Kadant Inc (KAI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Kadant Inc. earnings conference call. My name is Mark and I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to Thomas O'Brien, Chief Financial Officer. Please proceed, sir.

Thank you, Mark. Good morning, everyone, and welcome to Kadant's second-quarter 2014 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read 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 report on Form 10-Q for the fiscal quarter ended March 29, 2014.

Our Form 10-Q 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 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 second-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.

With that, I'll 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 is my pleasure to brief you on our second-quarter results as well as our outlook for the remainder of the year. We had a fantastic quarter with a record number of records, including revenue, bookings, backlog, adjusted operating income, adjusted EBITDA, and adjusted earnings per share. I hope you like the word record, because you're going to hear it a lot today. I will begin today's business review with the financial highlights of the quarter.

We finished the second quarter setting a new record for revenues at $105 million, which was up 28% compared to the second quarter of 2013, driven by both internal growth and acquisitions. Gross margins in the second quarter was strong, at 43%.

Adjusted operating income was up 47% to a record $13 million, representing 12% of revenue. Our operating leverage improved, leading to an adjusted operating income margin of 12%, even with a drop of gross margin. Our adjusted EBITDA was a new record, at $15 million or 15% of sales, up 39% compared to Q2 of last year.

Our GAAP diluted earnings per share of $0.70 in the second quarter included $0.04 of expense related to acquired profit and inventory and backlog associated with businesses acquired in 2013. The adjusted earnings per share was also $0.70 and this was also a new record.

We also repurchased over 255,000 shares of common stock during the quarter for $9 million. And finally, our bookings increased 32% over Q2 of last year to a record $115 million and we ended the quarter with a record backlog of $129 million.

Turning to our revenue performance in the second quarter, you can see that all of our product lines were up. The strong growth in revenue was led by our stock-prep and our fluid handling product lines, which increased 27% and 19%, respectively, compared to the same period last year.

As we discussed on previous calls, we've put a lot of effort into internal growth and I am pleased to report that these efforts, combined with improved market conditions, are paying off. The biggest contributor to our revenue increase this quarter was internal growth in our existing businesses, which was up 15% and 7% for the quarter and year to date, respectively.

The other big contributor to our revenue growth was our acquisitions, which contributed $10 million to Q2 revenue. When we acquired Carmanah in November of last year, we said we expected 2014 revenue of $35 million to $40 million. The management team at Carmanah has done an excellent job and we now expect that they will have revenue of over $40 million this year and even higher bookings.

Our bookings of $115 million in Q2 were up 32% compared to Q2 of last year, with acquisitions contributing $14 million. As is the case with revenue, we had strong internal growth in our existing businesses. Excluding the impact from acquisitions, our bookings were up 16% and 13% for the quarter and year to date, respectively.

The strong internal growth was primarily due to our China stock-prep business, which was up significantly compared to the last few quarters, where bookings were relatively sluggish. Our fluid handling and doctor, cleaning, and filtration product lines had modest decreases in bookings due to lower capital bookings.

It was a solid bookings quarter for both capital and spare parts. Very strong capital bookings in our stock private product lines in China and North America contributed to a 41% increase in global capital bookings in Q2. Overall, I'm very encouraged by the start we've had in 2014 and the continued activity level we're seeing in Q3.

The bookings and revenue trend chart on slide 8 shows our quarterly revenue -- which is the red line -- and our bookings, which are the blue bars. Q2 revenue was up 28% from Q2 of last year, boosted by strong internal growth and contributions from our recent acquisitions.

Sequential bookings were up slightly in Q2, setting a new record for the second consecutive quarter. The record bookings in Q2 were positively impacted by several large capital orders as well as contributions from our recent acquisitions. We have now had two consecutive quarters with book to bill ratios of 1.1 or better.

Our revenue for parts and consumables were a record $63 million in the second quarter of 2014 and made up 60% of our Q2 revenues. Acquisitions were a major contributor to these record results, contributing three-quarters of the increase.

Excluding acquisitions, our parts and consumables revenue was up 4%. Revenue was up 4% sequentially and 19% over Q2 of last year, with particularly strong performance in our fluid handling product line, which was up 14% compared to the same period last year.

We also had record parts consumables bookings, which were up 26% over Q2 of last year and 1% sequentially. Excluding acquisitions, our parts and consumables bookings were up 8% over Q2 of last year.

