Kadant Inc (KAI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2012 Kadant Inc. earnings conference call. My name is Lisa, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions). As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Thomas O'Brien, Chief Financial Officer. Please proceed, sir.

Thank you, Lisa, and good morning, everyone, and welcome to Kadant's fourth quarter and full year 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, 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 outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our quarterly report on Form 10-Q for the fiscal quarter ended September 29, 2012. Our Form 10-Q 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 statement we make during this webcast 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 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 fourth-quarter and full-year earnings press release issued yesterday, which is available in the investors section of our website at www.Kadant.com under the heading investor news.

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. Jon?

Thanks, Tom. Hello, everyone. It's my pleasure to brief you on our fourth-quarter and full-year results as well as our outlook for 2013.

Overall, we had a solid quarter and an outstanding year, which included record performance in a number of areas. We also made progress on a number of strategic initiatives intended to further strengthen our Company.

I will begin today's review with the financial highlights of the quarter. We finished the fourth quarter with revenues of $78 million, which was within our guidance of $77 million to $79 million, although it was down 20% compared to the record revenues in the fourth quarter of 2011. Despite the lower revenue, we generated GAAP diluted earnings per share of $0.84 in the fourth quarter of 2012 and $0.44 per share on an adjusted basis, which exceeded our guidance of $0.35 to $0.37.

As you can see on slide 6, our adjusted diluted earnings per share was down 25%, primarily due to lower sales volume.

Gross margins have returned to more typical levels of 43%. Q4 2011 included revenue from a large number of stock systems, which resulted in lower gross margins for that quarter. Cash flows in the fourth quarter of 2012 were $12.7 million, allowing us to end the quarter with a net cash position of nearly $48 million despite repurchasing approximately 195,000 shares of our stock for around $5 million.

Turning to 2012 full year, we had a fantastic 2012 and we set new records in a number of categories. Our gross margins of 43.9% were a record. Our adjusted EBITDA for 2012 was $44.8 million, and this was also a record both in dollar terms and as a percentage of sales at 13.5%. Most importantly, our adjusted earnings per share increased 9% to $2.29, which was also a record. Finally, our return on total capital, although not a record, was a solid 13% for the year based on adjusted net income.

We also announced yesterday that we will begin to pay a quarterly dividend of $0.125 per share starting in the second quarter. We have a long history of returning cash to our shareholders through stock repurchases as a means of creating value for our shareholders. This dividend program enhances our ability to return cash to shareholders and demonstrates our commitment to do so in the future.

We have the good fortune to have a business with relatively stable and strong cash flows throughout the business cycle. Consequently, we feel that we can support a dividend as well as continue to invest in our business, repurchase stock and pursue complementary acquisitions.

Turning back to our revenue performance in the fourth quarter, the decrease in revenues in Q4 is primarily due to lower capital revenues in our stock prep product line. You may recall that in Q4 2011, we set a Company record for quarterly revenues of $97 million, making this quarter's comparison a tough one. The doctoring, cleaning and filtration product line, however, had relatively strong results with revenue increases of 6% compared to the same period last year, driven primarily by our North American and European operations.

Turning to bookings, in Q4 we generated $76 million in bookings, which was down 3% compared to Q4 of 2012. The decline in bookings was largely due to a 9% drop in both stock prep and fluid handling booking. While the declines were not limited to a specific region, we saw some more significant drops in stock prep bookings from China and weaker fluid handling bookings in the US.

On the other hand, our bookings in our doctoring, cleaning and filtration product line were up 12%, primarily due to an increase in orders for our multi-jet high-pressure fabric cleaning system.

The bookings in revenue trend chart on slide 11 shows our quarterly revenues, which is the red line, and our bookings, which is the blue bars. Our quarterly revenues have continued to reflect the generally sluggish nature of the economy since the fourth quarter of 2011. Bookings have followed a similar pattern and have been relatively flat since the third quarter of 2011. As I mentioned on the Q3 call, the timing of capital orders as well as seasonality for some spare parts adversely impacted our Q3 bookings. In Q4 of this year, quarterly bookings have returned to more typical levels.

On a sequential basis, bookings increased 10% in Q4, led by our doctoring, cleaning and filtration product line, as well as our stock prep product line. Our strongest booking region was North America, followed closely by Europe, which was up 14% compared to the same period last year.

