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Kaydon Corporation (NYSE:KDN)

Q3 2008 Earnings Call

October 28, 2008 11:00 am ET

Executives

James O'Leary - President and Chief Executive Officer

Ken Crawford - Chief Financial Officer

Analysts

Mike Hamilton - RBC Capital

Richard Marshall - Longbow Research

Peter Thompson - Coho Partners

Walt Liptak - Barrington Research

Steve Barger - KeyBanc Capital Markets.

Nigel Coe - Deutsche Bank

Peter Lisnic - Robert W. Baird

Holden Lewis - BB&T Capital Markets

Operator

Welcome to the Kaydon Corporation's third quarter 2008 Earnings Call. Before the conference begins, the company would like to make the legal disclaimer that certain information in this formal discussion and that may be included in the question-and-answer session is forward-looking within the meaning of the Federal Securities laws. These forward-looking statements are only predictions based on the company's current expectations about future events. While the company believes that any forward-looking statements made are reasonable, actual results could differ materially since the statements are based on the company's current expectations and are subject to risk and uncertainties beyond the control of the company.

Listeners are cautioned to refer to the company's 2007 Form 10-K for a list of factors that could cause its results to differ from those anticipated in any forward-looking statement. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise, except as required by applicable law.

During this conference call, Kaydon spokespersons will refer to free cash flow, a non-GAAP measure. To assist you in understanding such non-GAAP measure, as well as to comply with SEC requirements, the company has included in its press release, a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

Today's conference is being recorded.

Now I would like to turn the call over to Mr. James O'Leary, President and Chief Executive Officer of Kaydon Corporation.

James O'Leary

Thank you, Rick. Good morning. Thank you all for joining us today. I am joined by Ken Crawford our CFO and Corporate Controller and Peter DeChants our SVP of Corporate Development and Corporate Treasurer.

We are here to review our third quarter, which I would term as solid relative to prior year, given the challenges that were unfolded at an accelerating pace as the quarter progress. I know I said solid, but this was a disappointing and a challenging quarter. While the quarter was less robust than we have previously been working towards, we did set third quarter records for orders, sales and quarter ended backlog as many of our longer term initiatives focused on making Kaydon less economically cyclical have largely played out as expected.

Also while only modestly higher than last year on an operating basis, we did achieve a level of third quarter operating profits, on a par with the highest level attained in the past decade despite a significant economic headwind that strengthened as the quarter progressed.

Our EPS in absolute terms was lower, primarily due to the meaningful drop in interest rates, as we have invested to protect principle, not chase yield, we are earning about 1% yield now on outstanding investable balances.

Sales increased to a third quarter record of $126.8 million versus $107.4 in the prior third quarter. During the quarter diluted EPS equaled $0.50 compared to the $0.54 in the prior quarter. Again, the principle difference in absolute EPS this year relative to last year was lower interest income earned.

We had a record order entry of $157.3 million in the third quarter, up 34.2% year-over-year and the second highest quarter in the company's history, leaving us with quarter end backlog of $354.5 million, almost 70% above the prior year's level.

Total wind orders booked in the quarter were $52.2 million, bringing year-to-date wind orders to $157.7 million. We will talk in a moment about next quarter expectations for our orders, particularly in the wind business, but needless to say, we are pleased with the continued strength in this strategically important business.

Gross profit for the quarter was $44.5 million with 35.1% of sales, as compared to $43.3 million or 40.3% of the sales during last year's third quarter. Gross margin was significantly affected by changes in product mix and sales of higher margin product segments, particularly in those served by our industrial distribution channels in North America and for export overseas, both dropped below prior quarter and prior year level for the first time in recent quarters.

Similarly, the expected unabsorbed overhead, associated with the wind energy ramp up has impacted gross margins. This unabsorbed overhead should dissipate meaningful in the fourth quarter and then into 2009.

Selling, general and administrative expenses were $19.8 million or 15.6% of sales during the third quarter, as compared to $18.8 million or 17.5% of sales in the third quarter of 2007, as we focused on controlling variable costs, indeed not being incur when profitability drops.

Operating income for the third quarter equaled $24.8 million as compared to $24.5 million in the prior year's third quarter. Operating margin was 19.5%, as compared to 22.8% last year. Operating margins again were impacted principally by product mix shift in our friction control product segments, the expected unabsorbed overhead associated with our wind energy ramp up, and lower volume in our sealing product segment. We will discuss each of these momentarily.

Interest income declined 68% from $4.8 million earned during the third quarter of 2007 to $1.5 million this quarter; this drop was due to lower rates earned on lower investable balances. Rates have declined to about 300 basis points year-over-year due to lower market rates and the impact of steps taken by us to preserve capital and liquidity rather than pursue higher short-term yields.

Also, as we put cash to work in areas such as the wind energy capital expansion and Avon acquisition we are seeing the short-term impact of turning investment income into operating earnings. It will contribute more meaningfully in the future quarters as the capacity comes on line and the purchase accounting amortization drops off.

The effective tax rate during the third quarter was 34.4% as compared to 36% in the prior year's third quarter. The effective tax rate for full year 2008 equaled to 35.1%. Ken, will discuss this in a little bit more detail momentarily.

Net income for the third quarter equaled $16.3 million, as compared to $17.1 million last year, while diluted earnings per share equaled $0.50 again as compared to $0.54 in the prior year's third quarter.

Now, I will talk a little bit about segment operating performance, strong friction control products. Sales increased $19.2 million to $79.3 million, or 32% when compared to prior year's third quarter. As we saw higher demand for specialty bearings utilized in the wind energy and heavy equipment markets and the inclusion of Avon bearings. Sales of split roller bearings also remained strong during the quarter.

Third quarter of 2008 operating income of friction control products increased $15.9 million, a 6.3% increase compared with $15 million in the prior year driven largely by the increased volume.

However, operating margins declined to 20.1% from 25% earned in the prior year due to products mix shift and absolute declines in sales to certain higher margins end markets as end markets in particular in North American distribution and for export weakened as the quarter progressed.

Growth in higher margin but lower than historical segment average margins, wind energy and split roller bearing products tend to absolute declines in book and ship orders in higher margin distribution channels in North America and for export overseas resulted in most of the margin declines.

Also, higher operating and raw material cost increases originating in prior quarters have negatively impacted current period margins. We expect this to improve prospectively as ongoing remediation steps to take advantage of the recent corrections in commodities pricing already underway gain traction in future quarters.