I would like to take the next few minutes to provide a brief review of our business activity in each of the major geographic regions of the world. Let me start with North America.

North America had strong performance in both bookings and revenues. Our revenue in North America was up 32% compared to the second quarter of 2013 to $53 million, but down 1% sequentially from a very strong Q1. Acquisitions were a major contributor to revenue growth in Q2.

In addition, our fluid handling product line led our internal growth, up 15% compared to Q2 of last year. Bookings in North America were $52 million, up 43% compared to the same period last year, but down 26% sequentially compared to a record-setting Q1.

You may recall that we booked an $11 million stock-prep system for a customer in Mexico in Q1. But we have seen a step down from the extremely strong activity level we had in Q1, the overall market conditions for both capital and spare parts in North America are still quite good.

We've seen a lot of activity from our [bergs] and pulp customers in the second quarter, including a $5 million order for a chemical pulping system, with similar potential projects in the works.

Turning to Europe, we had another solid card quarter and we're seeing business activity continue to strengthen as the macroeconomy slowly improves. We have a higher percentage of non-paper industrial customers in Europe compared to other regions and those customers are experiencing higher growth than pulp and paper customers.

Our Q2 revenue in Europe was $27 million, up 64% over Q2 of last year and 33% sequentially. Revenue from the sale of a large stock-prep system for a printing and writing producer in France contributed to the strong revenue growth. Q2 bookings of $22 million were up 18% compared to Q2 last year, but were down 12% sequentially. Like others, we are closely watching developments in Russia. However, our backlog for Russia remains rather modest at $1.5 million.

Next, let's take a look at China. After a relatively weak demand and production situation in 2013 across most paper grades, 2014 appears to be on a better trajectory, with industrial production up 9% in the first six months of 2014.

In addition, the government recently announced an update to its planned mill closures, totaling 3.7 million tons of capacity to be removed by the end of this year. We view this capacity contaminant favorably, as these mills being closed are inefficient, polluting operations that in most cases do not use our equipment.

In this environment, paper producers seemed increasingly optimistic about sustainable demand growth and are beginning to invest in new capacity. As you may recall, we've been talking about increased project activity for the last several quarters and we are now seeing this activity being converted into bookings.

Our Q2 revenues in China were $14 million, up 10% compared to Q2 of last year and more than double a weak first quarter of this year. This increase in revenues was led by our stock-prep product line, which shipped several large stock-prep systems during the quarter.

Our Q2 bookings in China were one of the highest in our history, at $29 million, nearly double the prior year. The timing of capital orders benefited us in Q2 as we booked five large orders for stock-prep and recycling systems with the combined value of $15 million. In addition, our wood processing business booked two orders for Strander systems, totaling $4 million that I mentioned in our Q1 call.

As I commented on previously, the capital business in China can be quite lumpy due to the timing of capital projects as well as market conditions. That said, while we don't expect a repeat of the booking performance we had in Q2, we do expect we will have a solid bookings performance in Q3, as we have already booked $4.5 million in capital orders so far this quarter.

Turning to South America, our smallest region, you can see the second quarter of 2014 was down significantly from the second quarter of 2013. With improvements in market conditions in China and Europe and continued softness in South America, I think it's fair to say South America is our weakest market.

Some of the weakness is due to temporary factors, such as the distraction of the World Cup and the uncertainty regarding the outcome of the presidential elections in Brazil, to be held later this year. The primary factor, however, is the continued sluggishness of the global commodities market and constrained consumer spending in Brazil. Despite these setbacks, we believe the medium- and long-term outlook for Brazil is good, driven by a growing middle class and rising standard of living.

Our revenue in South America was $6 million in Q2, down 22% compared to the same period last year and 12% sequentially. Bookings in Q2 were relatively soft at $5 million compared to an exceptionally strong Q2 of last year.

I would like to close my remarks with a few comments on our guidance for Q3 and the remainder of the year. As we noted in both our February and April earnings calls, we expected strong bookings in the first half of the year and that those bookings would drive significant revenue and earnings increases in the second half of the year.

