Kadant Inc (KAI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kadant Inc. first-quarter 2012 earnings conference call. My name is Yosini and I will be your operator today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

Now I have the pleasure in turning the conference over to Kadant Inc.'s Chief Financial Officer, Mr. Thomas O'Brien. Please proceed.

Thank you, Operator. And good morning, everyone, and welcome to Kadant's first-quarter 2012 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Let me begin by encouraging all participants in our business review today to participate via our webcast. You may access the live webcast by going to www.Kadant.com, select the Investors tab, and then select the Listen Live option for the webcast. To participate in the question-and-answer session at the end of our prepared remarks, you will need to dial into the teleconference. The dial-in number is available in our press release issued yesterday, and will also be shown at the end of our presentation.

Let me now remind everyone of our Safe Harbor statement. Various remarks that we may make today about Kadant's future expectations, claims and prospects, our forward-looking statements for purposes of the Safe Harbor provision 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 outlined at the beginning of our slide presentation, and those discussed under the heading Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Our Form 10-K 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 during this webcast represent our views only as of today. While we may elect to update forward-looking statements at some point into 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 webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first-quarter earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading Investor 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 John's remarks, I will give an overview of our financial results for the quarter, and we will then have a Q&A session. Jon?

Thanks, Tom. Hello, everyone. It's my pleasure to brief you on our first-quarter results. Well, despite the headwinds in the global economy, we had another very strong quarter. I'll begin my remarks with an overview of our financial performance in Q1.

We finished the first quarter with revenues of $84 million, which is up 17% compared to the same period last year. Gross margins at 46% were significantly higher than we anticipated, and Tom will provide the details behind this strong performance in his remarks. Q1 operating income increased 25% to $10.4 million, and we generated GAAP diluted earnings per share of $0.61 in the first quarter of 2012. This beat our GAAP guidance of $0.41 to $0.43, and was one of the best quarterly earnings per share performances in our history.

Our EBITDA for the first quarter was a record $12.6 million or 15% of sales, and up 24% from the same period last year. And finally, our net cash position at the end of the quarter was $31 million.

Taking a closer look at our revenue performance in the first quarter, we had a 17% revenue increase over Q1 of last year. This increase was due in large part to strong performance in our Stock Prep and Water Management product lines. Stock Prep revenues increased in all geographic regions, and our water management revenues benefited from Kadant M-Clean, which was not included in Q1 of 2011, as we acquired that business in Q2 of last year.

Turning to bookings, we generated $78 million in bookings, which is down 8% compared to Q1 of last year. The decline in first-quarter bookings was due primarily to a large drop in capital orders in China, particularly for our Stock Prep and Fluid Handling product lines. The general economic slowdown in China, combined with recent capacity additions, has resulted in a decline in bookings in that region for all product lines, except doctoring, which did see a slight increase.

On the other hand, bookings in our water management product line were up 51%, due to the addition of Kadant M-Clean bookings and to a large order for our Mist Elimination System for our linerboard mill in the US. Despite declining bookings in the first quarter, we still see good project activity around the world.

Last week, our Stock Prep group held its Annual Global Strategic Planning meeting, and I was pleased to hear that there is still a good amount of project activity being reported. In fact, after the first quarter ended, we booked two large capital projects in North America and Southeast Asia, with a combined value of $3.1 million. And we also received three pending orders from China, Europe and South America, with an aggregate value of over $10 million. I should note that we do not treat these pending orders as bookings until we have received a down payment.

The booking and revenue trend chart on slide eight shows our quarterly revenues, which is the red line, and our bookings, which is the blue bars. The revenue was down 13% sequentially from a very strong Q4, due in large part to declines in our Stock Prep and Fluid Handling product lines. Bookings were down 1% sequentially in Q1, primarily due to lower capital bookings for Stock Prep products. As you can see, bookings have been relatively weak the last two quarters, reflecting the uncertainty in Europe and China.

Taking a closer look at our parts to consumables, we can see on slide 9 that parts of consumables revenue in Q1 were up slightly from really a very strong Q1 of 2011, and they were up 6% sequentially. Overall, our revenues for parts and consumables in Q1 were $47 million, and they made up 56% of our revenues.