Looking forward, we expect wind energy revenue during 2008 to approximate $90 million, which compares to $32.8 million in 2007. For the first nine months of 2008, wind energy revenues have totaled $56.4 million as compared to $19.5 million for the first nine months of last year.

The growth in this business reflects the potential of the wind energy market for Kaydon as the investments we have made over the past year come to fruition even as other parts of the business may slow.

Order of friction control products for the third quarter totaled $111.7 million, an increase of 55.3% over the prior year's third quarter resulting in record quarter end backlog of $304.3 million.

In velocity control products, third quarter sales totaled $17.1 million, an increase of 3.5% over the prior year's third quarter. Shipments from our North American operations were lower, however, in the prior year's third quarter as we experienced notably stronger economic headwinds in the domestic business as the quarter progressed.

Growth in our European operations continued at a lower rate than in recent quarters and with a lower benefit from changes in the foreign exchange rates than we have experienced in past quarters as a significant dollar strengthening progress during the quarter.

Operating income equaled $4.5 million, equal to the prior year's third quarter and operating margin was 26.3%, slightly lower than the 27.1% earned in the prior year's third quarter.

Third quarter orders totaled $16 million, as compared to $16.5 million in the prior year with backlog improving by 2.1% over the prior year's third quarter.

Now, turning to sealing products. Sales of sealing products were $10.8 million compared to $12 million in the third quarter of 2007. Shipments of sealing products declined as incoming order softened and efficiency issues associated with an ongoing facility move impacted execution.

Operating income declined due to lower volume, unfavorable overhead absorption, and inefficiencies associated with facility move. The company recently appointed new leadership within its business to evaluate the overall capacity and the configuration of the operations in the current environment as business has softened during the quarter. Orders in the third quarter totaled $8.2 million, a decline of 16.6% as compared to 2007.

Finally, in our other businesses segment, sales in the company's remaining businesses equaled $19.7 million during the third quarter of 2008, an increase of $800,000 from the third quarter of 2007, resulting from higher demand for liquid filtration products and higher pricing for metal alloy products.

Operating income was $1.8 million compared to $2.2 million in the prior year's third quarter. The lower profits were largely associated with cost to exit a multi-employer pension plan and to a lesser extent, higher operating cost.

Order entry overall, during the third quarter, was strong. We achieved a record of $157.3 million, a 34.2% increase over the third quarter of 2007. The strong order activity resulted in record backlog of $354.5 million, an increase of 67.7% as compared to the prior year.

Our backlog consist of order shippable during the next six quarters and as we have discussed in previous quarters, our large wind energy orders will ship later and have been shipping later than our large non wind orders, largely due to wind capacity comes on line. As a result, these orders have continued to shift the timing of when our total backlog is expected to ship. Right now we expect to ship approximately 30% to 35% of our backlog in the upcoming quarter, approximately 35% to 40% over the next two quarters and the final 30% over the final three subsequent quarters.

Also, a few words I am thinking about order entries for the fourth quarter, particularly as it relates to wind energy. With much of our near term planned capacity in wind energy booked, and already reported in backlog, you will see a drop in new wind orders next quarter. This is not due to any weakness in the business, but the timing and the lumpiness inherent and how our customers' place and how we recognize these orders with our 18-month policy.

Now, I will turn it over to Ken to cover some additional financial items.

Ken Crawford

Thank you, Jim. Good morning, everyone. During the third quarter of 2008, we earned 2.2% on our average investable balances of $269.2 million. Interest income totaled $1.5 million in this year's third quarter. During the third quarter of last year, we earned 5.2% on average investable balances of $362.5 million, which generated $4.8 million in interest income.

The lower average investable balances compared to the prior third quarter resulted from the effects of capital expenditures to support our capacity expansion projects, the Avon acquisition, our third quarter 2007 pension contribution and our stock repurchase actions.

The lower interest rates were caused by lower rates available in the market and by proactive steps by the company to protect principle and liquidity. Interest income is also down sequentially as during this year's second quarter we earned 2.4% on average investable balances of $282 million.

As we had noted during our previous conference call, the lower average interest rate and the lower average investable balances reduce third quarter 2008 interest income by $3.2 million, equivalent to $0.06 per share on a diluted basis, compared with the third quarter of 2007.

At the end of the third quarter this year, our investable balances totaled $270.8 million, which is $79.6 million lower than at this time in 2007. The lower interest rates and the lower average investable balances will reduce interest income in this year's fourth quarter by at least $3.3 million compared to the fourth quarter of 2007. That is also equivalent to $0.06 per share on a diluted basis. We expect interest income for the full year 2008 to be approximately $5.8 million as compared to $18.1 million in 2007.

During the third quarter of last year, a portion of our investments included certain issues of asset-backed commercial paper and federally insured auction rate securities to achieve higher yields. We achieve those higher yields and then successfully exited those investments before the asset-backed paper and auction rates securities markets collapse.

At September 27, 2008, we hold an $8 million position in an enhanced cash fund being liquidated by the fund issuer. The fund continues to pay interest and we received principal during this year's third quarter totaling $3.4 million. We recorded a net loss of $100,000 as a reduction to interest income in the third quarter and an additional $250,000 early in the fourth quarter, as credit market conditions have caused the value of this investment to continue to decline.

Our cash and cash equivalent investments today are principally in money market funds that invest solely in short-term treasury securities. This provides the highest level of safety available although the returns currently are in the range of 1%. That said, we believe our financial resources will provide us the flexibility to take advantage of potentially unique opportunities that may arise during a period when liquidity can be a competitive advantage.

Interest expense during this year's third quarter, totaled $1.4 million compared to interest expense of $2.4 million in the third quarter of 2007. The reduced interest expense was due to noteholders converting the remaining outstanding $188.5 million of our contingent convertible notes into roughly 6.5 million shares of company common stock, during this quarter.

The conversion of the notes and the related reduction in interest expense had no impact on the diluted earnings per share, due to the accounting treatment of the underlying convertible debt instruments.

The effective tax rate during this year's third quarter, decreased to 34.4% compared to 36.1% in the prior third quarter, primarily due to a reduction in the provision for state taxes and favorable differences in income taxes on foreign earnings in 2008. The company currently expects the effective tax rate for full year 2008 to equal 35.1%.

Net income for the third quarter was $16.3 million, or $0.50 per share on a diluted basis compared to third quarter 2007 net income of $17.1 million, or $0.54 per share on a diluted basis.

