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Kadant Inc. (NYSE:KAI)

Q3 2010 Earnings Call

October 28, 2010 11:00 am ET

Executives

Thomas O’Brien - EVP & CFO

Jon Painter - President & CEO

Analysts

Walt Liptak - Barrington Research

Eric Prouty - Canaccord

Rick Hoss - Roth Capital

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Kadant Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Thomas O’Brien, Chief Financial Officer of Kadant. Please go ahead, sir.

Thomas O’Brien

Well, thank you operator and good morning everyone and welcome to Kadant’s third quarter 2010 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read the 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 discussed in our quarterly reports on Form 10-Q for the fiscal period ended July 3, 2010, which is on file with the SEC, and is also available in the investor section of our website at www.kadant.com under the heading SEC Filings.

In addition, any forward-looking statements we make on this call 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 call, we may refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release issued yesterday, which is available in the investor section of our website at www.kadant.com under the heading Investor News.

With that, I 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 the Q&A session. Jon?

Jon Painter

Thanks, Tom. Good morning everyone. It’s my pleasure to give you an update on Kadant’s third quarter performance and comment on our outlook for the rest of the year. I would like to begin my remarks with the financial highlights from our continuing operations and then I’ll provide you an overview of what we’re seeing in our markets around the world.

Overall, we had very good performance in the third quarter. Our revenue of $67 million was up 24% from the third quarter of last year, and on a sequential basis our revenues were down 4% from Q2. All major product lines experienced sequential revenue declines in Q3 except for our fluid handling line, which was up 8% compared to the previous quarter.

Our bookings for the third quarter was $58 million, a decrease of 6% compared to the same period last year, and 21% sequentially. This was largely due to lower bookings of our stock capital products. Although, the slowing of the economy has had some impact on our third quarter bookings, I believe the timing of capital orders had the greatest impact as several large stock prep orders slipped into the fourth quarter. Consequently, we do expect higher sequential bookings in Q4.

Our parts and consumable bookings in the third quarter were up 22% from Q3 of 2009 and were essentially unchanged from the second quarter of 2010, as machine operating rates remained high throughout the quarter. I’ll provide more details on bookings when I discuss our business activities in the various geographic regions we serve.

Our gross margins in Q3 were a very strong 44% particularly when compared to our historical pre-recession gross margins, which were in the 40% range. Looking ahead, we do expect that margins will decline somewhat from current levels and they will vary from quarter-to-quarter due to various factors such as product mix between higher margin parts and consumables and capital. That said, I believe the restructuring actions we took in 2008 and 2009 will in general result in higher average gross margins than we had prior to the recession.

Our adjusted diluted earnings per share for the third quarter was $0.30 compared to our guidance of $0.21 to $0.23. The higher-than-expected earnings per share was [partly] the result of strong margin performance, which I just talked about, and the increased sales of our fluid handling and stock prep products.

We also had another solid quarter of cash flows from operation and generated $6 million in the third quarter. This performance resulted in strengthening our net cash position at the end of Q3 to $27 million. And finally, during the quarter we repurchased 255,500 shares of stock on an average price of $17.25 for total cost of approximately $4.4 million.

Next, let me take a few minutes to review what we’re seeing in the marketplace. Overall, the market seems to be softening from the relatively strong pace of earlier this year. This has primarily impacted our capital business while our spares and consumables business has been relatively stable. Encouragingly, we do see a lot of capital projects activity in most regions of the world with several projects in the pipeline that should be booked before the year-end.

While our mill operating rates remained high in the third quarter across most grades, manufacturing activity is beginning to slow in North America and Europe and consequently demand for line of orders beginning to weaken. In addition, to sustain high level of white-collar unemployment along with reduced print and advertisement expenditures has impacted demand from printing and writing papers. As a result, we see rising inventory levels in some grades, although in general, levels are relatively low by [our] historical standards. We also see evidence of reduced pricing power of the paper producers. On the pricing front, prices for recovered paper pulp and most grades of paper are showing some signs of softening in most regions of the world after significant price increases earlier this year.