Overall, we believe the demand for our capital products will be stronger in 2013 and we are seeing increased project activity, particularly in our stock preparation product line. Since the end of the year, we have booked more than $12 million in stock prep capital orders, leading us to anticipate another favorable sequential bookings comparison in the first quarter of this year.

Taking a closer look at our parts and consumables, we can see on slide 12 that both bookings and revenues in Q4 were up from the same period last year. Our parts and consumables business continues to be a source of stability, offsetting some of the volatility we see in capital. Our revenue for parts and consumables were $50 million in the fourth quarter of 2012 and made up 64% of our fourth quarter of 2012 revenues.

Revenue was up 7% over Q4 of last year due to strong growth in our stock prep product line, particularly in North America and China. As you can see on the chart, this represents our best parts and consumables quarterly revenue performance since the third quarter of 2008. Revenue was up 14% sequentially with growth in all the major regions, particularly North America and China.

Looking at bookings, which are shown in the blue bars, our parts and consumables bookings were up slightly over Q4 of last year and up 3% sequentially.

I would now like to take a few moments to provide a brief review of our business activities in each of the major geographic regions in the world. I will begin with North America.

Many of you know the US economy experienced a contraction in Q4, but it has remained one of the stronger regions in the world for us. The containerboard section, which makes up the largest portion of our customers, saw a slight uptick in operating rate for the full year to 95.4%, and full-year production was up approximately 1% compared to 2011. Demand for printing and writing grades, on the other hand, continues to see downward pressure and shipments fell by 6% in 2012 compared to 2011. Operating rates for printing and writing grades have hovered in the low to mid 80s despite capacity closures in 2012.

Our Q4 revenues in North America were $37 million, down 5% compared to the same period last year and up 6% sequentially. The decline in revenue was due in large part to our stock prep product line, which had a very strong Q4 in 2011 as a result of revenue from major orders for chemical salting equipment.

Bookings in North America were up 8% in Q4 compared to the same period last year and up 14% sequentially. The sequential increase was led by our stock prep and fluid handling product line, where we booked several orders for stock prep capital equipment to improve plant efficiency and an order for a major dryer section rebuild at a linerboard mill in the Southeast US. In addition, after the quarter closed, we booked an order from a Canadian newsprint mill for a dryer section rebuild.

Turning to Europe, the strained market conditions in Europe have continued to impact the paper industry. Capacity rationalization is expected to continue in 2013, particularly in newsprint and printing and writing grades.

On the containerboard front, SCA Containerboard recently announced a EUR40 per ton price increase for its Kraft liner, following price increases announced by several European-based recycled board producers. Industry analysts are expecting this price increases to stick, suggesting tightening market conditions.

Our Q4 revenues in Europe are indicative of a challenging markets and dropped 45% compared to last year to 16 million. As you can see from the chart, revenue in Q4 of last year benefited from very strong bookings in the second and third quarter of 2011 before the sovereign debt crisis took hold in Europe.

Bookings in Q4 returned to more of a post-sovereign debt normal level, if you will, after a weak Q3 that was impacted by the timing of capital orders, as we discussed in the third quarter call.

As you can see from the chart on slide 15, our European-based business had a relatively strong bookings quarter and was up 14% compared to last year and 45% sequentially. The year-over-year increase was led by our doctoring, cleaning and filtration product line and orders for the multi-jet fabric cleaning system.

As I noted earlier, we booked several stock prep capital orders after the quarter closed, including an order from a tissue producer in Russia for a [de-ink] system valued at more than $5 million. We also booked in order for a stock prep system valued at $4 million. This order is part of an innovative project to convert a newsprint line to a recycled board line at a mill in France. This is the second conversion from newsprint to linerboard that we have been involved with and we are well positioned to participate in other conversions going forward. There are a number of these conversions on the drawing board as an alternative to shutting down newsprint mills.

Next, let's take a look at China. The economy in China rebounded in Q4 from the previous quarter to finish the year at 7.9% growth rate, and this reversed quarter-to-quarter declines recorded earlier in 2012. Although the rate of growth has rebounded slightly the timing for the addition of new capacity remains somewhat uncertain and is highly dependent on the market's ability to absorb existing capacity, particularly in containerboard.

The situation is helped by the recent announcement by the government in China of another round of mandated closings of older, higher polluting paper mills. This is a benefit to us as that capacity will need to be absorbed by the more modern mills, who are more likely to be our customers.

