Kadant Inc (KAI) 2010 Q2 法說會逐字稿

Good morning. My name is Latrisha, and I will be your conference operator today. At this time I would like to welcome everyone to the Kadant Inc. second-quarter business update. (Operator Instructions). Thank you. I would now like to turn the conference over to Mr. Thomas O'Brien, CFO of Kadant Inc. Please go ahead, sir.

Well, thank you, operator, and good morning, everyone, and welcome to Kadant's second-quarter 2010 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read the Safe Harbor statement. Various remarks that we may make today about Kadant's future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those discussed in our quarterly reports on Form 10-Q for the fiscal period ended April 3, 2010, which is on file with the SEC and is also available in the Investors section of our website at www.kadant.com under the heading SEC Filings.

In addition, any forward-looking statements we make on this call represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on these forward-looking statements as representing our views on any date after today.

During this call, we may refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second-quarter earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading Recent News.

And with that, I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I will give an overview of our financial results for the quarter, and we will then have a Q&A session.

Thanks, Tom. Good morning, everyone. It is my pleasure to give you an update on Kadant's second-quarter performance and comment on our outlook for the rest of the year. We had an excellent second quarter by almost any measure. Let me start with the financial highlights from our continuing operations, and I will then provide you with an overview of the trends we expect to play out during the second half for the year.

Second-quarter revenue of $69 million was up 38% from a very weak quarter of last year and our fourth consecutive quarterly increase. On a sequential basis, our revenues increased 13% from Q1. This increase was led by our Stock Preparation and Water Management product lines with sequential revenue increases of 41% and 32% respectively.

Our bookings for the quarter were $74 million, an increase of 57% compared to the same period last year and up 6% from Q1. This was our fourth consecutive sequential bookings increase as well. Our bookings in the second quarter benefited from strong performance in our Stock Prep product line that recorded sequential increases of 46% compared to the first quarter. This bookings increase, however, was offset by a 14% decline in our Fluid Handling business compared to a very strong Q1 bookings level.

Parts and consumables bookings were also down 6% sequentially compared to the strong first-quarter pace due to weaker demand in North America and Europe. As I noted in our Q1 earnings call, we believe that pent-up demand from 2009 contributed to a significant increase in order activity in Q1, and the subsequent softening in our bookings levels for parts and consumables was expected.

One of the most impressive results for the second quarter was our gross margin performance of 45%. This was the highest gross margin recorded in our Company's history and was the result of solid execution and lower manufacturing costs for both capital projects and parts and consumables.

Our operating income was nearly 11% of revenues for the quarter, and diluted earnings per share was $0.42 compared to our guidance of $0.38 to $0.40. Despite increasing revenue, we generated $9 million of cash flow from operations, bringing our net cash position to over $24 million.

And finally, I'm pleased to report that earlier this month we completed an acquisition of a small screen basket manufacturer and a dewatering equipment product line. I will provide additional detail on this transaction at the end of my remarks.

As I commented in our April earnings call, we maintain a relatively guarded outlook with respect to the world economic recovery and the ability of global markets to sustain the positive momentum generated at the end of 2009 and into the first quarter of 2010. In North America mill operating rates have remained high, and inventories have been well-managed. In container board, for example, where we generate approximately 40% of our revenue, machine operating rates exceeded 95% in June. Operating rates in demand in Europe and Asia across most grades were also relatively high.

On the pricing front, prices for recovered paper, pulp and most grades of paper have remained strong supported by the low mill and end user inventories and healthy demand. In the US graphic paper market, for example, inventory levels of coated papers are at their lowest point in more than 10 years, and this is helping to support incremental price increases in these grades.

Likewise, low inventory and healthy demand are positively influencing pricing in Latin America and Europe. Although we cannot predict what the economy will do in the second half of the year, we do know what the paper industry is in a much better position to handle a potential slowdown in the second half of 2010 than it was a year ago.

Our own North American bookings were up 36% over Q2 last year and maintained a healthy yet slightly slower pace compared to very strong first-quarter rates. North American bookings on a sequential basis were down 6% with all product lines reporting lower order volume, except for Stock Prep, which saw an 8% increase. This increase was driven by strong bookings from pulp producers in the US for our systems used in Virgin fiber processing.