Needless to say the outlook for the paper industry in North America and Europe is dependent on the pace of economic recovery, which is slowing but so for not stalling. Most industry observers are going for fairly stable production and operating rates in a short and medium term. However, unless we see some pickup in end user demand for paper and board products in North America and Europe, there is a risk that operating rates in paper production will level off or decline in those regions.

The picture is considerably wider in the developing world, particularly in China. In China, we continue to see strong business activity since the economic recovery took hold. Some of you may have read that the government in China announced the closure of small inefficient and polluting mills that are currently producing some 4.6 million tons of paper. This type of action is positive for Kadant as this times will move from older mills that are using outdated papermaking technology for larger modern mills who are more likely to be our customers. Another indication of the growth potential in China is the recent announcement by Chinese paper producers of capacity expansions in containerboard and other paper grades.

Taking a closer look at how our business fared in the geographic regions we serve. In North America, bookings were up 10% in the third quarter of last year while on a sequential basis decreased 9%. The sequential decrease in bookings was driven entirely by the decline in capital business. Our parts and consumable business in North America remained at relatively healthy levels due impart to high mill operating rates.

Parts and consumable bookings in North America were essentially unchanged from the previous quarter and up 11% compared to the same period in 2009. As this is the case in other regions in the world, we are seeing capital projects in the pipeline and while we anticipate an increase in the number of capital projects in the fourth quarter, particularly in our stock prep product line. In fact, we’re off to a good start already with two capital equipment orders booked in North America in October for approximately $2 million.

In Europe, the overall economic condition is similar to the U.S. Bookings from our European operations, which sell in the territories inside and outside of Europe, were down 13% compared to a relatively strong third quarter in 2009, and were down 19% sequentially from the second quarter. As was the case in North America, the sequential decline was all due to reduced capital bookings.

Parts and consumable bookings in Europe were up 3% sequentially from second quarter, and up 32% compared to the same period in 2009. Capital bookings were sequentially down in all of our product lines except fluid handling, which had strong bookings driven by capital projects in Scandinavia and Germany. The most significant decline in capital orders was in our stock prep product line and as was the case in North America, timing of orders as well as the slowing economy affected our bookings levels. For example, we were awarded a $2.3 million project for a de-ink line in Russia in the third quarter, but we did not record this as a booking until we received the down payment in the fourth quarter. In addition, we just received over last week that our fluid handling business in Europe book to dryer systems to be installed in India for a combined value of approximately $750,000. As this the case in North America the pipeline for capital orders from our European businesses, particularly our stock preparation [equipment] business is fairly promising.

While business activity in China remains good, our third quarter bookings in China were quite weak, down 57% from Q2 and 41% from the third quarter of 2009 despite good bookings in our fluid handling and water management product lines which more than doubled compared to the same period last year.

Our parts and consumable bookings had a sequential decline of 20% from Q2 to primarily for a stock prep product line, but an increase of 51% compared to the same period last year. Similar to other regions, the largest decline in our bookings in China was in stock prep product lines. As I mentioned earlier, I think this is largely due to the timing of orders rather than slowdown in the region. We have a higher level of capital project activity in our stock prep product line and expect the fourth quarter to show relatively strong bookings levels.

Supporting our expectations of a rebound in booking in China, so far in the fourth quarter we booked an order for a stock prep system valued at $1 million and signed to major contracts in China for our stock prep equipment valued at approximately $14 million. We expect to receive the down payment for the two pending orders before the end of the year, at which time those orders will be recorded as bookings.

And finally, in Latin America we continue to see positive growth trends in the marketplace and this in turn is generating increased opportunities for us, particularly with our stock prep and fluid handling lines. In Brazil, for example, we booked an order for stock prep system for a complete de-inking line valued at $2.9 million and several fluid handling equipment orders for a combined value of $500,000.

Before concluding my remarks this morning, I wanted to share with you news about a small but strategic acquisition. On our last call I talked about a small acquisition of a screen basket and dewatering business that extended the product offering of our stock prep product line. This month we completed another acquisition for small net investments, which we believe will further enhance the market position for our fluid handling business. We acquired [Tecmo] Systems, a leading supplier of steam systems and control software for the paper machine and dryer [sections] with historical annual revenues of approximately $2 million.

