Standex International Corp (SXI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Standex International earnings conference call. My name is Katy and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to hand the call over to your host for today, Mr. David Calusdian. Please proceed.

Thank you, Katy. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website at www.standex.com. Please see Standex's Safe Harbor passage on slide two. Matters Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation, and amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations; and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Standex believes that such information provides an additional measurement and consistent historical comparison to the Company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's fourth-quarter news release.

On the call today is Standex Chief Executive Officer, Roger Fix, and Chief Financial Officer, Tom DeByle. I'd now like to turn the call over to Roger.

Thank you, David, and good morning, everyone. Please turn to slide three.

We are pleased with our revenue and earnings performance for the fourth quarter of fiscal 2010, and are beginning to see improved top-line performance, as every business segment reported positive year-over-year sales growth during the period. This top-line growth, coupled with a significantly improved cost structure that we have put in place over the past two years, combined to generate non-GAAP diluted earnings per share of $0.64 during the fourth quarter versus $0.45 of non-GAAP diluted earnings per share for the year-ago period. This is the fourth consecutive quarter that Standex has reported earnings growth and the fifth consecutive quarter of margin improvement.

For the full fiscal year 2010, Standex is reporting non-GAAP earnings per share from continuing operations of $2.25 versus non-GAAP earnings per share of $1.56 for the fiscal year 2009. Non-GAAP earnings for each quarter shown on slide three exclude any special charges and benefits.

For the full fiscal year 2010, our revenue declined by 4.7%, given the difficult economic and market conditions that our business units have been operating under. Despite this revenue decline, we were able to grow adjusted EBITDA by 22%; increased non-GAAP operating income by nearly 30%; and non-GAAP earnings per share by 44% year-on-year, and significantly lower net debt. So as you can see, we navigated a very challenging economic environment quite well. In addition, we have repositioned the cost structure of the entire Company, which will enable us to continue to grow earnings as our end-user markets recover and we're able to grow our top-line sales.

Please turn to slide four. Standex generated 8.7% overall revenue growth during our fourth fiscal quarter. Although many of our major end user markets continue to be impacted by the global recession, all five of our business segments posted top-line growth this period, with three out of five growing by double digits.

As we discussed on last quarter's call, over the past six months, we have turned our attention to organic growth initiatives after successfully addressing the cost structure of the organization. The improvement in our top-line during these past two quarters is a result of improving market conditions and the early benefits of growth initiatives we have begun to implement. We expect that these improved top-line results will carry into fiscal 2011.

Slide five shows how we are internally tracking and prioritizing top-line growth initiatives across the enterprise, enabling us to better align our internal resources and capture future opportunities. New products, channel opportunities, cross-branding and cross-selling of products between business units, and geographic expansion are among the top-line initiatives we are driving and measuring on a monthly, quarterly, and annual basis in order to capture market share and improve our top-line performance.

Likewise, leveraging strategic partnerships can drive revenue growth as well. Here, our success is measured through new customer contracts, preferred supplier relationships, and performance awards. Finally, analyzing product and geographic gaps across our divisions is core to the implementation of our acquisition strategy.

Slide six identifies a number of recently announced customer and industry awards that recognize our innovative products and outstanding customer service. We're pleased to see this recognition extend across the entirety of Standex's business units.

Please turn to slide seven. As part of our growth strategy, we continue to introduce to our end-user markets a number of new and creative customer-centric solutions. Included among our new food service product offerings are a convenient and cost-effective food heating and holding solution; our value line reach-in refrigeration product line; an easy-to-view, low-curve glass ice cream display solution; and our energy-efficient, quick-start toaster.

Slide eight shows our new high-performance proximity switch from Standex Electronics, the size of a pencil tip; new and proprietary texturizing technology from our Engraving unit; Engineering Technologies of aluminum hydrogen fuel tank for Boeing's next-generation advanced high altitude unmanned aerosystems; and a new high-current/high-frequency choke for high-definition video MRIs. Each of these products offer our customers attractive value proposition while supporting our long-term revenue growth initiatives.

Speaking of growth initiatives, we're very excited to announce the acquisition of the business operation of Melco Engraving India Private Limited, a leading provider of mold texturizing services and engraved rolls and plates to the rapidly-growing Indian automotive and general industry markets. This acquisition in India, along with our opening of a third engraving facility in China, supports Standex Engraving emerging markets growth strategy.

