have also made significant progress in strengthening our balance sheet during the quarter. Our cash balance improved to $72.2 million. And we continue to improve our leverage ratio, which is currently the lowest it has been since we formed Altra.

With this strong balance sheet, we have the ability to execute on our organic growth initiatives as well as to make strategic complementary acquisitions that are quickly accretive and provide an excellent return on invested capital.

So, with that as a background, I'll now provide some insight into what is driving our top line. Please turn to slide three for a discussion of our end markets. First I'll describe what we're seeing in the distribution channel and then discuss specific end markets.

As you would expect, our distribution channel is predominantly comprised of sales of aftermarket parts and original equipment parts to small OEMs. Our distribution orders remained strong during the quarter, and distributors appear to be maintaining their current levels of inventory, which indicates the order growth is the result of real end user demand.

In the turf and garden, we continued to grow faster than the market, which was up in the mid single digits through Q3. We benefitted from a longer build season this year, receiving orders much longer than the typical season end in last spring. The Outdoor Power Equipment Institute, or OPEI, estimates that 2011 activity will be similar to 2010, which has been a pretty good year.

We will continue to work closely with our customers to collaborate on building safer and more efficient products. Our ability to provide just in time delivery is also a strong competitive advantage in this market.

In transportation, we reported another quarter of excellent sales in what has been a very strong market. While the automotive market growth is expected to normalize next year, we will continue to create new opportunities through our product development efforts.

Sales to the material handling market continued to be robust in the third quarter, especially in North America. We believe the demand was the result of the general improvement in the economy, and we expect this trend to continue into next year.

Our products are primarily used in material handling equipment such as conveyors, forklifts, and elevators. Our sales of products for electric forklifts and elevators were up dramatically again in Q3. We're seeing significantly increased quoting activity in the elevator market, being driven by new designs.

There has also been improvement in our sales to the conveyor systems market, which has been steadily improving since the beginning of 2010.

And finally, the ag market continues to be very robust, driven by significant demand for combine machinery. We have been running manufacturing lines 24/7 to keep pace with customer orders. We believe that some of this demand is coming from purchases in advance of the Interim Tier Four emission rules. We expect that increasing international demand will offset sales declines in North America after the new emission rules go into effect. We've very bullish about the ag market long-term.

I will now discuss our later cycle markets starting with energy. On the oil and gas side of the market, we're seeing stronger demand globally than domestically. The greatest demand in North America is in directional drilling, which requires higher horsepower drilling rigs.

OEM customers are still building new higher horsepower rigs, which is our sweet spot in the oil and gas market. We expect this market to remain strong with growth rates in 2011 similar to those we've experienced in 2010.

On the power generation side of the energy market, we saw some improvement in the third quarter. This market is now about flat when compared with 2009, which was a relatively strong year. We are continuing to see improvement in activity for high performance products for gas compression and transportation.

Turning to mining, this market continues to improve. As we anticipated, the quoting activity that we experienced earlier this year began turning into orders in the third quarter. We expect that to continue for at least the next few quarters. The greatest activity is coming from China and other developing industrialized countries, while North America remains flat.

There are also a few late cycle markets that are still soft but appear to have bottomed out, including aerospace and commercial construction. That summarized what we're experiencing in the major markets we serve.

A quick update on our plant consolidation efforts. The final two consolidation projects of the six we announced in early 2009 are nearly completed and the results of the receiving facilities have improved significantly. We expect the performance to be nearly back to pre-consolidation levels by the end of the year.

So far in 2010, we have experienced significant growth and expect the revenues for the rest of the year will continue at a similar pace. The economic indicators that we track and the initiatives that we are working on lead us to believe that we will be able to grow the top line at a healthy rate in 2011.

We have begun to roll out the objectives and initiatives associated with our 2011 strategy deployment. The strategic initiatives that we are working on are shown on slide four.

Organic growth at both new and existing customers has been a tremendous contributor to our success over the last several years. And we will continue to drive that growth through our focus on new product development. We are developing and implementing plans to expand our technical and selling resources in underpenetrated geographies.

