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Kadant Inc. (NYSE:KAI)

Q4 2013 Earnings Conference Call

February 20, 2014 11:00 ET

Executives

Thomas O’Brien - Chief Financial Officer

Jon Painter - President and Chief Executive Officer

Analysts

Walter Liptak - Global Hunter Securities

Rudy Hokanson - Barrington Research

Lawrence Stavitski - Sidoti & Company

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2013 Kadant Incorporated Earnings Conference Call. My name is Azkaban and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Thomas O’Brien, Chief Financial Officer. Please proceed.

Thomas O’Brien - Chief Financial Officer

Well, thank you operator and good morning everyone and welcome to Kadant’s fourth quarter and full year 2013 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

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

Let me now remind everyone of our Safe Harbor statement. Various remarks that we may make today about Kadant’s future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our quarterly report on Form 10-Q for the fiscal quarter ended September 28, 2013. Our Form 10-Q is on file with the SEC and is also available in the Investors section of our website at www.kadant.com under the heading SEC filings.

In addition, any forward-looking statements we make during this webcast represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today.

During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading Investor News.

With that, I will turn the call over to Jon Painter, who will give you an update on Kadant’s business and future prospects. Following Jon’s remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Jon Painter - President and Chief Executive Officer

Thanks, Tom. Hello, everyone. It’s my pleasure to brief you on our fourth quarter and full year results as well as our outlook for 2014. Overall, we had a solid quarter with strong gross margins and better than expected earnings per share performance.

I will begin today’s business review with the Q4 and full year financial highlights. We finished the fourth quarter with revenues of $95 million, which was up 21% compared to the fourth quarter of 2012 and 4% sequentially. Gross margins in the fourth quarter remained strong at 44%. Adjusted operating income was $9 million, up 38% compared to Q4 of last year. Our adjusted diluted earnings per share of $0.51 in the fourth quarter of 2013 increased 16% compared to Q4 of 2012. Our GAAP diluted earnings per share of $0.52 beat our guidance of $0.47 to $0.49. Incidentally, our guidance did not include the dilutive effect of the Carmanah acquisition, which was $0.05 in Q4.

Our bookings in the fourth quarter increased 11% to $84 million compared to the same period last year. Cash flow continued to be strong in the fourth quarter at $9 million. Also in the fourth quarter, we completed the acquisition of Carmanah and the integration into our organization is proceeding according to our plan. In addition, we also completed a small, but exciting technology acquisition of the European producer of ceramic creping blades in early Q1 of this year. This will expand our creping blade offering to tissue customers to include high-performance longer life ceramic blades. The ceramic blade market is estimated to be $50 million and is growing as tissue producers using the new TAD process are increasingly using ceramic blades.

Looking at the full year financial highlights, we had a solid 2013 setting a new gross margin record and near records in adjusted EBITDA and cash flow. Our record gross margins of 45.8% was the result of both favorable product mix and improved margins in parts and consumables. Our adjusted EBITDA for 2013 was $44.7 million or 13% of revenues compared to a record $44.8 in 2012. Our adjusted diluted earnings per share was down 10% from the record earnings per share we had in 2012 due to lower revenues excluding acquisitions and acquisition related expenses.

Bookings in 2013 were $343 million, up 14% compared to 2012 bookings. Excluding the impact from acquisitions, bookings were up 6% year-over-year with increases in all product lines. Cash flow from continuing operations was $40 million and up more than 30% from 2012 strong performance. Finally, our return on total capital was 9% for the year based on adjusted net income. The lower return on capital compared to 2012 reflects the increased investments we made in acquisitions in 2013 as well as the impact of acquisition accounting expenses. After adjusting for the acquisition accounting expenses, our return on total capital was 10% in 2013.

Turning back to our revenue performance for the fourth quarter, you can see that all of our product lines were up. In addition, with the acquisition of Carmanah in Q4 of 2013, we have added a new product line called wood processing systems. The increase in revenues in Q4 is primarily due to higher revenue from our recent acquisitions which contributed $12 million to Q4 revenues as well as growth in our doctoring cleaning and filtration product line. Excluding the impact from acquisitions, our revenue was up 6% with all product lines showing modest growth over Q4 2012.

