Kadant Inc (KAI) 2010 Q3 法說會逐字稿

Good morning, my name as Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the Kadant third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Thomas O'Brien, Chief Financial Officer of Kadant. Please go ahead, sir.

Well, thank you, operator, and good morning, everyone, and welcome to Kadant's third-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 his 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 of 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 July 3, 2010 which is on file with the SEC and is also available in the Investor 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 third-quarter earnings press release issued yesterday, which is available in the Investor section of our website at www.Kadant.com under the heading Investor News.

So 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 of the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Good morning, everyone. It's my pleasure to give you an update on Kadant's third-quarter performance and comment on our outlook for the rest of the year. I'd like to begin my remarks with the financial highlights from our continuing operations and then I'll provide you an overview of what we're seeing in our markets around the world.

Overall we had very good performance in the third quarter. Our revenue of $67 million was up 24% from the third quarter of last year and on a sequential basis our revenues were down 4% from Q2. All major product lines experienced sequential revenue declines in Q3 except for our fluid handling line which was up 8% compared to the previous quarter.

Our bookings for the third quarter were $58 million, a decrease of 6% compared to the same period last year and 21% sequentially. This was largely due to lower bookings of our stock capital products. Although the slowing of the economy has had some impact on our third-quarter bookings, I believe the timing of capital orders had the greatest impact as several large stock prep orders slipped into the fourth quarter. Consequently we do expect higher sequential bookings in Q4.

Our parts and consumables bookings in the third quarter were up 22% from Q3 of 2009 and were essentially unchanged from the second quarter of 2010 as machine operating rates remained high throughout the quarter. I'll provide more details on bookings when I discuss our business activities in the various geographic regions we serve.

Our gross margins in Q3 were a very strong 44%, particularly when compared to our historical pre-recession gross margins which were in the 40% range. Looking ahead we do expect that margins will decline somewhat from current levels and they will vary from quarter to quarter due to various factors such as product mix between higher margin parts and consumables and capital. That said, I believe the restructuring actions we took in 2008 and 2009 will in general result in higher average gross margins than we had prior to the recession.

Our adjusted diluted earnings per share for the third quarter were $0.30 compared to our guidance of $0.21 to $0.23. The higher-than-expected earnings per share was primarily the result of strong gross margin performance, which I just talked about, and the increased sales of our fluid handling stock prep products.

We also had another solid quarter of cash flows from operations and generated $6 million in the third quarter. This performance resulted in strengthening our net cash position at the end of Q3 to $27 million. And finally, during the quarter we repurchased 255,500 shares of our stock at an average price of $17.25 for a total cost of approximately $4.4 million.

Next let me take a few minutes to review what we're seeing in the marketplace. Overall the market seems to be softening from the relatively strong pace of earlier this year. This has primarily impacted our capital business while our spares consumables business has been relatively stable. Encouragingly we do see a lot of capital project activity in most regions of the world with several projects in the pipeline that should be booked before the year end.

While mill operating rates remained high in the third quarter across most grades, manufacturing activity is beginning to slow in North America and Europe and consequently demand for liner board is beginning to weaken. In addition, the sustained high level of white-collar unemployment along with reduced print and advertising expenditures has impacted demand for printing and writing papers.

As a result we see rising inventory levels in some grades, although in general levels are relatively low by historical standards. We also see evidence of reduced pricing power of the paper producers. On the pricing front prices for recovered paper, pulp and most grades of paper are showing some signs of softening in most regions of the world after significant price increases earlier this year.

Needless to say, the outlook for the paper industry in North America and Europe is dependent on the pace of economic recovery which is slowing but so far not stalling. Most industry observers are calling for fairly stable production and operating rates in the short and medium term. However, unless we see some pickup in end-user demand for paper and board products in North America and Europe, there is a risk that operating rates and paper production will level off or decline in those regions.