While the first -- with the first half of the year behind us, the good news is we were able to secure the bookings we had forecast and in fact, we're feeling pretty good about our booking prospects for the second half of the year. The bad news is some of the first half bookings we hoped would make their way into revenue this year will likely slip into 2015. These project delays will also cause a shift of revenue from Q3 to Q4, resulting in a weaker Q3 followed by a very strong Q4.

The anticipated revenue that was delayed is from capital projects, some of which were in China, where we do not use percent complete accounting. Consequently, we do not recognize revenue in these projects until they are shipped.

For the third quarter, we expect to generate $0.52 to $0.54 of GAAP diluted earnings per share on revenues of $94 million to $96 million. For the full year, we are lowering our GAAP diluted earnings per share guidance to $2.50 to $2.60 on revenues of $400 million to $410 million.

As a reminder, these results include $0.17 of purchase accounting charges related to profit and acquired inventory and a backlog associated with the businesses we acquired last year, and $0.03 of restructuring charges.

Finally, although we were lowering our guidance for 2014, we are still expecting 2014 will be by far the best year in our history, with record bookings, revenue, adjusted EBITDA, and adjusted earnings per share.

I will now pass the call over to Tom for additional details on our financial performance in Q2. Tom?

Thank you, Jon. I would like to give you an overview of our financial results this quarter, beginning with our gross margin performance.

Consolidated product gross margins were 43% in the second quarter of 2014, down 560 basis points compared to the record quarterly results in the second quarter of 2013. The decrease in consolidated gross margins from last year's second quarter was largely due to a decrease in margins in our stock-prep business, which had unusually high gross margins in the second quarter of 2013. Gross margins in our other major product lines were only slightly below last year's levels.

Consolidated margins decreased by approximately 50 basis points due to the effect of amortizing the acquired profit in inventory associated with the Carmanah acquisition, which we made in November 2013. I should point out that all the acquired profit and inventory from that acquisition has now been fully amortized and therefore, there will be no further impact on gross margins going forward.

Also, we had an unfavorable mix of products in the second quarter of 2014 compared to the second quarter of 2013 -- that is, proportionately more capital revenue and less spares and consumables revenue, and this reduced consolidated gross margins by 94 basis points. We have noted before that there is some variability in our margins from quarter to quarter, but looking ahead, we still expect that full-year 2014 consolidated gross margins will be approximately 44% to 45%.

Now let's turn to slide 18 and our quarterly SG&A expenses. SG&A expenses were $31.6 million in the second quarter of 2014, up $2.1 million from last year's second quarter and included an unfavorable foreign currency translation effect of $200,000. Excluding the translation effect, SG&A expenses were up $1.9 million over last year's second quarter, entirely due to a $2 million increase associated with the SG&A of acquisitions.

The higher revenues contributed to a significant improvement in operating leverage during the second quarter of 2014. SG&A expenses as a percentage of revenues were 30.1% in the second quarter of 2014 compared to 35.8% in last year's second quarter, a decrease of 570 basis points. Looking forward, we expect that SG&A spending in 2014 as a percentage of revenues will be approximately 31% to 32% compared to 34% in 2013.

Let me now turn to our EPS results for the quarter. We reported GAAP diluted earnings per share from continuing operations of $0.70 in the second quarter of 2014 compared to $0.51 in the second quarter 2013 or an increase of $0.19.

This increase of $0.19 in diluted EPS consists of the following: increases of $0.38 from higher revenues, $0.12 from the combined effect of the operating results of the acquisitions and lower acquisition transaction expenses, and $0.02 due to lower operating expenses. These increases were partially offset by decreases of $0.29 due to lower gross margin percentages and $0.04 from a higher effective tax rate.

Collectively included in all the categories I just mentioned was a favorable foreign exchange translation effect of $0.01 in the second quarter of 2014 compared to last year's second quarter.

Now let's turn to our cash flows, working capital, and debt leverage starting on slide 20. Operating cash flows from continuing operations were $9 million in the second quarter of 2014, down from $11.1 million in the second quarter of 2013, partly due to timing of customer deposits.

Free cash flow, defined as cash flows from continuing operations less CapEx, was $8.1 million in the second quarter of 2014, down from last year's $9.7 million. We had several notable nonoperating uses of cash during the second quarter of 2014, the most significant of which was $15.5 million for repayment of debt. We also purchased $9.3 million of our common stock, paid a dividend of $1.7 million, and expended $900,000 in CapEx.