Our Water Management and Fluid Handling product line revenues for parts and consumables were up 33% and 4%, respectively, compared to last year, while our Stock Prep and Doctoring parts and consumables revenues were down 9% and 2%, respectively. Again, I'll note that our water management parts and consumables revenues benefited from the addition of Kadant M-Clean revenues, which were not included in Q1 of last year.

Looking at bookings, which are shown in the blue bars, you can see that bookings have continued to trend upward, reaching $49 million in Q1, although they were flat compared to a relatively strong Q1 of last year. The first quarter is historically a good quarter for parts and consumable bookings, as most order parts in anticipation of planned maintenance shutdowns in the spring.

China, in particular, saw parts of consumables bookings increase nearly 30% in Q1 compared to the same period last year, with good double-digit increases in all of our product lines. As you know, we've been paying a lot of attention to growing our aftermarket business in China, and it's good to see continued progress in this area.

I'd now like to take a few minutes to provide a brief review of our business activities in each of the major geographic regions of the world. Before I start, I want to let you know that we're making a change in how we present the data in the geographic regions we operated in.

In the past, we presented bookings and revenues based on the selling location of the business. We're now presenting the information based on the location of the customers. And I think that this will provide more helpful information for understanding regional market conditions.

Starting with North America, the US economy in the first quarter continued its modest growth. And given the recent slowdowns in China and the uncertainty in Europe, the US continues to be one of the strongest regions in the world for us. Operating rates in containerboard and some grades of printing and writing continue in the low to mid-90s, and pricing is relatively stable.

I should also note that input costs from mills have moderated, with the cost of natural gas remaining low, and weaker global demand keeping dollar pressure on fiber costs, particularly OCC. Our Q1 revenues in North America were $40 million, up 4% compared to the same period last year. This update is due in large part to capital revenue increases in our Stock Prep product lines. Bookings in North America were up 4% in Q1 compared to the same period last year, and up 25% sequentially.

We were encouraged by the relatively strong bookings in our Water Management product line, which had several large orders, including one at Kadant M-Clean high-pressure cleaning system, and we also had very good sequential bookings for Fluid Handling and Doctoring product lines. All in all, market conditions in North America are good, and our businesses in North America are performing well.

Turning to Europe, the changes in how we present the numbers will really be most evident here, as our European businesses are the ones who saw a significant part of their sales outside of Europe. As you can see from the chart on slide 12, our revenues were up [56%] compared to Q1 of last year, and this is due largely to strong revenue growth in our Stock Prep and Water Management product lines. But they were down 34% from a very strong Q4 of last year.

Bookings in Europe were up 5% compared to last year, but they're down from levels we had in the middle of last year. And I will say despite the uncertainty in the region, we do still see a good number of active projects, particularly in our Fluid Handling product line.

Turning to China, in China, we see relatively weak market conditions, as the economy there faces some headwinds, and the paper industry deals with a large amount of capacity that's come online over the past year. We believe, however, that market conditions will be improving as the year progresses, and that the long-term outlook for China is still quite promising.

China recently released a five-year plan that targets capacity increases of 4.6% per year through 2015, and it also calls for a continued shutdown of smaller inefficient mills. Chinese economy, although slowing, is still the fastest -- one of the fastest-growing in the world, and is expected to lead the global paper and packaging sector in 2012, according to a report issued by Deloitte a few weeks ago.

Paper consumption is expected to grow at a compound annual rate of 7.1% through 2015, according to recent data by RISI. Our quarterly revenues in China continue to grow, thanks in large part to the Stock Prep capital orders that were booked in earlier quarters. Q1 revenues from China were nearly $12 million, up 34% from Q1 of last year, although down 37% sequentially from a very strong Q4 of last year.

Our bookings in Q1, however, were down 57% compared to the strong bookings in Q1 of 2011, and this decline was found in all of our product lines except doctoring. The decrease was in part due to the financial constraints placed on our customers in China, as well as the softer market that I noted earlier. While we are not seeing projects canceled, in some cases, we are seeing delays in projects being booked, as well as customer-requested shipment delays for orders that are in our backlog. This is typical, I should say.