Our Q4 revenues in China decreased to 34% compared to the prior year. The decline in revenues was primarily due to lower revenue for capital systems from our stock prep product line. Our fluid handling product line, on the other hand, recorded a solid increase in Q4 revenues of 21% compared to the same period last year.

Bookings were also down in Q4 of 2012 compared to the prior year. Q4 bookings were down 35% as a result of slower activity in capital orders. During the quarter, we booked several OCC recycled system orders with a combined value of just over $3 million. We also booked several orders for our new multi-jet fabric cleaning system and control technology with a combined value of approximately $1 million. In addition, our fluid handling business secured orders for two steam and condensate systems, one intended for a containerboard mill and the other for a tissue mill. Encouragingly, we are seeing increased project activity in China, and so far this year, we have booked three orders with a combined value of approximately $2.3 million for a stock prep system to produce recycled linerboard.

While we can't do much to influence the volatile nature of capital orders in China, we worked very hard to build an aftermarket parts and consumable business in China. As you can see from the chart on slide 17, we have been making very good progress. In general, we are seeing paper producers in China shifting their focus from adding new capacity as fast as they can to maximizing the efficiency of their existing operation. This provides us an opportunity to leverage our installed base and grow our parts and consumables revenue by partnering with our customers to, one, give them advice on improving operation of our equipment and providing genuine OEM parts to keep our equipment operating as efficiently as the day it was installed.

Bookings and revenues in the rest of the world continue to show progress since the global recession in 2008. That said, our revenues dipped a bit in Q4 of this year, following a fairly positive upward trend over the past 11 quarters. The relatively low sales volume in these regions means that the timing of capital orders has a large impact on bookings and revenue from quarter to quarter. We are seeing promising new activity, particularly in tissue in South America. Industry analysts are forecasting 2013 demand growth for tissue to be 6% in South America.

I would like to close my remarks with a few comments on our guidance in Q1 and the full year of 2013. The downside of a record year like we had last year is it does make comparisons difficult. For the first quarter, we expect to generate $0.32 to $0.34 of GAAP diluted earnings per share on revenue of $71 million to $73 million. For the full year, we expect to achieve GAAP diluted earnings per share of $1.80 to $1.90 on revenues of $320 million to $330 million. The headwinds in the global economy as well as our booking level over the past few quarters, particularly in Europe and China, have tempered our outlook for 2013. Although we expect another sequential bookings increase in Q1 and higher bookings for all of 2013 compared to 2012, we expect that our revenues in 2013 will be less than 2012, which will impact EPS accordingly.

In addition, we also have an adverse impact of $0.21 in 2013 due to a higher recurring tax rate, which Tom will discuss in his remarks.

I will now pass the call over to Tom for additional detail on our financial performance and the outlook for 2013. Tom?

Thank you, John. I will start with a review of our gross margin performance.

Consolidated product gross margins were 43% in the fourth quarter of 2012, an increase of 440 basis points compared to 38.6% in the fourth quarter of 2011. Compared to last year, margins for the fourth quarter of 2012 were up in all our major product lines, but particularly strong performances in stock prep and fluid handling. Stock prep margins were up significantly in North America, largely due to higher aftermarket margins and favorable product mix. Fluid handling margins increased over the fourth quarter of 2011 in all our major geographic regions, including Europe, North America and China.

On a consolidated basis, the favorable product mix accounted for approximately half of the margin improvement over last year but higher products and consumable revenues, representing 64% of total revenues, helped considerably from 48% in the fourth quarter of 2011. In addition, encouragingly, capital margins were notably higher than last year.

For the full year 2012, product gross margins of 43.9% equaled the record level set in 2010 and were 60 basis points higher than in 2011. This is now the third consecutive year that product gross margins have exceeded 43%. Looking ahead, we expect the 2013 consolidated product gross margins will be approximately equal to or even slightly higher than 2012, although, as is normally the case, there is likely to be some variability by quarter, due in part to product mix as well as the timing and profitability of larger system orders.

Now let's turn to slide 23 and our SG&A expense. SG&A expenses were $25.3 million in the fourth quarter of 2012, down $1 million or 4% from last year including a $300,000 reduction due to the favorable effect of foreign exchange. Although the dollar amount of SG&A expense has been relatively flat for the past several quarters, SG&A as a percentage of revenues increased to 32.4% in the fourth quarter of 2012 compared to 27.1% last year, mainly due to lower revenues in the 2012 period. For the full year 2012, SG&A expenses were $103 million, an increase of less than 1% over 2011, and represented 31.1% of revenues compared to last year's 30.6%.