Bookings from our European operations, which also sounded territories outside of Europe, followed a pattern similar to the one we saw in North America. Bookings were up 55% compared to the same period last period, but down slightly compared to Q1 bookings. Again, our Stock Prep business had the strongest performance with a 22% sequential increase in bookings, while our Fluid Handling and accessory product lines saw declines. The double-digit increase in Stock Prep included an order for a turnkey de-inking line valued at approximately $5 million for a tissue mill and various other capital equipment orders valued at approximately $2.5 million.

In contrast to the business activity in the developed world, we continue to see solid growth in business activity in the BRIC economies. Our Q2 revenues in Brazil, Russia and India of nearly $3 million was up 77% compared to the same period last year and up 13% sequentially from Q1.

In China we continue to have strong demand for capital and aftermarket products in most of our product lines. Our Q2 bookings in China were more than double Q1, led by a strong performance in our Stock Preparation product line. Three large OCC systems for liner and coated liner were booked along with orders for dispersion of screening systems. More encouraging is the increase in Stock Prep parts and consumables bookings that more than doubled compared to the same period last year to $2.4 million.

Increasing our Stock Prep aftermarket business in China where we have a very large installed base is one of our key growth initiatives, and we're very pleased to see our efforts bearing some fruit.

We also received significant orders for our other product lines in China, including orders for over $1 million for our water filtration products. Chinese customers are increasingly concerned about water usage as they work towards compliance with a target set by China's Ministry of Water Resources to reduce water consumption per unit of gross domestic product 60% by 2020. Our Water Management products helped paper mills reduce water consumption by allowing for the recycling of white water for reuse in various applications such as paper machine showers.

Before wrapping up, I wanted to provide a few details on the acquisition that we completed earlier this month for about $3.3 million. We acquired Filtration Fibrewall Inc., a Canadian-based supplier of screen baskets, and also a dewatering equipment product line from a related company. Combined these acquisitions generated annual revenues of approximately $3 million in 2009. The dewatering equipment, which includes turn wire presses and screw presses, fills a gap in our Stock Prep product line and will be sold worldwide to our existing sales organization.

Fibrewall is more of a technology acquisition and will be an important addition to our efforts to grow our screen basket business. As you may remember, screen baskets have an average rise of $15,000 to $20,000 and are typically replaced every nine to 12 months. They are by far the most significant consumable in Stock Preparation, and building that product line is an important part of our efforts to increase our spares consumables business.

Fibrewall developed an innovative screen basket that it introduced into the market about two years ago. We have seen their product in the marketplace, including a number of extremely challenging applications. We've also seen their screen baskets running well in our equipment and several mills in the US and Europe. Overall we believe Fibrewall has the top performance screen baskets in the market today, and we're delighted to acquire this consumable product line. We plan to integrate this technology into our screen basket product line and incorporate it into our capital screening products as well. I believe the combination of this technology with our applications expertise and our global sales team will make us a very strong supplier of this important consumable.

During our April earnings call, I commented our first-quarter bookings were very strong, leading us to forecast a significant increase in second-quarter earnings followed by a weaker second half of the year. Our view of the second half was based on our belief that our strong first-quarter bookings were due in part to pinup demand that would moderate. So for things are developing a bit better than we expected, although we still expect a weaker second half as the momentum of the economic recovery in North America and Europe decelerates and our gross margins come down somewhat as larger capital projects make a bigger part of our revenue mix.

That said, we expect to report GAAP diluted earnings per share of $0.21 to $0.23 for the third quarter of 2010 on revenues of $60 million to $62 million. For the full year, we are increasing our earnings per share guidance and expect to achieve GAAP diluted earnings per share of $1.20 to $1.25. We are also updating our revenue guidance to $255 million to $260 million. I should note that this revised guidance incorporates the higher assumed effective tax rate, which has a negative impact on the year of $0.04 and $0.01 of expense related to the acquisition made earlier this month.

Now I will turn the call over to Tom for a more detailed review of the financials. Tom?

Thank you, Jon. I will begin with our revenue performance. Consolidated revenues were $69.1 million in the second quarter of 2010, 38% higher than last year, including a 1% unfavorable effect from foreign exchange translation. The revenue results were at the higher end of our guidance for the quarter, which was $67 million to $69 million. Revenues in all our major product lines were higher than last year with particular noteworthy increases of 66% in Water Management, 52% in Stock Prep, and 33% in Fluid Handling. Water Management revenues of $8.6 million reached their highest levels since the fourth quarter of 2006, and increase over last year was due to strong capital and aftermarket sales in North America.