The picture is considerably brighter in the developing world particularly in China. In China we continue to see strong business activity since the economic recovery took hold. Some of you may have read that the government in China announced the closure of small inefficient and polluting mills that are currently producing some 4.6 million tons of paper.

This type of action is a positive for Kadant as [this ties] will move from older mills that are using outdated papermaking technology to larger modern mills who are more likely to be our customers. Another indication of the growth potential in China is the recent announcement by Chinese paper producers of capacity expansions in container board and other paper grades.

Taking a closer look at how our business fared in the geographic regions we serve, in North America bookings were up 10% in the third quarter of last year while on a sequential basis decreased 9%. The sequential decrease in bookings was driven entirely by the decline in capital business.

Our parts and consumables business in North America remained at relatively healthy levels due in part to high mill operating rates. Parts and consumable bookings in North America where essentially unchanged from the previous quarter and up 11% compared to the same period in 2009.

As is the case in other regions of the world, we're seeing capital projects in the pipeline and while we -- and we anticipate an increase the number of capital projects in the fourth quarter, particularly in our stock prep product line. In fact, we're off to a good start already with two capital equipment orders booked in North America in October for approximately $2 million.

In Europe the overall economic condition is similar to the US. Bookings from our European operations, which sell into territories inside and outside of Europe, were down 13% compared to a relatively strong third quarter in 2009 and were down 19% sequentially from the second quarter. As was the case in North America, the sequential decline was all due to reduced capital bookings.

Parts and consumables bookings and Europe were up 3% sequentially from the second quarter and up 32% compared to the same period in 2009. Capital bookings were sequentially down in all of our product lines except fluid handling which had strong bookings driven by capital projects in Scandinavia and Germany.

The most significant decline in capital orders was in our stock prep product line and, as was the case in North America, timing of orders as well as the slowing economy affected our bookings levels. For example, we were awarded a $2.3 million project for a de-inking line in Russia in the third quarter, but we did not record this as a booking until we received the down payment in the fourth quarter.

In addition, we just received word last week that our fluid handling business in Europe booked two drier systems to be installed in India for a combined value of approximately $750,000. As is the case in North America, the pipeline for capital orders from our European businesses, particularly our stock preparation equipment business, looks fairly promising.

While business activity in China remains good our, third-quarter bookings in China were quite weak, down 57% from Q2 and 41% from the third quarter of 2009, despite good bookings in our fluid handling and water management product lines, which more than doubled compared to the same period last year. Our parts and consumables bookings had a sequential decline of 20% from Q2 due primarily to our stock prep product line but an increase of 51% compared with the same period last year.

Similar to other regions, the largest decline in our bookings in China was in our stock prep product line. As I mentioned earlier, I think this is largely due to the timing of orders rather than a slowdown in the region. We have a high level of capital project activity in our stock prep product line and expect the fourth quarter to show relatively strong bookings levels.

Supporting our expectation of a rebound in bookings in China, so far in the fourth quarter we've booked an order for a stock prep system valued at $1 million and signed two major contracts in China for our stock prep equipment valued at approximately $14 million. We expect to receive the down payment for the two pending orders toward the end of the year at which time those orders will be recorded as bookings.

And finally, in Latin America we continue to see positive growth trends in the marketplace and this in turn is generating increased opportunities for us, particularly with our stock prep and fluid handling lines. In Brazil, for example, we booked an order for a stock prep system for a complete de-inking line valued at $2.9 million and several fluid handling equipment orders for a combined value of $500,000.

Before concluding my remarks this morning I wanted to share with you news about a small but strategic acquisition. On our last call I talked about a small acquisition of a screen basket and de-watering business that extended the product offering of our stock prep product line. This month we completed another acquisition for a small net investment which we believe will further enhance the market position for our fluid handling business.

We acquired [Tecmo] Systems, a leading supplier of steam systems and control software for the paper machine dryer section with historical annual revenues of approximately $2 million. We have worked with Tecmo Systems for many years and they have a highly regarded dryer management system that is widely used in Southern Europe. The addition of this product line to our business will both increase our fluid handling systems business as well as the sale of our fluid handling products.