With Standex Engraving India, we'll be able to capitalize on the growth of the domestic India automotive market, which is already nearly 20% the size of the North American market and growing by double digits. In addition, the acquisition will further enable us to provide exceptional support to our non-Indian global automotive customers who operate in India, including Ford India, Toyota, BMW, Renault-Nissan, General Motors, and Hero Honda, to name a few.

Our efforts to generate organic growth are beginning to pay off, as demonstrated by this quarter's solid top-line performance. At the same time, we continue to be focused on driving ongoing cost efficiencies throughout the Company through continuous improvement activities.

I'll now turn the call over to Tom for the financial view, and then I'll follow with a detailed discussion of each of our segments. Tom?

Thank you, Roger, and good morning, everyone. Please turn to slide nine.

Fourth-quarter net sales increased 8.7% year-over-year. Operating income, which includes $85,000 in pretax restructuring expenses and a $1 million charge related to the resolution of a legal dispute with a former ADP supplier, was $12.2 million. Our operating income margin improved significantly to 8.02% for the quarter -- a 142 basis point increase over the fourth quarter of last year.

Non-GAAP operating income, excluding restructuring expenses and one-time items for both quarters, was up 28.6%, due to volume leverage and cost reduction efforts we have implemented. In addition, non-GAAP operating income margin improved by 135 basis points year-over-year to 8.71%. Fourth quarter fiscal 2010 EBITDA came in at $15.9 million. Excluding the previously mentioned restructuring expenses, adjusted EBITDA was higher at $17 million, representing a 26.2% increase from Q4 2009. Adjusted EBITDA margin increased by 155 basis points to 11.2%.

Slide 10 shows Standex's strong fiscal year 2010 earnings performance in an improving revenue environment. As Roger mentioned earlier, for the fiscal year 2010, we were able to grow adjusted EBITDA 22% year-over-year and non-GAAP earnings per share 44% year-over-year in the face of a nearly 5% year-over-year decline in total revenue. This outstanding operational performance is a testament to our disciplined cost focus, which has enabled us to successfully navigate very difficult economic conditions over the past two years.

Please turn to slide 11. For the fourth quarter, net income from continuing operations increased to $8.5 million or $0.67 per diluted share versus $5.8 million or $0.47 per share a year ago. This represents a 43% year-over-year earnings per share improvement. Fourth-quarter 2010 net income from continuing operations includes a $643,000 post-tax non-recurring charge related to the resolution of a legal dispute with a former ADP supplier and a $1.1 million discreet tax benefit.

In the fourth quarter of 2009, non-recurring items included a $702,000 post-tax restructuring charge and a $824,000 discreet tax benefit. Excluding the previously mentioned items for both periods, non-GAAP net income from continuing operations increased to $8.2 million or $0.64 per diluted share from $5.6 million or $0.46 per diluted share in the same period last year. This represents a 39% year-over-year earnings per share improvement.

Please turn to slide 12. For the fiscal year 2010, net income from continuing operations increased to $28 million or $2.20 per diluted share versus a loss from continuing operations of $1.9 million or $0.15 per share for fiscal year 2009. Fiscal year 2010 net income from continuing operations includes, post-tax, $2.5 million in restructuring expenses; a $600,000 nonrecurring charge related to the settlement of a legal dispute with a supplier to our ADP business; a $900,000 gain on the sale of real estate; and a $1.5 million discreet tax benefit.

Fiscal year 2009 net income from continuing operations includes $21 million in non-recurring charges. These items are listed on slide 12 and include charges for a lower cost through market of inventory adjustment; restructuring charges; a non-cash goodwill and intangible impairment charge, which is partially offset by benefits from the reversal of accruals for the Company's long-term incentive and bonus program and discreet tax benefit.

Excluding the previously mentioned items for both periods, non-GAAP net income from continuing operations increased to $28.7 million or $2.25 per diluted share in fiscal 2010 from $19.1 million or $1.56 per diluted share in fiscal 2009. This represents a 44% year-over-year earnings per share improvement.

Turning to slide 13. Net working capital at the end of the fourth quarter of fiscal 2010 was $103.6 million, compared with $102.6 million at the end of Q3 2010 and $98.7 million at the end of Q4 last year. As you can see from this slide, our working capital turns have improved from 5.7 turns at the end of the fourth quarter of fiscal 2009 to 5.9 turns at the end of Q4 2010. The improving working capital turns ratio signals that we have become more efficient in managing working capital during the past year.