The increase in Stock Prep revenues was broadly based throughout all our major geographic territories. North America was up 75%, China was up 46%, and Stock Prep revenues in our Europe-based operations were up 31%, including an unfavorable foreign exchange effect of 10%. The increase in Fluid Handling revenues was also well distributed. Europe was up 45%, including 9% of unfavorable exchange, North America increased 29%, including 2% of favorable foreign exchange, and China was up 19%, including 2% of favorable foreign exchange.

On a sequential basis, consolidated revenues in the second quarter of 2010 were up 13% compared to the first quarter of 2010, including an increase of 17% in the Papermaking Systems segment. Revenues in all our major product lines in this segment increased compared to the first quarter of 2010 with the more noteworthy increases in Stock Prep 41%, Water Management 32%. The sequential increase in Fluid Handling was minimal compared to the first quarter of 2010. We are starting to see a slowdown in fluid handling activity, especially in the dryer systems projects with essentially flat revenues and lower bookings in the second quarter of 2010 compared to the first quarter of 2010. We expect that bookings and revenues in this product line may decrease again in the third quarter compared to the second quarter, and we have allowed for this in our guidance.

You can see more details of our product line revenue results and the comparisons to last year, as well as the comparisons to the first quarter of 2010 in the schedule attached to the press release that we issued yesterday.

And finally, I should note that our North American operations continue to lead the revenue upturn. Papermaking Systems segment revenues in North America were up $6.2 million or 21% compared to the first quarter of 2010. Revenues in China of $8.5 million increased $3.1 million or 59% compared to the first quarter of 2010 and would have been higher had we not experienced customer initiated delays in delivering several larger recycling systems. We generally used the completed contract method rather than the percentage of completion method to account for system sales in China, and this can at times make the recorded revenues quite lumpy and more difficult to forecast on a quarter to quarter basis.

Unfortunately this variability may continue over the next few quarters as there are several large system scheduled for shipment in China in the second half of 2010. Europe-based revenues were down slightly 3% when compared to the first quarter of 2010.

Now turning to our product gross margins, consolidated product gross margins were a record high 45.1% in the second quarter of 2010, up 360 basis points from last year's 41.5%. Encouragingly, the increase from the solid margin performance in the first quarter was 110 basis points. In our Papermaking Systems segment, gross margins of 44.9% were also 360 basis points higher than last year and 140 basis points over the first quarter of 2010. Product gross margins were higher in all our major product lines compared to last year with an especially notable performance in our water management product line where margins increased 980 basis points over last year.

We have noted in the past that in 2009 we undertook a consolidation of our US Water Management manufacturing facility into our US and Mexico manufacturing facilities, and and we are now starting to realize the full benefits of that consolidation.

In addition, our Papermaking Systems segment gross margins benefited from several capital projects in the US with relatively higher gross margins. We are also experiencing better absorption in cost efficiencies in our worldwide manufacturing operations, reflecting the higher volumes and the significant cost reduction efforts we undertook during 2009. These benefits were partly offset by unfavorable product mix in the second quarter of 2010. That is parts and consumables revenues were a lower proportion of total Papermaking Systems segment revenues than in the year ago quarter.

Nevertheless, parts and consumables revenues were 24% higher in the second quarter of 2010 compared to last year, and gross margins were up approximately 440 basis points as well.

With the exception of the unfavorable mix, virtually everything that could go right did go right for us in our gross margins in the second quarter of 2010, and we were quite encouraged with the sequential increase over the strong margin levels in the first quarter.

That said, we expect that gross margins in the next few quarters may decline from the first-half levels as we record higher revenues from larger systems projects. We also expect a decline in capital margins from the first-half levels.

In our Other category, gross margins of 50.8% were 570 basis points higher than last year's 45.1%, largely due to lower natural gas prices in our fiber-based products business.

Now let's turn to our SG&A expenses for a moment. SG&A expenses were $22.7 million in the second quarter of 2010, up $3.4 million or 18% from last year, including a decrease from the effective foreign exchange translation of $200,000 or 1%. The increase in SG&A compared to last year includes higher incentive expenses associated with the expected improved profitability performance in 2010 compared to 2009, as well as legal and due diligence expenses associated with the acquisition of the screen basket and the watering businesses, which John mentioned in his remarks.

