Kadant Inc. (KAI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Kadant Incorporated Earnings Conference Call. My name is Lisa and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Thomas O’Brien, Chief Financial Officer. Please proceed, sir.

Thank you, Lisa, and good morning, everyone, and welcome to Kadant’s fourth quarter and full year 2012 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-in to 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 29, 2012. Our Form 10-Q 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 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 these 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. So 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?

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 2013. Overall, we had a solid quarter and an outstanding year which included record performance in a number of areas. We also made progress on a number of strategic initiatives intended to further strengthen our company. I will begin today’s review with the financial highlights of the quarter. We finished the fourth quarter with revenues of $78 million, which was within our guidance of $77 million to $79 million, although it was down 20% compared to the record revenues in the fourth quarter of 2011. Despite the lower revenue, we generated GAAP diluted earnings per share of $0.84 in the fourth quarter of 2012 and $0.44 per share on an adjusted basis which exceeded our guidance of $0.35 to $0.37. As you can see on Slide 6, our adjusted diluted earnings per share was down 25% primarily due to lower sales volume. Gross margins have returned to more typical levels of 43%, Q4 ’11 included revenue from a large number of stock prep systems which resulted in lower gross margins for that quarter. Cash flows in the fourth quarter of 2012 were $12.7 million allowing us to end the quarter with a net cash position of nearly $48 million despite repurchasing approximately 195,000 shares to our stock for around $5 million. Turning to 2012 full year, we had a fantastic 2012 and we set new records in a number of categories. Our gross margins of 43.9% were a record, our adjusted EBITDA for 2012 was $44.8 million and this was also a record both in dollar term and as a percentage of sales at 13.5%. Most importantly, our adjusted earnings per share increased 9% to $2.29 which was also a record. Finally, our return on total capital, although not a record, was a solid 13% for the year based on adjusted net income. We also announced yesterday, that we will begin to pay a quarterly dividend of $0.125 per share starting in the second quarter. We have a long history of returning cash to our shareholders through stock repurchase as a means of creating value for our shareholders. This dividend program enhances our ability to return cash to shareholders and demonstrates our commitment to do so in the future. We have the good fortune to have a business with relatively stable and strong cash flows throughout the business cycle. Consequently, we feel that we can support a dividend as well as continue to invest in our business, repurchase stock and pursue complementary acquisitions. Turning back to our revenue performance in the fourth quarter, the decrease in revenues in Q4 is primarily due to lower capital revenues in our stock prep product line. You may recall that in Q4 of 2011, we set a company record for quarterly revenues at $97 million taking this quarter’s comparison as tough one. Our doctoring, cleaning and filtration product line however had relatively strong results with revenue increases of 6% compared to the same period of last year, driven primarily by our North American and European operations. Turning to bookings; in Q4, we generated $76 million in booking which was down 3% compared to Q4 of 2012. The decline in bookings was largely due to a 9% drop in both stock prep and fluid-handling bookings. While the declines were not limited to a specific region, we saw somewhat more significant drops in stock prep bookings from China and weaker fluid-handling bookings in the U.S. On the other hand, our bookings in our doctoring, cleaning and filtration product line were up 12% primarily due to an increase in orders for our MultiJet high-pressure fabric cleaning system. The bookings in revenue trend chart on Slide 11, shows our quarterly revenues, which is the red line and our bookings which is the blue bars. Our quarterly revenues have continued to reflect the generally sluggish nature of the economy since the fourth quarter of 2011. Bookings have followed a similar pattern and have been relatively flat since the third quarter of 2011. As I mentioned on the Q3 call, the timing of capital orders as well as seasonality for some spare parts, adversely impacted our Q3 bookings. In Q4 of this year, quarterly bookings have returned to more typical level. On a sequential basis, bookings increased 10% in Q4 led by our doctoring, cleaning and filtration product line as well as our stock-prep product line. Our strongest bookings region was North America followed closely by Europe which was up 14% compared to the same period last year. Overall, we believe the demand for our capital products will be stronger in 2013 and we are seeing increased project activity particularly in our stock-preparation product lines. Since the end of the year, we've booked more than $12 million in stock-prep capital orders leading us to anticipate another favorable sequential bookings comparison in the first quarter of this year. Taking a closer look at our parts and consumables, we can see on Slide 12 that both bookings and revenues in Q4 were up from the same period last year. Our parts and consumables business continues to be a source of stability offsetting some of the volatility we've seen in capital. Our revenue for parts and consumables were $50 million in the fourth quarter of 2012 and made up 64% of our fourth quarter 2012 revenues. Revenue was up 7% over Q4 of last year due to strong growth in our stock-prep product line particularly in North America and China. As you can see on the chart, this represents our best parts and consumables quarterly revenue performance since the third quarter of 2008. Revenue was up 14% sequentially with growth in all major regions particularly North America and China. Looking at bookings which are shown in the blue bars, our parts and consumables bookings were up slightly over Q4 of last year and up 3% sequentially. I'd now like to take a few moments to provide a brief review of our business activities in each of the major geographical regions in the world. I'll begin with North America. Many of you know the U.S. economy experienced a contraction in Q4 but it has remained one of the stronger regions in the world for us. The container board section which makes up the largest portion of our customers saw a slight uptick in the operating rates for the full year to 95.4% and full year production was up approximately 1% compared to 2011. Demand for printing and writing grades on the other hand continues it see downward pressure and shipments fell by 6% in 2012 