Our bookings of $84 million in Q4 were up 11% compared to Q4 of last year with our recent acquisitions contributing $12 million. Excluding acquisitions, our bookings was down 6% compared to the same period last year due entirely to weaker capital bookings, particularly in our stock-prep product line in our European operation. Our fluid-handling product line on the other hand saw a healthy pick up in bookings, up nearly 14% in Q4 compared to the same period of 2012. All of this growth was organic as none of our acquisitions in 2013 were in this product line.

Overall, I have expected higher capital bookings in the fourth quarter, but as you know timing for capital orders was always difficult to predict. That said, I am encouraged by the start we have had in 2014 with several large orders that I will discuss when I review our regional performances. The bookings and revenue trend chart on Slide 9, shows our quarterly revenues which are the red line and our bookings, which are the blue bars. Our quarterly revenues have seen a nice upward trend over the last three quarter reflecting the improved bookings in 2013 compared to 2012 and the additional revenues from acquisitions.

Bookings were up 3% from Q3, but as I noted were still somewhat soft in Q4 particularly when taking into accounts the bookings attributed to our recent acquisitions. Our parts and consumables business continues to be a source of stability offsetting some of the volatility that we see in our capital. Our revenue for parts and consumables was $59 million in the fourth quarter of 2013 and made up 62% of our fourth quarter 2013 revenue. Revenue was up 18% over Q4 of last year due to strong growth in our stock-prep product line particularly in Europe and China.

As you can see on the chart, this represents our best parts and consumables quarterly revenue performance post recession with acquisitions contributing $7 million in the fourth quarter. Parts and consumables revenue was up 12% sequentially with growth in all of our major regions. Looking at bookings, which are the blue bars. Our parts and consumables bookings were up 20% over Q4 of last year including $7 million from acquisitions and up 3% sequentially. Excluding the impact of acquisitions, bookings are up 5% compared to Q4 of 2012. The strong year-over-year growth has surrounded all of our product lines led by fluid handling. We expect the addition of Carmanah with this large parts and consumables revenue will give a give a boost to our parts consumables business in 2014 and beyond.

I would like to take the next few minutes to provide a brief review of our business activity in each of the major geographic regions of the world. Let me start with North America. Our revenue in North America was up 9% compared to the fourth quarter of 2012 to $41 million and up 10% sequentially. As you can see on the slide, revenues have trended upward since 2009. Bookings in North America in Q4 were $34 million, up 19% compared to the same period last year and 16% sequentially. These increases were due to our recent acquisitions including Carmanah whose business is primarily in North America as well as growth in our fiber-based products business.

The housing market in North America continues to show good signs of recovery and the pulp and paper industry remained stable with modest demand increases expected in container and tissue board offset by declines in printing and writing and newsprint. In addition, we are seeing growing activity in our other target markets such as specialty chemical, converting, and food processing. 2014 is off to a good start as we are awarded a pending order for stock-prep system valued at more than $11 million from a customer in Mexico. We expect to record this pending order as a booking in the first quarter of 2014.

Turning now to Europe, the market continues to be weak, but is showing some signs of improvements. Our Q4 revenues in Europe were $27 million, up 70% over a weak Q4 of last year and 4% sequentially. The strong revenue performance in Europe is driven by the timing of capital sales in all of our product lines led by our fluid-handling business. Q4 bookings of $19 million were down 8% compared to a fairly strong Q4 of last year and up 1% sequentially. 2014 is off to a good start in Europe as well. So far this year we have received two orders for stock-prep system upgrades for customers in Turkey with a combined value of more than $3 million and two pending orders from customers in Russia for drying systems with a combined value of more than $1 million.

Next let’s look at China. The economy of China has been slowing with Q4 and full year economic growth both at 7.7%. In addition, over capacity in the paper industries continues to create a drag in investments. This combination has impacted both our Q4 revenues and bookings in China. Our Q4 revenues in China were essentially flat compared to Q4 of last year, but down 15% sequentially. Our bookings in China were down 10% from Q4 to $9 million compared to Q4 of last year. Despite the weak market environment, we are seeing some project activity in China and we booked several orders in Q4 for our fabric cleaning systems, drying systems and an OCC system with a combined value of approximately $2 million.