Under the new accounting rules, these expenses must be recognized in the P&L when they are incurred rather than being capitalized on the balance sheet, which was the practice in the past.

We also had an increase in commission expense associated with the higher revenues in the second quarter of 2010 compared to last year, as well as an increase associated with the effect of furloughs and reduced pay programs in the 2009 period, which has since been terminated. As a percentage of revenues, SG&A expenses were 32.8% in the second quarter of 2010, down from last year's 38.4% as we continue to see improved operating leverage with the higher 2010 revenues.

We believe that the run-rate will decline somewhat in the next few quarters so that for the full-year 2010 we expect that our SG&A expenses will be approximately $86 million, an increase of 6% compared to 2009.

Now let me turn to our EPS results in the second quarter. We reported GAAP diluted earnings per share from continuing operations of $0.42 in the second quarter of 2010 compared to a loss of $0.10 in the second quarter of 2009. The second-quarter 2009 results include an after-tax restructuring charge of $0.06. So excluding the restructuring charge and the 2009 results, adjusted diluted EPS of $0.42 in the second quarter of 2010 compares to a loss of $0.04 in the second quarter of 2009 or an increase of $0.46. This improvement to $0.46 per diluted share includes an increase of $0.01 due to lower net interest expense offset by decreases of $0.01 due to higher shares outstanding and $0.01 due to the acquisition cost. The effects due to foreign currency translation and differences in the effective tax rate from the two periods were immaterial. The remaining increase of $0.47, therefore, was due to better operating results in the second quarter of 2010 compared to the second quarter of 2009.

Now let me also take a moment to compare the actual EPS results to the guidance, which we issued during our April 2010 earnings call. Our GAAP diluted EPS guidance for the second quarter of 2010 was $0.38 to $0.40, and this included $0.01 of restructuring costs. This compares to our reported GAAP diluted EPS of $0.42, which had no material net restructuring cost but which did include a decrease of approximately $0.02 due to a slightly higher effective tax rate than the rate we had included in our guidance and a decrease of $0.01 due to the acquisition costs.

The increase in the effective tax rate is primarily due to a change in the geographic distribution of earnings, and we now expect that for the full-year 2010 the effective tax rate will be approximately 22% to 24% compared to our earlier guidance of 20% to 22%.

Now turning to the balance sheet, we were quite encouraged with our cash flows and working capital results in the second quarter. Cash flows from continuing operations were $9 million in the second quarter of 2010, up 86% over last year's $4.8 million. The increase in our cash flows was due to our higher profitability and to our continued focus on working capital management during the quarter. Specifically days sales and receivables decreased to 57 days in the second quarter of 2010, an improvement of 26 days compared to last year's second quarter. This was the best DSO performance in our Company's history.

Also, the number of days in inventory decreased to 96 in the second quarter of 2010 compared to 135 days last year. And, finally, working capital as a percentage of the last 12 months' revenues where lower is obviously better decreased to 12.3% in the second quarter of 2010 compared to 13.1% in the first quarter of 2010 and to 16.1% in the second quarter of 2009. Working capital here is defined as current assets less current liabilities, excluding cash, debt and the discontinued operations.

Our net cash position -- that is cash less debt -- at the end of the second quarter of 2010 was $24.2 million, an increase of $3.7 million compared to the first quarter of 2010 and an improvement of almost $27 million compared to the position at the end of the second quarter of 2009. This is our highest net cash position in over five years and represents approximately $1.93 per diluted share.

That concludes my review of the financials. I will now turn the call back to the operator for our Q&A session. Operator?

(Operator Instructions). Claudia Hueston, JPMorgan.

I was hoping you could just talk a little bit about the trends you saw in demand over the course of this second quarter and just if you have any early read on July? Were there any major differences by geography or product, really just as the quarter trended?

You know, I looked at that, and actually June was not bad. It was not like it was trending down the whole time in most of the markets. So, again, that is looking at the base business. I think, for some of the capital, we did book some early.

Early in the second quarter June?

Yes, early in the second quarter. But we still -- there is still capital in the pipeline. There is still -- I would say the activity level, particularly in the developing world, you know in China, maybe most of all, we are still saying stuff that is all through the pipeline. I don't knows -- I think it is a little too early into July to really call it a trend here.

