Pall Corporation F3Q10 (Qtr End 04/30/10) Earnings Call Transcript

Jun. 9.10 | About: Pall Corporation (PLL)

Pall Corporation (NYSE:PLL)

F3Q10 (Qtr End 04/30/10) Earnings Call

June 9, 2010 8:30 am ET

Executives

Eric Krasnoff – Chairman and CEO

Lisa McDermott – CFO and Treasurer

Analysts

Kevin Maczka – BB&T Capital Markets

Hamzah Mazari – Credit Suisse

Brian Drab – William Blair

Richard Eastman – Robert W. Baird

Tony Butler – Barclays Capital

Dan Leonard – First Analysis

Jon Wood – Jefferies

David Rose – Wedbush

Adam Brooks – Sidoti & Company LLC

Operator

Welcome to Pall Corporation's conference call and webcast for the third quarter of fiscal 2010. Today's call is being recorded and simultaneously webcast. Instructions for the question-and-answer session will be provided at the end of management’s prepared remarks. Right now, all lines are in listen-only mode.

We would like to remind you that the company's third quarter press release is available at www.pall.com. Management's remarks this morning will include forward-looking statements. Please refer to slide two or request a copy of the specific wording of this qualification of the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in slides at the end of the presentation.

At this time, I would turn the call over to Mr. Eric Krasnoff, Pall Corporation's Chairman and CEO. Please go ahead, sir.

Eric Krasnoff

Thank you very much and good morning. It’s a pleasure to share Pall’s third quarter results and fourth quarter outlook with you today, and thank you for joining us. I’m here this morning with Lisa McDermott, our Chief Financial Officer, and Frank Moschella, our Corporate Controller.

As you saw from last evening’s press release, Pall’s third quarter results were a solid step toward meeting our year-end guidance. We will review some of the details and drivers. We will also provide our outlook for the balance of fiscal 2010. And of course, there will be lots of time for your questions at the end.

Third quarter sales were $616 million, and this is an increase of 11% on an as-reported basis over last year and close to 6% in local currency. Life Sciences grew over 6% in local currency. Industrial turned the corner in the third quarter growing 5% and delivering the stronger second half that we expected. The spreading recovery in our industrial markets goes well for a good close for 2010 and for a solid 2011. This is a quarter of achievement in Pall Industrial, culminating in almost $57 million in profit in the quarter, 88% more than the operating profit in the second quarter.

Our Microelectronics business shifted into high gear with sales up 77% and orders equally strong. We also saw the recovery begin to spread in other industrial markets, with revenues up sharply in all three core markets that we are particularly hard hit by the recession. And they are, in addition to Microelectronics, Industrial Manufacturing and Transportation.

On a geographic basis, sales grew in both the Industrial and the Life Sciences segments in all three of our geographies. Overall growth in the Western Hemisphere and Asia was 7%, and sales in Europe increased 4%. Our focus on increasing productivity and reducing costs continues to show through, with gross margin increasing all year despite earlier pressure on the top-line. Increased volume and especially solid growth in our three highest margin markets provided lift in the quarter. We do expect the large fourth quarter for system shipments and for gross margins to come down a bit in response.

At the end of the second quarter, we reported that orders turned positive and were up almost 5%. Now in the third quarter, orders jumped up 27% overall. They were up sharply in all regions, including Europe, which was up 22%, the Western Hemisphere up 30%, and Asia orders up 32%. On the Industrial side of the business, orders increased 47% and reflects an increasing capacity utilization and investment by customers. Orders grew double digits in all Industrial submarkets except Aerospace.

Now let’s look at those markets in little more detail. The 6% local currency sales increase in Life Sciences was driven by BioPharm, which grew more than 12%. Sales were up in Life Sciences in all regions, led by the Western Hemisphere at 8%, Europe up 6%, and Asia up 5%. Many major drivers in BioPharm continue to be the increased production of filtration dependent biotech drugs and vaccines, including for H1N1, and expanding consumption of our single-use products.