Free cash flow during the third quarter of 2008 was $7.8 million compared to a net cash outflow of $6.7 million in the prior third quarter. This swing was due primarily to the absence of the large third quarter 2007 funding of our qualified pension plans.

During the third quarter of this year, we invested at $15.9 million in capital expenditures, which compares to $16.8 million invested in the third quarter last year. Capital expenditures will remain at high levels in the near term as we expand to take advantage of the outstanding secular growth opportunity in wind energy.

Again free cash flow should be viewed as supplemental data rather than as a substitute or alternative to the GAAP measure. We have included in our earnings release, a reconciliation of this metric to the most comparable GAAP measure for your reference.

Cash and cash equivalents for short-term investments totaled $262.7 million at the end of the third quarter 2008 compared to $287 million at the end of 2007. During the third quarter of this year all of our outstanding long-term debt was converted into common stock of a company. The company has no outstanding debt at September 27, 2008 compared to $188.5 million at the beginning of the third quarter and $200 million at the end of 2007.

During the third quarter, we paid dividends of $4.1 million or $0.15 per share. We repurchased the 196,100 shares of common stock for $9.8 million and we invested $15.9 million in net capital expenditures.

Now, I would like turn the call back over to Jim.

James O'Leary

Thank you, Ken. Looking at the past quarter, I would say, we are comfortable, but clearly not happy with the results achieved, as we took what was available in the market and economy that grew more challenging as the quarter progressed.

That being said, we are pleased with the progress on our longer term growth initiatives, particularly in the expansion of large diameter bearing market, which continuously experienced secular strength. This will continue to yield benefits as we move into the fourth quarter of 2008 and into 2009.

Now, when we look at our various end markets, there is a very wide range around their relative strength and a very interesting economy. Wind energy continues to be a very good market for the company and will be a significant growth engine for the company, as our wind capacity expansion is on track and comes on line particularly in the next two quarters. Heavy equipment is also currently solid, as is our split roller bearing business.

At the other extreme, semiconductor continues to suffer with the decline in sales during the third quarter. Our North American general industrial markets were increasingly challenged since the end of last quarter, when we first discussed these issues. In particular, our book and ship business, which occurs inter-quarter and often goes to or through distribution dropped below both the prior quarter and the prior year's levels for the first time in several quarters.

The near term outlook for the domestic and international economies has weakened, as most of you have seen in recent weeks and months, stock markets, credit markets, commodity markets and foreign exchange markets have undergone rapid and unprecedented change, which has resulted in caution by Kaydon, our customers and the ultimate end-users.

That being said, we are well positioned to weather these storms, demand in wind energy remains strong, earlier this month the President signed legislation that extended the Federal tax credits for renewable energy including wind, and both presidential candidates have indicated their support for longer time investments in renewable energy.

Our strong backlog positions us well for the fourth quarter and beyond. Our strategic investment in servicing the wind energy infrastructure market highlights our business's potential in this market. Together with the strength of our balance sheet, we are well positioned to take full advantage of opportunities to further build on the foundation in place.

In addition, we expect to be able to prudently return capitals to our shareholders in the form of both share repurchases and periodically increased dividends, while driving profitable organic growth. As testament to our confidence, our Board of Directors declared a quarterly dividend of $0.17 per share for the fourth quarter, with an indicated annual dividend of $0.68 per share.

Finally, I would like to thank each of our Kaydon employees for their effort this quarter and prospectively for their efforts in delivering strong performance in what is an increasingly challenging period ahead of us.

That concludes the formal presentation. Michelle, we would be glad to take any calls.

Question and Answer Session

Operator

Thank you. (Operator Instructions). And we'll take our first question from Mike Hamilton with RBC.

Mike Hamilton - RBC Capital

Good morning.

Ken Crawford

Hello, Mike.

James O'Leary

Good morning.

Mike Hamilton - RBC Capital

I was wondering if you could give a feel of the degree you've got one on customer status in what they are finding and funding out wind projects. Obviously, a lot of these are fairly small operators at the end side where credit availability becomes an issue here?

James O'Leary

There has been a tremendous amount written about that particularly in the last week or so. We have yet to see it in our order book and at the present, a lot of that is just speculation. We do know that projects that go past what has primarily been committed 2011 and forward has been a bit suspect. And if you recall, last quarter we talked about a possible capacity expansion beyond what we've done, but we also said we'll only do that with comp customer commitments and long-term supply agreement similar to what we have now for certain of our customers.

Mike, I think that the financing issues to general economic uncertainty, the political environment and while I did know that the PPC got renewed, it got renewed for another year which is not optimal is not certainly not what the wind energy industry had been lobbying for. So, I think we'll obviously go much beyond the current horizon and the products that we had talked about in the previous conference call. There is a lot of uncertainty about that.

As far as near term projects, we have yet to see anything that directly impact us. But we are in the process of going through our business planning process now, as we speak. We're going back to every customer, going through every contract, and trying to get a better understanding if there is anything like that, but right now, nothing we are aware of.

Mike Hamilton - RBC Capital

Then there is a follow-up, Jim. What are you looking at on fourth quarter CapEx based on what you are going forward plan is?

James O'Leary

Relatively unchanged, but can give the...

Ken Crawford

Yeah, we are looking at about $25 million CapEx in Q4, which would bring our total to little bit more than $70 million this year.

Mike Hamilton - RBC Capital

Thank you, gentlemen. That's it from me.

James O'Leary

Okay. Thank you, Mike.

Operator

And next we'll move to Richard Marshall with Longbow Research

Richard Marshall - Longbow Research

Good Morning.

Ken Crawford

Good Morning

James O'Leary

Hello, Richard.

Richard Marshall - Longbow Research

Hi. A couple of more wind questions for you. You maintained the forecast of $90 million for this year. Is $160 million still the number for '09 and is there a 2010 number yet?

James O'Leary

Well, there's definitely not a 2010 number and we are going through as it is mentioned to the previous caller, Mike that we were going through the next year forecast and right now I think the variables around that number would be raw material price increases, which go up and down, would potentially impact that number. And as I mentioned we are going through customer-by-customer, contract-by-contract. So we will be a lot smarter about that in the next call, not sooner.

Richard Marshall - Longbow Research

Okay. Great. And along the same lines, I mean, are you seeing any delays in current orders, any cancellations? I mean we hear as you kind of refer to there are some issues with the Gamesa and Suzlon and so forth. Any delays of orders that you are seeing?