And just looking at the emerging market demand levels, how would you compare that today versus two years ago when things were really rocking and rolling there?

Two years ago in China when things were starting to stop rocking and rolling, you go back maybe three years ago, it's not as frenetic as that. It was almost a panicked attempt to -- you know how the Chinese can -- they have got to secure resources, and they got to secure equipment. So it is not like that. It is a much more rational broadly based I would say more methodical purchasing pattern, which is good.

Yes, no, I would agree. That is helpful. And then maybe if you just could comment a little bit on cash and the acquisition environment that you see out there and also if you just have an end of quarter share count, that would be great.

Okay. On the cash and acquisition environment, our work cash flow has been excellent, and Q2 was terrific. We are particularly delighted to be growing revenues and still throwing off the kind of cash we are throwing off. So that is all good.

I mean the second part is, what are we going to do with that cash? We are looking at acquisitions. I would say we are proactively and systematically seeking acquisitions and trying to evaluate acquisitions. So that's certainly on our radar screens as one of the things were going to do with the cash. Tom, maybe you can comment on changes in the share count.

Really there was not much of a change. I think the share count fully diluted was 12.5 million at the end of the quarter.

Okay. And just in terms of the M&A environment, do you feel like buyers and sellers are getting closer at this point? Do you feel like there is more sellers who might be more willing to sell than they were a couple of months ago?

I think -- a couple of comments on that. So last year you really did not sell unless you had to, and they were kind of -- it seemed like you might have had fire sale prices. So right now we don't see fire sale prices unfortunately. The EBITDA multiples are kind of normal I would say. And you have always had that question, what is normal EBITDA? Right? Is the EBITDA numbers they are giving -- is there a new normal in EBITDA or 2009 usually large? It probably was. So I think there is more people out there definitely than last year who are more willing to talk, and I would say the pricing is not fire sale pricing.

Walt Liptak, Barrington Research.

Nice quarter. I have got a couple of questions just on some of the trends. I guess I have been a little bit surprised by the -- it is nice to see the strength coming through as consistently as it is. But with the 21% North American improvement, are you seeing that more on systems, or are you seeing it more on the consumable replacement parts?

Are you talking about revenue for North America?

Yes.

It was pretty broadly based. It was pretty broadly based. I think the trends from -- if you want to talk about trends going into the future, I would look at bookings. And the bookings in North America were a little softer than Q1, and that is despite Stock Prep count holding up, having a positive increase, and some of that is capital going into the pulp mills.

So I think we overall see somewhat of a deceleration in North America. And, as we said earlier in the comments, a lot of it had to do with we had a pretty big burst in the first quarter from a bookings perspective.

Okay. I thought that bookings were slowing down because of the dryer systems.

The dry -- I would say if you look at Fluid Handling and dryer systems as part of our Fluid Handling group, that group had the biggest increases in the first quarter. So the comparisons are then Q1 to Q2 is the weakest. But all of our product lines other than Stock Prep saw a little softer second-quarter booking rate versus first-quarter booking rate.

Okay. I guess what I'm trying to get at is, what is the increased spending? Is it pent-up demand? Is it coupon systems? Is it payback on more efficient systems?

Well, I definitely think there is some pent-up demand in there, and we saw it more significantly in the first quarter, still pretty good in the second quarter. So, yes, I think there is a little bit of pent-up demand in those numbers.

And the China looks very strong on revenue. You go back just a year ago, and the utilization rates sounded like they were pretty low. Our China utilization rate is back up to normalize levels and is that why we are seeing the increased -- (multiple speakers)?

No, we don't have -- we do not have great information about utilization numbers in China. But what we hear is that, yes, China seems to be quite robust. I will say that the government stimulus has targeted a bunch of industries, one of which is paper. So in terms of expansion and capacity additions, they do in some cases have financing available from the government, which is a positive. But it seems like it is -- they are consuming that paper.

Okay. And Tom, I wondered about the corporate and other expenses. It was a little bit higher than I was expecting. Maybe I missed something in your commentary. It was about $1 million higher. Is there something special in there, or is there incentive comp that increased?

Incentives were a big piece of that. Of course, we also had the acquisition costs I referred to also.

What was the acquisition cost?