The plasma market has slowed compared to last year, and that is reflected in our numbers. Even so, base business in BioPharm grew 13%, continuing the healthy double-digit trend reported all year; 15% in the second quarter, and if you remember, 16% up in the first quarter. Increasing adoption of some of Pall’s newer high value products continues to drive Life Science gross margins, which increased 330 basis points in the quarter. System sales were up 6% and are expected to be about 20% in Q4, which is an unusually high amount.

Within BioPharm, lab sales were strong. Some of this is restocking, but it also reflects the strengthening of the end markets worldwide. Consistent with our earlier guidance, our expectation for BioPharm sales growth is single-high digits for the year. Medical sales were down almost 2% in the quarter as for blood filter sales.

A reduction in blood transfusions, particularly in the US and UK, held growth down. This is the same situation as last quarter. Decreased demand for blood attributable to declines in areas such as elective surgery. We still grew in the Western Hemisphere albeit slightly in spite of the drop-off in blood collection. Sales in Asia continue to ramp up and represent the largest potential for our future growth.

Medical OEM sales in Europe grew 10% for the second quarter in a row due to increasing sales to some of the largest medical diagnostics and device manufacturers in the world. Sales in Asia were also strong. Approximately 30% of Medical sales in the quarter and nine months are from new products. These higher margin products continue to make Medical a key component of Life Sciences’ strong profit growth. We expect Medical sales to be about flat for the year, consistent with Q2 guidance.

I’ll switch gears and look at Pall Industrial. This business has returned to growth in the quarter, with sales up 5% in local currency. Sales were up in all regions, led by Asia up 7%, the Western Hemisphere increased 6%, and Europe at 2%. Microelectronics took off in the quarter, with sales up over 77%.

The recovery was broad in all regions and key segments of this diverse market from chip production for the OEM to supply the industry, consumer electronics such as flat panel displays and printers and to new opportunities including the emerging high bright LED market. Growth in MicroE [ph] shows no signs of abating based on our current order book, and we expect it to exceed earlier projections for the year, coming in a growth in excess of 15%. MicroE was clearly the lead dog pulling the Industrial sled in the quarter. We saw evidence the recovery is spreading.

I already covered orders in some detail, but it bears repeating. Orders in Industrial were up 47%, up double digits in every market except Aerospace. Orders are up 55% in our Energy, Water & Process Technologies group. This is the most systems intensive part of the business. So we would expect to see these orders ship over approximately the next 18 months.

Looking at the third quarter, sales in EWPT were down slightly and our expectation for the year is a mid-single digit decline. Power Generation and Industrial Manufacturing sales grew 11% and 21% respectively. Most of the growth in Power Gen came from Asia, now the largest region for us in this submarket, and in particular, from the fast-growing wind turbine market in China. Orders from the Western Hemisphere have almost doubled from the third quarter of last year and include orders for two new nuclear power plants planned in this country.

The growth in Industrial Manufacturing was robust in all regions and largely driven by the mining and mobile equipment industries and that had a positive impact on gross margin. Sales in Fuels and Chemicals, which is the largest of the EWPT markets, were down 8% in the quarter. The good news is that orders increased 84%. This includes a number of capital projects, including a $25 million order for a system going as refinery in the Middle East. And it also reflects increasing production in some restocking to support demand.

Sales in Food and Beverage decreased 4% in the quarter, as system sales were down sharply. This reflects a decreased capital spending from last year and in the first quarter of calendar year 2010. But there is also good news here. Base business was up almost 7%. This is the first quarter of growth in consumables for Food and Beverage in seven quarters (inaudible) increasing production levels. Q3 orders for both base and systems in Food and Beverage were strong.

Now, as we announced last evening, we are transferring our Food and Beverage into Life Sciences effective with this fourth quarter. The food and beverage market is being drawn ever closer to the biopharmaceuticals world. With growing requirements for testing to identify disease and spoilage organisms and a tightening regulatory environment focused on public health and manufacturing practices.

Now finally, we’ll round out our report on EWPT with units above water, where sales were down 13%. This is a customer timing issue. The backlog in this market is up 58% for the year and we are expecting a record fourth quarter. Orders are up over 200%. And we will note that some projects are being slowed down due to funding issues in Europe.