In addition, so far this year we booked several orders for approach flow systems and recycling systems with the combined value of approximately $3 million. We are also seeing some promising activity in our wood processing systems business in China. I should note China is an important growth market for our wood processing business as OSB production is expected to have a significant growth in China in the coming years.

Turning to South America on Slide 15, you can see the impact of our CBTI acquisition, which we completed in the second quarter of 2013 and which is now fully integrated with our fluid-handling business and operating as Kadant South America. Revenue in South America was $10 million in Q4 you, p 10% compared to the same period of last year and up 24% sequentially. Bookings in Q4 more than doubled to $6.5 million compared to the same period last year although they were down 6% sequentially. According to recent economic reports, the Brazilian economy advance slightly in 2013 and industrial production grew only 1.2%. Despite the current slowdown, tissue and containerboard demand is expected to grow at a rate of 5% to 7% per year over the next five years according to the latest data published by (indiscernible).

I would like to close my remarks with a few comments on our guidance for 2014 and the first quarter. We expect to generate $2.60 to $2.70 of GAAP diluted earnings per share on revenues of $405 million to $415 million in 2014. While the acquisitions we made last year are a major contributor to our expected growth, we are also forecasting modest internal growth for 2014. For the first quarter, we expect to generate $0.38 to $0.40 of GAAP diluted earnings per share on revenues of $94 million to $96 million. We expect the first quarter of the year to be the weakest due to the timing of capital orders as well as purchase accounting adjustment for acquired inventory and backlog resulting from Carmanah acquisition.

I will now pass the call over to Tom for additional details on our financial performance in 2013. Tom?

Thomas O’Brien - Chief Financial Officer

Thank you, Jon. I will begin with an overview of our gross margin performance. Consolidated product gross margins were 43.9% in the fourth quarter of 2013, up 90 basis points compared to the fourth quarter of 2012. The increase in gross margins from last year’s fourth quarter was due primarily to higher margins in our products and consumables business offset partially by a small unfavorable product mix and slightly lower margins in our capital business.

Product gross margins were higher than last year’s fourth quarter in all our product lines in the paper segment. Regarding the unfavorable product mix, our higher margin parts and consumable revenues represented 62% of total revenues in the fourth quarter of 2013 compared to 64% in the fourth quarter of 2012. For the full year 2013, product gross margins of 45.8% set a new annual record, 190 basis points over the previous record levels achieved in both 2012 and 2010. More than half of the improvement in 2013 compared to 2012 was due to a better product mix with the remainder due to higher margins in parts and consumables. Margins in our capital business were slightly lower than last year. Looking ahead, we expect that full year 2014 consolidated product gross margins will be approximately 44% to 45%.

Now let’s turn to Slide #20 and our quarterly SG&A expense. SG&A expenses were $32.6 million in the fourth quarter of 2013, up $7.3 million or 29% from last year’s fourth quarter and included an unfavorable foreign currency translation effect of $400,000. Excluding the translation effect, SG&A expenses were up $6.9 million over last year’s fourth quarter, including a $4.8 million increase associated with the SG&A and transaction expenses of the acquisitions. SG&A expenses, as a percentage of revenues were 34.4% in the fourth quarter of 2013 compared to 32.4% in last year’s fourth quarter.

For the full year 2013, SG&A expenses were $117.6 million an increase of $14.5 million or 14% compared to 2012 and included an unfavorable foreign currency translation effect of $1 million. Excluding the translation effect, SG&A expenses were up $13.5 million over last year including $11.3 million of SG&A and transaction expenses of the acquisitions. Further, if we exclude the SG&A of the acquisitions and the translation effect, SG&A expenses were up 2% over 2012. Looking forward we expect that SG&A spending in 2014 as the percentage of revenues will be approximately 31% to 33% compared to 34% in 2013.