James O'Leary

Within wind, any delays we've seen is where people over ordered in aggregate, not just from us from others and we were able to supply others who wanted demand. So I wouldn't say within the wind energy business yet, although we have moved demand around within a pretty robust order book. And again, that is as of today, things have been changing so quickly, that you guys cited in particular, Gamesa and Suzlon, we have not seen any material issues with them, but we're respectful, I read the same papers that you guys do.

In other areas of the business and you didn't ask about this, but I do think it's prudent to mention it. In couple of areas, particularly in heavy equipment and in another smaller orders, we have had a couple of people come back and wanted to push orders out to the right a bit, not cancel, but as they are going through their business planning process, they don't want to over order or take things that could potentially go into inventory prematurely.

So, we have seen a few things pushed to the right, nothing material, but you know what its kind of early, we're hopeful that as the credit markets improve and kind of the general backdrop makes people feel better, and as people get through again with their own business planning processes, we have greater visibility on that, but we have seen some push outs in other parts of the business.

Richard Marshall - Longbow Research

Are you seeing any push back on price in the wind business?

James O'Leary

Most of that by LTA, so what I mentioned before, the 150, the variability, its higher or lower based on raw material pass through that are not contractually committed to. So the answer would be no, but it's kind of fixed by contract and PO and most of those are set now.

Richard Marshall - Longbow Research

Okay. And then just last thing, what were the sales from Avon Bearings this quarter?

James O'Leary

Was in this tier for the last quarter (inaudible).

Richard Marshall - Longbow Research

Okay.

James O'Leary

And it's no longer part of the accounts.

Ken Crawford

Yeah. We completed, what I'll call the key renovation of Avon. During the third quarter we moved some machines around and laid that plan out as our other large diameter bearing plans are. So, sales were down in the third quarter for that acquisition to about $5.5 million, but we expect to still achieve the $30 million in sales that we've talked about on previous calls.

Richard Marshall - Longbow Research

Okay. So, the $30 million number for '09 is what we'll be looking at?

James O'Leary

$30 million was for '08.

Richard Marshall - Longbow Research

I understand. Would that be going up materially in '09 or is that pretty close to the same line?

James O'Leary

I think going forward and I think what Ken mentioned, the key renovation of Avon. Right now Avon is really being geared up to devote to repair, refurbishment, heavy equipment, and couple of key wind energy businesses. Some of that wind energy business has been moved, stimulated by other Kaydon plans. So, there really won't be and fiscal '09 comparable for that business. It's fully assimilated into Kaydon. And right now part of the production at Avon on a standalone basis, would've planned in that third quarter, is it absorbed into other Kaydon plans. So, it gets to be a lesser relevant comparison going forward.

Richard Marshall - Longbow Research

Okay. Great. Thank you very much.

Operator

Peter Thompson with Coho Partners will have the next question.

Peter Thompson - Coho Partners

Good morning guys. Question is what your wind revenues actually where this quarter?

Ken Crawford

This quarter $21.5 million

Peter Thompson - Coho Partners

$21.5 million. And can you tell me what the wind is now in your order backlog?

Ken Crawford

$182 million.

Peter Thompson - Coho Partners

And did you get the order entry for wind this quarter?

Ken Crawford

We did, $52.2 million.

Peter Thompson - Coho Partners

Okay. Great. The real question is just to kind of capital allocation, obviously, share repurchase in this quarter was done at meaningfully higher levels as most of the companies were trading significantly higher, but now as you are looking at your capital resources are you changing your balance at all between deal desire or share repurchase at these levels?

James O'Leary

James O'Leary

You'll get a different answer almost every other day you ask that question right now.

Peter Thompson - Coho Partners

Okay.

James O'Leary

But let me give the parameters in the way we're looking at. I think the right framework against which we valuate that decision. The share repurchase, we slow that down before we went to our close period. We pullback on share repurchase a bit, not because we didn't think the shares were irrespective of whether the prices on a given day of fundamental long-term value, but we pull it down a bit because the acquisition market had got considerably better.

I'd say there was more volume. I think there were more realistic sellers. I think there were more deals that are, were and may still be potentially actionable than I think I've seen 17 or 18 months here at Kaydon or 18 plus months and have been on the Board I think several years.

The challenge now and lot of business folded probably at the beginning of this quarter or middle of the quarter is with the credit markets seasoning up the way they have and was industrial pricing obviously reflecting our own stock price going down to the extent it has. What sellers are willing to do and what buyers can do without price support is going to be a question to be answered.

Right now, again, we're still looking at and working hard on deals which I think would be good for the long-term value of Kaydon, but we also appreciate the fact that our stock price is down meaningfully. Any acquisition we would look at would to be evaluated in comparison to what we think our fundamental value is and what the market too is offering us.

So really that equation changes everyday. In next two or three, I'd say probably the next four weeks we'll tell you what our status is going to be a real market for acquisitions as the rubber hits the road on, will sellers stakes prices that reflects today's environment and will there be a financing markets claims that of any significant size though.

One of the better market I've seen in while really got turned upside down by the financing conditions as the banks pulled back dramatically. And I think sellers now have a tougher decision, they might have had when companies like Kaydon and our industrial peers who are trading had [good] returns with EBITDA higher.

Peter Thompson - Coho Partners

I really appreciate the thought process on that a lot.

James O'Leary

I hope it's helpful but honestly it does change everyday.

Peter Thompson - Coho Partners

That's very helpful. Listen, I don't have my note in front of me, but do you also remember what wind revenues were in the second quarter, Ken, just out of curiosity?

Ken Crawford

19.3.

Peter Thompson - Coho Partners

19.3. Thanks so much. Good luck.

Operator

And next we'll move to Walt Liptak with Barrington Research.

Walt Liptak - Barrington Research

Hi. Thanks. Good Morning guys.

Ken Crawford

Hello.

James O'Leary

Good morning.

Walt Liptak - Barrington Research

Okay, so you did 19.3 in the second quarter, so your winds deliveries were up a couple of million. You mentioned under absorption in the wind power operations. Were you expecting to have more sales shipped in the third quarter?

Ken Crawford

I think there was a planned discussion where we had expected a third quarter, not just seasonal processes but the third quarter was always going to be a bit weaker than the fourth quarter as far as general overhead absorption, because next quarter we're going to really start shipping. Quantifying that, any number we give you would be so fraught with assumptions and what if is it 100 basis points, probably less, but it is meaningful.

Walt Liptak - Barrington Research

Okay, so it might be a 100 basis points for operating margin that you were under absorbed this quarter that you might get back next quarter.