Looking forward, although we expect that SG&A spending in 2013 will increase only 2% over 2012, the percentage to revenues will increase to approximately 32% to 33%, largely due to lower volumes in 2013.

Let me now turn to our EPS results for the quarter on slide 25. We reported GAAP diluted earnings per share from continuing operations of $0.84 in the fourth quarter of 2012 compared to $0.90 in the fourth quarter of 2011. As you can see on slide 25, the result in both periods included significant benefits from discrete tax items, $0.40 in 2012 and $0.34 in 2011. Also, the fourth quarter of 2011 included $0.03 of restructuring costs. Excluding these items from both periods, adjusted diluted EPS was $0.44 in the fourth quarter of 2012 compared to $0.59 in the fourth quarter of 2011, or a decrease of $0.15.

This decrease of $0.15 in diluted EPS consists of the following -- a decrease of $0.45 from lower revenues in the fourth quarter of 2012 compared to the record revenues in the fourth quarter of 2011, which was partially offset by increases of $0.21 from a higher gross margin percentage; $0.06 from lower operating expenses and $0.03 from lower weighted shares outstanding. The benefit of $0.40 from the discrete tax items in the fourth quarter of 2012 was primarily due to the reversal of our remaining valuation allowances which were associated with foreign tax credits in the US. The reversal reflected a change in judgment in the fourth quarter that, considering our future expected foreign sourced income and our profitability in the US over the next several years, we now believe that we can earn out these foreign tax credits, which had been fully reserved in prior periods.

In short, since we now expect to realize the economic benefit of those credits, there is no longer any need to carry a reserve for them. Excluding this discrete tax benefit, our recurring effective tax rate was approximately 24% in the fourth quarter of 2012, slightly lower than the rate we had included in the fourth quarter guidance.

Looking forward, we expect a meaningful increase in our recurring tax rate in 2013 compared to 2012. In 2012, our recurring tax rate benefited from the utilization of foreign tax credits which had a full valuation allowance associated with them, again, established in prior periods. Now that we have released all the remaining valuation allowances on foreign tax credits, there will be no favorable effect on our tax expense in 2013, and consequently this will increase our tax provision in 2013 compared to 2012. It is important to note that there is no economic or cash impact from this change.

That said, we expect our recurring tax rate will increase from 26% in 2012 to approximately 34% in 2013. This higher tax rate lowered our 2013 guidance by approximately $0.21 compared to what it would have been had the recurring rate stayed at the same level as in 2012.

Now let's turn to our cash flows, working capital and debt leverage, starting on slide 27. Operating cash flows from continuing operations were $12.7 million in the fourth quarter of 2012, a very solid performance and one of our better quarters, and compares to an even stronger $14.9 million in the fourth quarter of 2011, which was one of the best quarterly performances in the Company's history.

Looking at the major non-operating uses of cash in the fourth quarter of 2012, we repaid $5 million of our debt, purchased $4.7 million of our common stock and spent $2.7 million in CapEx. The stock repurchases in the quarter represented approximately 195,000 shares at an average purchase price of $24.10 per share. For the full year 2012, operating cash flows from continuing operations were $30.5 million, a very solid performance and one of our better years, and compares to $34.4 million in 2011, which was the second-highest level we have ever recorded.

Major non-operating uses of cash in the full year 2012 included $14.5 million of common stock repurchases, $5.4 million of debt repayment and $4.3 million of CapEx. The common stock repurchases were $14.5 million for the full year 2012, which equates to 47% of our net income from continuing operations in 2012. Put another way, we returned almost half of our net income to our shareholders.

The repurchases represented approximately 634,000 shares at an average purchase price of $22.87 per share. Over the past two years, we have repurchased over $30 million of our common stock and this amount also equates to 47% of our net income from continuing operations over that period.

Our working capital as a percentage of the last 12 months' revenues was 13.9% in the fourth quarter of 2012, up slightly from the third quarter of 2012 and 4 percentage points higher than last year's near-record performance of 9.9%. Our net cash position improved considerably during the quarter and is at its highest level in over seven years. Net cash, that is, cash less debt, at the end of the fourth quarter of 2012 was $47.7 million, an increase of $6.2 million compared to the third quarter of 2012, and was up $12.3 million compared to the fourth quarter of 2011.