Finally, Aerospace and Transportation, which is tracking expectations, we expected a difficult year from the outset and difficult is the right description. The Commercial and Military submarket sales decreased 24% and 18% respectively. Airlines are under clear pressure from the economy, particularly the regional and private jet sectors.

Military aero was down with the deferral of military spending, particularly in the US, following an extended period of high growth. Our expectations for a difficult year were also predicated on tough 2009 comps, including about $25 million of sales in ’09 that are expected to repeat but not until 2011. The smaller Transportation submarket turned positive for the first time in over a year, with sales up 19%. Orders here were also strong this quarter.

And so in summary, Life Sciences continues to show its resiliency, several important industrial markets revived in the quarter, and we anticipate an industrial recovery began to spread across markets and regions. Improving business trends enabled Pall’s ongoing productivity and cost reduction programs to add leverage. The end result, a strong Q3.

And so with that, Lisa will now speak and review the financial details.

Lisa McDermott

Thank you, Eric, and good morning, everyone. Let’s review the financial results for the quarter and nine months, starting with earnings. Net earnings in the quarter were $69.7 million or $0.58 per share compared to $44.2 million or $0.37 per share last year. Earnings per share on a pro forma basis, as defined on slide 20, were also $0.58 compared to $0.42 per share, an increase of 38%.

In the nine months, net earnings were $186.3 million or $1.56 per share compared to $126.1 million or $1.05 per share last year. Earnings per share on a pro forma basis were $1.40 compared to $1.20 a year ago, an increase of almost 17%. The estimated impact of foreign currency translation increased earnings per share by $0.04 in the quarter and $0.10 for the nine months.

Now I’ll discuss the drivers of these results, which are displayed on slides 15 and 16. Sales increased almost 11% in the quarter and 3% in the nine months. Foreign currency translation added $28.6 million or 5% to our top line in the quarter and about $70 million or 4% in the nine months. This was primarily due to the dollar weakening against the euro, the British pound, and the Japanese yen.

Excluding this impact, sales increased almost 6% in the quarter and decreased about 1% in the nine months compared to the same periods in 2009. The impact of pricing was negligible in the quarter, as an improvement in Life Sciences was largely offset by a decline in the Industrial business. In the nine months, increased pricing contributed $7 million to sales overall, again attributable to an improvement in Life Sciences while pricing in Industrial was flat.

In our fourth quarter, we expect local currency sales growth of mid-single digits overall and from both businesses. With the euro at about 1.2 to the dollar, a 14% deterioration compared to the fourth quarter of 2009 and with about 30% of our sales derived from the Euro zone, we expect foreign currency translation to negatively impact the sales growth by approximately 3%.

Gross margins in the third quarter improved 340 basis points to 50.9%. So this is at about the midpoint of our 2013 goal. This result reflects continued upward momentum in both Life Sciences and in Industrial.

Let’s take a look at each of the businesses. Life Sciences gross margin continued its upward momentum of 330 basis points, reaching 56%. Key drivers of the improvement in gross margins continued this quarter. Favorable absorption of manufacturing overhead due to increased volume and the estimated benefit of cost savings initiatives, including improved deficiency and manufacturing operations that outpaced inflation, contributed approximately 200 to 230 basis points in margin.

Increase in pricing in biopharmaceuticals market as well as the benefit of sales channel changes from distribution to direct contributed an estimated 40 basis points in margin and finally mixed as estimated to have increased gross margin by about 50 basis points, primarily driven by growth in higher margin pharma consumable sales.

Looking to the fourth quarter, we expect continued year-over-year improvement in Life Sciences gross margin, given the sustainability of cost reductions. As expected, Life Sciences gross margins in the second half are coming in lower than the first half as capital sale at lower margins has a downward impact, turning a cornerstone with Industrial gross margin, which increased 340 basis points to 47.1% in the quarter.

Key drivers of the improvement in gross margin in the quarter were volume increases driven by sales growth, particularly in Microelectronics and the beneficial impact attended to this mix change, increasing gross margin by approximately 260 to 280 basis points and the estimated benefit of cost savings, net of inflation from Pall Industrial’s manufacturing operations, which contributed an estimated 80 to 100 basis points in margin.