Ken Crawford

Probably less, but it's something in that order of magnitude.

Walt Liptak - Barrington Research

Okay. I wonder if I can get the Avon orders this quarter, this will be the last time I am asking.

James O'Leary

Well, $5.5 million also.

Walt Liptak - Barrington Research

Okay. So it looks like your non-wind orders ex-Avon were down 10% to 15% year-over-year is that all attributable, you mentioned those few things, that's the magnitude of the drop in industrial distribution, and export et cetera?

James O'Leary

Non wind orders, this quarter were about a $105 million, and as I said $5.5 million of that was Avon. So that's about $100 million and third quarter last year non-wind orders were $99.8 million.

Walt Liptak - Barrington Research

There must be something wrong with my math. Okay. That's sounds better than I thought.

James O'Leary

We are pretty much little less than one-to-one book-to-bill, pretty much across the Board. It's a bit less this quarter that it has been previously, but nothing is that precipitously dropped. The biggest issue, and this is pretty much across the friction control segment, it's been mix. We are replacing wind and heavy equipment, which are strong, we had capacity for and we are having capacity to come online in wind energy, but the drop off in what is by far a more profitable business to industrial distribution for export and even within business lines, within military, we had a better quarter than had we expected last time out.

We are ahead of last year for the nine months, but the shift from what was earlier in the year and last year strokeable races, a legacy program that has been phenomenally successful for us in '05 and '06 and beginning of '07. And we talked a little bit about, but we're starting to see it within the military aerospace space, what we are shipping is more of helicopter swash plates and the like, dropped off. it was replaced by MRAP, it was replaced by vehicle and other products, but the margins are different. So, it was mixed more than volume this past quarter, but volumes did drop off especially towards the back half of the quarter.

Walt Liptak - Barrington Research

Okay. Given the distribution drop off in that higher margin product, is it in inventory correction, probably a lot of it's, I would think, in demand. How do you view what happened in the distribution channel?

James O'Leary

I think our customers are trying to give us the best information they have in a market that's changing very quickly. I am taking credit by the way, because I am happy about it, but when we first talked about it at the end of last quarter, I think I chatted about inventory correction or our initial guidance was, our customers are still showing end market sales that were good in that segment, and there would be guidance like motion command, AIP. And it was still showing decent sales, but tightened upon inventories, and they were probably taking in inventory and less of our products. They made a couple of press releases, one yesterday as well, from one of the those fellows that said, they've not only tightened up on inventories, where all levels to them were down. And I think as I mentioned before, we are down year-over-year and year compared to sequential quarter, not only they are down there they are all staring to see weakness in the end market. So I think it is migrated a bit too absolute end user demand and whether it exacerbates from there, I think it's going to be dependent on the general state of the economy.

Walt Liptak - Barrington Research

Yeah. Got it. Okay. All right. Thanks guys.

James O'Leary

You're welcome, Walt. Thank you.

Operator

And next we'll move to Steve Barger with KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets.

Good morning.

James O'Leary

Good morning, Steve.

Steve Barger - KeyBanc Capital Markets.

This is going to be a tough question because there is no formal guidance out there, I was just trying to categorize that $0.10 swing between what the street saw and what the actual results were relative to the volume declines you talked about, the slower material cost recovery, unobserved overhead FX. Maybe just help us kind of think about what the differences were?

James O'Leary

Okay. Anyway and by the way that's not, I don't think that is out of school, because we did give some general parameters earlier in the year when things were going great guns. I think if you took a couple of discreet buckets you come to easily the $0.10 and it's probably more because as I said we did a little bit better in certain areas, the military MRAP didn't drop off the way we thought. I don't think wind was better, but we do have a couple of areas little bit better and maybe then has been anticipated.

Currency, because we don't have guidance, I don't look as closely as maybe I should the way you fellows have for your currency translation benefits. But the pound and the euro translation had to have been a couple of pennies to the two or three, probably in that ballpark, but not much lower than two or three.

And the raw material pricing increases we've signal it a bit last quarter. They've kind of quote up on those, it's been probably several of couple of 100 basis points on the cumulative basis, much of which we've been getting back.

And now, we have the environment to get it back. Is that another third of the $0.10? Possibly, I think that's going to be one that's recoverable faster than in prior cycles. And I think we'll get it back faster than we've actually been hit by it. Since because it's been so severe and its so topper mind. I mean that's one of the principal discussions we'll be having over the next couple of weeks with our companies when they come in for their budget meetings and we're glad to see them.

So is another third to 40% in it? I'd say that's probably a fair guess. Remember some of pass through we've had on the upside as far as material passthroughs, we only do the quarter after. And the increase in raw materials and the decrease and really precipitous drop, it happens so quickly. We're probably a quarter into where we raised, but now we'll be dropping them again in the middle of the next year. That's in the long-term contract business.

And I think the whole balance then is the drop in two principal areas and the shift in mix in the third. The absolute drop in North American distribution and export, we saw a very big drop in export, particularly in our machinery segment at the end of September.

And for a company this size, with our share base, couple of million matters on an EPS basis. And I think the third thing which is mix, but it's not an important. This helicopter is, which we term military aerospace, where we did see a pretty big shift in mix as the year progressed and is particularly pronounced in the third quarter.

Steve Barger - KeyBanc Capital Markets.

That's great detail. Thanks.

James O'Leary

All of those will get you probably more than 10. And then you got to factor in where we may have under or over performed in other parts of the business.

Steve Barger - KeyBanc Capital Markets.

And is that mix a permanent shift or is it timing in terms of helicopters?

James O'Leary

I think its timing. And I think I've give this now recently talking to people in presentations and also on previous calls. But you are amazed what you read in the papers in the early parts of the war effort. You read everyday about helicopters being shot down, a lot of moving people of course longer distances and occupation effort rather than a ground effort where you occupy in there. You don't read about that much more anymore because it's much lesser than air occupations [clash assault] and it is an occupation. So, I think that's a large part of it. I do think it's timing there will be a replacement cycle at some point. I don't think we have seen it yet.

And the bigger thing, longer term to take away the simplicity of that is getting into commercial aerospace and we are bidding on projects now that we offer the first time at over a decade, and being a lot more aggressive on it, but that's a bit of a longer term initiative.