We are particularly pleased with our inventory performance. Inventory levels actually decreased from $75.6 million at the end of Q4 last year to $69.6 million despite an 8.7% increase in sales. As a result, our inventory turns improved year-over-year from 4.8 to 5.7 turns.

Slide 14 shows our improvement in working capital and working capital turns from last year. Our working capital turns at 5.9 times are the highest they've been for a fourth quarter since we began tracking this metric.

Slide 15 illustrates our net debt position for the quarter. We reduced our net debt by $25.6 million year-over-year to $59.7 million. The Company's balance sheet leverage ratio of net debt to total capital declined to 23.7% at the end of the fourth quarter compared with 32.6% during the prior-year quarter. As a reminder, we define net debt as short-term debt plus long-term debt less cash.

On a sequential basis, our net debt increased from $52.4 million in the third quarter to $59.7 million at the end of the fourth quarter 2010. Underlying this sequential increase in net debt were pension contributions totaling $19.5 million, including a $15 million voluntary contribution to our US pension fund and $1.7 million of contributions to plans outside the US.

Additionally, we made a $2.8 million payment for a settlement of a multi-employer pension liability previously accrued upon the closure of a facility in 2008. Without these voluntary contributions, our pension expense for the coming year would have been $1.3 million greater. So the pension contributions will be accretive to FY '11 and subsequent years' earnings. In addition, based on our most recent projections, we believe that these contributions will eliminate the need to make any material contributions to our defined benefit pension plans through fiscal 2012.

Our funded debt increased from $64.8 million in the third quarter to $93.3 million at the end of the fourth quarter. Late in the fourth quarter, we entered into $30 million of five-year interest rate swaps to fix a portion of our floating rate debt at a historical low rate of 2.4%. In order to take advantage of this opportunity, we borrowed an additional $30 million on our revolver during the quarter. The net effect of entering into these additional swaps was that our funded debt increased by $30 million and we closed the quarter with cash on hand of $33.6 million, a level that is higher than normal.

Our previously existing $60 million of swaps, which we entered into in 2008, expired in early July, so that increase in the funded debt was a short-term move. As a result of the $60 million in swaps expiring, you can expect our quarter cash position beginning with Q1 FY '11 will return to a normal range of $8 million to $10 million. In addition, our funded debt position will be positively impacted by roughly $20 million as well. Going forward, we will consider entering into additional swaps in order to replace those that have expired, and fix an additional portion of our debt at the market's prevailing low interest rate.

Please turn to slide 16. During the fourth quarter 2010, we generated approximately $7.9 million of free operating cash flow. We define free operating cash flow as cash from operating activities less cash paid for capital expenditures plus any voluntary pension contributions. Conversion of free operating cash flow from net income was 92.4% during the period.

We used $1 million in cash for CapEx in Q4 and $4 million for fiscal year-to-date. We expect CapEx spending for all of fiscal 2011 to be in the range of $11 million to $13 million. Our CapEx will focus on strategic initiatives for new products, penetration into new markets, and productivity improvements.

Slide 17 summarizes our successful initiative to sell off excess land and buildings during the past year, as well as the projected sale of our Sao Paulo, Brazil facility. We reported last quarter that we sold our facility in Norway, and we expected to sell other real estate by the end of the year that had become excess as a result of restructuring and lean enterprise activities. Subsequent to the close of the fourth quarter, we completed the sale of a property located in Leon, France.

Net cash proceeds from this sale are approximately $3.6 million and we plan to book a gain of approximately $0.21 in the first quarter of fiscal 2011. The total net cash generated by the sale of the four properties since the beginning of FY 2010 is $12 million.

In addition, we have entered into a contract to sell a facility in Sao Paulo, contingent upon a buyer finalizing financing for the transaction. We are optimistic that the buyer will be able to arrange financing, and currently expect that we could close on the sale during the next six to nine months. Net cash proceeds from this sale will be approximately $2.5 million and the sale will result in a gain of approximately $0.19.

Brazil is a very important emerging market for our Engraving business. The current Sao Paulo facility is located in a residential district. Subsequent to the sale of our Sao Paulo facility, we will relocate to a lease facility in an industrial park, where we can take advantage of improved logistics and more efficient plant layout.

With that, I'll turn the call back to Roger.

Thank you, Tom. Please turn to slide 19 and I'll begin our segment overview, beginning with our Food Service Equipment Group.