We have worked with Tecmo Systems for many years and they have a highly regarded dryer management system that is widely used in Southern Europe. The addition of this product line to our business will both increase our fluid handling systems business as well as the sale of our fluid handling products.

In summary, while China and the developing world continue to grow at a good pace, we see a strong recovery in North America and Europe. Our challenge is to continue to grow our business in this environment. We tend to do this by continuing to implement the growth initiatives that I had outlined in previous calls including focusing on higher growth in emerging markets, increasing our market share in regions where we are weak, expanding our parts and consumables business and shifting manufacturing to low cost areas. In addition, we continue to actively look for acquisitions that fit our business model. We are making good progress in these initiatives and I’m confident that we would be able to successfully grow our business in this environment.

Now onto our guidance. As I commented in our July call, we continue to expect a weaker second half of 2010 as the momentum of the economic recovery in North America and Europe decelerates and our gross margins come down a bit. For the fourth quarter of 2010 we expect to report GAAP diluted earnings per share of $0.26 to $0.28 from our continuing operations and revenues of 64 to $66 million. For the full year raising both our revenue and earnings per share guidance, we now expect to achieve GAAP diluted earnings per share of a $1.33 to $1.35 from continuing operations on revenues of 261 to $263 million.

Now I’ll turn the call over to Tom for a more detailed review of the financials. Tom?

Thomas O’Brien

Thank you, John. I’ll start with a review of our revenue performance. Consolidated revenues were 66.5 million in the third quarter of 2010, 24% higher than last year including a 3% unfavorable effect from foreign exchange [calculation]. Revenue results exceeded the high end of our guidance for the quarter, which was 62 million, largely due to higher revenues in our fluid handling and start prep product lines.

Comparing to a relatively weak quarter last year, revenues in all our major product lines in the paper making equipment segment were higher than the third quarter of 2009. In fact, three of our product lines are quite significant increases compared to last year. While our management revenues increased 54% including 2% of unfavorable foreign exchange, fluid handling revenues were up 37% including 3% of unfavorable exchange, and stock prep revenues increased 21% including 4% of unfavorable foreign exchange translation.

Accessories revenues were also up versus last year, but at a more modest 3% growth including 2% of unfavorable exchange. Revenues in this product line continue to generate impressive percentage increases in China (Inaudible) smaller as good amounts. Accessories revenues in Europe were down 3% including 10% of unfavorable exchange, and North American revenues were up 4% including 1% of favorable exchange.

Interestingly, this product line has a higher proportion of consumable products than our other product lines and the slowing growth rates in both bookings and revenues in the developed markets suggest a possible leveling off in our broader parts and consumables business over the next few quarters. These sequential results enforces the theory that a slowdown in market activity maybe underway.

Revenues in all the major product lines in the paper segment were lower compared to the second quarter of 2010 with the normal exception of fluid handling revenues, which increased 8%. Encouragingly, the increase in fluid handling revenues was broadly based in all our major geographic territories showing sequential increases with the exception of North America.

You can see more details of our product line revenue results and the comparisons to last year, that hold the comparisons to the second quarter of 2010 in the schedule attached to the press release that we issued yesterday.

Now, looking at our revenues in our major geographic territories in the papermaking segment; our North America operations which had led the revenue upturn in the past few quarters is now lagging the growth rates in our other territories. Although all the territories are up compared to last year, it’s relatively low revenue results. On a sequential basis North America decreased 15% compared to the second quarter of 2010 and European revenues were up 3%. China on the other hand had strong sequential growth with revenues of 10.9 million increased 28% over the second quarter of 2010, largely due to higher sales in the stock prep and fluid handling product lines.

Entirely taking a look at our revenue performance from another perspectives and following up on my earlier comments, our parts and consumables revenues were 38.8 million in the third quarter of 2010, essentially flat on a sequential basis, up 16% higher than last year’s third quarter. Parts and consumables revenue were 59% of our total revenues in the papermaking systems segment in the quarter of 2010, compared to 64% in the third quarter of 2009.