The stock repurchases in the quarter represented slightly more than 255,000 shares at an average price of $36.58 per share. Over the past 12 months, we returned $19.8 million of capital to our shareholders -- $13.9 million from share repurchases and $5.9 million from dividends. This represents approximately 78% of our net income during that period.

Our working capital performance was quite encouraging during the second quarter of 2014, with significant improvements in both days in inventory and days in receivables. Days in inventory were 92 in the second quarter of 2014 compared to 103 in the second quarter of 2013 and 110 in the first quarter of 2014.

Additionally, our days in receivables measured improved to 61 days in the second quarter of 2014, one of our best performances ever, and compares to 70 days in the second quarter of 2013 and 68 days in the first quarter of 2014. I should note here that a measure of 61 days in receivables for a multinational company such as Kadant, with operations in many countries with different payment practices, is quite an extraordinary performance.

Slightly offsetting these improvements in days in inventory and days in receivables was a decrease -- that is a deterioration -- in our AP days measured, both on a sequential basis and compared to last year.

Looking at the overall working capital position, our cash conversion days calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable improved significantly to 109 at the end of the second quarter of 2014, down 23 days and 8 days from the first quarter of 2014 and the second quarter of 2013, respectively.

Our net cash position decreased by $4.8 million in the second quarter of 2014 compared to the first quarter of 2014, largely due to the stock repurchases and dividend payments which I noted earlier. Net cash -- that is, cash less debt -- at the end of the second quarter of 2014 was $9.5 million compared to $14.3 million in the first quarter of 2014 and $48.5 million in the second quarter of 2013.

Finally, as you can see on slide 24, our leverage ratio, calculated as defined in our credit facility, was 0.42 at the end of the second quarter of 2014, down from 0.66 in the first quarter of 2014, mainly due to the repayment of approximately $19 million of debt in Canada, which was associated with the Carmanah acquisition. Under our credit facility, this ratio must be less than 3.5.

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) Rudy Hokanson, Barrington Research.

Could you maybe speak more about what you're finding with Carmanah in terms of their penetration of markets? And also following up on a discussion in the first quarter call, a little bit about the sales opportunities that you are seeing in China?

Sure. So kind of as I said in my earlier remarks, Carmanah has exceeded our expectations. It's really a terrific management team and have terrific opportunities, both in North America and abroad.

The main benefit in North America is really these idle oriented strand board operations that are starting up, which kind of kicks up a spare parts business for us. The other thing they do is they've got kind of a good innovation with disposable knives. Traditionally, these stranding operations would have knives and they would grind them by hand every eight hours.

And they'd have a dedicated grinding shop, which has its -- a lot of manpower, time-consuming, but it also is a bit dangerous, because these things are big, heavy, sharp knives. So Carmanah has introduced these disposable lightweight knives that are easier to change, but it's a nice -- now that's a spares business to us.

And they've done a nice job, particularly in North America, increasing the number of customers who use that -- those disposable blades instead of the traditional blade you grind. So that's been a nice source of spare parts growth for Carmanah.

Internationally, China -- I would say is the big story from them -- for them. Internationally, when you look at where the trees are and where there's wood housing and things like that or other needs for panels, it's China and Russia.

Russia's obviously a little slower for all the reasons we all know about, but China is a nice opportunity. And they basically -- they've got -- those two orders that they got in China earlier this year will probably be the capital orders for all of China in 2014. So you can't do much better than that, as far as that goes.

So those systems will kind of be delivered towards the end of this year, early next year. And then we'll see where it goes from there. As I kind of said in my early remarks, that is a new product in that market. So those -- our customers there will have a little bit of pioneering work to introduce OSB as an alternative to plywood.

Good. And on the general consumables side in terms of your legacy business, could you maybe talk about what you are seeing in terms of utilization in the paper industry on the equipment right now. Is there a way of tracking with what's happening with your consumables relative to perhaps the activity level in the paper industry that might give us some kind of a guideline off the last couple of quarters?

Sure. I will tell you, Rudy, one of the statistics -- and I think you can see that we have a superb quarter with record after record -- but frankly, one of the numbers that I'm the most proud of is that we had an 8% internal bookings growth for parts and consumables. And that really speaks well to kind of the hard work that our various subsidiaries are doing.