Although there are some macro challenges with respect to the capital business, we continue to make good progress in our spares and consumables business in China, with bookings up 30% over Q1 of 2011. Our Stock Prep business in China has contributed to the majority of this increase. That's particularly encouraging, because it's been a major goal -- a goal of our business in China to grow our spares and consumables business, as I noted.

Since we're now presenting information by customer location, we're including two more slides in our quarterly presentation, providing revenue and booking information for South America and the rest of the world.

Returning to South America, I'd like to just make a few general observations. First, only our Fluid Handling product line has a direct presence in Brazil, which is the largest market in South America. Our other product lines operate in the market through licensees.

Second, Q1 is historically a weaker quarter in South America, as it's their summer period south of the equator. And finally, as you can see from the chart, bookings can be somewhat lumpy. For example, the large Stock Prep order that was booked in Q3 of last year resulted in a spike in bookings in that quarter.

I'll conclude my remarks on the various regions we serve with a brief comment on the bookings and revenues from the rest of the world. This includes areas such as India, Middle East, Southeast Asia, and Australia. Like the general trend found in South America, we see revenues have been trending upwards since the 2009 recession.

Also, as is the case with other emerging markets, bookings can be somewhat volatile. We do expect that the rest of the world category will play an increasingly greater role in our business in the coming years. And I will be providing commentary on this region in future calls.

I'd like to close my remarks with a few comments on our guidance for the full year of 2012 and the second quarter. Although we see challenging market conditions in Europe and China, we had an excellent operating performance in Q1. We have a healthy backlog of $103 million, and we continue to see good project activities.

For the full year, we now expect to achieve GAAP diluted earnings per share from continuing operations of $2.10 to $2.20 on revenues of $335 million to $345 million, which is up from our previous guidance of $1.95 to $2.05 on revenues of $330 million to $340 million. For the second quarter, we expect to generate $0.50 to $0.52 of diluted earnings per share on revenues of $83 million to $85 million.

I'll now pass the call over to Tom for additional details on our financial performance. Tom?

Thank you, Jon. I'll start with a review of our gross margin performance.

Consolidated product gross margins were 45.6% in the first quarter of 2012, declining 200 basis points from last year's first-quarter record level, but up 700 basis points from the fourth quarter of 2011. As you can see on the chart, despite the decreases from last year, this is one of the best quarterly gross margin performances we have ever recorded.

Margins were higher than last year in both our private-based products and doctoring product lines, the latter of which recorded one of its best performances ever. Despite these increases, consolidated margins were lower in large part due to an unfavorable product mix compared to last year, that is, higher-margin parts and consumables products comprised 56% of total revenues in the first quarter of 2012 compared to 66% in the first quarter of 2011.

With respect to our guidance, gross margins were higher than we expected in all our major product lines, largely due to significantly higher margins in our capital businesses. Looking ahead, we estimate the consolidated gross margins will be between 42% and 44% for the full-year 2012, which suggests lower quarterly levels going forward. As we have noted before, there may be considerable variability in the 2012 quarterly margins, and therefore, our quarterly EPS results, due in large part to product mix.

Now let's turn to slide 19 and our SG&A expenses. SG&A expenses were $26.1 million in the first quarter of 2012, up $1.6 million or 7% from last year, and included $1.1 million or 4% from Kadant M-Clean, which was acquired in the second quarter of 2011. Operating leverage improved 300 basis points in the quarter, with SG&A expenses as a percentage of revenues declining from 34.1% a year ago to 31.1% in the first quarter of 2012, mainly due to higher revenues in the 2012 period.

Let me now turn to our EPS results for the quarter on slide 20. We reported GAAP diluted earnings per share from continuing operations of $0.61 in the first quarter of 2012 compared to $0.47 in the first quarter of 2011, an improvement of $0.14. This increase of $0.14 in diluted EPS consists of the following -- increases of $0.30 associated with higher volumes in the first quarter of 2012 compared to the first quarter of 2011, and $0.04 from lower weighted average shares outstanding.