I am turning to our product gross margins. Consolidated product gross margins were 44.1% in the third quarter of 2010, up 330 basis points from last year, 40.8%. Product gross margins in the third quarter were 100 basis points lower than the record-setting margins we saw in the second quarter of 2010.

In our papermaking systems segment gross margins of 44.4% with 320 basis point higher than last year and 50 basis points lower than the very strong margin results in the second quarter of 2010. Product gross margins were higher in all our major product lines compared to last year with the exception of accessories, which was down only slightly.

The improvement of last year continues to result mainly from better absorption in cost efficiencies in our worldwide manufacturing operations, reflecting both the higher revenue volumes compared to last year, and the significant cost reduction efforts we undertook in 2009. These benefits were somewhat offset by small unfavorable product mix in the third quarter of 2010 that is. And as I just noted, higher margin in parts and consumable revenues were a lower proportion of total sales than in the year-ago quarter. In our other category gross margins of 28.3% were 290 basis points higher than last year, largely due to lower natural gas prices in our fiber-based products business.

Now let’s turn to our SG&A expenses for a moment. SG&A expenses were 22.5 million in the third quarter of 2010, up 2.9 million or 15% from last year including a decrease from the effective foreign exchange translation of 500,000 or 2%. Approximately half of the increase in SG&A compared to last year is due to higher incentives and commission expenses associated with the improved results over the 2009 period. As a percentage of revenues SG&A expenses were 33.8% in the third quarter of 2010, down from last year’s 36.4% due to the improved operating leverage with the higher 2010 revenue.

Now, let me turn to our EPS results for the third quarter. We reported GAAP diluted earnings per share from continuing operations of $0.36 in third quarter of 2010, compared to a loss of $0.01 in the third quarter of 2009. The third quarter 2010 results include a gain of $0.06 from the sale of real estate in the U.S. The third quarter of 2009 results include an incremental tax provision of $0.03 and an after-tax restructuring charge of $0.03.

So excluding these items in both periods adjusted diluted EPS was $0.30 in the third quarter of 2010 compared to $0.05 in the third quarter of 2009, or an increase of $0.25. This improvement of $0.25 per diluted share includes increases of $0.02 due to a lower recurring tax rate and $0.01 due to a lower net interest expense, partially offset by decreases of $0.01 due to higher diluted shares outstanding and $0.01 due to the effect of foreign exchange translation. This leaves us with a remaining increase of $0.24 therefore due to better operating results in the third quarter of 2010, compared to third quarter of 2009.

Let me also take a moment to compare the actual EPS results to the guidance which we issued during our July 2010 earnings call. Our GAAP diluted EPS guidance for the third quarter was $0.21 to $0.23 and this does not include the gain of the sale of our real estate. This compares to our adjusted diluted EPS of $0.30, which also excludes the gain. As we noted in our press release $0.07 improvement over the high end of the guidance resulted from higher than expected revenues from our fluid handling and stock prep product lines as well as higher than expected gross margins.

Now, turning to the balance sheet. As John mentioned in his remarks, we had another solid quarter of operating cash flows in the third quarter. Cash flows from continuing operations was 6 million in the third quarter of 2010, significantly below last year’s 13.2 million, which was one of the strongest cash flow quarters in our company’s history. Despite the decline from last year’s near record level, we were quite pleased with these results given the higher revenue so far in 2010 compared to last year and the result of demands on incremental working capitals. In fact, the key working capital metrics that we tracked continued to show solid improvements over last year’s third quarter, although there were some small declines in performance compared to the second quarter of 2010.

Specifically, day sales and receivables were 65 in the third quarter of 2010, an improvement of 10 days compared to last year’s third quarter, although up 8 days in the second quarter of 2010. Also, the days in inventory were 101 in the third quarter of 2010, an improvement of 14 days compared to last year, but an increase of 5 days compared to second quarter of 2010.

Overall, our working capital as a percentage of the last 12 months revenues were lower and obviously better, decreased to 11.5% in the third quarter of 2010 in comparison to 13.6% in the third quarter of 2009, and 12.3% in the second quarter of 2010. Working capital here is defined as current assets plus current liabilities excluding cash, debt, and the discontinued operation.