I think it was a couple of hundred thousand dollars, somewhere in that range.

Okay.

Some of those things will not repeat. That is why I think that the rate should come down somewhat in the third and the fourth quarters to get to that $86 million number.

Okay. Got it. Okay. Thanks very much, guys.

Eric Prouty, Canaccord Adams.

Good quarter, guys. Maybe just a little discussion around what you are seeing over in Europe and how that played out during the quarter. Did you see any impact at all from the ups and downs of both the currency and the financing crisis over there, or was it pretty much business as usual through the quarter?

I would say generally speaking our bookings were more stable than I thought they would be. You know Tom and I both are constantly looking for problems there, and it seems it is okay.

I will say that when I look at our -- you know, we report our numbers for our European operations, and they do sell outside of Europe into South America and in some cases India, Africa, places like that. And their booking space is also strong for those reasons.

But Germany is having good demand for paper. Their manufacturing businesses are picking up, and they are actually needing liner board. So you see I would see in many cases two low levels of liner board and mills trying to catch up.

Great. And then any impacts -- you mentioned some of the currency impact in the results, but from a competitive standpoint, is that changing the competitive landscape, some of these currency moments, or is that kind of nullified given you produce globally?

We do produce globally, so the currency was one of our businesses win and one of our businesses loses. The weaker euro is certainly good for the paper customers in China and good for German exports, which is good for us because they need paper and we want to sell it to them. It is obviously not as good for our European operations that use manufacturing in China. Because it is less -- the savings is less good. It is still pretty good, but it's not as good as it otherwise would be.

Sure. And then finally, a big rebound back in the price of recycled fiber so far this year. Is that changing your customers' orders or your mix of business at all, or is that just part of long-term movements that just wind up equaling themselves out in the end? Have you guys noticed any impact in your customer inquiries, etc. because of the big rebound back in fiber prices?

Yes, I mean the fiber prices I would say are very frustrating for our customers because it is so volatile. And the volatility has a lot to do with whether China is buying a lot of wastepaper or where they are not. And part of what the reaction for them is that sometimes you will hear they want flexibility to be able to accept a lower grade of wastepaper as a hedge if wastepapers and a certain grade of wastepaper go up. But that is about all we see from that.

Okay. And then just finally, the R&D spending that you're doing out there, is there any specific areas that that money is going towards? Do you expect any new product enhancements or new product developments coming out over the next year or so?

Yes, we do. I think broadly speaking our areas of R&D are in the area of energy, fiber savings, and I would say ease of maintenance. You know making things -- parts and consumables easier to change. But we are in final stages of a new (inaudible) cell, a refiner. We have got a number of lathes that are in various levels of testing. I'm not sure I would call anything a revolution, but that's just not really the nature of our industry. But we do have a good pipeline of products that were at various stages of near introduction or introduction.

(Operator Instructions). Rick Hoss, Roth Capital Partners.

Gross margin, would you say that your typical range has now moved up? I know some of it is product mix, but you are talking about the benefit from some of your movement overseas and movement to Mexico. So can you give me a range of what you think is the normal --?

Sure. So I think on the 45% there's a few things involved in that. But I would say the fundamental thing is that we did lower our manufacturing overhead expense, and we have shifted product source to China. So you might get a couple of points that would be above our normal margins.

We also benefited from good, good capital margins. So we had some projects that everything sort of worked out well. We were in a very strong competitive position in terms of whatever that particular customer may have wanted. So we had -- those were what I would call just good jobs that might not always be there. So there is some of that, that probably will shift, and I do think the mix will shift as we get some larger systems coming through into revenue. So I would say a couple of points above our normal rates would be pretty reliably there.

Okay. So historically it looks like you have flirted with 40, so in the future it will be easily above -- I should not say easily -- but comfortably above 40?

Yes, yes, yes.

And then, Tom, do you have any read on what you anticipate taxes next year, a percentage?

Next year? Well, I think we mentioned that we are in a position where we have over $13 million of foreign tax credits that we had fully valued. So we have fully reserved for those foreign tax credits from prior periods. So there is a lot of moving gears in this. But assuming that we have the taxable income and we have enough foreign source income in the US in order to be able to utilize those credits, the rate should stay below 30 in the next few years. Again with those caveats.

Okay. And then the last question for me, any read on your market share in China? Are you gaining? Are you holding? Are you losing?