compared to 2011. Operating rates for printing and writing grades have hovered in the low-to-mid 80s despite capacity closures in 2012. Our Q4 revenues in North America were $37 million down 5% compared to the same period last year and up 6% sequentially. The decline in revenue was due in large part to our stock-prep product line which had a very strong Q4 in 2011 as a result of revenue for major orders for chemical pulping equipment. Bookings in North America were up 8% in Q4 compared to the same period last year and up 14% sequentially. The sequential increase was led by our stock-prep and fluid handling product lines where we booked several orders for stock-prep capital equipment to improve plant efficiency and in order for a major dryer section rebuild at a liner board Mill in the Southeast U.S. In addition after the quarter closed, we booked an order from a Canadian newsprint mill for a dryer section rebuild. Turning to Europe, the strained market conditions in Europe have continued to impact the paper industry. Capacity rationalization is expected to continue in 2013, particularly in newsprint and printing and writing grades. On the container board front, SBA container board recently announced a 40 Euro per ton price increase for its crop[ph] liner following price increases announced by several European based recycle board producers. Industry analysts are expecting this price increase to stick, suggesting tightening market conditions. Our Q4 revenues in Europe are indicative of the challenging market and dropped 45% compared to last year to $16 million. As you can see from the chart, revenue in Q4 of last year benefited from very strong bookings in the second and third quarter of 2011 before the sovereign debt crisis took hold in Europe. Bookings in Q4 returned to more of a post-sovereign debt normal level if you will after weak Q3 that was impacted by the timing of capital orders as we discussed in the third quarter call. As you can see from the chart on Slide 15, our European base business had relatively strong bookings quarter and was up 14% compared to last year and 45% sequentially. The year-over-year increase was led by our doctoring, cleaning and filtration product line and orders for the MultiJet Fabric Cleaning System. As I noted earlier, we booked several stock-prep capital orders after the quarter closed, including an order from a tissue producer in Russia for a de-ink system valued at more than $5 million. We also booked an order for a stock-prep system valued at $4 million. This order is part of an innovative project to convert a newsprint line to a recycled board line at a mill in France. This is the second conversion from newsprint to the liner board that we've been involved with and we are well positioned to participate in other conversions going forward. There are a number of these conversions in the drawing board as an alternative to shutting down newsprint notes. Next, let’s take a look at China. The economy in China rebounded in Q4 from the previous quarter to finish the year at 7.9% growth rate and this reversed quarter-to-quarter declines recorded earlier in 2012. Although the rate of growth has rebounded slightly the timing for the addition of capacity remains somewhat uncertain and is highly dependent on the market stability to absorb existing capacity particularly in container board. The situation is helped by the recent announcement by the government in China of another round of mandated closings of older, higher polluting paper mills. This is a benefit to us as that capacity will need to be absorbed by the more modern mills who are more likely to be our customers. Our Q4 revenues in China decreased 34% compared to the prior year. The decline in revenues was primarily due to lower revenue for capital systems from our stock-prep product line. Our fluid handling product line on the other hand recorded a solid increase in Q4 revenues of 21% compared to the same period last year. Bookings were also down in Q4 of 2012 compared to the prior year. Q4 bookings were down 35% as a result of slower activity in capital orders. During the quarter, we booked several OCC recycle system orders with combined value of just over $3 million; we also booked several orders for our new MultiJet Fabric Cleaning System and controlled technology with a combined value of approximately $1 million. In addition, our fluid handling business secured orders for 2 steam and condensate systems, one intended for a container board mill and the other for a tissue mill. Encouragingly, we are seeing increased project activity in China and so far this year we booked 3 orders with combined value of approximately $2.3 million for stock-prep system to produce recycle liner board. While we can't do much to influence the volatile nature of capital orders in China, we worked very hard to build an aftermarket parts and consumable business in China. And you can see from the chart on Slide 17, we've been making very good progress. In general, we are seeing paper producers in China shifting their focus from adding new capacity as fast as they can to maximizing the efficiency of their existing operation. This provides us an opportunity to leverage our installed base and grow our parts and consumables revenue by partnering with our customers to one, given advice on improving the operation of our equipments and providing genuine OEM parts to keep our equipment operating as efficiently as the day it was installed. Booking and revenues in the rest of the world continue to show progress since the global recession in 2008. That said, our revenues dipped a bit in Q4 of this year following a fairly positive upward trend over the past 11 quarters. The relatively low sales volume in these regions seems that the timing of capital orders has a large impact on bookings and revenue from quarter-to-quarter. We are seeing promising new activity particularly in tissue in South America. Industry analysts are forecasting 2013 demand growth for tissue to be 6% in South America. I'd like to close my remarks with the few comments on our guidance in Q1 and the full year of 2013. The down side a record year like we had last year it does make comparisons difficult. For the first quarter, we expect to generate $0.32 to $0.34 of GAAP diluted earnings per share on revenue of $71 million to $73 million. For the full year, we expect the GAAP diluted earnings per share of $1.80 to $1.90 on revenues of $320 million to $330 million. The headwinds in the global economy as well as our booking level over the past few quarters, particularly in Europe and China, have tempered our outlook for 2013. Although we expect another sequential bookings increase in Q1 and higher bookings for all of 2013 compared to 2012, we expect that our revenues in 2013 will be less than 2012, which will impact EPS accordingly. In addition we also have an adverse impact of $0.21 in 2013 due to a higher recurring tax rate which Tom will discuss in his remarks. I'll now pass this call over to Tom for additional detail on our financial performance and the outlook for 2013. Tom?