The Food Service Equipment Group generated 2% sales growth during the fourth quarter, underscored by the strong performance of our Procon pumps business. The year-over-year top-line sales for the Group comparisons were made difficult by a roll-out at one of the Yum! Brand restaurants that generated $2 million in sales in the prior-year quarter. Excluding this rollout, the Food Service Group sales were up 4.4% year-over-year in Q4.

We continue to see a recovery on the cooking side of the business, as we are benefiting from improving market conditions, increased market penetration, and key dealer buying group organizations, and from new products. On the refrigeration side, which is impacted by the recent moderation in retail construction, the rate of decline has slowed as the market appears to be identifying a bottom.

Procon, our fluid pump and dispensing business, continued its robust performance, posting a strong, double-digit increase in sales, as growth in beverage counts was complemented by improving conditions on the industrial side of the business. We continue to see growing optimism within our dealer sales channel and at the end user level, and we are beginning to see more project quotation activity.

During the fourth quarter, we introduced a new value line of upright, reach-in refrigeration products that are being very well-received by the marketplace. We expect future sales of this value-price, reach-in product line to be a strong addition to the Refrigerated Solutions Group product offering.

On the Cooking Solutions side of the business, we are engaged in a number of exciting product development projects within the convenience store and quick service restaurant market segments that could turn into sizable opportunities for Standex. We are confident that we can continue to take share on both the cold and hot side of the market by offering a compelling value proposition to our customers.

This quarter's operating margin at 12.3% is up 10 basis points year-over-year. Though we saw raising pressure lift somewhat during the second half of the quarter, unfavorable mix and pricing impacted the profitability of the Refrigeration Solutions Group to limit overall segment profitability versus the prior year.

Please turn to slide 20. The Engraving segment sales increased 12.5% versus the prior-year quarter, supported by strong mold texturizing demand, particularly from our North American and European automotive customers. This trend is expected to continue through the first half of fiscal 2011. Innovent sales also were robust during the period, driven by the sale of higher average sale price systems as compared to traditional lower average sale price components business. Roll plate and machinery sales continue to be soft, as recessions dampen demand in the consumer and building products end markets.

Operating income for the fourth quarter more than doubled year-over-year, as we benefited from significantly higher volumes; a better product mix, including more automotive activity; cost reductions completed in North America during the prior fiscal year; and the completion of our European restructuring activities.

In support of Standex's strategy to invest and expand our presence in the emerging markets, we recently took two actions. First, as I previously mentioned in my opening remarks, we acquired the business operations of Melco Engraving India Private Limited, a leader in mold texturizing services and engraved rolls and plates.

Our new business operates manufacturing facilities in the three major geographic centers of the automotive industry of India, namely the cities of Bangalore, New Delhi, and Pune. This acquisition will not only help Standex Engraving better service the rapidly growing Indian automotive market, but also our non-Indian automotive OEMs located throughout the country.

Second, during the first half of fiscal '11, Standex Engraving will open its third Chinese facility in Tianjin to complement two existing facilities located in Suzhou and Dongguan. Tianjin is a major industrial city located in northern China, about an hour drive from Beijing. The Suzhou facility is in Central China along the coastline just outside of Shanghai. Dongguan is located in the Guangdong Province in the South of China.

The addition of this third facility provides Standex very good geographic coverage of the major industrial centers of China. Through the past 12 months, the automotive build count in China has surpassed that of the US and is expected to continue to grow rapidly. Thus, we're investing in this market, as it represents a solid growth opportunity for both global as well as domestic automotive OEMs.

We look forward to significant contributions from each of these emerging market investments and we remain enthusiastic about the prospects for the Engraving business segment.

Please turn to slide 21. The Engineering Technology segment generated exceptional results during the fourth quarter with revenue growth of 30.5% year-over-year. This performance was driven by strong aerospace demand. Operating income growth of 70.4% year-over-year reflects not only operating leverage we realize from greater sales activity, but also cost reduction and process improvement efforts, initiatives that we will continue to pursue in the coming quarters. While the federal government has reduced its future funding for heavy lift launch vehicles, we expect Spincraft will continue to do very well with its ongoing sales diversification strategy outside of this area.

Please turn to slide 22. The Electronics and Hydraulics segment produced 31.4% year-on-year top-line growth during the fourth quarter, with exceptionally strong operating profit leverage. Electronics is realizing strong demand across most of its end markets, including aerospace, medical devices, automotive, and general industrial.