In summary, while China and the developing world continue to grow at a good pace we see a slowing recovery in North America and Europe. Our challenge is to continue to grow our business in this environment. We intend to do this by continuing to implement the growth initiatives that I've outlined in previous calls, including focusing on higher growth emerging markets, increasing our market share in regions where we are weak, expanding our parts and consumables business and shifting manufacturing to low cost areas.

In addition, we continue to actively look for acquisitions that fit our business model. We're making good progress in these initiatives and I'm confident that we'll be able to successfully grow our business in this environment.

Now on to our guidance. As I commented in our July call, we continue to expect a weaker second half of 2010 as the momentum of the economic recovery in North America and Europe decelerates and our gross margins come down a bit. For the fourth quarter of 2010 we expect to report GAAP diluted earnings per share of $0.26 to $0.28 from our continuing operations on revenues of $64 million to $66 million.

For the full year we're raising both our revenue and earnings per share guidance; we now expect to achieve GAAP diluted earnings per share of $1.33 to $1.35 from continuing operations on revenues of $261 million to $263 million. Now I will turn the call over to Tom for a more detailed review of the financials. Tom?

Thank you, Jon. I'll start with a review of our revenue performance. Consolidated revenues were $66.5 million in the third quarter of 2010, 24% higher than last year, including a 3% unfavorable effect from foreign exchange translation. The revenue results exceeded the high end of our guidance for the quarter, which was $62 million, largely due to higher revenues in our fluid handling and stock prep product lines.

Comparing to a relatively weak quarter last year revenues in all our major product lines in the paper making equipment segment were higher than the third quarter of 2009. In fact, three of our product lines saw quite significant increases compared to last year. Product management revenues increased 54% including 2% of unfavorable foreign exchange; fluid handling revenues were up 37% including 3% of unfavorable exchange; and stock prep revenues increased 21% including 4% of unfavorable foreign exchange translation.

Accessories revenues were also up versus last year, but at a more modest 3% growth including 2% of unfavorable exchange. Revenues in this product line continue to generate impressive percentage increases in China albeit on smaller absolute amounts. Accessories revenues in Europe were down 3% including 10% of unfavorable exchange and North American revenues were up 4% including 1% of favorable exchange.

Interestingly, this product line has a higher proportion of consumable products than our other product lines. And the slowing growth rates in both bookings and revenues in the developed markets suggest a possible leveling off in our broader parts and consumables business over the next few quarters. These sequential results tend to reinforce the theory that a slowdown in market activity may be underway.

Revenues in all the major product lines in the paper segment were lower compared to the second quarter of 2010 with the notable exception of fluid handling revenues which increased 8%. Encouraging the increase in fluid handling revenues was broadly based in all our major geographic territories, showing sequential increases with the exception of North America.

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

Not looking at our revenues by our major geographic territories in the paper making segment, on North America operations which had led to revenue upturn in the past few quarters, is now lagging the growth rates in our other territories. Although all the territories are up compared to last year's relatively low revenue results, on a sequential basis North America decreased 15% compared to the second quarter of 2010 and European revenues were up 3%.

China, on the other hand, had strong sequential growth where revenues of $10.9 million increased 28% over the second quarter of 2010 largely due to higher sales in the stock prep and fluid handling product lines.

And finally, taking a look at our revenue performance from another perspective, and following up on my earlier comments, our products and consumables revenues were $38.8 million in the third quarter of 2010, essentially flat on a sequential basis but 16% higher than last year's third quarter. Products and consumables revenue were 59% of our total revenues in the paper making systems segment in the third quarter of 2010 compared to 64% in the third quarter of 2009.

Now turning to our product gross margins. Consolidated product gross margins were 44.1% in the third quarter of 2010, up 330 basis points from last year's 40.8%. Product gross margins in the third quarter were 100 basis points lower than the record-setting margins we saw in the second quarter of 2010.