In the fourth quarter, we also expect Industrial gross margin to decrease sequentially, given an expected increase in system sales. So full year gross margin on a consolidated basis is now expected to exceed the high end of our full year estimate of 49%.

SG&A, including corporate expenses, increased 11% compared to the third quarter of fiscal year 2009. Excluding the estimated impact of foreign exchange, which increased SG&A by about $8 million, the increase was 6%. This increase reflects the impact of strategic and infrastructure investments we’ve been making to position Pall to achieve our longer term top and bottom line targets.

They include cost of the European consolidation in Switzerland, investments in information technology, geographic expansion in the Middle East and North Africa, Latin America and Asia, and cost associated with the acquisition of a biotechnology company and certain distribution rights. Approximately half or 3% of the increase in SG&A in the quarter relates to these investments, with the remainder attributable to inflationary items, partly offset by cost reductions. Compared to our second quarter, SG&A spend was flat, dropping to 30.4% of sales from 33.4%. We expect full year SG&A to be at about 31% of sales.

Segment profit margins grew by 280 basis points to 19.5% in the quarter compared to 16.7% in the third quarter of last year, driven by improvements in both Life Sciences and Industrial operating margins. For the nine months, segment profit margins were 17.5% compared to 16.4%, as improvement in Life Sciences was partly offset by a decrease in Industrial.

Consolidated operating margin in the quarter rose to 17.4%. This represents the highest achievement, spanning a number of years. For the nine months, consolidated operating margin was 15.2% compared to 13.8% last year.

Turning to income taxes, the effective tax rate or as reported rate for the nine months was 25.2%, reflecting a $16 million benefit related to the resolution of foreign tax audits this year. Excluding these discrete items, the underlying tax rate for the nine months was about 31%.

Net interest expense in the nine months reflects the benefit of reversing interest accrued of approximately $11 million, primarily related to the tax audits I just mentioned. Excluding these items, net interest expense has decreased by almost $5 million, primarily attributable to the repayment of higher rate foreign debt last year and the impact of lowered interest rates.

Turning now to cash flows and liquidity, operating cash flow in the nine months was about $257 million. This is compared to about $155 million last year, an increase of over $100 million or about 66%. It reflects the increase in net earnings, including reduced outlays for interest on indebtedness and reduced investments in inventories and improvement in receivables and payables. We have realized a reduction of 24 days in our full cash conversion cycle.

Significant uses of cash during the nine months included $93.5 million in capital spending; $53 million in dividends to shareholders, a 10% increase year-over-year; $36 million to repurchase the company’s common stock; and about $18.5 million for the acquisition of a biotechnology company and for certain distribution rights. Our cash position was $484 million at April 30, and our net debt to net debt plus equity stood at 16.6%, down from 21.4% at July 31, 2009.

Looking at fourth quarter earnings expectations, we expect foreign exchange to negatively impact earnings per share by about $0.03. Including this, our updated estimate is a $0.07 full year benefit from foreign exchange, down $0.02 from our previous estimate. That said, we now expect full year earnings per share to be at the high end of the range of our previous guidance of $1.95 to $2.05, excluding discrete items.

I’ll close by saying that we are pleased with our results this quarter. We see this successful execution on key initiatives clearly showing through in our results from the top-line to the bottom line and in cash generation.

Thank you for your attention this morning. And with that, I’ll hand this back to Eric.

Eric Krasnoff

Thank you very much, Lisa. And now with the help of our conference operator, we will take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Kevin Maczka with BB&T Capital Markets.

Eric Krasnoff

Kevin?

Kevin Maczka – BB&T Capital Markets

Can you hear me okay?

Eric Krasnoff

Just fine.

Kevin Maczka – BB&T Capital Markets

All right. Great. Good morning. Eric, I guess my first question, my only question, in terms of Industrial, the orders were impressive. I think you made the comment that you see no signs of the strength abating in Microelectronics. I’m just wondering in terms of visibility in general in that space, can you comment maybe on some of the other sub-segments? And do you see the encouraging trends as sustainable?