In addition to benefiting from broad-based demand, Electronics also is gaining traction from top-line growth initiatives. These include the development of new products, application of existing technologies into new applications and customers, and geographic expansion, particularly in the Asia-Pacific region and Europe.

Looking at Hydraulics, a positive book-to-bill during the fourth quarter, coupled with increased production levels at several of our major North American-based OEM customers, indicate that our end markets have stabilized and begun to recover. In addition, our efforts to grow in China and the Asia-Pacific region have recently begun to show results, and we're currently accelerating the ramp-up of production in our China facility.

Operating income of $1.9 million was a substantial improvement over the $131,000 generated during the fourth quarter last year. Both the Hydraulics and Electronics units contributed to the significant improvement in profitability. Electronics continues to benefit from prior restructuring efforts, as approximately 75% of electronics production now comes from low-cost facilities in Mexico and China. Hydraulics was successful at generating high single digit operating margins, reflecting significant cost reduction actions and efficiency improvements.

Please turn to slide 23. Air Distribution segment sales increased 6.3% from the fourth quarter 2009, as conditions in the residential home construction market remain weak. The segment experienced a $1.3 million operating loss in the fourth quarter versus $202,000 in operating income in the prior-year period. Last year's results were favorably impacted by $800,000 less Workman's Compensation and medical expense. As Tom mentioned earlier, this year's results were negatively impacted by approximately $500,000 of one-time charges related to the resolution of a supplier dispute.

We remain optimistic about the long-term prospects for ADP for a number of reasons. First, we recently moved our Southwest operations from the Hattiesburg, Mississippi facility to our Dallas, Texas plant. With the Dallas plant fully operational, we are already receiving new business orders as a result of our new presence in Texas. Along with Oklahoma, this geographically historic area has represented about 35% of total US housing starts.

Second, under new pull-sell strategy, we are partnering with wholesalers to create a preference for ADP products at the contractor level.

Third, we have introduced a number of new products, including flex duct tape, caulking and insulation line of materials to complement our traditional products. The addition of these complementary products, ADP's traditional metal duct work is being well-received by our wholesaler customers. As a result of bundling the purchases of these products from ADP, wholesalers are able to improve their working capital efficiency by buying more products from a single supplier. And finally, we did see pricing stabilization in the fourth quarter of 2010.

Please turn to slide 24 and I'll conclude on a few points before we go to questions. First, we are now seeing positive sales momentum in most of our end markets, demonstrated by the year-over-year growth we reported in all of our operating segments. The 8.8% organic growth rate we achieved in the fourth quarter demonstrates improvement in our end-user markets and the early results of our top-line growth initiatives.

Second, we continue to benefit from the cost reduction initiatives we implemented during the past two years. The fourth quarter represented the fifth consecutive quarter of improving non-GAAP operating margins, and our fourth-quarter non-GAAP $0.64 per diluted earnings per share is a significant improvement over the non-GAAP $0.45 per share reported during the fourth quarter of last year.

In fiscal 2010, we generated non-GAAP diluted earnings per share of $2.25 in the face of a nearly 5% revenue decline during the past 12 months. This level of earnings is the highest the Company has recorded in 10 years and was achieved against a difficult economic backdrop. We are optimistic that as our end-user markets continue to recover and we drive growth through our top-line initiatives, earnings growth will accelerate as we leverage our new lower cost structure.

Third, we'll continue to invest in organic growth initiatives and strategic acquisitions to build on the momentum we've established. We remain cautiously optimistic about our end markets and expect growth to continue into 2011.

With that, Tom and I will be happy to take your questions. Operator?

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

A question on SG&A. If I go back and look at 2006, that's -- the revenue level was about the same. SG&A, we were at about $133 million versus today's structure at $138 million. Is there further [until to] reduces SG&A? Or are you pretty much set on the footprint?

I think we're pretty much set on the footprint. I haven't looked at those numbers recently, but I believe you'll see there was a significant difference in bonus and long-term incentive compensation that would have distorted those comparisons. But back to your original question, I think we've taken about a 25% across-the-board reduction in SG&A headcount through all of our divisions across the world. And we think we're pretty well set.

The good news is that we think that with the current SG&A structure, though, we can return to the sales volume levels that we've seen, say, 18 to 24 months ago, which represents some pretty significant leverage for us.