These increases were partly offset by decreases of $0.10 from a lower gross margin percentage; $0.04 due to higher operating expenses; $0.03 due to nonrecurring expenses associated with a facility consolidation; $0.02 arising from the dilutive effect of M-Clean; and $0.01 from an increase in the effective tax rate. Selectively included in all the categories I just mentioned was a small unfavorable foreign exchange translation effect of $0.01 in the first quarter of 2012 compared to last year.

Now let's turn to our cash flows, working capital, and debt leverage starting on slide 21.

Operating cash flows from continuing operations were a negative $4 million in the first quarter of 2012 compared to positive cash flows of $400,000 last year. As you can see on the chart, the major factor contributing to this performance in the first quarter of 2012 was a $14 million use in working capital, largely due to incentive payments, which are typically made in the first quarter, along with an increase in the balance of unbilled costs and fees.

You can think of the latter account on the balance sheet as the receivable component associated with percentage of completion accounting. An increase in this balance means that we have recognized more revenue on percentage of completion projects than we have collected in cash on those projects. We expect the cash flows will be positively affected in future quarters, as we complete manufacturing and delivery of these systems, and receive additional progress payments from the customers.

Aside from the negative cash flows provided by the continuing operations, there were minimal other uses of cash during the first quarter of 2012. We purchased approximately $300,000 of CapEx and repurchased $1.3 million of our common stock, the latter of which represented approximately 58,100 shares at an average purchase price slightly over $22 per share.

The higher unbilled costs and fees balance affected our days and receivables performance, which, as you can see on slide 21, increased to 73 days compared to the fourth quarter of 2011's 58 days and last year's 68 days. Days in inventory also increased on a sequential basis, but were still lower than the results in the first quarter of 2011. Our AP days, on the other hand, were (technical difficulty), that is higher on a sequential basis but slightly lower than in the first quarter of 2011.

Putting this all together, our overall working capital performance, as measured by working capital compared to the last 12 months revenues, was 13.7% in the first quarter of 2012 compared to 9.9% in the fourth quarter of 2011, and 12% last year. I should remind you that 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 first quarter of 2012 was $30.9 million, a decrease of $4.5 million compared to the fourth quarter of 2011, and $9.1 million compared to the first quarter of 2011. The decrease of $9.1 million partly reflects several significant uses of cash during the 12-month period ending in the first quarter of 2012, including approximately $17.4 million for repurchases of our common stock, and approximately $15.2 million in cash for the acquisition of Kadant M-Clean.

And finally, on slide 24, you can see that our leverage ratio declined for the ninth consecutive quarter and now stands at 0.23 at the end of the first quarter of 2012. This ratio represents our total indebtedness divided by our consolidated EBITDA as defined in our credit agreement.

And that concludes our 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.

The first one I wanted to ask is, Tom, on the gross margin, you went through some of the detail with doctoring having a really nice margin and fibers, we can see that number. But it sounded like your mix of parts was lower? Is that right?

Compared to the first quarter of last year, that's right.

Okay. And which I guess implies that some of the systems that you ship had a better gross margin?

Yes, I would say if you're trying to bid analysis versus, let's say, our guidance, there was really no effect from mix there. All the margin increase was due to other factors, whether it be pricing or utilization of our overhead, maybe some mix within the mix, if you will, in the sense that we had better -- maybe more unit capital projects in our capital businesses as opposed to larger systems.

And I would say even with systems, in the first quarter, we had system -- the systems that we shipped in the first quarter had higher than average margins than other systems even in our backlog. So it was just a good -- it was just kind of a good confluence of events, where even the mix, as Tom says, within capital, both systems versus unit capital, and even just looking at systems themselves was quite favorable. And really more favorable than we expected it to be.

Okay. And so the question to follow on would be, is this -- was this a one-time thing where you got better pricing and utilization productivity on certain systems? Because I -- from -- I guess we've typically talked about systems having lower margins than parts and other products.