Let me turn to our EPS results for the quarter. We reported GAAP diluted earnings per share from continuing operations of $0.52 in the fourth quarter of 2013 compared to $0.84 in the fourth quarter of 2012. As you can see on Slide 22, the results in 2012 included a significant benefit from discrete tax items, also the fourth quarter of 2013 included $0.01 benefit from restructuring activities. Excluding these items from both periods adjusted diluted EPS was $0.51 in the fourth quarter of 2013 compared to $0.44 in the fourth quarter of 2012 or an increase of $0.07. This increase of $0.07 in diluted EPS consists of the following. Increases of $0.14 due to higher gross margin percentages, $0.13 from higher revenues and $0.04 from a lower recurring effective tax rate in the fourth quarter of 2013 compared to the fourth quarter of 2012. These increases are partially offset by decreases of $0.17 from higher operating expenses and $0.07 from the combined effects of the operating results of the acquisitions and acquisition transaction expenses.

The $0.07 of dilution from the acquisitions includes $0.12 of the amortization of acquired profit in inventory and backlog as well as $0.05 transaction cost offset partly by $0.10 of operating profit from the acquired companies. We expect that the remaining balances for acquired profit in inventory and backlog will be fully amortized in the first half of 2014. The translation effect on net income from foreign exchange was immaterial in the fourth quarter of 2013 compared to last year.

Let’s also take a moment to look at the EPS results for the full year on Slide #24. We reported GAAP diluted earnings per share from continuing operations of $2.07 in 2013 compared to $2.66 in a fourth quarter of 2012. Results in 2012 included a significant benefit from discrete tax items as well as a small restructuring charge. There were no adjustments to the reported results in 2013. Excluding the adjustments from the 2012 period therefore, we can now compare the reported and adjusted diluted EPS of $2.07 in 2013 to the adjusted diluted EPS of $2.29 in 2012 or a decrease of $0.22. This decrease of $0.22 in adjusted diluted EPS consists of the following.

Decreases of $0.35 due to lower revenues, $0.25 due to higher operating expenses, $0.12 from the combined effects of the operating results of the acquisitions and transactions expenses and $0.03 from a slightly higher recurring tax rate in 2013 compared to 2012. These decreases were partially offset by increases of $0.47 due to higher gross margin percentages, $0.04 due to lower shares outstanding and $0.02 due to lower net interest expense. The $0.12 of dilution from the acquisitions includes $0.17 of the amortization of the acquired profit in inventory and backlog as well as $0.15 of transaction costs offset partly by $0.20 of operating profit from the acquired companies. Also collectively included in all the categories I just mentioned was a favorable foreign exchange translation effect of $0.02 in 2013 compared to last year.

Now let’s turn to our cash flows, working capital and debt leverage starting on Slide 26. Operating cash flows from continuing operations were $9.2 million in the fourth quarter of 2013, a very solid result which contributed to an excellent performance for the year. For the full year 2013, operating cash flows were $39.9 million, an increase of $9.5 million or 31% over 2012. The 2013 operating cash flows were the second highest level ever achieved in our company’s history and we exceeded only by the record level of $43 million in 2009 when we experienced a significant reduction in working capital during the recession.

Slide #27 shows our free cash flow defined here as cash flows from continuing operations less CapEx for the past 10 years. As you can see free cash flow in 2013 was $34 million, up 28% over 2012. Going back to the quarter for a moment we had a number of notable non-operating uses of cash during the fourth quarter of 2013. The most significant of which was $50.9 million for the Carmanah acquisition. We also expended $2.1 million CapEx. We purchased $1.9 million of our common stock. And we paid a dividend of $0.125 per share or $1.4 million. The stock repurchases in the quarter represented 50,000 shares at an average price of $37.73 per share. During 2013, we returned $9.6 million of capital to our shareholders, $5.4 million from share repurchases and $4.2 million from dividends. This represents 41% of our net income from continuing operations in 2013 compared to 47% and 48% in 2012 and 2011 respectively.