Our net cash position that is cashless debt at the end of the third quarter of 2010 was 26.6 million, an increase of 2.4 million compared to the second quarter of 2010, and an improvement of almost 16 million compared to the position at the end of the third quarter of 2009. This is our highest net cash position since the first quarter of 2005 and represents approximately $2.13 per diluted share. The increase of 2.4 million in our net cash position compared to the second quarter of 2010 can be summarized as follows. Our major sources of the cash in the third quarter with 6 million and operating cash flows which I’ve already noted, 2.2 million from the sale of a manufacturing facility in the U.S. which we have earlier consolidated into our other facilities in the U.S. and Mexico, and a favorable exchange rate effect on cash of 2.6 million. Our major uses of cash were 4.4 million for stock repurchases, 3.2 million for the small acquisition which we announced in July and 700,000 for CapEx.

And 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) Your first question comes from the line of Walt Liptak with Barrington Research.

Walt Liptak - Barrington Research

Well, congratulations on leveraging the recovery and keeping the cost down as things can be active and it’s nice to see numbers coming out. It looks like the fourth quarter with these new orders coming in is going to be solid and the guidance is good. So, I wonder if you comment a little bit given the kind of mix outlook for the North American and Europe, and maybe more positive China what 2011 might look like given your initiatives, can 2011 be a growth year for revenue and what about profitability?

Jon Painter

Okay. Let me start I’m not exactly sure which bookings you’re talking about that are going to come through in the fourth quarter. I should make clear that some of the big China orders we had is $14 million, the two orders were $14 million system that we expect to be a booking in Q4. We don’t really expect revenue in Q4.

Walt Liptak - Barrington Research

Okay. Got it. Okay.

Jon Painter

Our China stuff right now, we don’t book that percent complete. So that’s going to book when we ship it sometime in Q2 in middle of 2011 sometime like that.

Walt Liptak - Barrington Research

Okay. All right. Thank you.

Jon Painter

I think you saw our guidance for Q4; I think we’ll have reasonable revenues.

Walt Liptak - Barrington Research

Right.

Jon Painter

When I look at 2011, I guess the easier one is China seems to be consistently growing and is steady upward path I would say. We don’t see too much strong cause on the horizon and there are and I’d say another parts of the developing world South America in particular, but also India, Russia those kinds of places. It seems to be pretty good growth prospects.

North America and Europe, it’s more complicated and it depends I think on how the economy goes. I mean, in the end, the mills are building inventory right now. There are very, very low inventory levels. So they need to build on, but they are not going to do that forever.

So assuming that these economies move through this sort of pause they are in now and start to grow up couple of percent, we should be okay in 2011. But if they stall or retreat then the mills are going to stop, they are going to slow their rates down, which is going to hurt our North American and European businesses.

Walt Liptak - Barrington Research

Okay. All right. While understanding those moving parts, do you expect revenue to be up next year?

Jon Painter

I thought I avoided that. We haven’t got our budgets in from our divisions. If you compare 10 to 11, as you know, we started with a pretty strong 2010 and it got weaker during the year. So we’re going to answer, I would say, 2011 in North America and Europe in particular in some as a weaker position that we ended 2010. Now what we build during the year, I would say, most economists say that there is some lift in the economies next year not much, but some.

Walt Liptak - Barrington Research

Okay. Are you getting any visible, I guess quote activity and things like they are just not there like they were last year…?

Jon Painter

Well, I mean we had a couple of things in Q1, so one was, we had a real pop in our spares and consumables bookings and we kind of attributed that to restocking inventory levels. So we had a pretty strong parts and consumables hit in the first part of the year.

The good news is they’ve come off from, let’s say, the Q1 booking rates, but they’re still holding pretty solid, and that makes me think that there’s no more inventory build going on, it’s just operating [rates]. Benefit for 2011 is we do have good quarter activity in China, which is going to be in 2011.

Walt Liptak - Barrington Research

Okay. Okay. I’ll get back in queue, but I just have one more quick one. Fourth quarter SG&A as a percentage of sales, do you have a guess of what that might be, Tom?