We are working to broaden our presence in several key strategic markets including renewable energy, aerospace and defense, and transportation. This initiative has already produced results, with us taking our first production order from one of the world's leading wind turbine manufacturers.

We are investing in technology to improve the operating performance of the business, including a new ERP system and state of the art manufacturing equipment. We also continue to drive productivity improvements throughout all aspects of the organization with the Altra Business System.

We are making investments in our associates to help improve their skills and abilities, which will enable us to achieve our goal of establishing the strongest team in the industry.

Finally, we intend to continue to grow the Company through acquisition. The M&A environment has improved over the last several months, providing us with a very healthy pipeline of potential quality targets. As we have stated in the past, we will be prudent and only acquire companies that meet our criteria, which includes being accretive to earnings and offering complementary products or providing new geographic markets.

Now I'll turn the call over the Christian.

Thank you, Carl, and good morning, everyone.

Moving on to slide five and our unaudited third quarter 2010 results, our net sales increased 23% year-over-year to $128.9 million, and were down 3.1% sequentially as a result of typical Q3 seasonality.

Foreign exchange rates negatively impacted the third quarter top line by approximately 140 basis points when compared to the prior year third quarter, while price was scalable by approximately 80 basis points.

The profit margin was up 270 basis points to 30% over the third quarter of '09. And we continue to hover near record levels for this metric. What is really telling about what we have been able to achieve in terms of our cost reduction initiatives is that our Q3 2010 gross profit margin is up 130 basis points from the third quarter of 2008 when we reported record revenues of $159.4 million for the third quarter.

Sequentially, gross profit margin is only down 20 basis points from the second quarter of 2010 on $4 million less revenue. SG&A and R&D for the quarter declined year-over-year as a percentage of sales to 19%, down from 19.9% a year ago.

I should note that we have substantially completed adding back certain temporarily suspended costs. For example, we reinstituted the Company's 401(k) matching contribution as well as wage and salary increases.

During the quarter, we recognized certain discrete tax benefits. As a result, the tax rate for the quarter was 27.1%. For the full year, we expect a tax rate of 29% to 31%.

Income from operations climbed 117% to $13.6 million, or 450 basis points, to 10.5% of sales, up from 6% of sales in the year earlier quarter.

Excluding $510,000 in restructuring charges in the third quarter and $1 million in charges for the restructuring costs in the third quarter of '09, non-GAAP adjusted income from operations increased 94% to $14.1 million, or 10.9% of sales, compared with $7.3 million and 6.9% of sales for the same period of '09.

I'd like to note that, while we are pleased with the leverage in our business model in Q3, we still have not fully benefitted from our plant consolidation efforts. We expect these efforts to continue to ramp up through the first quarter of 2011.

We reported net income of $6.6 million, or $0.25 per diluted share, compared with net income of $600,000, or $0.02 per diluted share, in the prior year third quarter. Excluding restructuring charges and the premium on debt repurchases in the third quarter of '09, non-GAAP adjusted earnings per diluted share was $0.26 compared to $0.06 in the prior year period.

Slide six is a reconciliation that shows how we get from reported income to the non-GAAP adjusted income number, and how we get from reported income from continuing operations to non-GAAP adjusted income from operations.

Please turn to slide seven. Our cash balance of $72.2 million is up around $20.7 million compared with year-end due to free cash flow of $24.6 million year-to-date. Cash is also up sequentially by about $14 million as a result of positive free cash flow of $12.3 million in the quarter.

Slide eight reviews our working capital performance. On a year-over-year basis, our 23% increase in sales far outpaced a 10% increase in working capital.

Capital investments during the quarter totaled $5 million and depreciation and amortization was $5.5 million, both in line with our expectations.

We continue to fund growth opportunities such as renewable energy projects. As a result, we now expect to invest approximately $17 million in 2010.

As a result of our strong performance in the third quarter, continued demand in our early cycle markets, and signs of a recovery in select late cycle markets, we are raising our guidance for the year. See slide number nine.