Let’s now look at our key working capital metrics on Slide 29. As you can see, we did have some sequential deterioration in our days in inventory and DSO metrics in the fourth quarter of 2013. Compared to the fourth quarter of 2012, both DSO and AP days improve slightly offset by an increase of 9 days in our days in inventory. Looking at that overall working capital position, our cash conversion days calculated by taking days and receivables plus days and inventory and then subtracting days in accounts payable were 118 at the end of the fourth quarter of 2013, up 8 days and 6 days from the third quarter of 2013 and the fourth quarter of 2012 respectively.

Also working capital as a percentage of the last 12-month revenues was 16.6% in the fourth quarter of 2013, up 220 basis points sequentially and 270 basis points compared to the fourth quarter of 2012. Our net cash position decreased by $47.1 million in the fourth quarter of 2013 compared to the third quarter of 2013, including a use of cash of $51.3 million for acquisitions during the fourth quarter. Net cash that is cashless debt at the end of the fourth quarter of 2013 was $11.6 million compared to $58.7 million in the third quarter of 2013 and $47.7 million in the fourth quarter of 2012. As you may recall, we financed the Carmanah acquisition, which closed in November 2013 with approximately $24 million sourced from our existing cash balances and the remainder from borrowings under our revolving credit facility.

As you can see on Slide #32, our leverage ratio calculated as defined in our credit facility was 0.63 at the end of the fourth quarter of 2013. Under the credit facility, this ratio must be less than 3.5. Before concluding my remarks, I’d like to give you a few additional details in our earnings guidance. As we noted in the press release issued yesterday, in the first quarter of 2014, we expect GAAP diluted EPS of $0.38 to $0.40. For the full year, the expected GAAP diluted EPS is $2.60 to $2.70.

Looking at our quarterly EPS performance in 2014, we expect that the first quarter will be the weakest quarter of the year and that the remaining three quarters will be approximately equally strong. Note that the first quarter guidance includes $0.15 of dilution associated with the amortization of acquired profit in inventory and backlog. I should caution that there could be some choppiness and variability in our quarterly results due to a number of factors, not the least of which is the timing of revenue recognition on larger capital orders. We anticipate CapEx spending in 2014 will be approximately $9 million to $10 million. It includes a significant investment in our doctor blade business. And finally, due to the acquisitions we expect the depreciation and amortization will increase to approximately $11 million in 2014.

That concludes my review of the financials. And I will now turn the call back to the operator for our Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) It looks like our first question comes from Walter Liptak with Global Hunter.

Walter Liptak - Global Hunter

Hi, good morning guys.

Jon Painter

Hi, Walt.

Thomas O’Brien

Good morning, Walt.

Walter Liptak - Global Hunter

Congratulations on a good year especially the gross margin looked terrific. So, I want to ask on the gross margin guidance and maybe I missed this in your prepared remarks, you guided to 44% to 45% gross margin, which is going to be down a little bit year-over-year, what is that related to?

Thomas O’Brien

I would say, well, that’s pretty much in the range in our forecasting accuracy. So, we’re still in that 44% to 45% range that we talked about even in the last call. There’ll be a little bit more capital business, I think in 2014 versus 2013 particularly all come out as some capital business and also in our stock-prep business as well. But I think that’s about as close as we can get.

Walter Liptak - Global Hunter

Okay, I get it. So we shouldn’t really read anything into the range being down a little bit year-over-year when it’s all said and done it could be above that?

Thomas O’Brien

Historically we have been…

Jon Painter

44% or 45%, I think 2013 was an exceptional year for gross margin so, I would say it would be at the top of our normal range and what we’re saying for next year is more or like our typical range.

Walter Liptak - Global Hunter

Okay. I want to make sure, excuse me, I am understanding the guidance correctly so, you’re including the accretion from the Carmanah deal, but excluding any purchase accounting or any other special charge from that deal or anything else in that $2.60 to $2.70, is that right?

Thomas O’Brien

No, the $2.60 to $2.70 is the gap guidance so that includes everything, that includes all of the purchased accounting adjustments that we’ve been talking about the amortization of acquired profit inventory, backlog etcetera. But we are saying is that we’ve given you some guidance on that where we can in the sense that we think the most of that amortization will be – most of those amounts will be fully amortized in the first half of the year and we said that we expected about $0.15 of amortization from those items in the first quarter of 2014. And I would say that the number in the second quarter is up $0.04 or $0.05, it’s about $0.20 for the year. But the guidance includes those amounts, Walt.