The other part of the business, yeah it's, I would say more sentiment driven. And if you look at Kaydon historically -- and that business will do better, when people are comfortable inventorying and ordering and I think we better respect the fact that our customers are going to do. When they are end sales, they are a little bit on the uptick. I wanted to tell you a couple of good weeks will make that figure different, with the headlines we have, but it is largely I think sentiment in end market driven and that will come back. I don't think that's cyclical, but it is a function of how comfortable people are, inventorying and ordering in a better economy that I think we've got right now.

Steve Barger - KeyBanc Capital Markets.

Right. So you did say that end markets in North American distribution and export did weaken as the quarter progressed. Are there companies that are reporting or have indicated that's persistent in October, just to be clear, you are seeing that weakness persist so far through October?

James O'Leary

Yes. Till today no improvement.

Steve Barger - KeyBanc Capital Markets.

Okay. The remediation steps that you had mentioned any specifics on that?

James O'Leary

Remediation steps that indicates raw material?

Steve Barger - KeyBanc Capital Markets.

Yes.

James O'Leary

We are going back, we are looking at our friction contracts, we are looking at all our raw material purchases, will also and this is beyond what I meant there, but as we go through the budget process, we'll be talking about a plan B with every business, if we do continue to see drop in volumes, if we see drop in absolute volumes, where we have capacity, where we have so much capacity, what our potential and we in particular are not at the stage of massive reductions in spending or personnel, but if you went through a precipitous decline as you did and it was long and deep, surely deeper than it was earlier this decade, we will have a plan B for that and it will an actionable plan B. We're also looking at, and there is something in the press release which we didn't talk about, good news about wind, bad news about the general economy as it has impacted the distribution business, but right now we have a project underway that will cost us couple of hundred thousands coupled with a drop off in business in sealing products.

Right now, we're looking at the overall capicitazation there and whether or not they are broader, more longer term profit driving initiatives, we could put in place there and the only good news about bad news is somebody's thing only get done when you've got a drop in business and business isn't going still great guns that you're doing all you can to satisfy demand, then when you have pause like this, it gives you an opportunity get out some of those things that probably you should have considered long ago.

Steve Barger - KeyBanc Capital Markets.

Right. Well I get to the point of how deep the downturn could get. Are you seeing any of your upstream vendors laying people off or getting squeezed by credit? Or do you have any worries about your own supplies chain?

James O'Leary

No, I think the only issue we continue to have is the function of, not the tale of two cities parable, we still have some headaches with supplies of forgings in wind energy. Nothing is bad as I think maybe two or three quarters ago may be three or fours quarters ago when we first started talking about it.

That business, there is parameter that at least in near term business isn't dropping off, that's still tough, not impacted by financing. I think the only think that you could attribute to financing that impacted us this quarter, but I couldn't quantified it enough to be comfortable saying, I would give you that anecdotally, we can think we might have picked up more shipments because the trade credit issues, where people waited to the end and maybe their banks were in such disarray, things didn't get done as they expected. That is the type of thing that, I guess anecdotally I could say we heard through the chain. I don't think we have any suppliers that are at financial risks. I don't think we have any major customers that have financial risk. If you would ask me I think there will be an investment banking industry quarter ago bought and the world has changed very quickly.

I think the most important thing now is probably getting through this yearend, saying that people are taking advantage of some of the liquidity injections measures the government is making available to them and pretty enough money to work, because one way to do, take a deal today, and if you are comfortable enough with the quality of the asset and sustainability in even a broader downturn you still find the money. I mean it is challenging to get, there are fewer banks out there that are even talking about lending to make commitments. So I think you got to get through this quarter and make sure people's balance sheet are in good shape and hopefully that starts to transmit through to buyer's businesses consumers.

Steve Barger - KeyBanc Capital Markets

Great. And one more question, just going back to the defense business. Navistar is going to [monitor] it's Dash which is a smaller MRAP variant I think probably for a GAAP [end], do you expect we're going to see others staff GAAP measures for variance in front of [GLTV] that will be benefit you or would it be better to see a go forward at the bigger program. How do you think given that MRAP didn't drop like you thought it might?

James O'Leary

I am going to point that question to probably the next quarter. Because I think we are getting smarter on that as the biding goes forward. We're obviously one of principal suppliers for Humvees and now MRAP. We are involved in most discussion but I don't think I am smart enough to add any more color on what you just said.

Steve Barger - KeyBanc Capital Markets

All right. Thank you very much, gentlemen.

James O'Leary

Okay. Thank you, Steve.

Operator

And next we'll move to Nigel Coe with Deutsche Bank.

Nigel Coe - Deutsche Bank

Thanks, good morning.

James O'Leary

Hi, Nigel.

Nigel Coe - Deutsche Bank

You have talked about the wind backlog, I think 182. You've given the agings of the total backlogs, I don't understand that the wind backlog is, will that move to the right given the nature of the product. But you said I think roughly $4 million of wind sales affected in 4Q. How does the first half of '09 shape up currently with what you have got in your backlog?

James O'Leary

I think must have already talk about. The discussion we gave on wind was not that wind has moved to the right. I think that's a general caveat we've been given since we've started taking major orders there. Just that our backlog in general shifts a little bit later. And as we get into next year, federal change where the steady run rate for the capacity would be coming on line. And on what it will be next year, probably, we are going to contact as we're going through our business planning process in there.

Nigel Coe - Deutsche Bank

Okay, that's fair enough. I know, you gave up to now good information in some of the earnings, as far as the inflation, the Boeing deleverage et cetera. But in terms of the friction margins, how much impact do you think the [windflow] pressure had in that segments? And as you go into full Q, does that get better or you expect a similar impact?

James O'Leary

It has been a couple of 100 basis points over the last few quarters.

Nigel Coe - Deutsche Bank

Yeah.

James O'Leary

I think much of that we recovered. Although, the way we track it, you see raw material price increases as one part of the profit growth we analyze. And then there are separate line items for price recovery, price increase, efficiency in the case of Six Sigma and some of the Kaydon programs we have.

So to directly say, this increase got offset by price increase with its efficiency and actually [it kind of helped]. But I do think it is, it's been pretty close to even for the better part of the year. I think it started to drop off or got harder to offset it towards the end of last quarter. And I do think this quarter particularly was the most challenging. I do think we're going to get lot of that back over the next couple of quarters. I think this coming quarter -- because we're not in the middle of it, but we are [third] through it, and we are in the process of going back and working through our purchasing people, supply chain, and that too with some of our suppliers. I don't think we see a lot over this quarter. I do expect they'll see a fair base next year.