We currently expect 2010 sales in the range of $512 million to $517 million and non-GAAP adjusted diluted EPS in the range of $0.95 to $1.00 for the full year. Please note that the fourth quarter will have two fewer shipping days than the third quarter.

Also, we announced price increases effective January 1st to offset commodity cost increases in copper, steel, and iron.

Free cash flow is projected to be in the range of $25 million to $30 million for the full year. We anticipate depreciation and amortization for the year in the range of $21 million to $22 million.

Our confidence is building as we look at 2011, the second year of the recovery. Yesterday's ISM reading of 56.9 indicates continued growth in the manufacturing sector. While we are looking at more moderate growth rates as we face more difficult comparables, we estimate our sales to outpace GDP and grow between 5% and 7% in 2011.

Before I turn the call back to Carl, I'll add a quick update on our Company-wide implementation of SAP. We successfully brought our first business unit online on September 1st and were able to ship product, invoice, and collect cash on day one. We are now looking to replicate that configuration at multiple sites in the next 12 months.

With that, I'll turn the discussion back to Carl.

Thank you, Christian. And before we go to questions, I would like to leave you with four key thoughts. Please turn to slide ten.

First, we are very pleased with the demand environment, which continues to improve. Our early cycle end markets are strong and we are encouraged by the improvement in certain of our late cycle end markets.

Our order book remains healthy. And if the current business levels continue, we should have another solid quarter to end 2010 and begin 2011 on very strong footing.

Second, we are demonstrating excellent leverage in our business model. Our gross profit margins and operating margins continue to improve on a year-over-year basis. And we achieved non-GAAP adjusted earnings per share of $0.26 for Q3.

What's more impressive is that substantially all of our temporary cost reductions are now back in our operating expenses. And we expect to see some additional benefits from our consolidation efforts through Q1 of next year.

Third, we are making very good progress on executing our long-term growth strategy. Our strategy includes investing in growth opportunities with our existing and new customers, targeting key underpenetrated geographic regions, entering new high growth markets, enhancing our efficiency and productivity through the Altra Business System by continuing to develop our people and processes, and pursuing strategic acquisitions.

We hit a major milestone during the third quarter in our effort to enter new high growth markets when we received a significant order from one of the world's largest wind turbine manufacturers. Earlier in the year, we invested about $1 million in CapEx and installed equipment to make a component for wind turbine drive trains. This was our first major order in this market and we are currently working on additional projects to expand our presence in the renewable energy sector.

And finally, as a result of our optimism for 2010, we have raised our top and bottom line guidance of the year.

We'll now go to questions.

Thank you. (Operator instructions.) Our first question is from Mike Halloran with Robert W. Baird. Please proceed with your question.

Morning, guys.

Morning.

So, the first question is just on the incremental profitability and the expectations on the go-forward. The incremental profitability in this quarter was in that 25%, 30% range, yet you certainly talked about how you haven't really got to that full run rate from the savings initiatives you guys have pushed through so far.

So, if I think about incremental profitability from 3Q revenue levels, is it fair to assume that you can maintain that 25% to 30% rate or maybe even do a little bit better?

Yes. We think 25% to 30% is what our business model leverages up. We do think that the incremental savings from finalizing the plant consolidations next year will be approximately $2 million.

I got you. And then, anything from a commodities standpoint that would pressure that at this point? I know historically you guys have been pretty successful passing through price increases. So, just curious how you think that will play out.

And so, we've seen the commodity prices have been going up. And we announced a price increase the end of October, beginning of November for January implementation. So, I feel comfortable that we'll be able to offset the input costs with our price increases.

Do you expect a fourth quarter modest -- or even more than modest fourth quarter impact on the commodity side as those costs or as those price increases are starting to be pushed into place? Or, are you hedged enough at this point that it's a pretty neutral impact?

I think it'll be pretty neutral. We saw favorable pricing in the third quarter. We saw a little bit of favorable pricing. And we've got some other activities to offset anything that we might see on the commodities side.