Walter Liptak - Global Hunter

Okay, great. So when we look at your full year 2014, sorry, we would be looking at $2.60 to $2.70 plus for one to adjust and add back the purchase accounting?

Thomas O’Brien

Yes, I was just going to say that. That is exactly right.

Jon Painter

Excellent question.

Walter Liptak - Global Hunter

Okay, okay, thanks. And Jonathan, on your comments about Carmanah ordering in China, I think they have some initiative there, but part of the acquisition strategy was to leverage your global channel strategy or your channels. Are there synergies that are happening already for Carmanah?

Jon Painter

Yes, absolutely. China is a good example. So, our – one of our lead sales people in China with the group at Carmanah when they’re talking to customers, there is in fact some overlap in terms of customers at least know each other traveling the same circle so, yeah, we’re definitely it’s helping them as much, in the end they have to sell the product themselves obviously and the products speak for itself, but giving them some guidance about how business is done in China and that sort of thing is I believe our team on the ground in China has provided a big help to them.

Walter Liptak - Global Hunter

Okay, great. And I was hoping that we could just talk about some of the geographic regions and just get a little bit more color. A year ago I would have thought that China for example would have done a little bit better that they would have absorbed some of their capacity and starting to reinvest in new capacity. I think there were shutdowns that were happening related to pollution and it sounds like it’s still pretty soft. Is that economy related or how do you view the China market?

Jon Painter

Well, I can agree with you, Walt. I would have thought that they would – probably have a little more to pickup and probably most people did by now, but yeah, it’s still relatively weak and there is still dribbling in business, it’s not like there’s nothing. There is still some projects, but I would say there is still – an overhang continues to be there. I think the slowing economy is certainly reduced the – typically the economy grows into that overhang of capacity so that absorbing the capacity has been slowed by the slowing economy. That said, it’s still growing, we still have a big population moving to city and the per capita consumption is going to go up, but it has been slower in 2013 than probably in any year at least in the last several years.

Walter Liptak - Global Hunter

Okay. Then if we could switch back to North America, the bookings were up year-over-year, is Carmanah’s bookings included in that?

Jon Painter

Yes, they are and Carmanah has a heavy percentage in North America. North America is where a lot of the wood houses are so you’ll see going forward Carmanah will contribute a little more over way to the North American market than the other ones. I would…

Walter Liptak - Global Hunter

Okay, so…

Jon Painter

Kind of perspective, places like China are a growth market, a future market, but they don’t have a very good position there now.

Walter Liptak - Global Hunter

Okay. What were in North American core bookings if you take Carmanah out? Were they up or down? How did they look?

Jon Painter

I thought…

Thomas O’Brien

Carmanah’s bookings are about $6 million in the quarter.

Jon Painter

Yes, most of that were (indiscernible).

Walter Liptak - Global Hunter

Okay. In the North American market, if you could provide some color on what the outlook is there for 2014?

Jon Painter

Excellent, pretty good. I would say we’re pretty encouraged by our bookings so far this year. There is decent, this is in the big capital market. There is decent sort of flow business in really all the product lines. So, I feel best about North America than even anywhere in the world right now.

Walter Liptak - Global Hunter

Okay, great. And then last…

Jon Painter

North America, but stock-prep is $11 million and that’s slowed in North America.

Walter Liptak - Global Hunter

Okay. I want to ask about that too. The phone cracked a little bit, I think when you were doing your prepared remarks. Could you talk about what orders came in the first quarter, the $11 million?

Jon Painter

The biggest one of note is a stock-prep order of the $11 million for customer in Mexico. So, that’s one of these turn key stock-prep systems in Mexico. But I would say we have decent activity in South America also for stock-prep so, I would affect that we’ll see some activity there as well.

Walter Liptak - Global Hunter

Okay, good. And then last if we could just switch to Europe and sorry for asking so many questions. But the bookings look pretty stable there and I wonder if you could talk about what you’re seeing for 2014, any early order activity so far?