Yes. I would not say this is kind of the new normal. I think we kind of gave -- you got the guidance for our margin in the, you know, I would say normalized kind of at a 42 kind of range. This year, they'll be a little higher because of the good start we had in Q1. We're having, as I said on earlier calls, we are seeing improved pricing compared to a few years ago, but I don't think that there's anything unique going on in the first quarter, other than the nature of the systems that we shipped.

Okay. Okay, got it. If we could just walk through China a little bit more. And I guess one way to look at it might be to look at the backlog. How much China-related product is in the backlog?

It's probably $20 million. So we still have a good backlog in China. The other thing I would say is that in China in particular, we still have good project activity. You compare this to the kind of slowdown you had in kind of '08/'09, we didn't have very good bookings and we didn't have very good project activity. That's not the case this time. We do still have a number of active projects in China that we expect to book during the year.

Okay. You mentioned that there might be some shipment delays in the coming quarter?

Well, I mean, it's margin and we've seen this in other kind of slowdowns in China before. You know, the Chinese customer really has no reluctance to ask you to postpone a shipment -- even if they've already paid for the shipment, in some cases. And the way we recognize revenue in China, we don't recognize it until we ship it. So that makes it hard to predict.

And also, we've got -- when we're looking at a project and working, quoting, that kind of stuff, we have estimates of when that order will be let. In this environment, we've seen for the last several quarters, and I expect we'll see for a few quarters coming forward, that those times are delayed. As the customer is looking at the market and looking at, hey, how much capacity is there? How much has been absorbed? What's the economy like? They're going through the same kind of thinking that you're going through.

Right, right. And the government seems like it's acted to reduce bank reserves, they're trying to improve their own consumer economy. Are some of those early actions that have happened over the last month or so, is that why we're seeing more project activity now?

You know, I would say the good part about the actions of the government, and you know, until recently, the government was actually trying to slow down growth in China. And we did see the effect of increasing bank tightening on bank lending, affecting projects. Now, we've definitely been reading about them loosening -- trying to loosen credit for the banks and that kind of stuff, and I think that will have a favorable effect going forward as the year progresses. The Chinese government, actually I think, in my experience, has a pretty good ability to control their economy, both up and down

Right, okay. Okay and then just to switch to Europe and the bookings activity there. It's kind of counter to what we've been dealing with in the markets with the bookings up 5%. Is this retrofit replacement efficiency? What does the visibility look like in Europe?

You know, we were also, I would say, somewhat surprised and pleased about our bookings in Europe. And as I mentioned, particularly for Fluid Handling, despite the kind of concerns in the market, there are still projects. You know, a healthy list of projects. Again, more for Fluid Handling probably than from our Stock Prep business, but it's a bit of a puzzlement to us; it runs counter to what we would have expected reading in the paper and so forth.

Okay. Okay, and the expectation is that that should continue into the -- or through the second quarter?

Yes, I would say we've got a pretty good visibility on reasonable bookings. I mean, they are not at the level they were at in the middle of last year, sort of prior to the slowdown with the sovereign debt thing in August, right? But they're still not bad. And the way it looks is that, yes, we see it -- we see things kind of continuing decently well along there.

Okay. Okay, good. And then I guess the last one -- you mentioned pricing as one of the things that has helped out. Did you take prices up this year? Or is that a last year price increase that you're benefiting from?

So, we kind of look at pricing a couple of ways. So, what element is pricing for parts and consumables? And we take those up continually. And I would say we're actually, in the last year, we've really done detailed studies in pricing and our competitive position for parts in particular. And I think we've gotten a lot smarter about pricing for parts. And I think that's showing some benefits in our overall margins.

Pricing for capital, particularly big systems, is different. I mean, every capital job, you look at what your strength is; has the customer had one of your systems before? What's your strength in that market? Who are your competitors? So, that's really a case-by-case business. And it's not like you're saying, okay, we're going to raise capital pricing on systems 5% this year. It's more of a feel for what your competitive position is in the market.

Okay, got it. Okay. Thanks very much, guys. Good quarter.

[T.R. Damisky], Sidoti & Company.