Thomas O’Brien

I think, it’ll be pretty close to the third quarter level, Walt.

Walt Liptak - Barrington Research

In the dollar amount, it will be the same.

Thomas O’Brien

Yes. Dollar amount you got the same as well already.

Operator

The next question comes from Eric Prouty with Canaccord.

Eric Prouty - Canaccord

A quick question; I know you touched up on some of the geographies, but if we look at specific companies, there’s obviously been a lot of tough news for the last few years out of many of the major players out there in the market. Are you at least seeing your folks taken out capacity, bankruptcies et cetera from a corporate standpoint, because I know you guys were closely do think seems to be bottoming out at least there from that standpoint?

Jon Painter

I would say they have. I mean, IT at least just they had a fantastic second quarter. They have trimmed down their footprint, brought down some closer mills brought capacity down, but they are operating at a very high rates. They’re still building inventories and they were pretty optimistic for the rest of this year and pretty optimistic for 2011. Now there are in some better grades in some ways now. The (Inaudible) I assume are quite as upbeat but again I think a lot of the pain is probably behind them.

Eric Prouty - Canaccord

Great. And then from a specific kind of the profit breakdown or the segmentation standpoint, if you look at accessories revenue line in particular, that seemed to have slowed down quite a bit sequentially, dropped a tiny bit slowed down significantly year-over-year. Is that a timing issue or is there anything specific there that we should be keeping an eye on?

Jon Painter

I would say that we spend a lot of time here comparing the trends of our various businesses and I’ve kind of come to the conclusion that it’s hard to lead too much into it, because very often a capital projects that is in one quarter or another throws the comparisons off. That said, I would say the accessory business as Tom kind of mentioned in his remarks, it’s one of our more heavy consumer [world] businesses. So the weakness maybe indicative of this slowing that I was talking about earlier in North America and Europe.

Thomas O’Brien

That’s right. It was up over last year, Eric, but you’re right. It was down sequentially.

Eric Prouty - Canaccord

Right. And then from the gross margin standpoint in particular, you guys are still hanging in there in kind of the mid-40s, you know very good margin. What’s kind of the outlook there? They used numbers that you think obviously mix plays into this quite a bit, but any thoughts on the margin standpoint?

Jon Painter

That’s a good question. There’s a whole bunch, we were pleasantly surprised with the margins in Q3 and the margins had benefited to some extent from previous session times in that we have a bit more spares and consumable, but there’s a whole bunch of factors as you could imagine that go into margins, some of which is the product line mix between our businesses, accessories versus food handling versus stock prep.

Another one is things like the absorption we’ve got and that I think a permanent benefit. We took down a lot of overhead in a lot of manufacturing capacity so allowing us to be more fully absorbed. So I think that’s a permanent change in our operations. But, I would say if you look at the first part of this year, the mix and even pricing within product lines has been unusually good. I wouldn’t want to forecast it will always be that good.

Eric Prouty - Canaccord

Okay. Fair enough. And then finally, you mentioned China obviously an area of strength. Can you guys just break out, I mean from a percent of revenue standpoint, what type of contribution China is now?

Thomas O’Brien

Well, I think we said in the third quarter it was 10.9 million of revenues.

Operator

(Operator Instructions) Your next question comes from Rick Hoss with Roth Capital.

Rick Hoss - Roth Capital

Jon, not to belabor the whole bookings discussion here, but I’m just trying to get a feel for the differences 2Q, 3Q, I realized 2Q benefited from, as I think you mentioned tent up demand. And I mean is 3Q, is that indicative of kind of an ongoing demand or interest rate or do you see this as sort of a period of where you had fantastic bookings and a lot of catch up and then after you got these kind of high priority projects in place then the purchasing managers kind of looked around and said, okay, what else do we need to do?

Jon Painter

If you’re comparing, you made a good point about comparing Q3, let’s say, to Q2 because Q2 wasn’t so bad. I guess a couple of key points, one, parts and consumables were steady. So we are really talking about capital and we’re mostly talking about stock prep capital. In every region of the world that was the business from a bookings point of view that was down significantly and China really significantly. I tried to kind of comment in my remarks that a lot of that’s timing, I mean we’re going to have, I think in Q4 when we’re talking about comparisons to Q3 it’s going to much more favorable, particularly in areas of stock prep.