Okay. So the focus at this point is less on reducing your overhead and more on growing the organic parts of it?

Correct.

Okay. Thank you.

John Walthausen, Walthausen & Company.

Congratulations, and then a couple of quick questions. On the Engineering Group, you had a great quarter. Can you talk about whether that's a one-time event? And also you talked about diversifying in other markets to deal with the changes in government procurement. Can you expand on that a bit?

Please. We've mentioned in past calls that the nature of our engineering technologies business is that we process large projects without relatively high sales volume associated with them. So, we obviously had a good quarter. Part of that was driven by some large projects that were, in fact, delivered and sold, if you will, during the course of the quarter. And so you can expect some up and down as you look at the sales and profit of the business going forward, depending on exactly how the backlog unfolds.

The reduced government funding that we referred to is associated with the Constellation Program, and specifically, the Ares I Program. If you look over the last two years, we've had very little NASA-related business other than the Teledyne Brown Project. And we were hoping for the Ares Program to continue with its funding. Right now it appears that the Administration wishes to move away from the Constellation Program; that hasn't been totally finalized yet.

But our diversification is really to attack a number of markets outside of the pure aerospace. We see opportunities in aviation; we see opportunities in energy and some other emerging markets for us.

Can you talk a little bit about -- those sound like markets that, with your skills, you can penetrate, but it would take a number of years to really generate any meaningful revenues. Is that a correct assumption? Or are we closer than that?

I would say two things. First of all, there is a significant maturation process that you have to go through on these projects. But this is an initiative that we really started two and one-half, three years ago. The team had identified really at that point in time a number of new market segments or new applications that we wanted to go after. And those have been in the pipeline and we expect those to continue to develop as we go forward.

So, from that timing, is it reasonable to assume that you might have something that, 12 months from now, you can talk about more concretely?

Absolutely. And a good case in point of one of those initiatives is really spent on slide number eight -- that unmanned aerial vehicle. That's a developmental program that Boeing as well as [B/E] Aerospace are pursuing. The government intends to fund those going forward, assuming the development programs are successful. And that could turn out to be a pretty significant ongoing revenue stream for us.

Okay. And then on a different topic, you made great progress in working capital turnover. Now with the economy starting to grow and your sales starting to grow, and it sounds like resources of suppliers, in some cases for some industries getting stretched, is it reasonable that you can continue to improve working capital turnover? Or have we gotten as far as we're likely to get for the next 12 months?

I think the very significant improvements are probably in our numbers. We internally have said that world-class is in the six-plus range. And so, we would hope over time that we'd still be able to get in to, say, the low sixes. Obviously, that's not a huge improvement from where we're at. The other point I would make, obviously, as the volume does improve, clearly, our working capital will have to go up as our turns remain relatively flat.

Thank you.

Jamie Wilen, Wilen Management.

Great numbers. You've done such a nice job of managing these businesses to make them all more profitable. I'm excited about the next level as we move with the -- on the acquisition program. Can you tell us a little bit about where you stand, what you're looking at and what types of multiples you might expect to pay?

Well, that's an awful lot of questions and I don't want to name specific targets; obviously, those negotiations and whatnot are confidential. But as we've mentioned, we're really focused on -- primarily three of our platforms would be Food Service, the Engraving side, and Engineering Technologies, although we wouldn't be afraid to do other smaller bolt-ons outside of those three areas.

In the Food Service area, our real focus in the near-term is on the Cooking Solutions side of the business. Cooking Solutions, if you look at the total marketplace, has a pretty wide variety of different types of equipment. We have, in our current portfolio, a number of those, but there are some gaps that we have identified, that we're currently identifying targets and trying to engage on a possibility of acquisitions.

In Engraving, what we did in India I think is a good example of what our focus might be. There are opportunities out there for us where, in some of the emerging markets, we have local competitors that we would like to approach over time and see if we can't acquire them.

This does a couple of things for us -- it improves, obviously, our global reach as well as it jumpstarts us rather than doing a green field. But at the same time, we did the Tianjin facility, which will be a green field, so we'll look at a combination of both. But I think geographic expansion on the Engraving side makes sense.

I think you might also see us look at adding new technologies or strengthening some of our technologies. Machine building, roll engraving part of the business, we're really a North America-centric business. We really don't have a significant presence outside of North America. And so it may make sense to do geographic expansion in that particular product segment.