Jon Painter

Europe has historically been quite weak. I would say it’s improving modestly, maybe you couldn’t hear because of phone problems, but we talked about some orders in Turkey. We got a couple of stock-prep upgrades in Turkey around $2 million and we’ve also had some orders for drying systems in Russia about $1 million. I will say Russia, in other calls I talked about that it’s being an area of concern in the sense that we haven’t trouble – lot of our customers haven’t trouble getting financing that in 10 years as you know the rubles really falling and I’m sure that’s not making it easier. But in general, I would say Europe overall is a little bit better.

Walter Liptak - Global Hunter

Okay, great. Well, thanks for the color, guys, and we can do a follow-up probably I think for the rest of my questions.

Jon Painter

Okay, thanks, Walt.

Thomas O’Brien

Thanks, Walt.

Walter Liptak - Global Hunter

Okay, thanks.

Operator

Our next question comes from Rudy Hokanson with Barrington Research.

Rudy Hokanson - Barrington Research

Good morning. Nice job on the quarter. Question – a couple of questions, one, in the slide presentation, you showed that the cash cycle I believe had slowed down a bit and I was wondering if that was due to acquisitions being accounted for at the end of the quarter or if there’s anything going on in any of your geographies?

Thomas O’Brien

The one of the key numbers that I look at, Rudy is the overall working capital management and one of those numbers that I showed was our working capital as a percentage of the last 12 months revenue was 16.6%. That is – that was affected somewhat by Carmanah because the way that calculation is they were putting all of their working capital in the numerator and only two months of revenue in the denominator. But having said that, there was some deterioration in it, but I think all of those metrics you have to look at the trend is up here is not just one data point. So, the one I really keep my eye on is the days in inventory, that did come up a bit sequentially and so we’ll keep our eye on that one, but we know some of that’s being affected because we have a couple of larger stock-prep systems awaiting shipment, one of which comes to mind in our European operations. So, I’m not overly concerned with it. I still think the 16.6% is a very good performance and it’s a little bit high partly due to the acquisition of Carmanah, yes.

Rudy Hokanson - Barrington Research

Okay, thank you. And then again in terms of the mix, last year, you were pleasantly surprised at the improvement in margins in large part because of the mix and the amount of consumables, etcetera and parts that were being ordered. And now in the discussion, it’s – we’re hearing a lot more about bookings and capital equipment being ordered. I’m wondering if you’re seeing because of what was going on in the particular markets, the economies, or the nature of your sales efforts. If in 2014 and maybe this is part of the issue on your margins for 2014, are we going to be going back towards maybe a more historical mix? I know you’ve sort of implied this in various things you said, but I’m just wondering if you just maybe flush it out a bit. If that means that we can expect maybe more upside on the revenue side that it would be probably larger items, capital items?

Thomas O’Brien

Rudy, I think this fits best to how finely we can calibrate our guidance, but I would say that our mix will be probably in the range of where it was for 2013, maybe a little bit heavier in capital. But I think at this point, it’s really nothing significant in that. I think our margins guidance reflects pretty much where we’ve been, we were at record levels in 2013 will be low, but it’s still in a very, very solid range. And that could be impacted, for example, there is a $11 million order – pending order that Jon mentioned in Mexico, that won’t be at 45.8% margin unfortunately, but it will provide a lot of margin dollars in income. That would – if we get a few more of those that would tend to way in the margin percentage.

Jon Painter

Yeah, of course that’s about it. Of course, you lose it on the gross margins, but you more than make up for typically in the SG&A level so, in the bottom-line it’s good news.

Rudy Hokanson - Barrington Research

I was just wondering if you’re finding customers being more interested in or at least talking to your sales people about more capital investments right now than they may have before at least as far as an interest or inquiry level?

Jon Painter

I would say it’s probably likely more in Europe, it’s in the U.S., I would say no significant change particularly and in China it’s probably flat just slightly down.

Rudy Hokanson - Barrington Research

Okay.

Jon Painter

Sort of capital activity, yeah, maybe, maybe flat would be better term for China. China is a little bit of a wildcard.