Makes sense. And then, on the orders and the -- when you think about your later cycle projects, what kind of -- later cycle end markets, I mean, what kind of lead times are you guys looking at there? I know you've seen some of the early strength from an orders standpoint this year starting to roll in the third quarter. But, what would be a typical lead time for your later cycle markets?

The typical is probably in the -- for the larger products going into the late cycle markets is probably in the 10 to 16 weeks. Some of them are significantly longer than that. Could be six to nine months for very, very large drive shafts that cost $500,000, $600,000 apiece. So, that's -- but, typically it's 10 to 16 weeks.

And then, on the tax rate, any sort of guidance on the tax rate beyond the fourth quarter? I know it's been a little bit lower than we would have thought so far this year. Is that fourth quarter guidance a pretty sustainable run rate, you think, on a go-forward basis?

Well, we think, on a go-forward basis, more in the 33% to 34% range.

Makes sense. All right, guys. I appreciate the time.

Okay.

Thank you, Mike.

Thank you. Our next question is from Steve Sanders with Stephens, Inc. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Thank you, Steve.

Just to start, as we think about the late cycle market starting to pick up, is there a meaningful difference overall in your margins for the late cycle versus the early to mid cycle?

Not meaningful. There is -- in the aftermarket parts, there's typically a meaningful difference. So, early on, sometimes you'll see a margin improvement as the aftermarket parts pick up. But, once the OEM business rolls in, that's typically at a lower margin than some of the aftermarket parts.

Okay. And then, your comment on -- I think it was that you're kind of looking for 5% to 7% growth in 2011. Does that include the full realization of the price?

Yes, that includes the full realization of the price.

Okay. And then, I think, Carl, you talked about it was a very, very strong year in turf and garden and that the industry estimates were that your markets would be relatively flat. But, it also sounds like you're taking some share.

So, I wanted to see if you could talk specifically about how difficult the comps are in turf and garden and your opportunities to take share. And then, if you could, work that into a general comment about where you might have some particularly difficult comps going into '11.

Yes. So, I think that's probably one market that's going to have some difficult comps, because it was a very strong year this year. But, we do -- the industry does expect to see some low single digit growth. And with some of the projects we have, we'll see some -- probably in the same kind of range that we see for the overall business.

And again, that depends -- that market depends on consumer activity for about half of it. Half of it's residential. Half of it's commercial turf and garden equipment that we make. So, after the first quarter, we should know how well that's going, and can give you feedback probably -- maybe even when we give our year-end update. So, that's one market, I think.

And there's the transportation industry, which was very strong this year, saw some very high growth rates. They're expecting, I think, 11.5 million vehicles to be built -- or passenger vehicles this year. The numbers that J.D. Powers has recently updated are what, 12.9 for next year? So, that's substantial growth but not what we saw this year for growth. So, that would be another one.

And I guess probably the one that would -- let's see. Our distribution business was also significantly up this year. So, compare -- so, that'll be a tough comparison next year.

Okay. And then, Carl or Christian, where are you in terms of production schedules, employees, utilization? In other words, are you adding permanent people now, or do you still have some room now that you're getting through the facility consolidations and getting some efficiencies back, to increase production significantly without adding a lot of people?

Let's see. We were at about 2,600 people at the low point, and then we're currently at around 2,800 people. Many of the people that we brought back are temporary employees.

And for our fulltime highly skilled people, what we tried to do was go to shortened work schedules, short workweeks. And that worked particularly well in some of the European countries where the government supported that activity and compensated some of the people for short workweeks.

But, we also did that here. So, we've been able to bring capacity back without having to add a significant number of fulltime employees. I do expect that if we see another uptick and people get more confident of what's going to happen next year, then we will add fulltime employees and we'll take capacity up.

In our consolidations, we didn't reduce permanent capacity at all. We moved the equipment that we had in the facilities that we were closing, and we moved that equipment into the receiving facility. So, we kept the machine capacity and it's merely a matter of adding people. It takes some time to train them. And we're trying to do that ahead of the curve.