And then in Engineering Technologies, we have a very nice niche position in specialized manufacturing processes -- spinning and heavy machining being the two strongest. But there are complementary technologies, manufacturing technologies, that could go along with our core that would allow us to bring a wider variety of products to some of our existing customers. And so what I call a technology, a manufacturing technology acquisition would probably make sense in that area.

Okay. And do you still have the mantra that all these acquisitions must be accretive from the get-go?

That's our mantra.

What percentage of capacity are your facilities now running? You said you had room to -- the SG&A won't have to grow, but how much more can this reduced footprint cover for you?

I think quite a bit. It's hard to generalize but -- because each of our segments is a little different, but in general, I would say that we're running on a solid one plus a fraction of a second shift. And that, again, obviously varies by area. But there's significant volume capacity available to us in our current footprint without any -- certainly without any addition to any facilities. Ultimately, you may need to add a piece of capital equipment here and there, but nothing of any significant investment levels that would be certainly well within our normal capital budget spending.

Great. And lastly, as far as raw material costs and pricing, could you describe the impact of raw material costs to you and pricing to your customers?

That's a great question. And I'll be honest and I'm sure you, Jamie, you're seeing the same things. The future on commodity pricing seems to be all over the map. 90 days ago, the headlines were certainly full of the concern over some significant inflation on the steel side. Several of the mills back then tried to pass through, in general, price increases -- not just to us, but to the broad industry. And that didn't seem to hold. And then, of course, with some of the concerns about the slowdown in the economy, commodity prices actually retreated.

So, it's really very uncertain for us. Our big buys are carbon, stainless steel and aluminum, along with copper and refrigeration products. So that's the big exposure we have. And again, they've been relatively benign but inflation is potentially out there.

On our ability to pass through pricing, I think if you were to look at what happened two, two and one-half years ago when we saw the last, pretty significant round of metal inflation, we were very successful in passing on most of those costs, working with our customers in that regard. So we continue to monitor that very carefully and it's a little uncertain as to what's actually going to happen.

Okay. Let me throw in one more. The balance sheet is wonderful and the stock market doesn't reflect what you've done. What are your thoughts as far as using your capital structure for stock buybacks or increasing the dividend?

Certainly, we're very committed to the dividend. So I think the Board would like to, over time, increase our dividends as a reward to our shareholders. Candidly, what's going on in Washington causes us to have somewhat of a pause right now -- wanting to know exactly what the tax treatment is going to be, because that could, in fact, obviously, affect what our shareholders think about dividends.

As far as stock buybacks, we think at this point in time, that as long as there are attractive strategic acquisitions available for us, that that probably is a better use of our available balance sheet than to do the one-off stock buybacks. We're already, as a micro-cap, have a limited float. And of course, some of our larger institutional shareholders are concerned about the float and the amount of daily volume.

So I think right now, buying back stock probably would be counter to what some of those folks would have in mind for us. And we think personally and internally, the Board and management, that investing that balance sheet in our core businesses is a better use of our available balance sheet capacity.

Excellent job. Thanks, fellows.

Ned Borland, Hudson Securities.

A couple of quick questions on Engraving. I know we're dealing with a small base here, but the operating income improvement and the buckets of items that you mentioned caused some improvement in mix. Your volume increases -- I mean, can you give us a ballpark of which -- where the improvement came from, in terms of magnitude, which was the biggest driver?

Probably in rank, order, the volume would be the first biggest piece. Fairly close behind it would be the cost reductions in North America. And probably the more distant third would be the European restructuring. The cost savings -- we took out a couple of plants in North America. We had a pretty significant headcount reduction in North America. We did reduce headcount in Europe, but not to the same extent. So that would be probably the relative order.

Okay. And then on this third plant in China, can you give us a sense of -- will that be the same size facility as your other two plants? And what is your revenue contribution in Engraving in China right now?

Ultimately, that facility we expect will be of the same size. We're planning to scale into it. We're going into leased facility with a relatively short-term lease and it gives us flexibility as that business grows. We really like to keep our infrastructure costs compatible with the volumes initially and then grow that. And there's -- our ability to take on larger space is relatively straightforward. We really haven't revealed our amount of sales in China, so I'd rather not go into that one.

Okay. Fair enough. Thanks.

At this time, you have no further questions. I'd like to now hand the call back over to Roger Fix for closing remarks.

We thank everybody for their interest in the conference call today. We look forward to speaking to you again next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.