Thank you, John. I’ll start with a review of our gross margin performance. Consolidated product gross margins were 43% the fourth quarter of 2012, an increase of 440 basis points compared to 38.6% in the fourth quarter of 2011. Compared to last year, margins in the fourth quarter of 2012 were up in all our major product lines but particularly strong performances in stock-prep and fluid handling. Stock-prep margins were up significantly in North America largely due to higher after market margins and favorable product mix. Fluid handling margins increased over the fourth quarter of 2011 in all our major geographic regions including Europe, North America and China. On a consolidated basis, a favorable product mix accounted for approximately 1/2 of the margin improvement over last year with higher margin parts and consumable revenues representing 64% of total revenues up considerably from 48% in the fourth quarter of 2011. In addition and encouragingly, capital margins were notably higher than last year. For the full year 2012, product gross margins of 43.9% equaled the record levels set in 2010 and were 60 basis points higher than in 2011. This is now the third consecutive year that product gross margins have exceeded 43%. Looking ahead we expect that 2013 consolidated product gross margin will be approximately equal to or even slightly higher than 2012, although as is normally the case there is likely to be some variability by quarter due in part to product mix as well as the timing and profitability of larger system orders. Now let's turn to Slide 23 on our SG&A expense, SG&A expenses were $25.3 million in the fourth quarter of 2012 down $1 million or 4% from last year including a $300,000 reduction due to the favorable effect of foreign exchange. Although the dollar amount of SG&A expenses has been relatively flat for the past several quarters, SG&A as a percentage of revenues increased 32.4% in the fourth quarter of 2012 compared to 27.1% last year mainly due to lower revenues in the 2012 period. For the full year 2012 SG&A expenses were $103 million, an increase of less than 1% over 2011 and represented 31.1% of revenues compared to last year’s 30.6%. Looking forward, although we expect that SG&A spending in 2013 will increase only 2% over 2012, the percentage to revenues will increase to approximately 32% and 33%, largely due to lower volumes in 2013. Let me now turn to our EPS results for the quarter on Slide 25. We reported GAAP diluted earnings per share from continuing operations of $0.84 in the fourth quarter of 2012 compared to $0.90 in the fourth quarter of 2011. As you can see on Slide 25, the results in both periods included significant benefits and discrete tax items; $0.40 in 2012 and $0.34 in 2011. Also the fourth quarter of 2011 included $0.03 of restructuring costs. Excluding these items from both periods; adjusted diluted EPS were $0.44 in the fourth quarter of 2012 compared to $0.59 in the fourth quarter of 2011 or a decrease of $0.15. This decrease of $0.15 in diluted EPS consists of the following: a decrease of $0.45 from lower revenues in the fourth quarter of 2012, compared to the record revenues in the fourth quarter of 2011, which was partially offset by an increases of $0.21 from a higher gross margin percentage, $0.06 from lower operating expenses and $0.03 from lower weighted shares outstanding. The benefit of $0.40 from the discrete tax items in the fourth quarter of 2012 was primarily due to the reversal of our remaining valuation allowances, which were associated with foreign tax credits in the U.S. The reversal reflected a change in judgment in the fourth quarter that, considering our future expected foreign sourced income and our profitability in the U.S. over the next several years, we now believe that we can earn out these foreign tax credits which have been fully reserved in prior periods. In short, since we now expect to realize the economic benefit of those credits, there is no longer any need to carry a reserve for that. Excluding this discreet tax benefit, our recurring effective tax rate was approximately 24% in the fourth quarter of 2012, slightly lower than the rate we had included in our fourth quarter guidance. Looking forward, we expect a meaningful increase in our recurring tax rate in 2013 compared to 2012. In 2012, our recurring tax rate, benefited from the utilization of foreign tax credits, with a full valuation allowance associated with them again establish in the prior periods. Now that we have released all the remaining valuation allowances on