In our slide 31, you can see that our leverage ratio has declined substantially since the end of 2009 and now stands at 0.09 at the end of the fourth quarter of 2012. Under our new credit facility, this ratio must be less than 3.5.

Before concluding my remarks, I would like to give you a few additional details on our earnings guidance. As we noted in the press release issued yesterday, in the first quarter of 2013 we expect GAAP diluted EPS of $0.32 to $0.34. For the full year, the expected GAAP diluted EPS is $1.80 to $1.90. As I noted earlier, the higher recurring tax rate in 2013 has an unfavorable impact of $0.21.

Looking at our quarterly EPS performance in 2013, we expect that the first quarter will be the weakest quarter of the year and that the second quarter will be the strongest. I should caution that there could be some choppiness and variability in our quarterly results due to a number of factors, not the least of which is the timing of revenue recognition for larger systems orders in both China and Europe. As we have noted in the past, revenue for systems orders in China is typically recognized on completed contract method, and it is not unusual for customers, for any number of reasons, to temporarily delay delivery of their orders, and this can materially affect our quarter-to-quarter results.

We anticipate CapEx spending in 2013 will be $4 million to $5 million and include some carryover CapEx projects from 2012, where spending was lower than we anticipated. Our 2013 guidance includes approximately $0.30 per diluted share associated with our non-cash equity compensation expense, the same level as in 2012.

Finally, we expect depreciation and amortization to be approximately $8 million in 2013.

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

(Operator instructions) Lawrence Stavitski, Sidoti.

Could you give the outlook for, I guess, China and Europe in terms of what the paper components are going to be, what the outlook is for tissue versus paperboard in Europe and China?

Sure. So, let's start with China. Maybe we can start with a general comment on the world. As you kind of get from our comments, there's a distinction. The printing and writing grades aren't doing well, really, anywhere in the world including China, including Europe, including the US.

Right.

So printing, writing and newsprint are doing less well. Tissue and containerboard are much stronger. I would say that, in Europe, containerboard is strengthening. So is tissue, while printing and writing grades are continuing to shut down mills and so forth.

In China, we are seeing more project activity, I would say, both in China and in Europe. You saw we had a pretty substantial bookings increase in Europe. We have activity -- I would say it's more in the Russia/Eastern Europe part of Europe, but we did have that big project in France. So that's pretty encouraging.

That said, Europe is still, I would say, a relatively weak economy. In China, again, we certainly got off to the year pretty well. For our products, it tends to be that the first product that sees an up-tick and sees a down-tick is our stock prep product line. So that's where we are seeing the -- a lot of that project activity is more directed around our stock prep project line, which is very typical when things start to turn.

Okay, so you said that bookings were going to be up for 2013 and the revenues down. So is the variability in the stock prep -- is that accounting for --

Sure. There's a couple of things. You might remember, in 2012, we entered the year with a pretty big backlog. So the bookings in 2012 were coming down as the world economy came down, but we really softened that blow by having a great deal of backlog coming into 2012.

Now, turning over to 2013, our backlog is not as high as it was in 2012, but we do anticipate higher bookings. So we had a little bit of an uptick in Q4. We see a little bit of an uptick in Q3. I'm not going to say that it's going to be steady every quarter better than the one before, but I do think that we are going to have a stronger booking year in 2013 versus 2012.

Okay. Switching gears a little bit, the dividend, the first ever you guys initiated -- can you go over your uses of cash and what your priorities are there? Do you have any more buybacks scheduled or programs on the horizon?

So our uses of cash remain the same. And I'm glad you asked that question, because I guess I want to be clear about it. I think the dividend is -- it's part of our general thinking of returning cash to shareholders. You heard Tom's comment that we returned half our cash to shareholders the last couple -- half our net income to shareholders the last couple of years. So this is really part of that program, that general idea.

The other uses of cash are acquisitions and just investing in our own business. No one should read this as there is some shift in strategy, that we are going to do less on acquisitions or anything like that. Our feeling is that we have good cash flows so we can easily support the dividend, continue to do buybacks, but also continue to do acquisitions really at the same pace that we did before. And we are continuing to look at acquisitions.