Eric Krasnoff

Well, borrowing some financial calamity, as we saw a couple of years ago, I think we have very good view into the sustainability of the recovery. A lot of the orders that we have in are for capital investment to expand capacity for our customers in these key markets as well as to build new plants. So I think it’s here to stay.

Kevin Maczka – BB&T Capital Markets

And maybe in terms of my follow-up, how about on the Life Sciences side? Is there anything unique happening there in terms of maybe the timing of various drugs hitting the market or what have you that may cause a bit of a blip either up or down in that space over the next few quarters?

Eric Krasnoff

I think it was – because of the timing issue, we’ll probably see a little bit of an abatement in the BioPharmaceutical growth from double-digit to more of a mid-single digit for a couple of quarters. And that relates more to some major sales that don’t repeat on an annual cycle that we saw in the last year. But beyond that, the trends are all positive. The more drugs that are manufactured and the higher their volumes, the better it is for our business. And that trend is ongoing.

Kevin Maczka – BB&T Capital Markets

Okay. And that’s not related to any kind of market share loss of any kind?

Eric Krasnoff

No, absolutely not.

Kevin Maczka – BB&T Capital Markets

Okay. I’ll get back in line. Thank you.

Eric Krasnoff

Thanks, Kevin.

Operator

Your next question is from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari – Credit Suisse

Thank you. Just a question on your European exposure. How should investors be thinking about your euro-denominated revenue and your cost base there? And any fallout from any fiscal issues in Europe and how that impacts you? Maybe talk about your customer base there. Are they selling outside of Europe? How should we view all that?

Eric Krasnoff

I’ll handle maybe the second half and let Lisa to handle the first half of the question. We are not in any consumer market directly. So our products tend to be used in a, if not non-discretionary, you know, mostly non-discretionary way; the healthcare, production of energy, water, et cetera. So, as long as the level of basic manufacturing remains reasonably solid in Europe, the impact on us is minimal from a customer point of view. Lisa, do you want to talk about currency or cash flow?

Lisa McDermott

Well, I’ll add boldly that in terms of the manufacturing question, most of what’s sold in Europe is – much of what’s sold in Europe is manufactured in Europe. In terms of exposure to the, I’ll say, the harder hit countries that we’re reading about in the newspaper everyday, that represents no more than 5% of Pall total sales on an annual basis. So when we look at orders, orders were good in the quarter in Europe; orders were good in May in Europe. So going back to Eric – circling back to what Eric has said, so far we see improving trend in Europe.

Hamzah Mazari – Credit Suisse

Okay. And then just a follow-up question. Can you talk about how much of their demand pickup that you are seeing is due to restocking versus underlying organic pickup? What are your customers saying there? What are you seeing?

Eric Krasnoff

The vast majority is due to increased production level and for adding on capacity. I think we mentioned that some restocking in the lab business and probably a little bit on the shelves of our other customers, but that’s – it's not really quantifiable. And in terms of the future orders trend, that would allow us – let us make the judgment that it’s not a one-time restocking effect in the quarter.

Hamzah Mazari – Credit Suisse

Okay, great. Thank you very much. Appreciate it.

Operator

Your next question is from the line of Brian Drab with William Blair.

Brian Drab – William Blair

Good morning.

Eric Krasnoff

Good morning.

Brian Drab – William Blair

First question, it look like – given the strong outperformance in the third quarter and taking that into account with your guidance of being at the high end of the previous range, it looks like you might be a little conservative for the fourth quarter. I’m wondering – is there anything else going on besides those things you discussed today in the fourth quarter and outside currency that would make you conservative going into the fourth quarter?

Lisa McDermott

A couple of things. Number one, a significant part of our sales, book-of-business in the fourth quarter will be systems. So we do expect to see the margin tweak a bit as a result of that. Eric already mentioned that, in our fourth quarter, we’re not necessarily expecting the kind of double-digit growth that we’ve been seeing for many, many quarters now in forma. So we think our guidance is prudent, and essentially with foreign exchange now having taken earnings down by $0.03 whereas in our prior guidance it was estimated to be neutral for the fourth quarter. Taking it to the high end, we’ve to some extent raised our guidance.