foreign tax credits, there will be no favorable effect on our tax expense in 2013, and consequently this will increase our tax provision in 2013 compared to 2012. It is important to note that there is no economic or cash impact from this change. That said, we expect our recurring tax rate will increase from 26% in 2012 to approximately 34% in 2013. This higher tax rate lowered our 2013 guidance by approximately $0.21 compared to what it would have been had the recurring rate stayed at the same level as in 2012. Now let’s turn to our cash flows, working capital and debt leverage starting on Slide 27. Operating cash flows from continuing operations were $12.7 million in the fourth quarter of 2012, a very solid performance and one of our better quarters and compares to even stronger $14.9 million in the fourth quarter of 2011 which was one of the best quarterly performances in the company's history. Looking at the major non-operating uses of cash in the fourth quarter of 2012, we repaid $5 million of our debt, purchased 4.7 million of our common stock and spend $2.7 million in CapEx. The stock repurchases in the quarter represented approximately 195,000 shares at an average purchase price of $24.10 per share. For the full year 2012, operating cash flows from continuing operations were $30.5 million, a very solid performance and one of our better years and represents -- and compares to $34.4 million in 2011, which was the second highest level we have ever recorded. Major non-operating uses of cash in the full year 2012, included $14.5 million for common stock repurchases; $5.4 million of debt repayment; and $4.3 million of CapEx. The common stock repurchases were $14.5 million for the full year 2012, which relates to 47% of our net income from continuing operations in 2012. Put another way, we returned almost half of our net income to our shareholders, and repurchases represented approximately 634,000 shares at an average purchase price of $22.87 per share. For the past 2 years, we have repurchased over $30 million of our common stock and this amount also equates to 47% of our net income from continuing operations over that period. Our working capital as a percentage of the last 12 months revenues was 13.9% in the fourth quarter of 2012, up slightly from the third quarter of 2012 and 4 percentage points higher than last year’s near record performance of 9.9%. Our net cash position improved considerably during the quarter and is at its highest levels in over 7 years. Net cash, that is cash less debt, at the end of the fourth quarter of 2012 was $47.7 million; an increase of $6.2 million compared to the third quarter of 2012 and was up $12.3 million compared to the fourth quarter of 2011. In our Slide 31 you can see that our leverage ratio has declined substantially since the end of 2009 and now stands at 0.09 at the end of the fourth quarter of 2012. Under our new credit facility, this ratio must be less than 3.5. Before concluding my remarks, I'd like to give you a few additional details on our earnings guidance. As we noted in the press release issued yesterday, the first quarter of 2013 we expect GAAP diluted EPS of $0.32 to $0.34. For the full year, the expected GAAP diluted EPS is $1.80 to $1.90. As I noted earlier, the higher recurring tax rate in 2013 is an unfavorable impact of $0.21. Looking at our quarterly EPS performance in 2013, we expect that the first quarter will be the weakest quarter of the year and that the second quarter will be the strongest. I should caution that there could be some choppiness in variability in our quarterly results due to a number of factors, not the least of which is the timing of revenue recognition for larger system orders in both China and Europe. As we have noted in the past, revenue for systems orders in China is typically recognized on completed contract method, and it is not unusual of customers, for any number of reasons, to temporarily delay delivery of their orders and this can materially affect our quarter-to-quarter results. We anticipate CapEx spending in 2013 will be $4 million to $5 million and include some carryover CapEx projects from 2012 where spending was lower than we had anticipated. Our 2013 guidance includes approximately $0.30 per diluted share associated with our non-cash equity compensation expense, the same level as in 2012. And finally, we expect depreciation and amortization to be approximately $8 million in 2013. That concludes my review of the financials and I will now turn the call back to the operator for our Q&A session. Lisa?