Okay. And I think I missed it, your CapEx guidance for 2013. Did you guys comment on that?

We said $4 million to $5 million, Larry.

$4 million to $5 million?

Yes, $4 million to $5 million.

Okay, thank you, thanks, guys.

You might remember, we expected a bigger year last year and we had couple of projects that just sort of flopped over into this year.

Okay, okay, that's helpful. Thank you.

Stuart Benway, S&P Capital IQ.

I was just looking at the sequential revenues in your other category, which were down significantly December versus September. Where is that and what was going on there?

So our other -- that is our fiber-based granule business, and that is a highly seasonal business. So it's tied to the agriculture and people putting things on their lawn. So their first and second quarters are real strong, and then the third quarter is weaker and so forth. So I would put that more in the seasonal department. That business is doing extremely well.

It was also down year-over-year by, percentage-wise, a fair amount, a third, I guess.

What happens in the fourth quarter with that business -- their customers need to be ready for spring.

Well, last year it was warm, too; wasn't it?

Well, it has a lot to do with inventory in the chain, in the distribution chain. It has to end up in Wal-Mart somewhere. So, sometimes, Wal-Mart says I'm low on inventory and they talk to their customer, who talks to us, and they put the order in the fourth quarter. Sometimes they put it in the first quarter. So it's as much to do with that as anything else.

Okay. And how about South America, which actually was strong really both year over year and quarter over quarter, or quarter to quarter? And you had mentioned, I guess -- is that mostly because of the tissue business, or what is going on there?

You know, South America is a developing country with all those characteristics. So I would say as a backdrop, we see as projecting that overall paper consumption is going to grow about 4% in South America; and short of the good grades, tissue and containerboard are growing 6% and 5%, respectively.

That said, you do have some variability with capital orders that make it kind of choppy. You will have a big tissue job that comes in one quarter and spreads brings out. So it's a little bit harder to see a trend because the revenues overall are relatively low in end use, but a recycled tissue job can end up blowing things off. I don't know if you guys have anything else to add to that.

(inaudible)

And can you remind me -- I think generally your margins on your parts business are typically higher than on large systems. Right? Is that generally true?

Generally, that's a fair assumption.

Okay, but is there a difference between like large systems and small systems as far as margins go? It seems like last year, you were saying that there was a lot of large systems, which were --

I think two things are happening over the long run. Yes, as a general matter, large systems often have lower margins than smaller unit capital, for example. I would say we are, and Tom referenced it in his comments, we are doing better in our margins in our capital. So that's a whole combination of things -- mix within capital, pricing, doing a good job with manufacturing efficiencies and so forth.

Okay, and the tax rate -- it seems like you are talking about a semipermanent thing here. So should we expect a higher tax rate in 2014 and beyond?

I would say the rate will be in and around this level going forward. It's hard to pick how further that could go, of course; but, yes, it will be in that range.

You mean the level of 2013?

Yes.

And one last quick one on the dividend -- was broadening the investor base, I guess, to institutions that require a dividend part of the thinking there at all?

Yes, it's part of the thinking. I wouldn't say it's a major factor, but sure. I know fully well that there are investors who are not allowed to invest in us if we didn't do a dividend.

Also, we talk to our investors all the time, and many of them are saying, hey, we like the fact that you are buying back stock. But dividends are a stronger commitment to your pledges, if you will, of returning cash to stockholders. So we are trying to be responsive to that as well.

Well, that's a pretty good-sized dividend to start out with, it seems to me. So it's a pretty strong statement.

What we didn't want to do is have a token dividend, sort of a dividend in name only. We want it to be a real and meaningful dividend.

Thanks for taking my questions.

There are no further questions at this time. (Operator instructions)

Are there no more questions, operator?

There are no further questions.

Alright, thanks very much, Lisa. Let me conclude the call with what I view as three key takeaways from our quarter and the year.

First, it was an excellent year. We had new record for earnings per share, adjusted EBITDA and gross margin.

Second, as we just talked about, we initiated this dividend of $0.125 per share, or $0.50 on an annualized basis, and that is consistent with our overall strategy to return cash to shareholders.

And third, although in 2013 we are expecting a decline in revenues and earnings per share, we do see encouraging signs of booking activity. We expect another sequential bookings increase in Q1 and higher bookings for the full year of 2013 compared to 2012.

With that, I look forward to updating you on progress on our next call. Thanks very much.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.