Brian Drab – William Blair

All right. Okay. Thank you. And then just one more question, have you seen any material change in the competitive dynamics given Merck’s acquisition of Millipore?

Eric Krasnoff

No, not yet.

Brian Drab – William Blair

And would you expect any – are you expecting to see any changes and how would you deal with that?

Eric Krasnoff

I would expect that anytime there is an acquisition, there tends to be some disruption in the focus of the company. I also don’t believe that Merck’s competitors would want to have – provide them with full access to all of their biotechnology drug pipeline and their most intimate secrets in drug production. So we may see some dissection of the business from Millipore to fall for that reason.

Brian Drab – William Blair

Okay, thank you.

Operator

Your next question is from the line of Richard Eastman with Robert W. Baird.

Richard Eastman – Robert W. Baird

Hi, very nice quarter. In terms of the two pieces of the business, if you split it by consumables and systems, could you possibly give us the growth rate in consumables and systems year-over-year in local currency? Is that –?

Lisa McDermott

Sure. The overall for Pall, the growth rate in consumables is about 8.5% and systems in the quarter were down about 14%.

Richard Eastman – Robert W. Baird

Okay. And then we would expect a big systems fourth quarter, kind of given the backlog. And just one additional question, on the systems side of the business, are we seeing any slant there in terms of orders either towards Industrial or towards the BioPharm business? That order growth number seemed pretty significant, but is it slanted towards the Industrial side of the business?

Lisa McDermott

Actually, in this particular quarter, the orders were certainly slanted towards Industrial. Large order growth in systems, in fuels and chemicals, power gen, municipal water orders grew hugely.

Richard Eastman – Robert W. Baird

Okay. Okay.

Eric Krasnoff

I don’t think – you can’t read too much into that because of the size of some of the Industrial orders are so large.

Lisa McDermott

Many of these orders, we will expect, as Eric mentioned in his remarks, to convert to revenue over the next year or year-and-a-half. Although that said, we are expecting our systems business to be up significantly compared to our third quarter.

Richard Eastman – Robert W. Baird

Okay. And then just lastly, Eric, on the Medical side of the business, I think you had mentioned the blood was off about that average, so maybe it’s off 2% or so. Lab sales were strong. Is there – what should we be focusing on the Medical side as we look out to fiscal ’11 for growth?

Eric Krasnoff

I think on the blood side of the Medical, it’s definitely the newer products that are catching on, including the products of using random donor platelets in place of – for these platelets. On the clinical care side of the business, the increasing concerns and increasing penalties for hospitals that sicken their patients. So hospital-acquired infection related products, and we expect it to grow. And then I would look at Asia. Asia is certainly well under-penetrated for medical products, not just for Pall but for device manufacturers in general. So we should see our highest growth rates there.

Richard Eastman – Robert W. Baird

Okay. Okay, thank you.

Operator

Your next question is from the line of Tony Butler of Barclays Capital.

Tony Butler – Barclays Capital

Thanks very much. Eric, you mentioned that the plasma market was down. This is back to Medical and BioPharm, and is that temporary or –? And back to the previous question, as you think through Q4 and into 2011, is that – do you see that kicking up even though you didn’t mention it in your comments around the Medical side?

Eric Krasnoff

Plasma business is notoriously cyclical. So we would see it picking up, probably middle of 2011 would be my guess.

Tony Butler – Barclays Capital

Thank you for that. And then the second issue, and forgive me if you’ve said it, is the system sales as a percent of total revenue in this quarter, do you have that, Lisa? And then the second question really is – I’m struggling with the conversion rate of orders into revenue, especially in EWP and A&T where you’ve just got phenomenal net number of orders. It just strikes me that the Industrial part of your business is – quite frankly, we are struggling with seeing how it doesn’t outperform the top-line. Margins may be a little bit of an issue, but outperform on the top-line for the next several quarters given this overall order rate. I’d love some comment there. Thanks.