Hey, guys, congratulations on what I think was a record quarter for you. A few questions. I apologize if I missed anything, as I was just kind of bouncing around calls. Just first on China. I guess with the 8.2 million tons of capacity being taken offline in 2011, I mean, how long does that kind of capacity take to get absorbed by your customers? And what kind of purchases are we looking at here?

Well, as I understand it -- and you know, I don't know that anyone has perfect visibility what's going on there -- is that $8.2 million is pretty much off at the end of the year. That timing was coincident with a lot of capacity being added. And part of the reason that capacity is being added, of course, is they know they can see that that smaller -- those smaller mills are --

Shutting down.

-- going off-line. I will say that the five-year plan calls for more shutdowns. I think it's like $10 million or $11 million of capacity shutdowns through 2015. And a lot of analysts say that they expect that, in fact, the government will close more than that amount. So I don't think we're done with capacity shutdowns in China. The smaller mills that, again, aren't really our customers.

Right. And then, just sort of near-term, is that -- we're still seeing just Chinese markets suffering due to reduced exports to Europe. And as the new capacity comes online, is that what we're seeing?

That's exactly right. I mean, they have a bigger -- they have a substantial export business to China. No question that affects their main paper grade, which is linerboard. As you know, they're trying to increase their consumer spending, but at the same time, they're trying to slow down their housing market. The housing market actually generates a lot of linerboard demand. So, it's running a little bit at cross-purposes. The good news is that China is still a growing economy and it's just a question of time, but they will absorb this capacity that they've put online.

Great. And then can you touch a little bit on input prices for you guys? I guess -- anything, I guess, it's relevant -- you know, metals, whether it's steel, brass, bronze, energy or air freight, and sort of how that affects margins.

Well, you know, our main input price is steel. And that's -- the bigger equipment, like our Stock Prep equipments, steel is a reasonably big piece, maybe 20%, 25% of our cost of goods in that range.

Steel actually had been trending up, then trended down, isn't really doing anything dramatic right now. I think that the general slowdown in the world economy has taken some pressure off of steel. The other one that I think we pay a little bit of attention to is just shipping costs, for when we're shipping things out of China. And nothing really dramatic in there either, I would say, T.R.

Great. Just on the competitive landscape position. Is anything changing as far as either pricing or competitors winning or losing the business? Anything that's kind of interesting there? Any product line, any geography, really?

I would say that our Fluid Handling business, my impression, unfortunately, when you're looking at the competitive landscapes, it's just your sense of it. But my sense is that our Fluid Handling business is becoming stronger and an even bigger player. And they were already a big player. That's particularly the case in North America, but also in Europe and they continue to be quite strong in China.

I would say the other one worth noting is our largest Stock Prep competitor, a company called Voith in Germany, is becoming a bigger player in China. They were somewhat slower to the China market. They make the paper machines, as you may know, but their Stock Prep has been a little bit of a late entry to the market. And they are trying very hard to get a foothold in China and having some success. They are a good competitor worldwide.

Absolutely. And you said Fluid Handling, so is that -- I mean, kind of doing well against Dublin or others possibly?

Yes. Doing well against really everybody but maybe even Dublin in particular. And the other one, I would just say our doctoring business in North America, they had a very, very good quarter for blades. Whether that's a market change or just a little excess demand, I couldn't tell you. But things are going very well in North America for our doctoring business.

Great. And then -- are you guys, just on the second quarter, are we still sort of expecting that to be the strongest of the year based on sort of large systems and backlog? Or has anything changed, I guess, there in second quarter?

I'd say that has changed, T.R. I know we said that last quarter. But again, getting back to some of the issues that we've already talked about with China, the timing of shipments, et cetera, I would say probably like third-quarter, there will be -- looks like the strongest at this point. Again, that could change too, depending upon when some of these systems actually ship. So as you can see from our revenue guidance in the second quarter, it's basically equal to the first quarter, maybe slightly over.

You were at [90] and then it went to [83] to [85]. Is that right? Yes.

We never really gave second-quarter revenue guidance. But I'm saying the second quarter revenue guidance we're giving now is kind of basically equal to the first quarter. So that suggests -- and the way we look at it, looking at the backlog, looking at the potential orders to be shipped, it looks like the third quarter will probably be the strongest quarter this year right now.