And again, I think when people get some more confidence that this is going to be a steady -- maybe slower growth than we've seen in other recoveries, but a nice, steady slow growth, then we'll see some additional people come into the business.

Okay. And then, the last question for Christian. You raised your CapEx spending. Obviously, your cash flow is tracking a little bit better than you expected. Orders are better. Could you just talk a little bit about where you're spending the incremental CapEx, and then remind us of what the maintenance CapEx is versus the investments for productivity, automation, etc.?

We think our maintenance CapEx is somewhere between $10 million and $12 million, the incremental spend on SAP, implementing SAP, as well as some additional machinery, equipment that we bought. Carl mentioned $1 million of equipment to support the wind project.

But, we're still taking advantage of some attractive pricing in the equipment market, and those days will pass as we move in into '11. And that's also a driver where we just want to take advantage of some -- saw some attractive pricing in the marketplace.

Okay, great. Thanks for taking the questions.

Thanks, Steve.

Thank you. Our next question is from Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey, can you hear me?

Yes.

Morning, Jeff.

Hey. Can you -- Christian, you talked about the cost savings from plant consolidations carrying into '11. Can you quantify how much of an opportunity that is into '11?

About $2 million year-over-year.

Okay. And then, just understanding 3Q to 4Q a little bit better, if I go back, with the exception of '08 where the world kind of stopped on a dime, it seems like 4Q is up versus 3Q. You're kind of guiding to flat to down. What's maybe different this year?

Two fewer shipping days, which is about a 4% delta. So, if you take the high -- if you take $128 million, which we did in the third quarter and you just reduce it by 4%, particularly on an equivalent basis, and then it's a fraction more a function of how distribution will behave at the end of the year.

In some of the prior years, distribution bought heavily to take advantage of rebates. In other years, they have not done so. We don't know how they will behave this year. That's really the big question mark that we have.

Yes. And to follow on on distribution, because, Carl, I think you mentioned that as one area maybe having tougher compares. But, it just seems like those guys are building momentum through the year and yet haven't really done any kind of restock.

Yes, that's right. I think that the -- at least the inventory of our products they've kept fairly flat. And when they sell the product, they replace it. But, they're not building inventory to any extent.

And I think that if we perform well as manufacturers, then they can probably live with a little bit less inventory. And I think all the work that we've done and investments we've made in the ABS system, then we should be able to perform better.

So, our hope is that we can get to a more normalized inventory rather than having big lumps of inventory as manufacturers can't perform in upturns and year-end activity happens, too. So, that may not happen before I'm lying down, but that's my hope is that someday we get to a more normalized inventory in the whole channel.

Great. Okay. And then, last question. Can you give us book to bill for the quarter?

We don't publish it. But, it was positive again and in kind of that one plus mid single digits.

Okay. Great. Thanks, guys.

(Operator instructions.) Our next question comes from Torin Eastburn with CJS Securities. Please proceed with your question.

Good morning.

Good morning, Torin.

Morning, Torin.

My first question is about the room for improvement on costs that you think you still have in front of you. How much of that is going to manifest itself in gross profit and how much will be on the corporate level?

Of the $2 million related to the plant consolidations?

Sure, that and whatever further opportunities you think you have.

The $2 million is probably split, I'd say, two-thirds in gross profit margin, one-third in SG&A, if I had to take a guess.

Okay. And I looked back. I think was your highest third quarter gross margin since you've been a public company. Do you think, over the longer term, this kind of gross margin is sustainable for you?

We think so. We did a calculation that says, when we get back to the $600 million plus revenue range, what our EBITDA would look like given the leverage that we demonstrated over the last few quarters.

And it kind of indicates to us that, at that revenue level, we should be performing at that 18% EBITDA level, which just all ties back to what we've been saying for about a year now is that the permanent cost savings will translate into about a 200 basis point improvement in our business model. And that assumes 30 -- gross profit margins in the 30% plus a little bit range.