In our paper making systems segment gross margins of 44.4% were 320 basis points higher than last year and 50 basis points lower than the very strong margin results in the second quarter of 2010. Product gross margins were higher in all our major product lines compared to last year with the exception of accessories which was down only slightly.

The improvement over last year continues to result mainly from better absorption and cost efficiencies in our worldwide manufacturing operations, reflecting both the higher revenue volumes compared to last year and the significant cost reduction efforts we undertook in 2009. These benefits were somewhat offset by a small unfavorable product mix in the third quarter of 2010 that is, and I just noted, higher margin parts and consumable revenues were a lower proportion of total sales than in the year-ago quarter.

In our Other category, gross margins of 28.3% were 290 basis points higher than last year 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 $22.5 million in the third quarter of 2010, up $2.9 million or 15% from last year including a decrease in the effective foreign exchange translation of $500,000 or 2%. Approximately half of the increase in SG&A compared to last year is due to higher incentive and commission expenses associated with the improved results over the 2009 period. As a percentage of revenues SG&A expenses were 33.8% in the third quarter of 2010, down from last year's 36.4% due to the improved operating leverage with the higher 2010 revenue.

Now let me turn to our EPS results in the third quarter. We reported GAAP diluted earnings per share from continuing operations of $0.36 in the third quarter of 2010 compared to a loss of $0.01 in the third quarter of 2009. The third-quarter 2010 results include a gain of $0.06 from the sale of real estate in the US.

The third-quarter 2009 results include an incremental tax provision of $0.03 and an after-tax restructuring charge of $0.03. So excluding these items in both periods adjusted diluted EPS was $0.30 in the third quarter of 2010 compared to $0.05 in the third quarter of 2009 for an increase of $0.25.

This improvement of $0.25 per diluted share includes increases of $0.02 due to a lower recurring tax rate and $0.01 due to lower net interest expense, partially offset by decreases of $0.01 due to higher diluted shares outstanding and $0.01 due to the effect of foreign exchange translation. This leaves us with a remaining increase of $0.24 therefore due to better operating results in the third quarter of 2010 compared to the third quarter of 2009.

Let me also take a moment to compare the actual EPS results to the guidance which we issued during our July 2010 earnings call. Our GAAP diluted EPS guidance for the third quarter was $0.21 to $0.23 and it did not include the gain on the sale of real estate. This compares to our adjusted diluted EPS of $0.30 which also excludes the gain.

As we noted in our press release, the $0.7 improvement over the high-end of the guidance resulted from higher-than-expected revenues from our fluid handling and stock prep product lines as well as higher than expected gross margins.

Now turning to the balance sheet, as Jon mentioned in his remarks, we had another solid quarter of operating cash flows in the third quarter. Cash flows from continuing operations were $6 million in the third quarter of 2010, significantly below last year's $13.2 million which was one of the strongest cash flow quarters in our Company's history.

Despite the decline from last year's near record level, we were quite pleased with these results given the higher revenue so far in 2010 compared to last year and the resultant demand on incremental working capital. In fact, the key working capital metrics that we track continue to show solid improvements over last year's third quarter, although there were some small declines in performance compared to the second quarter of 2010.

Specifically, days sales and receivables were 65 in the third quarter of 2010, an improvement of 10 days compared to last year's third quarter, although up eight days from the second quarter of 2010. Also the days in inventory were 101 in the third quarter of 2010, an improvement of 14 days compared to last year, but an increase of five days compared to the second quarter of 2010.

Overall our working capital as a percentage of the last 12 months revenues, where lower is obviously better, decreased to 11.5% in the third quarter of 2010 and compares to 13.6% in the third quarter of 2009 and 12.3% in the second quarter of 2010. 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 third quarter of 2010 was $26.6 million, an increase of $2.4 million compared to the second quarter of 2010 and an improvement of almost $16 million compared to the position at the end of the third quarter of 2009. This is our highest net cash position since the first quarter of 2005 and represents approximately $2.13 per diluted share.