The production and operating rates in North America and Europe are pretty stable and haven't changed much. I would say production rates in China are improving a little bit. I've talked earlier about how we are often partnering with our customers in China to help them operate more efficiently and that often entails using more of our parts, coincidently. So I hope that answers your question on that.

Okay, fine. Thank you very much.

Walter Liptak, Global Hunter.

Wanted to ask about Carmanah sales. If we could break out what the sales bookings were in the quarter.

We do have that in our press release or -- no, we don't, actually.

Yes, we have the Carmanah sales in the press release. So you can see in the wood processing segment there, it's $9.8 million of revenues in the second quarter.

Okay, okay. Sorry about that, was bookings and backlog in there as well?

It's right below the papermaking systems segment number there.

Okay, great.

It was $9.8 million of revenue.

Okay great. Wanted to ask about China and these -- the nice bookings that you took in in the quarter. Is that sustainable, do you think? It sounded like you took in an order for $4 million. I thought I heard you say post the end of the quarter -- is that right?

Okay, I would say the short answer, Walt, at $29 million, that isn't -- that's hardly the new normal. That's not really a sustainable everyday kind of thing. So that timing of capital orders absolutely benefited us Q2.

Not only did we have this $15 million of stock-prep systems, we had $4 million of those two stranding systems I talked about. So the short answer is the $29 million is a bit unusual, but as I kind of said in my remarks, in Q3, while we're not going to do $29 million, we're going to have a very respectable quarter, because we've already booked $4.5 million of capital.

So I expect -- not to repeat the $29 million we did in Q2, but to still have a pretty decent and higher than average, let's say, booking quarter in Q3.

Okay. Got it.

Q4 is not looking terrible either. You never know -- capital on China it is we hate predicting, as we hate predicting revenue, because the orders are so big that if one slips out, suddenly you missed your number completely.

Right. So just to get a little bit more color on these -- the stock-prep orders and the Strander orders -- were those all one customer or was it just coincidental that you took in multiple orders from different customers?

I will tell you actually how we -- the short answer is it's not all one customer. The way -- we defined an order as -- we might have three orders for one line on one paper machine. We -- our convention is we will call that one order, because that's basically for one stock-prep line.

But we also might have a customer who is ordering two lines or three lines and we will call that three orders. That's kind of -- when I say there's five orders, I mean for five lines. Five stock fiber processing lines for five paper machines.

Okay, okay. So I guess --

There's actually many more orders, technically speaking, separate POs, but I think that's a shorthand way to think of it.

Okay, make sense. So as you look into the second half, are there other projects out there -- like what percentage of your pipeline to these orders represent?

Well, there's still an active pipeline, absolutely, as I mentioned. In Q3, we've already booked around $4.5 million, so that's a pretty -- that's a pretty good -- for halfway through the quarter, that's not so bad. You can never tell when these things fall, but we don't expect another quarter like Q2 for the rest of the year.

Okay. Got that. So the project that pushed out, that was just a push from a shipment from the third quarter into the fourth quarter, is that right?

There was -- yeah. There was -- let me start by saying this happens all the time. Projects get shift routinely, because typically -- especially in China, because they are -- it's not just they are building a building, they are putting in a paper machine -- there's 1 million different things going on.

It's not someone ordering equipment for an existing mill and you just send it and in it goes. There's kind of a lot of moving parts with a greenfield mill. So delays are not at all unusual, particularly in China.

We had -- frankly, we had some stuff shipping from Q3 to Q4 and Q4 into 2015. It just -- and a little bit, we're guessing on -- we will go by the facility and see how the building is coming along and kind of use a little bit of our own judgment as to when that customer will actually be able to take that.

Okay.

And of course, the other thing I would add is one of the issues in China is we don't ship typically until they make the final payment. And they really don't make the final payment until they're good and ready and they need the equipment. That's just the way life works in China.

Okay, okay. How does the pricing look on these orders in China? What are you expecting for the gross margin when they do ship?

We don't get into gross margins by product line or by region, but I think we've said in the past that our margins, including our capital margins in China, are quite respectable. It's not like a lot of companies. They almost lose money in China. I would not say that's the case with us.

We have -- I would say the pricing is lower than the rest of the world, but the costs are lower in the rest of the world. And we have very respectable margins there. Both capital and spares.