Okay. And last question. Your sales to Asia and other regions, as you report them, account for about 5% of your revenues. How much do Asia and other emerging markets account for when you factor in where some of this product is ultimately going?

Yes, we -- it's significantly higher than the 5%. But, we do not try to track where our customers end up shipping the product that we sell to them.

But, you look at the big -- the mining equipment that ends up all over the world, and we report our sales as being North American sales. And that equipment does end up all over the world. So, we can't really give you a number on that, Torin. But, it is significant.

Okay. Thank you.

Thank you. Our next question is from Scott Graham with Jefferies and Company. Please proceed with your question.

Hey, good morning. Very nice quarter. I wanted to very simply ask, with your debt to capital and other leverage ratios coming down for earnings and certainly capital reasons, just wondering when -- you guys have historically been pretty good at the acquisition thing. I was just wondering, with the market, M&A market, getting better, your leverage ratios coming down, are we expediting efforts in M&A? What does, let's say, the next year look like on that front?

In 2008, we didn't make any acquisitions, and we did that intentionally to consolidate the acquisitions we had made. To improve the business 2009 with the financial crisis, we didn't make any. And then, in 2010, we significantly ramped up our activity in looking for acquisitions, trying to get the balance sheet -- at the end of 2009, we refinanced the long-term [inaudible] to be in a position to make acquisitions in the future.

And then, I think in the last four or five months we've started to see some activity in our space. And we've been ramping up our activity. So, we don't have anything to announce today, nor are we prepared to say that we've got anything that we're ready to announce.

But, it's definitely an improved environment. And our activity is significantly higher.

Would you say then, maybe triangulate this a different way, you would be surprised if you didn't close a couple of deals in the next 12 months?

Yes, I'm not going to comment on that.

Okay. Fair enough. Thank you.

I'll say you got to find a seller, you got to negotiate a deal, and there's a lot of things that can go wrong in that activity for that. Okay?

Of course. Thanks.

Thank you. Our next question is from Alan Mitrani with Sylvan Lake Asset Management. Please proceed with your question.

Hi. Thanks. I may have missed it, but what do you expect your tax rate to be next year?

33% to 34%.

33% to 34%. And you said you added all your SG&A costs, the ones that you had cut temporarily, back in now, gets you about a 22 and change run rate each quarter on SG&A. Is that a good run rate to use for next year, or are there any large scale SG&A increases you expect? So, if your revenues are going to go up 5% to 7%, I assume your SG&A is going to go up lower than that. Just talk a bit about anything that's unusual in that line.

There is nothing unusual in that line. I think as revenues increase, there is variable costs that change with that. As a percentage of sales, that number should decline as revenues increase.

A big chunk of that is -- we consider to be fixed. Some of our engineering expenses are included in that line. Our expenses for our sales force are included in that line. And during the downturn, we did not cut back significantly our sales force.

We made a conscious decision to not cut back in that area in line with our sales decline to protect our sales force, to protect our engineering staff, because at some point life is going to be better, and that we wanted to maintain our service to our customers and our product development efforts.

So, that block is fixed. And therefore, we should expect with higher revenues, SG&A as a percentage of sales to decline.

Great. And can you just remind us the kind of acquisitions or the size of acquisitions you would be looking at, and what kind of multiples you'd look to pay?

Yes. I'll hit the first part and then Christian can talk about the multiples and where they are.

The sweet spot for us is probably in the $25 million to $75 million range. And the targets that we're looking at currently are probably in the $10 million to $100 million range. So, they're kind of in our sweet spot. And so, that's the size.

You want to talk about leverage ratio and things?

I think that the multiples that we are seeing in the marketplace are anywhere from 5.5 to 8.5 times, depending on size of the entity, depending on geography, depending on the quality of the asset.

We've seen some transactions in our space at higher multiples than that, but that's not typically where we play. Our space is somewhere between 5.5 and 8.5.

Great. Thank you.

Thank you. Mr. Christenson, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments.

Okay. Thank you for joining us this morning, and we look forward to speaking with you again on our fourth quarter and year-end 2010 call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.