The increase of $2.4 million in our net cash position compared to the second quarter of 2010 can be summarized as follows -- our major sources of cash in the third quarter were the $6 million in operating cash flow which I've already noted; $2.2 million from the sale of a manufacturing facility in the US, which we had earlier consolidated into our other facilities in the US and Mexico; and a favorable exchange rate effect on cash of $2.6 million.

Our major uses of cash were $4.4 million for stock repurchases, $3.2 million for the small acquisition which we announced in July, and $700,000 for CapEx. And that concludes my review of the financials and I will now turn the call back to the operator for our Q&A session. Operator?

(Operator Instructions). Walt Liptak, Barrington Research.

Good morning, guys. Congratulations on leveraging the recovery and keeping the cost down as things came back ;it's nice to see numbers coming out. It looks like the fourth quarter with these new orders coming in is going to be solid and the guidance as good.

I wonder if you could comment a little bit given the mixed outlook for North America and Europe and, maybe more positive, China, what 2011 might look like. Given your initiatives, can 2011 be a growth year for revenue and what about profitability?

Okay, let me start by -- I'm not exactly sure which bookings you're talking about that are going to come through in the fourth quarter. I should make clear that some of the big China orders we had, the $14 million -- the two orders for that $14 million system that we expect to be booking in Q4, we don't really expect revenue in Q4.

Okay, got it. Okay.

Our China stuff right now, we actually -- we don't book that percent complete. So that's going to book when we ship it, sometime in Q2, middle of 2011, something like that.

Okay. All right, thank you for that clarification.

But we do -- I think you saw our guidance for -- our guidance for Q4 I think will have reasonable revenues.

Right.

When I look at 2011, I guess the easier one is China seems to be consistently growing and is a steady upward path, I would say. We don't see too much storm clouds on the horizon in there. And I would say in other parts of the developing world, South America in particular, but also India, Russia, those kinds of places. It seems to be pretty good growth prospects.

North America and Europe, it's more complicated and it depends I think on how the economy goes. In the end the mills are building inventory right now, they're at very, very low inventory levels, so they need to build inventory. But they're not going to do that forever.

So, assuming that these economies move through this little pause they're in now and start to grow a couple percent, we should be okay in 2011. But if they stall or retreat then the mills are going to stop -- they're going to slow their rates down, which was going to hurt our North American and European businesses.

Okay. All right. Well, understanding those moving parts, would you expect revenue to be up next year?

I thought I avoided that. I couldn't -- we haven't got our budgets in from our divisions. If you compare 2010 to 2011, as you know, we started with a pretty strong 2010 and it got weaker during the year. So we're going to enter I would say 2011 in North America and Europe in particular -- in some ways a weaker position than we entered 2010 in. Now will we go during the year? I would say most economists say that there's some lift in the economies next year, not much, but some.

Okay. Are you getting any visibility -- I guess quote activity and things like that just seem to be -- they're just not there like they were last year or the beginning of last year?

Well, I mean, we had a couple things in Q1. So one was we had this -- you may remember, we had a real pop in our spares and consumables bookings and we kind of attributed that to restocking inventory levels. So we had a pretty strong parts and consumables hit in the first part of the year.

The good news is they've come off from let's say the Q1 booking rates, but they're still holding pretty solid. And that makes me think that this isn't -- there's no more inventory build going on, it's just operating rates. The benefit for 2011 is we do have good quote activity in China, which is going to be in 2011.

Okay. I'll get back in the queue, but I just had one more quick one. Fourth-quarter SG&A as a percentage of sales, do you have a guess at what that might be, Tom?

Yes, I think it will be pretty close to the third-quarter level, Walt.

In the dollar amount it will be the same?

Yes, the dollar amount will be about the same as well, right.

Okay, all right. Thanks very much.