So I think there is an element, particularly Northern Europe where the hot projects move forward and some of the (Inaudible) product lines and maybe there is a little bit of softening. But I think primarily it’s a timing issue with just the way that the projects are falling, because our Q4 is looking pretty good so far, particularly out of China. Tom, do you want to add anything to that?

Thomas O’Brien

No, I guess I think that was really (Inaudible) with capital business in the third quarter that was very weak, most of that was stock prep, most of that was in China. And as you can see, we have already talked about those 40 million in orders, but there are others out there that we think we’re really timing between the third and fourth quarter.

Jon Painter

The project pipeline looks pretty good in China. So I wouldn’t yet call that a trend, I mean that drop.

Rick Hoss - Roth Capital

Right, okay. And then when I think about North America and Europe and based on your comments and there is a little bit of divergence from the IP call yesterday. How do you grow and it’s assuming a flat market as you’re saying, how do you grow the North American business? I mean your focus on market share, you’re going to focus more on a M&A, additional products, which strategy?

Jon Painter

Okay. So I want to maybe comment first on the divergence from our fee. If you listened to the IP call, it was pretty optimistic for the rest of ‘11. It’s a little, I’d say, more optimistic than people like (Inaudible) about 2011, they’re little more cautious about what the economy is going to do in North America and Europe. So, we’re probably going to be somewhere in between that, but we’re not economist.

So then in terms of growing our business in the slow-growth markets, I cannot put North America and Europe together in a lump. There are things we can do, one of them is just getting more yield out our installed base. The mills are still running and some of our business we have a very good part stream coming of our installed base and in some of our businesses we could do better, I’d say in particular things like stock preps.

Another area I’d say particularly in Europe we’ve decent market share in Europe, but it’s very uneven. We have relatively low market share places like in Germany and lot of the Scandinavian countries. So we do have opportunities I think to grow our market share in those regions. So those are, say, the two prime possibilities.

Rick Hoss - Roth Capital

Okay. And then, Tom, I know over the last few quarters we’ve talked about SG&A levels and with a certain revenue target, it looks like run rate from based on third quarter is about 90 million. I think we’ve discussed in the past maybe 86 to87 up to 300 onto type of top line. Would you say that now we’re moving into 90 and maybe that increases as revenue gets harder to come by, maybe you have any give up pay more to get these sales and how would you characterize that?

Jon Painter

Yeah, I mean no, you’re right. I mean, we’re running higher than what I thought and what I told you last quarter. There’s no question about that. It’s slightly higher. I mean, I think, we’ll come in maybe a little under 89 million for the year.

I think, what’s happened is a couple of things; one is and I kind of mentioned this in my remarks. We’re seeing higher incentive expense, higher commission expense with the higher revenues and also I would say we had batten down the hatches so hard last year and anything that moved on deck, we had screwed down pretty tightly.

As some of that gets loosened a bit, we’re seeing a little bit more travel expense, for example mostly all guys get out to meet more customers, which is we want and things like that. So I think I was being as little optimistic in terms of my SG&A forecast last time, but I think we’ll come in at around 89 million.

Now having said that, these margin levels, a little bit more revenue will give us some good operating leverage, because I don’t think it will grow proportionately the SG&A from here.

Thomas O’Brien

(Inaudible)

Rick Hoss - Roth Capital

Okay. And then tax rate has been great. What should we model for the fourth quarter?

Jon Painter

Fourth quarter, we’re looking at around 23%.

Rick Hoss - Roth Capital

23%?

Jon Painter

Yeah.

Operator

I would now like to send the call back over to Thomas O’Brien for any closing remarks.

Thomas O’Brien

Thank you, operator. Well, thanks for your attention. I think that the strong margins we had and our performance in the third quarter shows benefits of the restructuring that we did over the past few years. As we look forward, our balance sheet is healthy, our operating units are doing a great job seizing new opportunities and I look forward to reporting our progress in future calls. Thanks very much.

Operator

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

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