Rudy Hokanson - Barrington Research

Okay. And then on your repurchase program right now, could you remind us how much you have remaining and also what – given your current balance sheet? What you would anticipate in terms of turning out the repurchase program anything in terms of timing or urgency, anything like that?

Thomas O’Brien

I think we have about a $20 million authorization that the board approved in early November of ’13 and I think you probably only used about million or so, $1 million or $2 million so, most of that left so, we say $18 million is left. And the way we’ve always approached that, we’ve been doing this for a number of years since we’ve been opportunistic and when we do our repurchases, I think the key point that we try to make during the earnings call of the fact that we returned almost $10 million of capital to our shareholders in 2013 with a combination of both the repurchases and the dividend program, which of course we instituted last year. So, we continue to return to shareholders 45% to 48% of our net income each year and I think that’s something that we’re not guaranteeing that year-after-year because there are other cash uses that sometimes will come up, but I think that’s generally the tone from the management here is to do that.

Rudy Hokanson - Barrington Research

Okay, thank you. Those are my questions.

Jon Painter

Alright, thank you, Rudy.

Operator

Our next question comes from Lawrence Stavitski with Sidoti & Company.

Lawrence Stavitski - Sidoti & Company

Hi guys. Congratulations on the quarter. Can you guys just get into the OSB market in China a little bit, I know Jon touched on it, but maybe in terms of growth rates and just a little bit more color on that?

Jon Painter

Sure. I mean, in terms of the offshore market I would say China is one of the more interesting one. There isn’t a lot of wood houses in China as you would expect. We have a lot of apartment buildings, but they need things like sub floor and they need – they also do a lot of things you wouldn’t think it’s a lot of panel board, but it is things like bed liners for containers. So, they do have a lot of need for panel. They don’t have big forests with big gigantic trees, but they do have smaller trees and one of the advantages of OSB is that actually can use trees when they are small, it doesn’t need big mature trees like plywood does. So, it’s a good market. They have very little production right now. So, talking percentage growth rates doesn’t make a lot of sense, but people talk about several OSB mills being constructed there over the next few years.

Lawrence Stavitski - Sidoti & Company

Okay, that’s helpful. Thanks. Now in terms of the acquisition front, you guys were pretty successful in ‘13. You continue to look in ‘14 and if so, would it be one of your current business segments or would it be something like a Carmanah where you’re going to go outside and look for kind of a little different spin on what your core business has been?

Jon Painter

So, I would say we’re continuing to look at acquisition sort of the same way we did in 2013. The ones with high synergies tend to have the highest returns like the paper ones I would call in – that we did last year. That Carmanah as well not that we have acquired it and I do book Carmanah’s end markets are growing faster than our pulp and paper markets for example. We have other industrial markets that are going pretty well than our pulp and paper markets, the OSB type market is growing faster so, yeah, we would love to do a more acquisitions in that space that fit well with Carmanah and we would look at acquisitions and those are areas just as we do in pulp and paper.

Lawrence Stavitski - Sidoti & Company

Okay, okay, great. And just the tax rate going forward for ‘14, do you see any kind of range of what it would be?

Thomas O’Brien

I would use somewhere in the range of 33%, that’s going to vary somewhat maybe perhaps quarter-by-quarter, but I would say for the overall for the year in that range.

Lawrence Stavitski - Sidoti & Company

32% you said?

Thomas O’Brien

32%.

Lawrence Stavitski - Sidoti & Company

Okay, great. Thanks guys.

Jon Painter

Alright, thank you.

Operator

It looks like there are no further questions in the queue.

Jon Painter - President and Chief Executive Officer

Alright, thanks, Azkaban. Let me conclude today’s call, what I think there are several key takeaway points. First, we had a solid year in 2013 with a new record for gross margin and new records for EBITDA. Second, our cash flow remained strong at $40 million and with the second highest achieved in our company’s history. Third, our parts and consumables business continues to grow increasing 13% over 2012 with margins up over 200 basis points. And finally, we’re expecting a record 2014 with revenues up 18% to 21% and diluted earnings per share from continuing operations of 26% to 30%. I look forward to updating you next quarter on our progress. Thanks very much for listening. Bye.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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