Eric Prouty, Canaccord.

Good morning, thanks, guys, good quarter.

Thank you.

Quick question, I know you touched upon some of the geographies. But if we look at specific companies there's obviously been a lot of tough news the last few years out of many of the major players out there in the market. Are you at least seeing your folks, the (inaudible) folks taking out capacity, bankruptcies, etc., from a corporate standpoint? Because I know you guys work closely, do things seem to be bottoming out at least there from that standpoint?

I would say they have. I mean IP released yesterday they had a fantastic quarter. They have trimmed down their footprint, brought down some -- closed some mills, brought capacity down. But they're operating at very high rates, they still are building inventory and they were pretty optimistic for the rest of this year and pretty optimistic for 2011. Now they're in some better grades in some ways, the newsprint guys I assume aren't quite as upbeat, but again, they -- I think a lot of the pain is probably behind them.

Great. And then from a specific -- kind of the product breakdown or the segmentation standpoint. If you look at the accessories revenue line in particular, that seemed to have slowed down quite a bit sequentially, dropped a tiny bit, slowed down significantly year over year. Is that a timing issue or is there anything specific there that we should be keeping an eye on?

I would say that we spend a lot of time here preparing the trends of our various businesses. And I've kind of come to the conclusion that it's hard to read too much into it because very often a capital project that is in one quarter or another throws the comparisons off.

That said I would say the accessories business, as Tom kind of mentioned in his remarks, it's one of our more heavy consumable businesses. So the weakness may be indicative of this slowing that I was talking about earlier in North America and Europe.

And then --.

(Inaudible).

No, I think that's right. It was up over last year, Eric, but you're right, it was down sequentially.

Right. And then from a gross margin standpoint in particular, you guys are still hanging in there in kind of the mid-40s, very good margin. What's kind of the outlook there? Are these numbers that you think -- obviously mix plays into this quite a bit. But any thoughts on the margin standpoint?

That's a good question. There's a whole bunch of -- I'll be honest, we were pleasantly surprised with the margins in Q3. And the margins have benefited some -- to some extent from pre-recession times in that we have a bit more spares and consumables. But where there's a whole bunch of factors, as you can imagine that go into margins, some of which is the product line mix between our businesses, accessories versus fluid handling versus stock prep.

Another one is things like the absorption we've got and that's I think a permanent benefit. We took down a lot of overhead and a lot of manufacturing capacity allowing us to be more fully absorbed. So I think that's a permanent change in our operation. But I would say if you look at the first part of this year the mix and even pricing within product lines has been unusually good. I wouldn't want to forecast it will always be that good.

Okay. Fair enough. And then finally you mentioned China, obviously an area of strength. Can you guys just break out, I mean from a percent of revenue standpoint, what type of contribution China is now?

Well, I think we said in the third quarter it was $10.9 million of revenues.

Got you, okay, I missed that. Okay, great. Thanks a lot.

Okay.

Thanks, Eric.

(Operator Instructions). Rick Hoss, Roth Capital.

Good morning. Jon, not to belabor the whole bookings discussion here, but I'm just trying to get a feel for the differences 2Q, 3Q, I realize 2Q benefited from, as I think you mentioned, pent up demand. Is 3Q -- is that indicative of kind of an ongoing demand or interest rate, or do you see this as sort of a period of where you had fantastic bookings and a lot of catch-up and then after you got these kind of high-priority projects in place then the purchasing managers kind of looked around and said, okay, what else do we need to do?

I'm glad you asked that question, Rick. So, if you're comparing -- you made a good point about comparing Q3 lets say to Q2 because Q2 wasn't so bad. I guess a couple of key points. One, parts and consumables were steady, so we're really talking about capital and we're mostly talking about stock prep capital.

In every region of the world that was the business from a bookings point of view that was down significantly, in China really significantly. And I tried to comment in my remarks that a lot of that is timing. I mean, we're going to have -- I think in Q4 when we're talking about comparisons for Q3 it's going to be much more favorable, particularly in the area of stock prep.