[Operator Instruction] This is coming from Lawrence Stavitski from Sidoti.

Could you just kind of give the outlook for I guess China and Europe in terms of what the paper components are going to be, what the outlook is for like tissue versus paperboard in Europe and China I guess?

Sure. So, I guess let's start with China and maybe we can start with our general comment on the world as you kind of get from our comments. There's a distinction. The printing and writing grades aren’t doing well really in anywhere in the world including China, including Europe, including the U.S. So printing, writing and newsprint are doing less well. Tissue and container board are much stronger. I would say that in Europe, container board is strengthening. So is tissue. While printing and writing grades are continuing to shut down mills and so forth. In China, we're seeing more project activity. I would say both in China and in Europe. So we had pretty sequential bookings increase in Europe. We have activity, I would say, it's more in the sort of Russia, Eastern Europe, part of Europe but we did have that big project in France. So that’s pretty encouraging. That said, Europe still is, I would say, a relatively weak economy and China, again we had, we certainly got off to the year pretty well. For our products, it tends to be that the first product that sort of sees an uptick and sees a downtick is our stock-prep product line. So that’s where we're seeing sort of a lot, lot of that project activity is more directed around our stock-prep product line which is very typical when things start to turn.

Okay. So did you said the bookings are going to be up for ‘13 and the revenues down, so is the variability in the stock-prep is that accounting for it?

Sure, there's a couple of things. You might remember in 2012, we actually we entered the year with a pretty big backlog, so the bookings in 2012, were coming down as the world economy came down, but we really softened that blow by having a great deal of backlog coming into 2012. Now turning over to 2013, our backlog is not as high as it was in 2012. But we do anticipate higher bookings, so we had a little bit of an uptick in Q4, we see a little bit of uptick in Q3 I am not going to say this is going to be steady every quarter better than the one before, but I do think that we're going to have a stronger booking year in 2013 versus 2012.

Okay. I guess switching gears a little bit, the dividend first ever you guys initiated can you just kind of go over your uses of cash and what your priorities are there, do you have any more buyback scheduled or programs on the horizon?

So I mean, our uses of cash kind of remain the same and I am glad you asked that question, because I guess I want to be clear about it. I think the dividend is a -- it's part of our general thinking of returning cash to shareholders, you heard Tom’s comment that we returned 1/2 our cash to shareholders, 1/2 our net income to our shareholders in last couple of years. So this is really part of that program, that general idea. The other uses of cash, our acquisitions and just investing in our own business, no one should read this as there's some shift in strategy that we're going to do less on acquisitions or anything like that, I mean our feeling is, is that we have good cash flows that we can easily support the dividend, continue to do buybacks but also continue to do acquisitions really at the kind of same pace that we did before and we are continuing to look at acquisitions.