Lisa McDermott

Well, to your first question, systems in the quarter were about 10.5% percent of total sales compared to 13% last year. In terms of outperforming, there is a number of different dynamics going on here. Clearly, the orders are strong in the Industrial business in both consumables and base – consumables and systems, and systems have much longer lead time. So we wouldn’t necessarily expect those orders to convert and drive sales growth in the fourth quarter – the sales we will see in the fourth quarter from previous backlog. In terms of the consumables, we do expect in the fourth quarter a significant growth again from Microelectronics. We expect that even in the consumables for EWPT that a lot of that order book is longer term, made to order items. So, not necessarily fourth quarter items. And then we expect Aerospace in the fourth quarter to continue to be down double digits.

Tony Butler – Barclays Capital

Yes. Thanks, Lisa.

Operator

Your next question is from the line of Dan Leonard with First Analysis.

Dan Leonard – First Analysis

Thank you. Eric, you mentioned in your prepared remarks that you are already seeing some weakness in municipal water in Europe as a result of government funding. Can you give us some flavor of how much of your revenue, whether it be from muni water or laboratory products in government run labs? How much of your revenue would be directly tied to European government funding?

Eric Krasnoff

Most of our lab business is more in the manufacturing quality control lab sector, not as much as in basic research or in national health systems. So the major areas where we would be impacted would be in the – as I mentioned, in municipal water for Europe, and that’s a much smaller part of our total. Most of our water business is in the US and some in Asia. The other area that might be affected might be, say, military spending Europe, but again I don’t think that the six countries now that are being particularly discussed are major consumers of military products.

Dan Leonard – First Analysis

Okay, thank you. And then for my follow-up, could you give me an update on maybe what inning you are in as far as your pricing efforts go? I believe that was a new effort for you guys around late 2008, and it seems like the momentum has slowed down a bit.

Eric Krasnoff

The pricing initiative is fully deployed now. All of our people around the world have been framed. And it’s just an ongoing effort of slogging through and trying to get the best pricing we can in each market. When we talk about price, the formula we use is comparing part numbers. And that can be a bit misleading. So for instance, in Asia, with the ramp-up in sales to very large volume OEM customers, they may receive a lower price, say, than a smaller end user. So the same part number while we may actually beginning price increases would not show up that way in the formula. So I think we need to take a broader trend look at those pricing increases rather than just a quarter-by-quarter.

Dan Leonard – First Analysis

Okay, thank you.

Operator

Your next question is from the line of Jon Wood of Jefferies.

Jon Wood – Jefferies

Hey, thanks, good morning. Hey, Lisa, did – it looks like you are tracking pretty much above the top end of your cash flow range? I mean, is it safe to say that the top end of that prior guidance range on cash flow is reasonable at this point for the year?

Lisa McDermott

Yes. It’s a good observation we are tracking towards the top end. My previous guidance was operating cash flow of $320 million to $350 million based upon our latest look as well as the achievement – significant achievement that we’ve done with respect to improving working capital. I would say that we are more in the $340 million to $360 million, $365 million range of operating cash flow for the year now.

Jon Wood – Jefferies

Okay, great. And then I think you talked about repurchases of $50 million to $75 million. Is that still relevant for 2010?

Lisa McDermott

Yes. Through to – to date, we have purchased $50 million, although as of the end of the quarter, that number was $36 million.

Jon Wood – Jefferies

Okay. And then one last one for Eric, you talked about the BioPharm business going back to around the mid-single digit trajectory in the next couple quarters. Is that mostly a function of an H1N1 comp or is there specific ordering fluctuations like going on in the protein markets that are driving that?

Eric Krasnoff

It relates to comps and more on the virus filtration area and some (inaudible), which can get some very large orders that are not repeating on an annual basis in this business.

Jon Wood – Jefferies

But it’s – is it therapeutic vaccines or the H1N1 situation?

Eric Krasnoff

No, it’s not tied necessarily to H1N1, but I would also say that we are talking, you know, long-term this is a high-single digit performer. We’re just talking about the next couple of quarters.

Jon Wood – Jefferies

Okay, great. Thanks a lot.

Eric Krasnoff

Thanks.

Operator

(Operator instructions) Your next question is from the line of David Rose of Wedbush.