Okay. And then, Tom, this is just one for you. I guess kind of at a high level and you addressed some of the gross margin -- was it a surprise at all to you where the gross margin came in for the quarter?

And I guess the way that I'm looking at it is that the gross margin was lower than I expected, but you offset that with lower SG&A costs -- lower overhead. Was that gross margin what you expected and then you -- or this is something that you reacted to in the quarter?

No, I would say pretty much -- I mean, there's kind of an inverse relationship between the level of revenues and the gross margin percentages. Because typically, when we have more revenues, it's going to carry -- it's going to be a result of more projects, more stock-prep orders, etc, which have lower gross margin percentages. Good gross margin dollars, but lower percentages. So that certainly was within our range.

I think the other the two factors, which I mentioned, was we saw a decrease in margins of about a half a point, so 50 basis points, due to the amortization of the step up in inventory from Carmanah. And as I just mentioned, it was almost a point, or 94 basis points, for the affective mix.

So basically you add those to 43%, you're at 45%-ish, which is about where we typically are.

Right.

Yes, right. So we said back in our earnings call in February that we thought margins would be 44% to 45% for the year and we are still tracking to that. There will be variability quarter to quarter. As I said generally, the higher the revenue, the lower the margin percent, because generally, the higher the revenue means the more capital we have in that mix.

Okay, got it. Okay, I was [going to skip] --

On a slightly different note, Walt, I'm actually kind of pleased that we have -- we had this 12% adjusted operating income margin with, for us, relatively on the lower end of the scale, gross margins. So that actually makes me kind of feel good about the future.

Yes, I guess that's kind of where I was going with the question is on the overhead cost, the SG&A was lower, and I wondered if that was something that you reacted to or if that's just from ongoing cost control at the administrative level?

Yes, no, I think we have good cost control, but I think if you look at the overall level, it was just slightly down sequentially, the SG&A.

Right.

It was pretty close. I don't know if we can go back to that slide, but if we could, you can see that the level of SG&A was pretty close sequentially in the second versus the first, down a little bit.

Hundreds of thousands, but not millions.

Yes. But the leverage we got was obvious, because -- with the higher revenues, the percentage of SG&A to revenues went to 30% from whatever the previous quarter was, the 34% or so. So we had good -- as Jon mentioned, we had good operating leverage, which led to good operating margins in the quarter.

Yes, okay. All right, sounds good. Then just the last couple of things. What are you expecting for tax rate in the back half?

For tax rate for the year, we are saying will be about 33% to 34%. And there could be variability again by quarter, but for the year, we're still in that 33% to 34% range.

Okay. Okay. The cash flow continues to be impressive and I guess we would continue to see share repurchase at the current level?

You know, the cash flows were -- I would say good. They weren't record-setting like many of the other records, but I still think we will have a very good year for cash flows in 2014.

If you take our net income implied with the guidance, it's about $29 million; add D&A back to that of $11 million. We've got some equity compensation in the range of $6 million, so you can easily get up to -- it's like $45 million, $46 million, and then say $8 million or so for CapEx.

So we will have free cash flow in the high $30s million, assuming the guidance and all those other factors that go into it. So that would be a very strong free cash flow performance for us. So that suggests a good second half in cash flows and that's certainly what we're hoping for.

Okay, and the primary use of cash at this point is that share repurchase?

Yes, we paid $15 million down in debt. We may continue to do that and you know our share repurchases have been more optimistic. We saw good opportunities in the second quarter and we took advantage of those to the effect of $9 million -- or got $9 million in the second quarter.

All right, okay. Okay. Sounds good, guys. Thanks.

(Operator Instructions) There appears to be no further questions. I would now like to turn the call over to Jonathan Painter for closing remarks.

Thanks, Mark. Let me conclude today's call with what I think are several key takeaway points. First, we had an outstanding quarter, with new records for revenue, adjusted EBITDA, adjusted earnings per share, bookings, back -- and backlog, with solid contributions from our acquisitions as well as from our existing businesses.

Second, we're seeing improving market conditions in China and Europe. And finally, although we are lowering our revenue and earnings per share guidance for 2014, the reason for this is timing of capital orders and decidedly not weakening market conditions.

I look forward to updating you next quarter on our progress. Thanks for your attention. Bye-bye.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.