And as far as margins, I think where we finished up, I think 19.5 over the third quarter, I think we'll see recovery, a bit of recovery in the fourth quarter because it take the total year. And I probably talk a total year somewhere between 20% and 21%. I hope it will be close to 21%. It will be somewhere between the two. A lot of that is the capacity utilization. A lot of that is a normal fourth quarter pickup, where third quarter is usually a weakness. And finally, some of the issues we got in place, but I don't think you will still see those come to full fruition until a bit later into next year.

Nigel Coe - Deutsche Bank

That is great color, Jim. And then just two more questions for me. Obviously you've got a great balance sheets and that is a real advantage in this environment. What is kind of the minimum level of buffer of cash buffer you need in this environment? You obviously don't need $270 million. Why wouldn't you pick up the share buybacks at this point in time?

James O'Leary

Well, that's the discussion we are having. And I want to relate it to one of the first question on capital allocation, how you are evaluating that relative to M&A and relative to other opportunities and it's an active dialogue we are having today internally with our Board. It's a Board decision. I think the key question is, what's your downside for deeper recession, what's the worst case, and if we looked at historical periods. Kaydon was pretty much cash generating even in those periods.

I think the difference today and again, we are running these numbers now, as we go through our business planning process. I think the only real difference is, we do have CapEx that need to be completed with the existing projects. That I wouldn't say is committed, but it's pretty much committed, we're going to spend it as for a project that is an important part of '09 and our future.

We do have maintenance CapEx, historically we spend about 3%, Realistically I think Kaydon has 3% to 5% standard. And I am pretty sure, our cash generation, even if you are in a much deeper recession, I think we were in mid to high teens in the last two recessions as far as operating margins overall, when you ignore write-offs and one-time gains and some of that stuff.

In an environment like that even if sales are lower, we are still producing more cash than that 5% CapEx. So, we don't need a big buffer. I think the big buffer we would need, the big buffer is for CapEx already committed, particularly to wind energy. I think we should leave, I think it's prudent to leave some additional cushion this time in case, projects come up. And while it is a business that is still working, a secularly strong wind energy business, but you don't need $270 million.

Nigel Coe - Deutsche Bank

And the actual CapEx commitments right now, as we look into 4Q and for first half of'09, can you just remind us how much capital you've got committed right now for the expansion.

Ken Crawford

Well, the wind energy expansion that we've announced, the four phases that we've announced total up to about $80 million and we will spend 78ish of that by the end of this year. So, just a couple of three million left committed to be spend in '09.

Nigel Coe - Deutsche Bank

Great. And then just one final one, inventory pickup a little bit from 2Q levels. I mean how much of that was associated with the ramp up which occurred in 3Q. And maybe how much was due to some of the weakness in the book and ship business.

Ken Crawford

The entire $8 million increase in inventory is in our specialty bearings division and it primarily is in Mexico. We are ramping up the wind energy stuff and we're buying forgings and making big bearings and to a lesser extent, we had a couple of million dollars increase in inventory at Avon and again, that was associated with what I've talked about earlier realigning that plans and we didn't get as much out of the door in Q3 because of that and its sitting in inventory, but is expected to be shipped in Q4.

Nigel Coe - Deutsche Bank

Great. Thanks a lot.

James O'Leary

Thank you, Nigel.

Operator

And next we will move to Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

Good morning, gentlemen.

James O'Leary

Pete, officially good afternoon.

Peter Lisnic - Robert W. Baird

Good afternoon.

James O'Leary

(inaudible)

Peter Lisnic - Robert W. Baird

It's sunset time so I m still in the morning here.

James O'Leary

You get that sensation.

Peter Lisnic - Robert W. Baird

Thank you. Jim if you could maybe talk about the competitive landscape for wind that we've seen press releases from maybe direct [or/and] for our competitors, however, you weren't afraid to talk about expanding presence in that space and was also seen under investments in section and other areas of the business. Can you just talk about the competitive landscape that you're seeing? Are people becoming more aggressive given the downturn? And how do you think about all that going forward?

James O'Leary

I think I know the few things in particular you're talking about. My response will be how things really changed all that much, although, if you're talking about one of our and not our competitor but one of our peers in Ohio, they issued a press release which I think was more gearbox bearings. I don't think they are turnables. They are not large slewing bearings where we're competitive more with SKF and FAG guys who are coming online in the next Q, maybe, at the end of this year and beginning of '10, which might be obviously. Since then I think their press release early this week is non-competitive with us as mostly gear boxes is. It is for the wind energy market, but it's not tough but we go head-to-head. And the other press release which they issued earlier, it is absolutely in fashion which we do. But I don't think it was new except we've always competed in. I think adding it as a catalog part, certainly those suggested they're taking most seriously, but, hopefully, because it's a bigger market and we're pretty much on vast leader in that. I don't know if the competitive landscape has really changed.

So one of those notable release is not really directly competitive with us. The other one yet is, but it's roughly in competitive with any way. So other than heightening our awareness as well, I don't if it really changes much.

Peter Lisnic - Robert W. Baird

Okay. All right. That's good on that one. Then last question, if you could. Just on the commodity cost side of the equation and your confidence and your ability to sort of start getting some of that back, can you maybe give us a sense as to what and I don't this is that right way of looking at it, but what percentage of revenue or what percentage of orders of backlog, are contract based where you can actually dictate a price passthrough mechanism help you recover those costs.

James O'Leary

Well, I mean, remember the wind business, it is contractually committed to, but it's up and down. So we get it back on the way up and we give it back on the ways down. But, in terms of absolute dollars, there is nothing we're going to be able to do within the wind energy business, but the wind energy business isn't where we are talking about having a flat in the back on that. I mean it's the other part of the business where I think that have had a [deliberate] impact and I think it's not as I said and a couple of 100 basis points, 200-300 basis points as a percentage of cost of sales, probably more percentage of sales over the last year or so, everywhere expect wind.

So I think when you look at this year they will finish up in around 90. It's in the balance of the business and I think how you had that grow because we've got eight other businesses, very dissimilar. I don't know if I could say we'll get that all back, by x of next year. I think we're going to collectively get past that part of it over the next year and hopefully, we can recover that much or more by working with our supply base and getting efficiencies where they should exist.

Peter Lisnic - Robert W. Baird

All right. That covers it from me. Thanks.

James O'Leary

Okay, Pete, thanks

Operator

And our final question will come from Holden Lewis with BB&T Capital Markets.

Holden Lewis - BB&T Capital Markets

Thanks. Good afternoon.