So I think there is an element of particularly in North America and Europe where the hot projects move forward and some of our other product lines and maybe there's a little bit of softening. But I think primarily it's a timing issue with just the way the projects are falling. Because our Q4 is looking pretty good so far, particularly out of China. I don't know if you want to add anything to that, Tom?

No, I think that's it. It was really -- as John said, there was a capital business in the third quarter that was very, very weak. Most of that was stock prep, most of that was in China. And as you can see from -- we've already talked about those $14 million in orders but there are others out there that we think -- we're really timing between the third and the fourth quarter.

Yes. The project pipeline looks pretty good in China. So, I wouldn't -- I wouldn't yet call that a trend. You know, I mean, that drop.

Right. Okay. And then when I think about North America and Europe and based on your comments, it's a little bit of a divergence from the IP call yesterday. How do you grow -- assuming a flat market as you're saying, how do you grow the North American business? I mean, do you focus on market share? Are you going to focus more on M&A, additional products, what's your strategy?

Okay. So I want to maybe comment first on the divergence from IP. If you listen to the IP call it was pretty optimistic for the rest of -- on 2011. It's a little I would say more optimistic than people like (inaudible) art about 2011, they're a little more cautious about what the economies going to do in North America and Europe, I think. So we're probably going to be somewhere in between that, but we're not economists.

So in terms of growing our -- in terms of growing our business in these slow growth markets, I kind of put North America and Europe together in a lump. You know there are things we can do, one of them is just getting more yield out of our installed base, the mills are still running and we don't -- in some of our business we have a very good parts stream coming out of our installed base and in some of our businesses we could do better. I would say in particular things like stock prep.

Another area I would say particularly in Europe -- we have decent market share in Europe but it's very uneven. We have relatively low market share in places like Germany and a lot of the Scandinavian countries. So we do have opportunities, I think, to grow our market share in those regions. So those I would say are the two prime possibilities.

Okay. And then, Tom, I know the last few quarters we've talked about SG&A levels and with a certain revenue target. It looks like the run rate based on the third quarter is about $90 million. I think we've discussed in the past maybe $86 million to $87 million on a [300] type of topline. Would you say that now we're moving into $90 million maybe that increases as revenue gets harder to come by maybe you're having to give up -- pay more to get these sales or how would you characterize that?

Yes, I mean -- no, you're right. I mean, we're running higher than what I thought and what I told you last quarter, there's no question about that. It's slightly higher. I mean, I think we'll come in maybe a little under $89 million for the year.

I think what's happened is a couple things. One is, and I kind of mentioned this in my remarks. We're seeing higher incentive expense, higher commission expense with the higher revenues and also I would say we had battened down the hatches so hard last year, anything that moved on deck we had screwed down pretty tightly. As some of that gets loosened a bit we're seeing a little bit more travel expense, for example, as -- more sales guys get out to meet more customers which is what we want and things like that.

So I think I was a little -- maybe I was a little optimistic in terms of my SG&A forecast last time. But I think we'll come in at around $89 million. Now, having said that, at these margin levels a little bit more revenue will give us some good operating leverage. I don't think it will grow proportionately the SG&A from here.

Right, I would agree with that completely, yes.

Okay. And then tax rate, tax rate has been great. What should we model for the fourth quarter?

Fourth quarter we're looking at around 23%.

23%.

Yes.

Perfect. Thanks, guys.

All right, thanks, Eric.

I would now like to turn the call over to Thomas O'Brien for any closing remarks.

Thank you, operator. Well, thanks for your attention. I think that the strong margins we had and our performance in the third quarter shows the benefits of the restructuring that we did over the past three years. As we look forward our balance sheet as healthy, our operating units are doing a great job seizing new opportunities and I look forward to reporting our progress in future calls. Thanks very much.

This concludes today's conference call. You may now disconnect.