I would say you have to look at the products. So we have historically had excellent market share for Stock Preparation and Fluid Handling. And I would say those are holding steady on the capital side, and we are -- tied to my remarks -- I talked about pretty good headway we are making in spares. So to the extent that there is a market share in Stock Prep spares, we picked up good market share there.

The area of our accessories in Water Management, we have pretty small market share, and we are definitely picking up there. They had growth quarter over quarter of maybe 30%, admittedly off of a small base. But we are in a good position to grow because we are relatively small there, and I think we have the right tools in place to do that.

And remind me, have you sold blades over there before?

We have sold -- we had agents who sold blades for us. But I would not -- it is not the concerted effort we have now. Now we have our own sales force selling blades. We make blades over there. We have in our [Wuxi] factory, so it is a much more significant effort there than we had five years ago.

And is there the ability to differentiate?

Between us and the local blades?

Correct.

Well, it is a combination. So they have local blades, and yes, we can certainly differentiate on the local blades. They also have blades from [Kluth], our German manufacturer, as well as the Japanese manufacturer who has good blades. I would say where we are trying to distinguish ourselves is really the service. It is the same formula we use in the US and Europe where what the customer really values as much as the blade is the applications knowledge that comes with that, salesmen and our company as to how to apply that blade and where it should be applied. Which -- you know there's 60 different types of blades that can be put in various positions in various rows. I am always surprised kind of being somewhat new to the blade side there is art and science and craft to it. And that is really in the broadest sense what we try to offer the customer. And it's a process to get customers to appreciate that and sell -- be willing to set higher prices for that service.

Brent Miley, Rutabaga Capital.

Two questions. One, I was wondering if -- I know Fluid Handling sounded like it had a very tough comparison sequentially. But could you talk about that business? You mentioned that, I think I heard you say that might go down somewhat in the coming quarters, and obviously the paybacks are still high. Maybe it is gas prices or something. But I was just curious as to whether there is something that has changed there, or that is just the business trend?

And then secondarily, on the small acquisitions you did, is the main opportunity there to take the screen basket and I guess some of the other technologies and put them through your distribution channel? Is that sort of the general theory there?

Absolutely. I will start with the screen baskets since you ended with that. On the screen basket, we will take that technology and manufacture it in our operation in China. And that technology will be incorporated into our screens, and almost just as importantly is our screening product line. It is not just the aftermarket baskets, but it does enhance the performance of our own capital. So that is another hit from that.

The other question, Fluid Handling. So you're absolutely right. It is a tough comparison. If you look at their bookings growth the second quarter over the last five quarters was their second highest quarter. It just was not as high as the first quarter, which was terrific. You might remember when we were talking about Q1, we said Fluid Handling bookings were up like 26%, something like that if memory serves. So that is a tough -- I don't want to underestimate that tough comparison that they had.

That said, the systems business in Fluid Handling, as Tom said in his remarks, is slowing, and when they look further down in the early stages of the pipeline, if you will, they don't see as many projects in the formation stage. That is probably a combination of they did a lot of the projects, as well as some caution on the part of the paper industry. Listening to their reports, particularly in North America and also in Europe, they are concerned about what the second half will bring. I think we will -- it will be helpful just to get a little time between us and that kind of little mini-shock we had with the sub-debt thing and get people more comfortable that the world is not going to fall apart.

There are no further questions at this time. Are there any closing remarks?

Yes. Thanks, operator. As Rick said in his remarks and what he alluded to, I think in the second quarter you can see some of the fundamental changes that we made in our business and improved its profitability. We talked a little bit about the gross margins. That, as I said earlier, that effort is to some extent permanent for at least a couple of points of that. I mean I don't know that we will stay at 45%, but we will have I think higher gross margin than we historically have had.

Similarly, our operating income of 11%, you know, on a relatively modest level of sales compared to pre-recession times, gives some example of the operating leverage we can generate because of the restructuring work we did. And I believe that as we -- as the recovery picks up a little steam and we get a little more revenues, we are going to continue to see good operating leverage.

We have still got a lot of work to do in our business, and it's a challenging environment, but I really think we are well-positioned to take advantage of the recovery as it develops, and I look forward to reporting to you on our progress in the first half -- I mean the second half of 2010.

Thanks very much.

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