I would say we actually -- we kind of had a bizarre situation in Q1, where we -- in reflection, Q2 -- in Q1, we had some orders that we actually expected to ship in Q2 that turned out being shipped in Q1. And those were nice, high-margin orders. We also had orders that we expected to ship in Q2 that have -- looks like they're going to slip to Q3. So we kind of had it going at both ends.

Okay, that makes sense. And then just on margins in, like, second -- in Q -- second quarter, I think you mentioned that margins will be lower because there will be a larger proportion of capital in the quarter. Is that -- am I okay on that? Or is that different?

Yes. Probably slightly unfavorable mix versus the first. So, a point or two in margins makes a pretty significant impact on our EPS these days. So, that's why we're at the, say, $84 million range in revenue and, say, [51], pick the middle number in the EPS range. And all that difference I would say would be attributable to slightly lower margins. Again, a point or two makes a big difference.

Right, great. And then just on the CapEx front, still $6 million to $7 million in 2012 for upgrading manufacturing capabilities in China. Is that right or has that changed?

Yes, I mean, as you can see, it was a little light in the first quarter but we're still estimating the $6 million to $7 million number.

And then 2013 more normalized kind of $5 million range?

Exactly. I will also say I think we've done a fair amount of investment in our manufacturing facility in China, both of them. And I think that is also showing in our margins to some extent.

Great. Yes, it does it for me. I'll probably follow-up offline. Thanks, guys.

Mark Tobin, ROTH Capital Partners.

Thanks for taking my questions. A lot of my questions have been addressed. I think the one on the cash flow side, you've given a lot of commentary as far as your outlook for '12. Can you comment on your expectations for cash flow? And then along those lines, you did continue the buyback during the quarter; you know, maybe some commentary on potential M&A and uses of cash.

Okay. Well, on the cash flow front, obviously, we're not overly concerned in the first quarter. This is pretty typical that our cash flow in the first quarter will be low.

If I look at kind of the year, in order to have a free cash flow analysis, I think we might have done this during the February earnings call. If I kind of take the middle point of the guidance for net income, say that's $25 million, add $8 million of D&A and subtract $6 million of CapEx, so I'm kind of around $27 million or so for free cash flow. And I think that's maybe a little bit higher than what we have thought back in February.

But -- and that compares to, say, $34 million in 2011, which was an outstanding year for cash flow as well. So, I would say around $27 million or so in free cash, give or take.

Okay.

And the stock purchases, I think over the last 12 months, the last running 12 months here ending March 31, 2012, we bought back over 17 million in stock. Of course, a lot of that was last year. So, I wouldn't read too much into only $1 million or something in the first quarter. We've got three more quarters to go. And as we've said before, we try to be opportunistic in terms of the repurchases and we'll continue to do that during the year.

Okay. That's helpful. And any commentary or updates on what you're seeing on the M&A front?

Sure, we're looking at things. Again, nothing that has tempted us to pull the trigger yet. And a lot of the problem often is things like pricing. I certainly think that we can have a healthy M&A activity and do buybacks, with the strong shape of our balance sheet and our pretty good cash flows. So, I don't see it as one or the other, unless the acquisition, of course, is very large. But no, I don't -- other than to say we continue to look and I would say inside paper is our primary area, but we're also looking at some kind of adjacent industries that would be kind of a natural fit for us.

Okay. That's helpful. Thanks for taking my questions.

(Operator Instructions). With no further questions in queue, I'd like to hand back to our CEO, Jonathan Painter, for closing remarks.

Okay. Thanks, everybody, for listening in. I guess I'd like to close with really three takeaways, in my opinion. First, of course, we had a very strong start to the year, record EBITDA and very strong gross margins. We have a very healthy backlog at $103 million. And really now, as we look to 2012, I think it will continue to be a challenging year, but at the rate we're going, we do expect to beat the record adjusted earnings per share that we had in last year. And I look forward to updating you on our progress on that. Thanks very much. Bye.

Ladies and gentlemen, that concludes the conference. You may now disconnect. Have a wonderful day.