David Rose – Wedbush

Good morning. I was hoping you can give a little bit more clarity on the Microelectronics business. With respect to the orders, are there any particular large orders that we saw in the order or sales that we saw in the quarter, and are there expectations from the large orders in the fourth quarter from one particular client?

Eric Krasnoff

No. The business is very, very nicely spread out. It’s literally every chip manufacturer, every tool manufacturer out there, as well as very broad in the consumer electronics segment. So –

David Rose – Wedbush

How much geographically?

Eric Krasnoff

I’d say – we have to take one area that would jump out. It might be the inkjet printing as an area. But things both geographically as well as in terms of market application, Asia is 70% of our sales. Obviously there is the largest component of the increase.

David Rose – Wedbush

So if you were to have any concern of the fourth quarter or the subsequent quarters in the next year with respect to risk, would you say that Asia is sort of your – is high in your list in terms of market risk?

Eric Krasnoff

I’d be more worried about Europe at this point than Asia.

David Rose – Wedbush

But for Microelectronics, you have very little exposure to Europe. Is that fair?

Eric Krasnoff

Yes, about 10% of our MicroE sales.

David Rose – Wedbush

Okay.

Eric Krasnoff

I thought you’re asking the question more broadly than just MicroE. Yes, for MicroE, it certainly would be the major Asian countries.

David Rose – Wedbush

Okay. And then, I’m sorry, last question is, as far as water is concerned, how much of your water business is regulatory driven in the US and internationally?

Eric Krasnoff

That’s hard to respond because so many water districts are out of compliance and so many regulations in the US are not enforced. So I would say that the – certainly having strong regulation is the impetus for those water districts that choose to be in compliance, and it will increasingly become more of a pressure as regulations are tightened and as we see now that there is more of a federal will towards enforcement in the US and a greater regulation being promulgated in Europe and definitely in places like China.

David Rose – Wedbush

The orders that we are seeing, are they primarily driven by long-term too?

Eric Krasnoff

Could you restate that?

David Rose – Wedbush

Are the orders that we are seeing in the US municipal business driven primarily by long-term too? Are they driven by stage-two DDT? Do you have any gauge on that?

Eric Krasnoff

It’s generally driven by microbiological contamination levels in local water supplies that need remediation. That’s the major driver of the more traditional regulations.

David Rose – Wedbush

Okay, great. Thank you.

Eric Krasnoff

Thank you.

Operator

Your next question is from the line of Adam Brooks with Sidoti & Company LLC.

Adam Brooks – Sidoti & Company LLC

Yes. Just two quick questions. Have you noticed any change I guess in the competitive environment, Aerospace, since that Donaldson’s acquisition of Western Filter?

Eric Krasnoff

No.

Adam Brooks – Sidoti & Company LLC

Fair enough. And then looking at MicroE, could you maybe break down the performance I guess of consumer over semiconductor and where you see that I guess in 4Q and maybe beyond that?

Lisa McDermott

I think that – broadly speaking, I don’t have exact numbers that they both grew by significant double digits. There was significant growth in both the OEM side for semicon as well as chip manufacturers and on the consumer electronics side. Don’t know the exact numbers for the split.

Adam Brooks – Sidoti & Company LLC

All right. And lastly, on the BioPharm, could you maybe talk about how the single use processing technologies are coming along and maybe what growth is like in the quarter?

Eric Krasnoff

Good. Definitely single-use processing for biotech continues to grow at double-digit rate. We are continuing to expand our product line in that area. And I think that’s going to be a long-term product as we see the shift from, if you will, hard wire, hard type production plans into these more flexible micro environment single-use disposable process and technologies.

Adam Brooks – Sidoti & Company LLC

Okay, thank you.

Operator

We have no further questions at this time. I would now like to turn the call back over to Eric Krasnoff for any closing remarks.

Eric Krasnoff

Thank you very much. We appreciate your participation today and sharing the results of the quarter with your. I’d like you to put September 14th and 15th on your calendars for our Q4 and year-end results. We are going to release on the 14th after the market closes and our conference call will be on the 15th at 8:30 AM. And we look forward to sharing the year-end with you then. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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