Okay, I'm sorry I think I missed it, your CapEx guidance for ‘13, did you guys comment on that?

We said $4 million to $5 million, Larry.

$4 million to $5 million?

Yes.

You might remember, we had a few, we expected a bigger year last year, and we had a couple of projects that is just sort of plopped over into this year, so.

The next question comes from Stuart Benway from S&P Capital IQ.

I was just looking at the sequential revenues in your other category which were down significantly December versus September, is there -- where was that, and what was going on there?

So our other -- that is our fiber based granule business and that is a highly seasonal business. So it’s tied to the agriculture and people putting the things on their lawn, so their first and second quarter are real strong and then it sort of, the third quarter's weaker and so forth. That, I would put that more in the seasonal department. That business is doing extremely well.

But it was also down year-over-year by percentage wise a fair amount, 1/3 I guess.

What happens in the fourth quarter with that business, their customers need to be ready for spring.

Last year was warm too, wasn't it?

Well, it has a lot to do with the inventory in the chain and the distribution chain. It has to end up in Wal-Mart somewhere. So sometime Wal-Mart says, "I am low on inventory," and they talk to their customers who talks to us and they put the order in the fourth quarter, sometimes they put it in the first quarter. So it’s as much to do with that as anything else.

And how about South America which actually was strong really both year-over-year and quarter-over-quarter, or quarter-to-quarter and you had mentioned I guess, is that mostly because of the tissue business or what's going on there?

In South America it’s a developing country with all those characteristics. So I would say as a backdrop we see as projecting that overall paper consumption is going to grow about 4% in South America and sort of the good grades, tissue and container board are growing 6% and 5% respectively. That said, you do have some variability with capital orders that kind of make it kind of choppy. You'll have a big tissue job that comes in one quarter and spreads out so it’s a little bit harder to see a trend, because the revenues overall are relatively low and let’s say a recycled tissue job can end up slowing things up. I don't know if you guys have anything else to add to that.

Okay, and can you remind me, I think generally your margins on your parts business are typically higher than on large systems right, is that generally true or?

Generally. That's a fair assumption.

But I mean is there a difference between like large systems and smaller systems as far as margins go or it seems like last year you were saying that there's a lot of large systems which were…

Two things are happening over the long run, yes as a general matter large systems often have lower margins than smaller unit capital for example. I would say we are and Tom referenced it in his comments we are doing better in our margins in our capital. That's a whole combination of things; mixed within capital, pricing, be doing a good job with manufacturing efficiencies and so forth.

Okay, in the tax rate I mean it seems like you are talking about kind of a semi permanent thing here. So should we expect a higher tax rate in 2014 and beyond?

I would say the rate will be in and around this level going forward. It’s hard to pick how further out it goes of course but yes it will be in that range.

You mean the level of 2013?

Yes.

And one last quick one on the dividend, was broadening the investor base I guess to institutions that require a dividend part of the thinking there at all?

Yes, it’s part of the thinking. I wouldn't say it’s a major factor but sure. I know fully well that there are investors who are not allowed to invest in us. So if we didn't do a dividend. I also we talked to our investors all the time and many of them are saying, "Hey we like the fact that you are buying back stock, but dividends are a stronger commitment to your pledges if you will of returning cash to stockholders." So we're trying to be responsive to that as well.

That’s a pretty good size dividend to start out with it seems to me. It’s a pretty strong statement.

What I didn’t want to do is have a token dividend, sort of a dividend in name only. I mean we wanted to be a real and meaningful dividend.

There are no further questions at this time. [Operator Instructions]

Is there no more questions Operator?

There are no further questions.

Thanks very much, Lisa. Let me kind of conclude the call with what I view is kind of 3 key takeaways from our quarter and the year. First, it was an excellent year. We had new records for earnings per share, adjusted EBIT and gross margin. Second, as we just talked about, we initiated this dividend of $0.125 per share or $0.50 on an annualized basis and that’s consistent with our overall strategy to return cash to shareholders, and third, although in 2013, we are expecting a decline in revenues and earnings per share, we do see an encouraging signs of booking activity. We expect another sequential bookings increase in Q1 and higher bookings for the full year of 2013 compared to 2012. With that, I look forward to updating you on progress on our next call. Thanks very much.

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.