James O'Leary

Hello, Holden.

Holden Lewis - BB&T Capital Markets

I am sort of curious about the, in terms of organic growth and operating margin, you kind of said that you'd have more absorption in Q4 and that could have up to may be 100 basis points of benefit. I guess raw-materials are probably looking like maybe it's a little bit of a drawback there, but probably not a big number. But I guess, at the same time, you're going to see wind really take off, what's happening in non-wind in terms of the mix. And I guess my question is where are the wind margins relative to non-winds now? Is the lot of the pressures that you're seeing is pushing the margin down mostly on the non wind side so that at some point, wind doesn't come in as much and so the increase in wind and the mix is actually going to become a positive or stabilized with the margin, or wind margins come down along with non-wind margins, so that as that mix increases its going to continue to drag on the mix.

James O'Leary

All right. I think what you're saying is pressure on the margins again is largely mix. Its business that had it shipped and it has gross margins of meaningfully higher than company average. They mathematically would have pulled up the business significantly. Though, its not that we're seeing pressure, push backs on price, that's pure volume of higher margin products, I think you could say it started earlier this year with certain military programs, particularly the strokable race and it's continued now with North American, what we call book and ship business.

As over a longer term cycle when you've got stable based business in the machinery sector in the North American industrial business, with that support as well, we've got Kaydon's margins to be somewhere in the low-20s, I expect it to be, as I mentioned before, somewhere between 20 and 21 as we finish this year. There are some other option issues, but those are issues that we expected and anticipated when we planned for this year, what we didn't plan for this year is a pretty significant drop off, particularly as the third quarter progressed in some of the business. I would say it is discretionary.

People, their willingness to take inventory, and that one sales typically the smaller factories for automation, robotics which is kind of a heart of the custom friction line that's where I don't think we saw margin pressure, pure sure a drop off in business would have averaged up our margins. And on the put side of that, which we have talked about for a couple of years here is we saw margins come down as our split roller bearing business doubled.

And that business is high-teens, just touching on 20, if mathematically that business doubles, and margins that still most of our competitors would kill for, it brings the margins down. So I folks had the margin issue more as a drop off in discretionary high margin business, mixed issue within military, not pressure that I would is anything other than, this was something you had to anticipate as we grew the company.

Holden Lewis - BB&T Capital Markets

Okay. Fair enough. I guess what I'm trying to get at is, we expect that wind will become a significantly larger portion of the mix particularly given that non wind is slowing down, then we kind of cited wind as being one of those sort of mix pressures, if you will, but I would think that the demand and improved absorption on wind while the non wind is [grasping] under absorption and weaker mix and that sort of thing I mean at some point the growth in wind and the mix become a benefit or stabilizer of the margin or is it still much larger or is it still lower than the corporate average even at 35 gross and 19.5 operating.

James O'Leary

It's still lower than the company average, because we have so many initials that are difficult to grow we have ridiculously higher margins and as I think it's historically been a composition of the company. If it stabilizes right away, if you think about it, when you are introducing something that's good margins, it doesn't change. It benefits, but remember, it can only benefit when some of these contracts are reset, because so much of it is under long-term supply agreement, so it can benefit when the contracts are reset and that goes out over a couple of years. So, our original strategy with wind was, we guarantee the IRR, we guaranteed our investment around a couple of key customers or a key customer in particular, and we're still happy with that decision they're happy with it. I think it was kind of unequivocally the right thing to do. It stabilizes margins from the short-term if everything goes down, but not on historical level, which probably couldn't be wrong on where the company had reached.

Holden Lewis - BB&T Capital Markets

Right, but it is also still a little bit below where we are in the third quarter. So, as wind grows the mix, there will still be a pressure on the mix.

James O'Leary

Well, if you are 19.5%, you think we'll recycle is, as we said before are 19.8, it should be spot on stabilizer.

Holden Lewis - BB&T Capital Markets

Okay. And then in terms of the capacity, I mean I understand that you've just about done this latest round, but you had plans I think to expand further in 2009 and maybe add another line or two. Is that right? And is that sort of been put off at this point?

James O'Leary

Did you join the call a little bit late?

Holden Lewis - BB&T Capital Markets

I may, was that (inaudible) or something, so I don't.

James O'Leary

What call was more important enough.

Holden Lewis - BB&T Capital Markets

I did not join the call late. I missed something.

James O'Leary

On capital allocation, don't ask this question as to what the financing markets were doing to the wind business. And in the short-term, we haven't seen significant impact. Over the long-term, remember, we announced, we had secured and our board so fully supports additional capacity expansion in a meaningful amount, well over $50 million. If we had customer commitments and if we were comfortable with the long-term supply agreements with under lot of those investment decisions. I think that has been impacted by – well, I wouldn't say, I hope this is a transitory issue. But right now, the longer term financing at least, I don't believe it's a short-term financing today, but absolutely long-term financing decision being impacted by the credit market.

So, until that gets better, until our customers are more comfortable with long-term supply agreement, we have not committed nor have we in the [promissory] 10 days before factor into our capital spending. The additional, I think it's anywhere between 50 million and 80 million based on new facility, Greenfield expansion on existing facility and a potential non-GAAP facility that would be also Greenfield.

So, we talked about three [possible] expansions, all of which was we're still exploring and talking to people about, none of which we're going to expand unless we are comfortable with the longer term horizon. And I do think that is financing related.

Holden Lewis - BB&T Capital Markets

Okay.

James O'Leary

Is that helpful?

Holden Lewis - BB&T Capital Markets

That is, thank you.

James O'Leary

Okay. Sorry if that was so confusing, but that piece in particular, we would love to be spending that money, but we have to spend in parameters that we are comfortable we can secure the investment for you.

Holden Lewis - BB&T Capital Markets

Okay. Thanks.

Operator

And that will conclude the question-and-answer session. And I would like to the turn the call back over to Mr. O'Leary, for any additional or closing remarks.

James O'Leary

The only remark is that, this was a challenging quarter. We are not happy about it or pleased about it, but we recognized and are respectful that it's going to be a very tough economic environment. The one thing I can assure you is, on the front of capital allocation and contingency planning, if this is a tougher period for longer time than any one of us expect, we are working now on all the steps needed to make sure we are going through this and coming out of it in the best shape possible. And we appreciate your attendance today, your patience and we rare working hard here. So thank you.

Operator

And that will conclude today's call. We thank you for your participation.

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Source: Kaydon Corporation Q3 2008 Earnings Call Transcript
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